Reinstatement of cancelled GST registration upheld by Court of Appeal
Decision date: 30 November 2005
Case: Lopas and McHerron v The Commissioner of Inland Revenue
Act(s): Goods and Services Tax Act 1985, Interpretation Act 1999
Keywords: Cancellation of GST registration, amount specified for purposes of section 51, thresholds for registration and deregistration
Summary
The Court of Appeal determined the Commissioner had correctly reinstated the cancellation of a GST registration which had been made in error. The Court found that where total cessation of a taxable activity is intended, taxpayers should apply for cancellation of registration on that basis under section 52(3), and not on the basis the activity will involve supplies under the threshold (section 52(1)) as had been done in this case.
Facts
The taxpayers were the partners in a partnership which registered for GST purposes on 1 October 1992 with a taxable activity of forestry. In its first GST return the partnership claimed an input tax credit on the purchase of a property.
On 4 October 1999, the partnership applied to cancel its GST registration with effect from 30 September 1999, on the basis that its taxable supplies for the next 12 months would be less than $30,000.
The application form prepared by the partnership's accountant stated that the partnership would be keeping some of its business assets when the registration ceased, namely land valued at $115,000 inclusive of GST, being the lesser of cost or market value.
The Commissioner cancelled the GST registration from 30 September 1999. The taxpayers took the view that section 5(3) of the GST Act deemed the land, being an asset of the taxable activity, to be supplied immediately before the cessation of the registration. They considered that section 10(8) deemed the consideration to be the lesser of cost or market value. As a consequence, the partnership's return for the period ended 30 September 1999 returned GST output tax on $115,000, which was the cost price of the land.
On 8 October 1999, the taxpayers entered into a sale and purchase agreement with the Jeffrey Lopas Family Trust and Lorraine McHerron Family Trust Partnership ("the trusts partnership") to sell the property for $375,000. Possession was to be given on 1 November 1999 and the purchase price was to be satisfied by a mortgage back to the vendors. The purchase price was based on a registered valuer's report.
The two family trusts were created by deeds of trust dated 20 September 1999. On 5 October 1999, the Commissioner received an application to register the trusts partnership for GST purposes from 1 October 1999. An application had been made in the name of the trusts partnership on 26 July 1999 to the Banks Peninsula District Council for permission to subdivide the land. The application was approved on 13 October 1999.
The Commissioner became aware of the sale to the trusts partnership. He considered the sale was an action done in the termination of a taxable activity and that section 6(2) of the GST Act applied to deem the sale to be a supply carried out in the course or furtherance of the taxpayer's taxable activity. As a consequence he considered GST to be payable on the $375,000 purchase price. That being so, the Commissioner took the view the taxpayers made taxable supplies of more than $30,000 in the relevant period.
In light of this additional information, and after an opportunity had been provided for the taxpayers to respond, the Commissioner amended the partnership's deregistration date from 30 September 1999 to 30 November 1999. The decision to amend the date was disputed, and led to this litigation.
Decision
The Court had no difficulty in concluding that the phrase "the amount specified for the purposes of section 51(1) of this Act" refers to the $30,000 or any substituted figure set out in section 51(1)(a). It rejected the taxpayer's submission that the word "amount" imports not only the monetary sum in section 51(1)(a) but also the methods of calculating the amount in a particular case, including the exclusions in sections 51(1)(c) and (d).
The Court also accepted that there is no compelling policy reason for holding that the purpose of the reference to section 51(1) in section 52(1) must have been to ensure the same thresholds for registration and deregistration. It accepted a submission for the Commissioner that there are plausible policy reasons for there to be a difference between the thresholds for registration and deregistration, and it would defeat the purpose of having a threshold if unregistered persons were brought within the GST net at the moment they were ceasing a taxable activity. On the other hand, those deregistering are already in the GST net and seeking to be removed. In such circumstances there is no compelling policy reason to exclude any taxable supplies from the calculation that are in contemplation in the period after deregistration from the threshold calculation.
The Court also accepted a submission for the Commissioner that when total cessation of a taxable activity is intended, taxpayers should apply for deregistration under section 52(3) and not section 52(1). If that had been done, then deregistration would have been deferred until cessation of the activity and thus any sales made in the course of ceasing the taxable activity would have been subject to section 6(2).
The Court also observed the Commissioner was acting under the erroneous impression that the supplies would be under the threshold. For this reason, it was appropriate in terms of section 13 of the Interpretation Act 1999 that he re-exercise his discretion and set a new GST cancellation date once he was in possession of the full facts.
Date published: 10 Oct 2006
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