Decision by Elias CJ, Blanchard, Tipping, McGrath and William Young JJ in:

Thompson v Commissioner of Inland Revenue [2012] NZSC 36, 10 May 2012 

Legislation cited:

Goods and Services Tax Act 1985, ss 6(2), 10(8), 51(1), 51(1)(c), 52, 52(10, 52(3)

Tax Administration Act 1994, s 138P

Background:

Registered for GST

After the introduction of Goods and Services tax (GST) on 1 October 1986, the taxpayer registered for GST with respect to his business activities which included the leasing of property he owned in Rolleston (the property). The rental the taxpayer received (including rates) amounted to more than the threshold for GST registration (which at that time was $30,000, GSTA 1985, s 51(1)).

De-registered for GST

Following his taking of specialist tax advice the taxpayer (while still retaining the property) applied to the CIR to be de-registered for GST, effective from 30 November 1999. The taxpayer claimed that his taxable supplies for the following 12 months would be under the registration threshold. That request was accepted by the CIR with effect from the 30 November date. The de-registration did not immediately affect the taxpayer’s relationship with his tenant who continued to pay the tax which included GST.

Sale of properties

In the period between December 1999 and September 2000 the taxpayer disposed of the property.
This was effected by way of three sales.

The first sale (the Horsburgh sale) comprising around 49 hectares was to a company associated with the taxpayer. The sale price was $461,250. Settlement took place in June 2000.

The second sale of 15 hectares was also made to a company associated with the taxpayer (Armagh) and was for $810,000.

That amount was not paid but remained under an acknowledgement of debt which was executed in September 2000 (but back dated to 31 March 2000). In June 2000 after being challenged by Inland Revenue concerning why the taxpayer was collecting GST while unregistered, the taxpayer took steps to “regularise” the position in respect of the rent he received by retrospectively interpolating another of his companies between himself and the tenant. That company supplied the tenant with GST invoices and accounted for the output tax to the CIR and to the taxpayer for the net rent.

The third sale comprised the balance of the land to Armagh under a sale and purchase agreement for $2 million. Payment was effected by an acknowledgement of debt.

No output tax on transactions

The taxpayer did not account for the output tax on these transactions.

As business assets retained by the taxpayer at de-registration are subject to output tax, (GSTA 1985, 5(3)) the CIR cancelled the de-registration and assessed the taxpayer for the output tax on the sales. Where assets were acquired before the coming into force of the GST Act output tax is calculated on the lesser of their costs price or open market value under s 10(8) of that Act.

Re-registration decision challenged

The taxpayer challenged the re- registration decision. The Taxation Review Authority (TRA) allowed the taxpayer’s challenge, finding that the likely proceeds of the then proposed land sales did not form part of the anticipated future turnover for the purposes of s 52(1) and that given the probable effect of such sales as at November 1999, the taxpayer’s prospective rental receipts for the next 12 months were under the threshold. The CIR’s re-registration decision was quashed and the original de-registration was re-instated, Case X6 (2005) 22 NZTC 12, 079.

CIR appealed

The CIR appealed this decision (at which time the decision of Lopas v Commissioner of Inland Revenue(2006) 22 NZTC 19,726 (CA) had been delivered).
The High Court allowed the appeal.
The Court directed that the necessary re-hearing should be in the High Court and dealt with at the same time as the hearing of the challenge to the assessments.
Those assessments having been made after the TRA hearing but before his decision and were subject to separate challenges filed in the High Court, Commissioner of Inland Revenue v Thompson (2007) 23 NZTC 21,375.

Results of High Court Hearing

In the subsequent High Court hearing, Dobson J held that he was bound by the Court of Appeal’s decision in Lopas. His Honour determined that the facts in this case were indistinguishable from Lopas.

The taxpayer was not then entitled to de-register and the CIR had been correct to set aside that de-registration.

Sales unplanned

However, His Honour further held that the first Armagh sale had not been relevantly planned as at 30 November 1999 (the de-registration date) and the relevant date for the second Armagh sale was 31 July 2000. This sale he held was not, at that date, planned.

Output tax payable

The taxpayer was not successful in relation to the associated assessment for the output tax on the first sale to Armagh however, because with the setting aside of the 30 November 1999 de-registration and the Horsburgh sale occurring in February, the relevant tax periods expired on 31 July 2000.  As the first Armagh sale took place during the same tax period, output tax was payable.

Dobson J further held that as the second Armagh sale was not planned as at 31 July 2000 this meant that there could be no justification for a later de-registration date and therefore output tax was not payable in relation to the sale, Thompson v Commissioner of Inland Revenue (2009) 24 NZTC 23,725.

Court of Appeal Results

The Court of Appeal dismissed the taxpayer’s appeal in relation to the Horsburgh and first Armagh transactions and allowed the CIR’s appeal in relation to the second Armagh transaction.

The Court of Appeal agreed with Dobson J that the likely proceeds of the Horsburgh sale had to be taken into account in relation to whether the taxpayer was entitled to de-register on 30 November 1999 and that this meant that output tax was payable on the first Armagh transaction.

The Court held that Dobson J had been wrong to focus on the words used in Lopas ,particularly the word “planned”, rather than the text of the statute.

The Court of Appeal dealt with the case on the basis that at all material times the taxpayer faced a dilemma which precluded the CIR being satisfied that his turnover would be less that the $30,000 threshold, Thompson v Commissioner of Inland Revenue [2011] NZCA 132.

