Contract Pacific – IRD’s obligations to pay GST refunds – Feburary 2010
In the recent Court of Appeal decision CIR v Contract Pacific Limited (CA759/08, 4 December 2009), the CIR succeeded in an appeal against a High Court decision which had given judgment to the taxpayer on a GST refund. The case has important implications for the IRD’s ability to withhold a GST refund under s 46 Goods and Services Tax Act 1985 (GSTA 1985 [in this article, provisions of the GSTA 1985 are generally referred to by section number only]).
The refund provisions of the GST legislation are often relied upon by taxpayers to provide much-needed cashflow or to ameliorate heavy outgoings, especially during start-up projects or during major acquisition or expansion. Recognising this reality, the CIR is obliged to make a refund quickly, unless he starts an investigation. The issue in the Contract Pacific case was whether the CIR had to take all the mandated steps or simply one of them in order to be relieved from liability to pay the refund pending resolution of a dispute.
Facts
The taxpayer company was an “inbound tour operator” which meant that it sold New Zealand tour packages to overseas intermediaries, who on-sold them to foreign tourists. Prior to May 1999 there was ambiguity in the application of the GST legislation to these services, and some inbound tour operators (like Contract Pacific) included GST in the sale price for services sold to overseas wholesalers, while others did not. In May 1999 the GST legislation was amended with prospective effect, making it clear that GST was chargeable on such supplies. This change necessarily highlighted that there had been ambiguity in the application of the law prior to this point. Subsequently the CIR formed the view that the law prior to that point did not require that GST be charged in respect of “facilitation services” but that GST was imposed on other services provided. Legislation with retrospective effect was eventually introduced[1], explicitly imposing GST on the services provided. The remedial legislation was expressed (in s 241(6) of the amending Act) not to apply to those taxpayers who had received a refund or credit before 14 May 2001: it left their rights under the original law intact.
In 2000, the taxpayer sought a refund of over $7.5m in GST paid for the period between July 1993 and April 1999. An assessment was made by the CIR accordingly, but the CIR also advised the taxpayer that payment of the refund was to be withheld pending investigation of the readjustment claim, and placed an “account halt” on the taxpayer’s account. The CIR gave notice of his intention to investigate the return within the statutory time limit of 15 working days[2] stipulated in s 46(5). An administrative error resulted in the expiry of the halt placed on the taxpayer’s account on 5 February 2001, and the taxpayer received a notice of assessment and a refund cheque for $7.5m. The CIR stopped payment on the cheque on 14 February 2001, and the cheque was dishonoured before the taxpayer received the proceeds.
In subsequent months, the taxpayer and the CIR reached settlement in respect of the “facilitation fee” component of the refund claim, which amounted to about $1.2m. The balance was left unresolved, and in 2005 the taxpayer issued proceedings on the balance of the dishonoured cheque (ie approximately $6.3m plus interest).
Taxpayer’s Causes of Action
The taxpayer supported its claim to the balance of the GST refund under two causes of action.
- The first cause of action was an action on a cheque under s 27 Bills of Exchange Act 1908. The taxpayer submitted that the reasoning in CIR v Sea Hunter Fishing Ltd (2002) 20 NZTC 17,478 (CA) applied, and that if it could be established that the CIR failed to comply with all the requirements in s 46, then the CIR had no authority to withhold the refund and therefore, as at 5 February 2001, there was an existing liability which provided valuable consideration for the cheque.
- The taxpayer’s second and alternative cause of action was that it qualified under the savings provision in the retrospective remedial legislation, because it was a person for whom the CIR had reduced the amount that would otherwise be payable. This relied on a submission that the combined effect of ss 20(5) and 46 meant that that the notice of assessment accompanying the refund cheque of 5 February 2001, and seemingly the cheque itself, could not be dismissed as the consequence of a mechanical or computer error which does not qualify as the product of an assessment under the principles established in Paul Finance Ltd v CIR [1995] 3 NZLR 521 (CA).
Refund Provisions
Section 20(5) requires the CIR to refund any excess where the total amount that may be deducted for a taxpayer’s output tax exceeds the aggregate amount of the output tax for that taxable period. Section 46 deals with the CIR’s right to withhold payments, providing that if the CIR is required to refund an amount under s 20(5), he shall do so within 15 days of receipt of the return subject only to his powers under s 46(2) to withhold payment. The materially relevant parts of s 46 are:
(1) Subject to this section, if the Commissioner is required to refund an amount to a registered person under section 19C(8) or section 20(5) of this Act, the Commissioner shall refund the amount –
(a) Except when paragraph (b) applies, not later than 15 working days following the day on which the registered person’s return was received by the Commissioner; or
(b) The day after the working day on which the Commissioner –
(i) Determines the amount is refundable, after first having –
(A) Investigated the circumstances of the return in accordance with subsection (2); or
(B) Reviewed the information requested in accordance with subsection (2); and
(ii) Is satisfied that the registered person has complied with the person’s tax obligations.
(2) If the Commissioner is not satisfied with a return made by a registered person, the Commissioner –
(a) May investigate the circumstances of the return:
(b) May request the registered person to provide further information concerning the return.
…
(4) The Commissioner must give a request for information concerning a return under subsection (2) –
(a) Within a period of 15 working days following the day on which the return is received by the Commissioner (in the case of an initial request for information); and
(b) Within a period of 15 working days following the date of receipt of any information previously requested by the Commissioner (for subsequent requests for information).
(5) The Commissioner must notify the registered person –
(a) Of the Commissioner’s intention to investigate the circumstances of the return under subsection (2);
…
within 15 working days following the day on which the return is received by the Commissioner.
