High Court considers whether a repayment of a loan can generate an input tax deduction

Summary

The matter was an appeal of a Tax Review Authority (“the TRA”) decision, TRA 08/18 [2019] NZTRA 3, denying Mr Darryl Patrick Burke the right to claim additional input deductions for a payment made during the two-month taxable period ending 30 September 2007 (“the Disputed Period”). Mr Burke argued that the payment of $498,640.48 to his financier, Citywide Capital Limited (“CCL”), represented payment for the goods and services supplied to him during the development. The Commissioner of Inland Revenue (“the Commissioner”) viewed the payment as fulfilment of Mr Burke’s obligation under a loan agreement with CCL; the payment was not charged with goods and services tax (“GST”) and accordingly cannot generate an input tax deduction. The TRA agreed.

The High Court found in favour of the Commissioner. The reasons given by Justice Downs largely mirror those of Judge Sinclair from the TRA which the High Court held to have been “undoubtedly correct” (at [18]).

Impact

The judgment reclarifies the fact that a repayment of a loan is not consideration for a supply.

Facts

Mr Burke entered into a property venture in mid-2006 with CCL who provided funding for the purchase of two properties (secured by a mortgage) and the costs of developing the properties for sale. The loan agreement between Mr Burke and CCL resulted in suppliers being paid by CCL through draw downs on the development funds. The payments to suppliers increased the overall debt Mr Burke had with CCL, and the GST refunds received during the development of the properties which were paid to CCL by Mr Burke, were credited against his loan.

In August 2007, after the first property was sold, a payment of $498,640.48 (“August 2007 payment”) was made to CCL by Mr Burke. Mr Burke claimed that his unique financial arrangement with CCL meant that he only made payment of the invoices to the suppliers when he made the August 2007 payment. The fact that the supplier’s invoices had already been paid by CCL at the time, was not relevant to his position.

Issues

The sole issue for the court to determine was whether the August 2007 payment should activate the deductibility of Mr Burke’s earlier expenses to offset his GST liability in the Disputed Period (at [8]).

Decision

In dismissing the appeal in its entirety, Justice Downs agreed with the TRA that the August 2007 payment was a loan repayment; one required by the loan agreement between CCL and Mr Burke. Justice Downs held the payment “was obviously not made to obtain supplies from his suppliers” and “this payment was not made in exchange for a good or service attracting GST” (at [15]; emphasis added by the Court).

Section 20(3) of the Good and Services Tax Act 1985 establishes how much GST is payable in a taxable period. Those who account for tax on a payment or hybrid basis are governed by s 20(3)(b)(i). It provides:

(3) Subject to this section, in calculating the amount of tax payable in respect of each taxable period, there shall be deducted from the amount of output tax of a registered person attributable to the taxable period—

(b) in the case of a registered person who is required to account for tax payable on a payments basis or a hybrid basis pursuant to section 19, the amount of the following:

(i) input tax in relation to the supply of goods and services made to that registered person, being a supply of goods and services which is deemed to take place pursuant to section 9(1) or section 9(3)(a) or section 9(3)(aa) or section 9(6), to the extent that a payment in respect of that supply has been made during the taxable period:

For a person using the payments or hybrid basis, the input tax is deducted from the output tax in relation to the supply of goods and services “to the extent……a payment in respect of that supply has been made during a taxable period” (at [13]; emphasis added by the Court).

Justice Downs held that s 20(3)(b)(i) answered Mr Burke’s case – Mr Burke was supplied goods in the three previous GST periods (ending March, May and July 2007) and these were paid by Mr Burke within these periods. He was entitled to, and he did claim, the corresponding input tax deductions within each of the three periods. “No further input tax deduction arose for the disputed period in terms of s 20(3)(b)(i); Mr Burke’s suppliers had already been paid” (at [14]). It did not matter who paid Mr Burke’s suppliers – they were paid.

Therefore, contrary to Mr Burke’s submission, there was no material linkage between the August 2007 payment and the goods earlier supplied to him. Mr Burke’s repayment to CCL did not somehow mean his suppliers were paid only then (at [15]).