Nicholls v Commissioner of Inland Revenue CA55/98 [1999] NZCA 359; (1999) 19 NZTC 15,233 (2 June 1999)

Last Updated: 14 January 2019

IN THE COURT OF APPEAL OF NEW ZEALAND CA55/98


BETWEEN THE PARTNERSHIP OF GRANT
STANLEY NICHOLLS AND MARGARET ISOBEL NICHOLLS

Appellants

AND THE COMMISSIONER OF INLAND REVENUE

Respondent


Hearing: 20 May 1999

Coram: Henry J Blanchard J Tipping J

Appearances: G S Nicholls in person
J H Coleman for the Respondent

Judgment: 2 June 1999

JUDGMENTS OF THE COURT

HENRY J

[1] The issue on this appeal centres on the right of a taxpayer, registered to account for goods and services tax on a payments basis pursuant to s19 of the Goods and Services Tax Act 1985, to deduct input tax. The supplier in question is registered to account for tax payable on an invoice basis, and the transaction was the purchase by the taxpayer appellant partnership of a residential section of land.

[2] The agreement for sale and purchase, dated 14 October 1993, provided for a purchase price of $94,500 expressed as inclusive of G.S.T. A deposit of $14,700 was payable on execution. Possession date was to be five days after issue of the title. The balance of the purchase price was payable in one sum of $79,800 twelve
months and five days after title to the property issued. The purchaser also had the option of requiring the vendor to carry the balance outstanding as at the due date for payment for a further period of twelve months at an interest rate of 10% per annum. Attached to the agreement was a disclosure notice, prepared for the purposes of the Credit Contracts Act 1981. It clearly relates to the option, as the Act would otherwise have no application to the transaction.

[3] When the agreement was signed the vendor issued a tax invoice to the appellants in the following form:

	Description Purchase of Lot 159 Conifer Grove	Amount 94,500.00
	TOTAL (including GST)	$94,500.00
	Payment Detail Deposit Due @ 5% of $84,000	4,200.00
	GST Due @ 12.5% of $84,000	10,400.00
	Total Paid 15/10/93	14,700.00
	Balance Outstanding	79,800.00
	Total As Above	$94,500.00
[4]	The appellants claimed as an input	credit for the taxable period	which

included 14 October 1993 the sum of $10,663.28. This appears to have been the result of including the full purchase price as a taxable supply received by them and available for deduction. The Commissioner disallowed the claim, and accepted as a deduction only the sum of $1,633.33 being the tax fraction of the sum of $14,700 actually paid during the taxable period. The Taxation Review Authority upheld the
appellants’ objection but on a case stated Fisher J allowed the Commissioner’s appeal.

[5] The issue turns on the construction of s20(3)(1)(b), which is the provision under which the appellants claim the deduction is available to them. It states:

(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 payment basis or a hybrid basis pursuant to section 19 of this Act, the amount of input tax-
(i) 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) of this Act, to the extent that a payment in respect of that supply has been made during the taxable period:

The Taxation Review Authority decision

[6] The Authority appears to have proceeded on the basis that the value of the supply here was $94,000. No quarrel could be taken with that. He then took the view that in terms of s9(1) of the Act, supply was deemed to have taken place at the time of issue of the tax invoice, namely 14 October 1993. Again that would seem to follow. The Authority then went on to note that the equitable estate in the property passed to the purchasers on 14 October 1993 and to hold that as it was “an invariable rule in cases involving the sale of land that a deposit be paid”, the legislative intention was for the GST consequences to be fixed at that time rather than at the time of payment of “the last of the consideration”. The basis for this conclusion is unclear. It is said that injustice results if the Commissioner’s contentions were accepted because the taxpayers (purchasers) paid the whole of the GST as required by the contract, but can only deduct one-ninth of that sum. This would seem to beg the question and to ignore the appellants’ status as payments based taxpayers. It was also said to result in an absurdity if the time of supply is fixed as being 14 October, because the taxpayer is deprived of the benefit of deducting in full input tax “which arises at that date”. The Authority also noted the
absence of any mechanism to allow a deduction for later payment of the balance of the purchase price. The decision makes no overt attempt to apply what seems to be the plain words of s20(3)(b)(i) to the facts of this case, but without further rationalisation contains the broad statement that if output tax is payable by a vendor on execution of an agreement, and some payment is made by the purchaser, there is an immediate entitlement to deduct the full input tax.