By way of comment, the distinction which appears to be drawn in s 46 between “giving a request for information concerning a return” and “investigating the circumstances of the return” is not an obvious one. When the CIR is requesting information concerning a return, surely he is necessarily also “investigating the circumstances of the return”, and the CIR investigating the circumstances of the return will usually involve him requesting information from the registered person involved.
High Court Judgment
After referring to the Court of Appeal decision in CIR v Sea Hunter Fishing Limited (2002) 20 NZTC 17,478, Duffy J concluded that s 46 is a code for the authority to withhold payment of disputed GST refunds. She held that there is only one interpretation of s 46(2) that does not undermine Parliament’s intent to impose strict limits on the CIR’s authority to withhold a refund. This is that whenever the CIR is faced with a refund issue under s 46 that requires both an investigation and the collection of further information, the two limbs of the section must be used in conjunction. Therefore, in any investigation of a refund claim that engages s 46(2)(a), requests for information will engage s 46(2)(b) as well. Any such requests that do not comply with the time limits in s 46(4) will cause the CIR to lose his authority to withhold the refund while he carries out his investigation. While the CIR need not engage both limbs of s 46(2), where his actions do entail both an investigation and a request for information he must comply with the prescribed time limit.
In this dispute, as noted above, the CIR had issued a notice under s 46(2)(a), notifying his intention to investigate the matter, and had done so within the 15-day time limit prescribed in s 46(5). However, the CIR also made requests for information in the course of that investigation, but these were made outside the prescribed time limits in s 46(4). Accordingly, Duffy J concluded that the CIR “lost his authority to withhold the disputed refund”.
The effect of Duffy J’s judgment was to regard the requirements in ss 46(4) and (5) as cumulative. If the CIR is to give notice of investigation, and require information, he must do both within 15 working days. As he had done both of these things, but only one within 15 working days, he lost his entitlement to retain the refund.
Consequently, Contract Pacific was held to be entitled to judgment for the unpaid balance on the cheque.
Court of Appeal Judgment
The Court of Appeal[3], however, held otherwise. The Court started its analysis by emphasising the CIR’s specific duty[4] to collect the highest revenue that is practical having regard to resources and the importance of obtaining compliance, especially voluntary compliance. The crucial grounds of the judgment are at paragraphs [35] to [37]:
[35]…“[W]e agree with Mr Palmer that the proper interpretation of s 46(2) is that each of the avenues available under subs (2)(a) and (2)(b) respectively is alternative and distinct.
[36] In cases where all that is required is additional information, the Commissioner will not investigate the circumstances of the return but will merely request information.
[37] If, however, as in this case, within the 15 day period the Commissioner gives notice of an investigation, that investigation is not subject to any limitation, curtailment or restriction. If, in the course of the investigation, instead of or as well as seeking submissions, the Commissioner requires additional information, he can ask for it and such request will not engage s 46(2)(b).
In contrast to Duffy J’s judgment, the Court of Appeal’s approach regards the requirements in ss 46(4) and (5) as alternative. If the CIR is to give notice of investigation, and require information, he must do one of these within 15 working days if he is to remain entitled to retain the refund. As he had done one of these things within 15 working days, he retained his entitlement to retain the refund and the action on the dishonoured cheque failed.
Conclusion and Implications
The taxpayer has sought leave to appeal to the Supreme Court, but it remains to be seen with what result. However, leaving aside the particular circumstances of this case (a cheque issued by mistake, a stop on the cheque, the retrospective legislation), the outcome of the Court of Appeal decision casts a worrying shadow. All the Revenue need do to withhold a refund indefinitely (or at least for the 4 years mandated by s 108A TAA 1994) is to announce an investigation within the 15 working day period, and then investigate at leisure.
Even before the Court of Appeal decision was released, word on the street has been that IRD is getting noticeably more reluctant to let refunds go out the door, especially if the people behind the registered person concerned have been involved in other companies which folded, leaving GST unpaid. While this approach certainly maximises revenue collection in these credit-crunched times, it is important to bear in mind that the CIR’s obligation is to maximise revenue collection “within the law” – a qualification which was noticeably absent from the Court of Appeal’s summary of that obligation in the decision under discussion.
It may well be that one day a decision to delay a refund under the pretext of “investigation” – on the real basis that the individuals behind the entity entitled to the refund have been involved with other entities with unfulfilled GST obligations – will result in a victory for the taxpayer and a change in the Courts’ apparently sympathetic attitudes to the CIR’s efforts to maintain the revenue base. If the CIR’s concern is that individuals are systematically running companies in a way which results in them defaulting on GST obligations, then the CIR has remedies under s 61 GSTA 1985 and HD 15 of the Income Tax Act 2007; as well as under the general Companies Act 1993 provisions relating to reckless trading, trading while insolvent and breaches of directors’ duties; and in extreme cases, under the criminal law. What the CIR must not do is hold up a refund under the pretext of investigation, when there really is no dispute, simply because he has missed out on GST as a creditor of a related taxpayer.
[1] Taxation (Taxpayer Assessment and Miscellaneous Provisions) Act 2001.
[2] “Working day” is defined in s 2 GSTA 1985 to mean “any day of the week other than –
(a) Saturday, Sunday, Good Friday, Easter Monday, Anzac Day, Labour Day, the Sovereign’s birthday, and Waitangi Day; and
(b) A day in the period commencing with the 25th day of December in any year and ending with the 15th day of January in the following year.”
[3] Hammond, Chambers and Robertson JJ, judgment of the Court being delivered by Robertson J
[4] Section 6A(3) TAA 1994.