BURKE v COMMISSIONER OF INLAND REVENUE [2019] NZHC 2569

BURKE v COMMISSIONER OF INLAND REVENUE [2019] NZHC 2569 [10 October 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-001376[2019] NZHC 2569UNDER Section 26A of the Taxation ReviewAuthorities Act 1994IN THE MATTER of an appeal against the decision of theTaxation Review AuthorityBETWEEN DARRYL PATRICK BURKEAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 9 October 2019Counsel: GJ Thwaite for AppellantOJG Upperton and TN Carr for RespondentJudgment: 10 October 2019JUDGMENT OF DOWNS JThis judgment was delivered by me on Thursday, 10 October 2019 at 1 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Crown Law, Wellington.GJ Thwaite, Auckland.The appeal[1] Mr Darryl Burke contends he owes less goods and services tax—better knownas GST—than the Commissioner of Inland Revenue considers payable. The TaxationReview Authority found for the Commissioner.1 Mr Burke appeals.2 Mr Burke arguesa payment of almost $500,000 to his financier on 3 August 2007 effects his GSTliability for the August/September period that year.The background in brief[2] Mr Burke is a self-employed contractor who renovated houses and buildings.He is, and was, GST registered.[3] In 2006, Mr Burke and Citywide Capital Ltd—or Citywide—entered aproperty venture. Mr Burke bought two properties: 10 and 19 Florey Street, Rotorua.Citywide loaned Mr Burke the money to buy both. The loans were secured by amortgage over each property. The loan agreement required Mr Burke to useCitywide's chartered accountant and claim, through her, his GST refunds as soon asthese were available. It required Mr Burke to use these to pay, first, any default underthe loan; second, to pay interest; and third, to repay principal. The agreement alsorequired Mr Burke to pay his suppliers. Mr Burke did so using money he hadborrowed from Citywide, albeit Citywide made the payments. Mr Burke and Citywidewould confer about what suppliers he owed; Citywide's accountant then paid them.[4] In the middle of 2007, Mr Burke sold 19 Florey Street. On 3 August 2007, herepaid Citywide $498,640.48. The loan agreement required as much. The sumrepresented interest, an amount or amounts earlier owing to Citywide from Mr Burke,and the cost of Mr Burke's suppliers.[5] Mr Burke continued work on 10 Florey Street, but he and Citywide then partedcompany. Mr Burke and Citywide could not agree on further funding to allow1 Burke v Commissioner of Inland Revenue [2019] NZTRA 3.2 I may take a different view if Mr Burke persuades me the Authority's decision is wrong; seeAustin, Nichols & Co v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [40] and [6];and AAA Developments (Ormiston) Ltd v Commissioner of Inland Revenue [2015] NZHC 2318,(2015) 27 NZTC 22-026.Mr Burke to complete number 10. In early September 2007, Mr Burke leftNew Zealand. He left his suppliers unpaid. For reasons that need not be recorded,none of this caught the Commissioner's attention until 2015.The decision of the Taxation Review Authority[6] Mr Burke argued his arrangements with Citywide meant his earlier expenses—his payments to his suppliers—should be attributed to the disputed period(August/September 2007), and therefore deductible within it. Mr Burke submitted thismeant his core GST liability was $20,857.49, not $51,840.30. Mr Burke contendedhis arrangements with Citywide were "unique".3 He said he was not liable to pay hissuppliers until he paid Citywide. So, he could only then claim his expenses as GSTdeductions. Mr Burke said repayment of the $498,640.48 on 3 August 2007 meant hisearlier expenses fell within the disputed period.[7] Judge Sinclair disagreed:4I do not accept this analysis for a number of reasons. The Loan Agreementwas structured to enable development funds to be drawn down by the disputantto pay suppliers' invoices and included a detailed mechanism by which thiswas to be done. [Citywide] did not assume any responsibility for makingpayment and the disputant remained at all times contractually liable to paythese invoices. Mr Thwaite placed emphasis on the fact that the payments tosuppliers were not made out of the disputant's own pocket. I do not considerthis to be of any significance. The fact is, as soon as particular amounts weredrawn down, they were debited to the disputant's account under the LoanAgreement. The disputant became liable to pay interest and to repay theseamounts. In summary, while [Citywide] loan funds were used, payment of theinvoices was still made by the disputant.In addition, it was the disputant who was required under the Loan Agreementto file GST returns (using the services of the project accountant) claiminginput tax deductions. The GST refund payments were made directly by InlandRevenue to the disputant, and the disputant was then required to account to[Citywide] for the payments received by him. It is evident from thisarrangement, that it was the disputant, as the party liable to pay the input taxon the suppliers' invoices who in fact claimed the input tax deductions in theGST periods ending 31 March, 31 May and 31 July 2007, not [Citywide].On a careful consideration of the terms and conditions of the Loan Agreement,I do not agree that there is anything exceptional in the funding arrangementswhich in any way changes the nature of the parties' GST obligations. Thedisputant remained responsible for payment of the suppliers' invoices and to3 Burke v Commissioner of Inland Revenue, above n 1, at [26].4 At [28]–[30].claim input tax deductions which happened in the prior GST periods. Thedisputant's payment of $498,640.48 on 3 August 2007 was not made inexchange for a supply of any good or service. Instead, it was paid in reductionof the amounts owing under the Loan