The High Court judgment

[7] Fisher J, in a concise and cogent judgment considered that s20(3)(b)(i) contemplated some form of apportionment, which here would be achieved by applying the tax fraction to the payment actually made, namely $14,700. The Judge did not accept that any significant anomalies resulted from the Commissioner’s approach. Those suggested arose from the taxpayer paying the whole of the GST component, but only being able to deduct one-ninth; the Commissioner receiving the full component from the vendor but rebating part only to the purchaser; the different treatment of invoice and payment based taxpayers; and the absence of a mechanism for later deduction of the balance of the purchase price.

The submissions for the appellants

[8] Mr Nicholls presented detailed submissions, supplemented by oral argument and reference to a series of diagrams prepared for the purpose of demonstrating that the entire input tax was deductible in the relevant taxable period. In addition to relying on the decision of the Authority, and without intending to downplay their extent, Mr Nicholls’ submissions on analysis would seem to come under three principal heads.

[9] First, it was said that the scheme of the legislation was to ensure there was no “cost to business” from the collection of tax - if output tax is paid, the corresponding input tax can be deducted. This submission loses sight of the fact that deduction in circumstances such as the present is allowed; it is only the timing of it which is affected when as here the supplier is on an invoice basis, and the recipient is on a
payments basis. The delay in the offsetting process is a necessary consequence of the distinction between the methods of accounting, is inherent in the legislation, and cannot justify giving the words of s20(3)(b)(i) something other than their plain meaning.

[10] Secondly, Mr Nicholls contended that he had in fact paid GST of $10,500 to the vendor, and must therefore be entitled to a corresponding input tax deduction. The fallacy is that what was paid in October 1993 was a part of the total consideration for the purchase. Output tax is imposed under the Act, particularly s8, which places the supplier under a liability. As was said by McKay J in New Zealand Refining Co Ltd v Attorney-General (1993) 15 NZTC 10,038 at 10,052, a vendor of goods does not receive any part of the purchase price as GST on behalf of the Crown, but beneficially as to the whole. The basis upon whether vendor and purchaser elect to calculate a particular payment is irrelevant. In this case the sum of $14,700 was nothing other than a payment of part of the whole of the consideration payable by the purchasers. The fact that it was calculated to provide the vendor with funds to meet its tax liability, and it did meet that liability, does not matter and does not impinge on the purchaser's entitlement to a deduction under s20(3)(b)(i).

[11] Thirdly, Mr Nicholls contended that this was a credit contract and the purchasers had given full consideration at the outset. This contention is misconceived. The true meaning and intent of the agreement is beyond doubt. The consideration payable was $94,500. Of this the sum of $14,700 was due on execution of the agreement, and the balance within a stipulated time following release of the title. But the only payment made during the relevant taxable period was $14,700. There was no “forbearance” on the part of the vendor, whose only contractual entitlement at any time was to receive the balance on the later date. Associated with this submission was the suggestion that this transaction was identical to one in which the purchasers had borrowed the balance of the purchase price from, for example, the vendor and therefore effectively paid the vendor for the property but remained indebted for the loan. The short answer is that the agreement was not structured, nor was it carried out, in any such way. The legal
consequences of the transaction as spelt out by the relevant evidence must be given effect, and the legislation applied accordingly.

Conclusion

[12] I am in agreement with Fisher J that the Commissioner’s argument must prevail. The Authority’s decision cannot stand, for reasons which can be expressed quite briefly.

[13] For present purposes, input tax is the tax charged under s8(1) on the supply to the taxpayer of goods and services. Under s9(1), the supply in this case was deemed to have taken place at the time the vendor issued the invoice in October 1993. The wording of s20(3)(b)(i) is clear and unambiguous. The amount which is deductible is the amount of input tax “to the extent that a payment...has been made during the taxable period”. It does not permit deduction of the whole of the input tax relating to the supply, but only to that portion of it which relates to a payment or payments actually made in respect of the supply. Here the only payment made was of the sum of $14,700. I am unable to see how the provision can be construed otherwise. It is perhaps not surprising that there has been no previous authority on this point.

[14] The Act distinguishes between taxpayers who are to account on an invoice basis, and those who are to account on a payments (or hybrid) basis. The need for consistency as between liability to pay output tax and the ability to deduct input tax within the same regime is obvious, and is reflected throughout the Act. There is however no need for consistency as between the two different regimes.

