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A GST Issue for the uninitiated.

GST REGISTRATION AND WARRANTIES

The case of Louise Ling Vs YL NZ Investment Limited [2018] NZCA 133 (YL) shows how careful taxpayers need to be with GST registration issues.

The facts of the case were as follows;

On 2 July 2015, Ms Ling entered into an agreement to buy certain property situated at 170 Station Road, Pukekohe (the Property). On 21 December 2015, prior to having settled her purchase, Ms Ling entered into an agreement to sell the Property (the Agreement) to YL NZ Investment Limited (YL), for $3.5 million inclusive of GST. The parties were not associated.

On the front page of the Agreement was the statement:

The vendor is registered under the GST Act in respect of the transaction evidenced by this agreement and/or will be so registered at settlement: Yes/No. “No” was circled beside that statement.

The vendor Ms Ling thereby clearly indicated that as at 21 December 2015, she was not registered for GST. Ms Ling therefore warranted she was not registered under the GST Act in respect of the transaction and would not be so registered at settlement. YL was registered under the GST Act.

Schedule 2 to the Agreement (GST information) was partly filled in. The vendor’s GST registration number was left blank. The purchaser indicated that it was registered for GST and would be so registered at settlement, and that at settlement the purchaser intended to use the Property for making taxable supplies. The answer “No” was given to statements as to whether the purchaser intended to use the Property as a principal residence under the GST Act.

As the vendor Ms Ling was apparently not GST registered and the purchaser YL who was so registered intended to use the Property to make taxable supplies, on the face of it, YL was entitled to a second hand good GST input credit. 

On 15 July 2016, YL submitted a GST return to the IRD claiming a GST input credit tax refund of $365,869.57 (the GST Refund) in relation to the purchase of the Property. YL’s claim for an input credit tax refund of $365,869.57 was rejected by the Inland Revenue Department (IRD) on the basis the supply was from a registered person to another registered person and was therefore zero-rated under the GST Act. In other words, despite Ms Ling stating that she was not GST registered, the IRD considered that on some basis she was GST registered or at least liable to be registered

On 15 September 2016, the IRD wrote to Ms Ling (the Letter), giving her a GST registration number and saying:

You’re now registered for GST as from 8 May 2015. From this date, you need to charge and account for GST on all goods and services you supply in your taxable activity using the hybrid accounting basis.

Ms Ling had apparently engaged in (taxable) activity that the IRD considered made her liable to be GST registered, and it backdated her GST registration to 8 May 2015..

YL’s advisers asked the IRD about the GST Refund and were advised by email on 10 October 2016:

I can confirm the vendor for the property sale at 170 Station Road, Pukekohe is GST registered and should have been at the time of sale

YL successfully applied for judgment against Ms Ling claiming breach of warranty resulting in YL’s inability to claim the input tax refund. The Judge held that the vendor had warranted that she was not GST registered, and accordingly by breaching that warranty, YL had suffered a loss, being the GST claim of $365,869.57 that was declined by the IRD

The warranty on which YL relied is contained in clause 14 of the Agreement.

Clause 14 said:

14.0 Zero-rating

14.1 The vendor warrants that the statement on the front page regarding the vendor’s GST registration status in respect of the supply under this agreement is correct at the date of this agreement.

The statement on the front page of the Agreement, which is set out in full above, was to the effect that the vendor was not registered under the GST Act in respect of the transaction and/or would not be so registered at settlement

The lawyer for the vendor Ms Ling argued that when she made the warranty she was not GST registered, and so she had not breached the warranty. The judge rejected this argument and held that by responding “No” to the statement on the front page of the Agreement, Ms Ling said in effect that she was not then a GST registered person and would not at settlement be a registered person, that is, registered or liable to be registered under the GST Act. Clause 14.1 of the Agreement makes that statement a warranty said the judge.

The lesson for taxpayers is that when warranting that you are not GST registered, you are taken to also warrant that you are not or will not be deemed to be GST registered at the date of settlement. That means that if the IRD deems you to be registered on a date that precedes the date of settlement, even if when you gave the warranty you were not yet GST registered, you could still be liable for a breach of warranty.

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