The taxpayer appealed

The taxpayer’s main contentions were:

• The proceeds of asset sales likely to occur in the 12 months following de-registration might be required to be taken into account in assessing prospective turnover (there being no challenge to Lopas).  However that was so, only in relation to sales which were “planned” at the time of de-registration;
• It was accepted that the Horsburgh sale was “planned” at the date of de-registration.  Accordingly there was no longer any dispute concerning the Horsburgh sale;
• The taxpayer’s liability to remain registered should be assessed as at 9 February 2000.
  (The deposit on Horsburgh having been received on 8 February 2000 being the time of supply).
   On the 9 February date neither of the Armagh transactions were “planned" (Lopas) and the anticipated proceeds of sale were irrelevant to whether the taxpayer was entitled to de-register.
  It was accepted that in terms of s 52(2) of the GSTA 1985 that the default position is that de-registration occurs at the end of the tax period in which a request is made but that should not be 31 July 2000 (the last day of the taxpayer’s tax period) but rather 9 February 2000 when the taxpayer was no longer required to be registered.
• The rent to be received over the following 12 months (from 9 February 2000) was below the threshold;
• The way in which the Court of Appeal dealt with the rental issues was challenged.

 Decision:

(1) The Supreme Court dismissed the taxpayer’s appeal.

(2) Their Honours considered the most important issue was whether at the two possible de-registration dates (9 February and 31 July 2000) the proceeds of future land sales were required to be taken into account in assessing prospective turnover.

(a) The Rental turnover

In the context in which s 52(2) operates, prospective turnover should be assessed on the basis that the taxpayer, by this stage will be de-registered and will not therefore be charging GST.
The net rent payable by the tenant (rent without any GST component) provides the appropriate basis for the assessment.

The CIR correctly assesses the value of supplies exclusive of GST both for registration and de-registration. There is an inconsistency when someone who is not registered charges and recovers GST.

When exercising his discretion as to the effective de-registration date the CIR would be entitled to defer effective de-registration until the taxpayer stopped charging GST or to a date where this will happen. It was noted that as at 9 February 2000 the taxpayer was still charging GST on the rent.

Having regard to the taxpayer involving another company which issued the tenants with GST invoices then the actual rent he derived for the 12 months (from 9 February 2000) was the net rent (exclusive of GST) and was less than the $30,000 threshold.

By 31 July 2000 the taxpayer had resolved the problem that the rent he received included GST.  Therefore as a result of that and the Horsburgh and first Armagh sales, it was clear that the rental turnover for the following 12 months was going to be under the threshold.

The Court of Appeal were wrong in its dilemma approach to de-registration as at 31 July 2000.

(b) Assessment of future turnover

Section 52(2) provides for two decisions, firstly the decision to cancel registration which turns on an assessment of future turnover.

Where called upon to do so, the TRA should make this decision as at the first date on which it could have been safely predicated that supplies of the following 12 months would be less than the threshold; and (ii) the effective date of de-registration.
While under s 52(2) the default date is the last day of the then current tax period the CIR can fix another date. The Authority could depart from the default date to another date ie the date on which it could first have been safely predicated that supplies for the succeeding months would be less than the threshold.

Their Honours held that the correct de-registration date was in June 2000 up to which time the taxpayer continued to collect GST from his tenant.
Their Honours held that the taxpayer could not obtain a de-registration date which preceded the time of supply in relation to the first Armagh transaction and the taxpayer was held to be liable to output tax on that transaction.
Their Honours, did not accept the taxpayer’s contention that the 9 February 2000 date de-registration was correct, the first Armagh transaction was well over the threshold and took place less than seven weeks later. Further as at that 9 February date the taxpayer was "in the course of the unsatisfactory implementation of a doubtful tax plan and was not a very promising candidate for the favourable exercise of a discretionary judgment”.

(c) The relevance of the proceeds of future land sales to the s 52(2) test

The Supreme Court held that Dobson J in the High Court misinterpreted Lopas finding that His Honour did not give effect to the statutory language.

Under s 6(2) “asset sales “in connection with the “termination of a taxable activity” are taxable supplies.

The disposition by the taxpayer of the property was “in connection” with the termination of his taxable activity (the leasing of that property). The taxpayer was therefore, only entitled to be de-registered if the CIR could be satisfied that for the period of 12 months following any assumed de-registration date, that his turnover including the proceeds of sales of the property would be less than the threshold.

After reviewing the evidence relevant to whether future land sales were required to be taken into account in assessing the likely turnover in 12 months following any one of the de-registration dates contended (ie 30 November 1999, 9 February 2000 and 31 July 2000) their Honours held that on any possible approach to the s 52(2) test it could not be predicated as at 31 July 2000 that there would not be a sale of the balance of the land within the following 12 months. The taxpayer was not therefore entitled to be de-registered as at the 31 July date and the CIR was correct to assess him for the output tax on the second Armagh transaction. Similar reasons also applied to the other two dates which were contended for.

(d) The application of the test under s 52(1) and (2)

Their Honours also made some comments concerning the application of s 52 should issues arise in the future.

Their Honours noted that de-registration depends on the CIR being “satisfied” that taxable supplies for the following 12 months will not be more than the threshold. As a result of both Lopas and this judgment, de-registering taxpayers will be careful to ensure retained assets are not disposed of until the 12 months from de-registration have elapsed. For that reason normally there will be at the date of de-registration a settled intention that there will be no relevant assets disposal for at least 12 months and it will for most cases be clear that other taxable supplies will not exceed the threshold.

Their honours also went on to state:

(i) Section 52 means what it says and there is no point trying to paraphrase it;

(ii) The section requires the CIR to be satisfied as to a negative (the turnover will not exceed the threshold);

(iii) The test will not be satisfied when transactions which would result in the turnover being exceeded are either (a) being implemented at the proposed de-registration date; or (b)planned to occur (or contemplated as likely to occur) in the course of the succeeding 12 months;

(iv) The test will probably only be satisfied where the taxpayer can show a settled intention that such transaction will not take place.

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