[15] With respect, the Authority’s concentration on the timing of the supply is misplaced, and ignores the plain words of s20(3)(b)(i) and the requirement for the deduction to be based on a payment made within the taxable period. Similarly neither the fact of payment of the full GST component by the vendor, nor the inclusion of that in calculating the amount of the initial payment can assist the appellants. The matters seen as constituting absurdity, anomaly, or unfairness,
even if they could be so classed, cannot be cured by construing the legislation in a way which does not accord with its words and the intention conveyed by them.

[16] A final matter can be mentioned. As noted earlier, it was suggested that because there can only be one invoice rendered for a particular supply, and an invoice is required for s20(3)(b)(i) purposes, there is no mechanism for obtaining an input tax deduction when the balance of the purchase price is paid. As Fisher J pointed out, no difficulty arises. The invoice issued in October 1993 could be used for that purpose, and indeed Mr Nicholls confirmed that as events have transpired, input tax on the balance has now been claimed and allowed.

[17] The Court being unanimous the appeal is dismissed, with costs to the respondent in the sum of $5,000 together with disbursements as fixed by the Registrar.

BLANCHARD J

[18] I agree with the judgments of Henry and Tipping JJ.

TIPPING J

Introduction

[19] This appeal from Fisher J concerns input tax and its deduction when calculating the amount of tax payable under Section 20 of the Goods and Services Tax Act 1985 ("the Act"). In October 1993 the appellants bought a parcel of land from a company to which I shall refer as the vendor. The appellants were registered for GST on a payments basis and the vendor was registered on an invoice basis.

[20] The contract provided for a price of $94,500 inclusive of GST. A deposit of
$14,700 was payable and paid immediately. Possession was to be given and taken 5 working days after title was available, with the balance of the price payable 12 months thereafter.
[21] A disclosure document in terms of the Credit Contracts Act 1981 was given in relation to the deferred part of the price. It is to be noted, however, that the transaction was structured as a delayed settlement rather than as an outright purchase with vendor finance by way of mortgage.

[22] When the contract was signed the vendor issued a tax invoice to the appellants. This described the total then paid (ie. the $14,700 deposit) as being "deposit due @ 5% of $84,000 - $4,200" plus "GST due @ 12.5% of $84,000 -
$10,500". It is this apportionment of the deposit between price and GST which has led to the dispute between the appellants and the respondent Commissioner. The appellants claimed as an input credit under Section 20(3) of the Act the sum of
$10,500 as the purported GST element of the deposit. The Commissioner disallowed the claim and accepted as an input credit only the sum of $1,633.33, being the tax fraction (one ninth) of the sum of $14,700 paid. Mr Nicholls appealed to the Taxation Review Authority which rejected the Commissioner's view and directed him to allow the full deduction of $10,500. The Commissioner appealed to the High Court. Fisher J allowed the appeal and restored the Commissioner's decision allowing a deduction of only $1,633.33. The question in this further appeal, namely which approach is correct, turns, as Mr Nicholls accepted, on the correct construction of Section 20(3)(b)(i) in its statutory context.

Legislation

[23] Section 20 is the starting point. It requires every registered person to calculate for each taxable period the amount of tax payable by that person in terms of the section. Essentially this is a calculation of output tax, being the tax charged to the registered person under Section 8(1), in respect of the supply of goods and services made by that person. Having calculated the output tax payable for the period the taxpayer is allowed a deduction for input tax, subject to the invoicing requirements set out in Section 20(2). Section 20(3) allows the taxpayer to deduct from the total output tax for the period any relevant input tax. In the case of persons registered on a payments basis, as were the appellants, the section describes the amount of input tax that may be deducted rather awkwardly:
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) of this Act, to the extent that a payment in respect of that supply has been made during the taxable period.

The remaining subparagraphs of paragraph (b) are not relevant.

[24] Paragraph (d) of Section 20(3), although not relevant to the present facts, is helpful because it expresses in rather simpler language than paragraph (b), the essential concept behind deduction of input tax from total output tax. It describes the amount of input tax that may be deducted as "an amount equal to the tax fraction of any payment made during the taxable period by that registered person". Thus it is necessary to identify such qualifying payments as have been made, and then to apply to them the tax fraction of one-ninth (viz 12.5 divided by 112.5). The product is the allowable input tax credit.

