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GST on property transactions

GST issues continue with property transactions

The following case highlights one of many GST issues with the sale and purchase of property. In this case the IRD deemed that the vendor was GST registered. This meant that the IRD then disallowed the purchaser a $720,000 second hand goods claim. The purchaser was then forced to recoup the GST from the vendor for a breach of warranty. The successful litigation required that there were appropriate clauses in the sale and purchase contract. The outcome: the purchaser was returned to their expected contract position and the vendor was $720,000 worse off.

Breach of GST warranty in agreement confirmed, 13 June 2022 The High Court has held that a vendor breached a GST warranty provided to the purchaser that they were not registered for GST. The purchaser’s application for summary judgment was upheld. Background The purchaser, Park Homes Ltd (Park Homes), sought summary judgment in the sum of $730,434.78 against the vendor, Mr Miah, for an alleged breach of a GST warranty he provided to Park Homes. The warranty was contained in a variation to an agreement for sale and purchase of a property sold by Mr Miah to Park Homes. On 13 November 2020, Mr Wong, the director of Park Homes Ltd, as purchaser, entered into an agreement for sale and purchase with Mr Miah, as the vendor. On 18 November 2020, Mr Wong and Mr Miah entered into a written variation agreement which reduced the purchase price. In the variation agreement the vendor warranted that they were not registered for GST as at the date of the agreement and that they would not be registered for GST at settlement. On 19 November 2020, Mr Wong paid Mr Miah the deposit. On 20 November 2020, Mr Miah’s solicitors advised Park Homes’ solicitors that Mr Miah was not registered for GST. A further variation to the agreement for sale and purchase was entered into by the parties on 25 November 2020. On 27 January 2021, Mr Wong incorporated Park Homes and on 9 March 2021, nominated Park Homes as the purchaser under the agreement for sale and purchase by written deed of nomination. Settlement took place on 16 March 2021. Subsequent to settlement, Park Homes attempted to obtain a GST refund from Inland Revenue for the GST component of the purchase price but was advised that Mr Miah was registered for GST. Inland Revenue declined to pay the refund on the basis that it deemed Mr Miah was registered for GST on the settlement of the purchase and accordingly the supply was a zero-rated transaction under the Goods and Services Tax Act 1985. Park Homes applied for summary judgment against Mr Miah in relation to the sale of the property based on a breach of a GST warranty by Mr Miah. Park Homes claimed as its loss its inability to obtain a GST refund. Mr Miah denied liability and submitted that he was never registered for GST and that the warranty only applied until 15 March 2021. Settlement occurred on 16 March 2021 and the warranty accordingly had no application. He contended that he had an arguable defence that there was no breach of the warranty and that the matter should therefore go to trial. Decision The High Court granted the application by Park Homes for summary judgment and entered judgment against Mr Miah in favour of Park Homes in the sum of $730,434.78 together with interest. The Court found as follows:

  1. Mr Miah could not avoid the application of the Goods and Services Tax Act 1985 (GST Act). A person’s liability for registration was governed by s 51 of that Act. A person became liable to be registered if, in a 12-month period, he or she carried on taxable activities exceeding the relevant threshold or there were reasonable grounds for believing that would occur.

  2. Inland Revenue deemed Mr Miah to be registered for GST as at 16 March 2021. Even if Mr Miah committed an inadvertent breach of the warranty that did not alter the fact that he was “registered” in terms of the GST Act (Ling vYL NZ Investment Ltd; (2018) 28 NZTC ¶ 23-057 cited).

  3. The risk as to GST registration lay with Mr Miah. There could be no dispute about the clear statutory context which applied and there was no issue that needed to go to trial. Mr Miah was unable to point to any disputed factual matters which could have any real bearing on the clear and unequivocal meaning of the warranty at issue.

  4. Mr Miah’s contention that the warranty only applied until 15 March, when settlement ultimately took place the next day, was equally without merit. The only tenable interpretation of the relevant contractual terms was that the settlement referred to in the warranty clause was the settlement that occurred on 16 March 2021.

  5. Mr Miah may originally have understood “settlement” to refer to 15 March 2021. However, his agent, his solicitor, subsequently agreed to a variation. There was no suggestion that the solicitor was acting without authority or that the subsequently agreed settlement date was not binding on all parties.

  6. Park Homes had established a loss. Park Homes was denied an input credit for the GST component of the purchase price. That was a loss that arose naturally from the breach of the warranty.

Regards, Glenn & Michael

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