Agreement. Importantly, repayment ofa loan is not consideration for a supply and the payment made by the disputantwas not subject to GST input tax. Accordingly, in these circumstances, itcannot generate an input tax deduction.Mr Burke's appellate case[8] Mr Burke advances the same arguments as those rejected by the Judge. Hecontends his repayment of Citywide on 3 August "should activate the deductibility"of his earlier expenses to offset his GST liability in the disputed period. Mr Burkecontends there is a link between his repayment of Citywide and his earlier, GSTdeductible expenses, in turn effecting their timing for GST purposes. Put another way,Mr Burke argues he did not really pay his suppliers until 3 August, when he repaidCitywide, even though his suppliers' invoices had been earlier paid, and in tax periodsbefore the disputed one.Analysis[9] First, some basics. GST is a broad, value-added tax borne by the finalconsumer. GST distinguishes input tax from output tax to render GST neutral untilthe consumer bears it. An example may help. Company A supplies timber. CompanyB makes wooden furniture. If company B buys timber from company A, thetransaction attracts GST. Company B must pay GST on its purchase to company A.Company A must account for this tax as output tax. Company B may claim the GSTit paid to company A as input tax. So, the transaction is GST neutral as between thetwo companies.[10] GST registered persons must adopt one of three accounting bases: invoice,payments or hybrid. Those who use the invoice basis return output tax and claim inputtax deductions during the period in which the relevant supply is made.5 This is,generally, the earlier of the issuing of an invoice or payment of that invoice.6 Thosewho use the payments basis return output tax and claim input tax deductions during5 Goods and Services Act 1985, s 20(3)(a) and 20(4)(a) as at 3 September 2007.6 Section 9(1) as at 3 September 2007. The current version of the Act uses the same wording.the period in which payment is made.7 Those who use the hybrid basis return outputtax on an invoice basis and claim input tax deductions on a payments basis.8[11] Mr Burke adopted a hybrid basis with two-monthly taxable periods. Hechanged to a payments basis from 1 August 2007.9[12] Section 20(3) of the Goods and Services Tax Act 1985 establishes how muchGST is payable in a taxable period. Those who account for tax on a payment or hybridbasis are governed by s 20(3)(b)(i). It provides:(3) Subject to this section, in calculating the amount of tax payable in respectof each taxable period, there shall be deducted from the amount of outputtax of a registered person attributable to the taxable period—(b) in the case of a registered person who is required to account for taxpayable on a payments basis or a hybrid basis pursuant to section 19,the amount of the following:(i) input tax in relation to the supply of goods and services madeto that registered person, being a supply of goods and serviceswhich is deemed to take place pursuant to section 9(1) orsection 9(3)(a) or section 9(3)(aa) or section 9(6), to the extentthat a payment in respect of that supply has been made duringthe taxable period:[13] So, for those using the payments or hybrid basis, the input tax is deducted fromthe output tax in relation to the supply of goods and services "to the extent apayment in respect of that supply has been made during a taxable period".10[14] The provision answers Mr Burke's case. Mr Burke was supplied goods in threeperiods before the disputed period: February/March; April/May; and June/July 2007.Mr Burke paid for these goods within these periods. Mr Burke was entitled—anddid—claim his corresponding input tax deductions within each of these taxableperiods. No further input tax deduction arose for the disputed period in terms ofs 20(3)(b)(i); Mr Burke's suppliers had already been paid.7 Goods and Services Act, s 20(3)(b) and 20(4)(b) as at 3 September 2007.8 Section 20(3)(b) and 20(4)(a) as at 3 September 2007.9 Burke v Commissioner of Inland Revenue, above n 1, at [8].10 Emphasis added.[15] Mr Burke's August payment of $498,640.48 to Citywide was obviously notmade to obtain supplies from his suppliers; again, they had been paid. Indeed, thispayment was not made in exchange for a good or service attracting GST. It was a loanrepayment, and one required by the loan agreement between Citywide and Mr Burke.So, contrary to Mr Burke's submission, there is no material linkage between thispayment and the goods earlier supplied to him. In short, Mr Burke's repayment ofCitywide on 3 August did not somehow mean his suppliers were paid only then.[16] Relatedly, Mr Burke's arrangements with Citywide do not affect his GSTliability. Mr Burke was required to pay his suppliers' invoices irrespective of hisobligations to repay Citywide. If he did not, his suppliers would sue him. ThatMr Burke paid them with money borrowed from Citywide is beside the point. And asobserved, that he repaid Citywide on 3 August is also beside the point. In terms ofs 20(3)(b)(i), the payment "in respect of [each] supply" occurred when Mr Burke paidhis suppliers for goods they provided to him; not when he repaid Citywide under theloan agreement.[17] For completeness, it matters not who paid Mr Burke's suppliers. Input taxmeans, in relation to a registered person, tax charged under s 8(1) on the supply ofgoods and services to that person, being goods and services acquired for the principalpurpose of making taxable supplies.11 It is unarguable the goods were supplied toMr Burke. He acquired them.[18] These reasons largely mirror those of Judge Sinclair, who was undoubtedlycorrect.Result[19] The appeal is dismissed...Downs J11 As at 3 September 2007.