[25] I return to Section 20(3)(b)(i). This provision allows the deduction of the amount of input tax in relation to the supply of goods and services to the registered person to the extent that a payment has been made during the taxable period by the registered person for those goods and services. What this means depends on a proper understanding of the concept of input tax. A registered person pays output tax but does not pay input tax. Indeed, no one pays input tax; it is simply an allowable deduction from output tax, claimable by the recipient of goods and services. Input tax, as regards such recipient, is the tax payable by the supplier of those goods and services to the recipient. Output tax is the tax payable under section 8(1) by the supplier of goods and services on supplies made by that person.

[26] Hence input tax in the present circumstances was the tax payable by the vendor of the land consequent upon the supply of the land to the appellants. They, the appellants, were entitled to an input tax credit to the extent they made a payment in respect of that supply (ie. for the land) during the taxable period. The fact that the vendor had to pay output tax of $10,500 on the rendering of the invoice, does not mean that the appellants as purchasers could claim input tax of the same amount. They (being registered on a payments basis) could claim input tax only to the extent that they made a payment for the land during the relevant tax period. The appellants
made a payment during that period only to the extent of $14,700. The input tax relevant to that payment was $1,633.33 (being one ninth of $14,700), not $10,500.

[27] The fallacy underlying Mr Nicholls' argument was his assumption that in paying the sum of $14,700 the Nicholls partnership was thereby paying GST of
$10,500. In acquiring the land and making the payment, the appellants did not make any supply of goods or services so as to attract liability for GST under Section
8. While from the vendor's point of view, the calculation of the price for the supply of goods or services will be influenced by the vendor's liability to pay GST (output tax), this does not mean that the purchaser/recipient of the goods or services so supplied is making any payment of GST as part of the price.

[28] That analysis accords with what McKay J said in this Court in New Zealand Refining Co Ltd v Attorney-General (1993) 15 NZTC 10,038, 10,052. He pointed out that a vendor of goods does not receive any part of the price as GST on behalf of the Crown. The vendor receives the whole price beneficially and as the price. The vendor's liability to pay output tax in respect of the supply is an independent liability of the vendor. In short no part of the price (whether fixed as GST inclusive or GST exclusive) comprises a payment of GST. The fact that the price may be fixed at say
$80,000 plus GST, does not mean that the purchaser is paying a price of $80,000 plus GST of $10,000. It means the purchaser is paying a price of $90,000. Reference to GST is simply a method whereby the total price is assessed and is useful to avoid doubt as to the total payable in a situation where GST is relevant.

[29] It follows from the foregoing that I agree with the conclusion to which Fisher J came in the High Court and with his reasoning. The Judge was correct in departing from the contrary view which prevailed in the Taxation Review Authority (Judge Willy), and upon which Mr Nicholls naturally relied. At the risk of undermining the relative simplicity of the matter it is appropriate that I explain why I cannot accept Mr Nicholls' submissions.

Appellant's submissions

[30] Mr Nicholls' essential complaint was that he had to carry what he saw as the cost of paying the GST until he was able to get it back as an input tax credit when he made the deferred payment. Having in his view paid all the GST as part of the deposit he felt he should get it all back immediately as an input tax credit. It is quite correct that as the transaction was structured, Mr Nicholls' partnership incurred the consequence of which he complains; but that is the effect of the Act. The result would have been the same whether the price was described as $94,500 inclusive of GST or $84,000 plus GST. It is the deferral of the second and final payment which leads to the consequence of which Mr Nicholls complained. If he had settled the transaction in full when title became available, funding the purchase by way of an external or indeed a vendor mortgage, he would thereby have made payment of the whole balance and would have been entitled to an input tax credit on that basis.

[31] Mr Nicholls suggested that by entering into what he described as a credit contract, he was giving consideration in full at the outset. Irrespective of whether a credit contract was involved in this transaction, Mr Nicholls' argument confuses the concepts of consideration and payment. Section 20(3)(b)(i) refers to a payment. While payment is a form of consideration as that word is defined in the Act, this does not mean that everything within the definition of consideration is a payment. By reference to that definition Mr Nicholls suggested there had been a forbearance, but the vendor's forbearance, if such it can be called, in deferring payment of the balance owing under the contract is not a consideration provided by the purchaser; the more so it is not a payment, as section 20(3)(b)(i) requires.

