Taxpayer symmetry does rounds of courts

By Denham Martin

Taxwise


While the introduction of GST in Australia is imminent, in New Zealand tax advisers have been grappling with the intricacies of GST for almost 14 years. Even now, the courts are still being asked to resolve what would appear to be fundamental issues concerning the application of the GST legislation.

A clear illustration of this is found in the recent Court of Appeal decision Nicholls & Nicholls v CIR.

The court was asked to determine the GST treatment of the deposit paid by a payments-based taxpayer. The facts of the case were simple. The taxpayer had signed an agreement to purchase a residential section, with a 12-month delayed settlement, for $94,500 including GST.

In accordance with the agreement, the taxpayer paid the sum of $14,700. According to the vendor's invoice, the sum was made up of a deposit of $4200 and GST of $10,500. The taxpayer paid the balance of the purchase price 12 months later.

As the taxpayer was registered for GST on a payments basis, it claimed a GST input tax credit of $10,500. However, the commissioner disallowed the claim, stating that the taxpayer was only entitled to one-ninth of $14,700, namely $1,633.33.

The taxpayer objected and the case went to the Taxation Review Authority. The authority upheld the taxpayer's objection and directed the commissioner to allow an input tax credit to the taxpayer of $10,500.

The commissioner then appealed to the High Court. The High Court allowed the commissioner's appeal, agreeing with the commissioner's view that the taxpayer was only entitled to an input tax credit of $1,633.33.

The taxpayer then appealed to the Court of Appeal. It argued that it was unfair if taxpayers paid the full amount of the GST but were being permitted to deduct only a small portion thereof at the time of such payment. The taxpayer also argued there would be a "mismatch" between a vendor and a purchaser and that while the commissioner would immediately gain the full GST payment as output tax from the vendor, the purchaser would be receiving a credit for only one-ninth of that amount.

The Court of Appeal unanimously dismissed the taxpayer's appeal from the High Court. The Court of Appeal held that the taxpayer had not paid GST of $10,500 to the vendor and was, therefore, not entitled to a corresponding input tax deduction. The payment of $14,700 was nothing more than part payments of the whole of the purchase price.

They said that symmetry was only required for a particular taxpayer between that taxpayer's input and output credits for GST purposes. Symmetry was not required between different taxpayers (i.e, a vendor and a purchaser). The fact that the vendor had to pay output tax upon rendering the invoice to the purchaser did not mean that the taxpayer, as purchaser, could claim input tax of the same amount. The legislation clearly distinguishes between taxpayers that account on an invoice basis and those that account on a payment basis. The court said there was no need for consistency between the two regimes.

With respect to the interpretation of the relevant provisions of the GST Act, the Court of Appeal stated that the legislation was clear. It said that just because tax legislation was seen as unfair or absurd, it should not be interpreted in a manner inconsistent with its clear words and intention.

The court also made the observation that had the taxpayer settled in full, with the purchase price being funded by way of vendor finance for a 12-month term (instead of the 12-month delayed settlement), a full input credit would have been available to the taxpayer. That is simply because the taxpayer would have paid the whole of the purchase price. However, the court refused to treat the transaction as if it had been structured in this manner.

It held that tax must be calculated in accordance with the legal consequences of the transaction into which the parties have entered, not upon the basis of what they might have done to achieve the same outcome.

In conclusion, buyers and sellers of land should ensure that they clearly understand the GST position prior to entering into a sale and purchase agreement.

* Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.