[32] As I understood him Mr Nicholls also argued that, in spite of the transaction being structured as a deferred payment, rather than as full settlement with a vendor mortgage, the Court should treat the transaction according to its general effect. It was suggested that the transaction should be treated as if there had been an exchange of cheques or the conveyancing equivalent. It is sufficient to say that this did not happen. The Court cannot proceed as if the transaction had been structured differently, or as if it had been carried out differently, on some sort of economic equivalence basis. Tax is payable or not and deductions are allowable or not, 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.

[33] Mr Nicholls attempted to make something of the fact that only one tax invoice may be issued by a supplier for each taxable supply – see Section 24(1)(a). While that is so there is nothing in the Act to prevent the same invoice being used more than once, if appropriate. The invoice supplied in the present case is a good example of when this can happen. It was able to be used first in relation to the payment of the deposit and again in respect of the payment of the balance. The invoice was drawn on that basis showing two separate payments due.

[34] Mr Nicholls complained about what he saw as a lack of symmetry between taxpayers because he could not get an input credit for the whole $10,500 immediately. If that is to be regarded as a lack of symmetry, it is clearly inherent in and envisaged by the legislation when, in a case such as this, the vendor is registered on an invoice basis and the purchaser on a payments basis. The suggested lack of symmetry is in any event more apparent than real. Mr Nicholls' perception derives from his inability to recognise that in paying the price, however calculated, he was not actually paying any GST. He was simply paying the price. His ability to obtain an input tax credit depended on the amount and timing of the payments he made of what, for a person in his position, is for taxation purposes regarded as entirely the price of the goods or services.

Decision of Taxation Review Authority.

[35] It is not necessary to say very much about the reasoning of the Authority. I agree with the basis on which Fisher J found it to be unsound. As a general observation I consider, with respect, that the Authority was diverted from an application of the clear words of Section 20(3)(b)(i) by its reference to certain perceived anomalies which might ensue. In essence, the Authority concluded that a taxpayer registered on a payments basis could claim an input tax credit on what was effectively an invoice basis. This is true asymmetry. It is so prima facie unusual as to suggest error. The Authority came to its view on the basis that Mr Nicholls had paid "the whole of the GST component of the price" and it would be unjust if he
could deduct only one ninth as input tax. But that, with respect, is a misapprehension of the position. The price had no GST component, as has earlier been pointed out. The Authority also saw as arbitrary:

the result that an invoice-based taxpayer may deduct the allowable input in the period in which the output is paid but the payments-based taxpayer may not.

[36] There are two difficulties with this reasoning. The first is that the legislation expressly provides for different results according to the different accounting bases employed. To describe the different results as arbitrary, and then, in the face of plain words, to construe the legislation so as to eliminate those different results, is unpersuasive. In any event this Court has pointed out in Shell NZ Holding Co Ltd v CIR (1994) 16 NZTC 11,163, 11,168 that there are various potential timing "mis matches" possible under the Act. These arise, inter alia, because there are three different taxable periods available (1, 2 and 6 months) and three different accounting bases (invoice, payments and hybrid).

[37] The second difficulty relates to the Authority's use in the passage above of the expression "in the period in which the output is paid". There is another passage to the same effect in the Authority's decision and it is an aspect on which Mr Nicholls appeared to rely. The Authority suggested that the appellant as purchaser was "entitled to deduct the corresponding input in the same period as he pays the output". The concept of paying the output treats the purchase price, or at least some part of it, as an output. It is not clear in what sense, technical or otherwise, the Authority was using the word output. Payment of the price and acquisition of the land can hardly be described as an output in any relevant sense. Indeed the concept of an output per se is not one upon which the Act is based. All in all, Mr Nicholls' reliance on the decision of the Authority cannot prevail against the stance of the Commissioner, based as it was on the cogent reasoning of Fisher J.

[38] The Authority's reasoning does not accord with the plain words of section 20(3)(b)(i), focussing as they do on the concept of a payment during the relevant taxable period, and an input tax credit being allowed only to the extent of such payment; nor does the Authority's reasoning accord with the different outcomes inherent in the different accounting bases allowed for in the Act; nor does it recognise that, from a taxation point of view, a purchaser is not paying any GST when paying the price or any part of it.

Conclusion

[39] For these reasons I would dismiss the appeal with costs as proposed by Henry J.

Solicitors

Crown Law Office, Wellington