EDUCATION ADMINISTRATION LIMITED V COMMISSIONER OF INLAND REVENUE HC WN CIV-2007-485-002547

EDUCATION ADMINISTRATION LIMITED V COMMISSIONER OF INLAND REVENUE HC WN CIV- 2007-485-002547 5 May 2010IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2007-485-002547UNDER Part VIIIA of the Tax Administration Act 1994 BETWEEN EDUCATION ADMINISTRATION LIMITED Plaintiff AND COMMISSIONER OF INLAND REVENUE Defendant Hearing: 7-9 December 2009 & 5 February 2010 Appearances: G D Clews and S L Buckley for Plaintiff M Deligiannis and B L Orr for Defendant Judgment: 5 May 2010RESERVED JUDGMENT OF HON. JUSTICE FRENCH Introduction[1] This proceeding is brought under Part V111A of the Tax Administration Act 1994. It concerns the operation of the Goods and Services Tax Act 1985. [2] As is well known, the GST Act taxes supplies of goods and services made by registered persons in the course of their taxable activities – output tax. The Act also permits such persons to claim deductions for the amounts they expend in connection with those activities – input tax. The rate of tax is 12.5 per cent and hence the tax fraction applicable to the deductions is one-ninth. At the end of each taxable period, a person registered under the Act must make a GST return bringing to account both outputs and inputs and then either pay the debit balance or claim the credit balance(the "GST refund") as the case may be: see Glenharrow Holdings Limited v Commissioner of Inland Revenue [2009] 2 NZLR 359 (SC) at [16]. [3] The plaintiff, Education Administration Limited, was an entity registered under the Act. Between September 2003 and September 2005, it claimed certain GST input tax credits which the Commissioner of Inland Revenue subsequently disallowed. Education Administration challenges the Commissioner's assessments as wrong in fact and law. It seeks an order setting them aside. [4] The issue is whether an arrangement whereby Education Administration used GST input tax credits to fund the development of a software package amounts to tax avoidance under s 76 of the GST Act.Factual Background[5] Education Administration is owned by the family trust of Mr Nicholas Grove. [6] In 2001 Mr Grove was managing two businesses known as Kip McGrath Education Centres. The two centres belonged to his mother and were part of a national franchised business which provides after-school private tuition to school students. [7] It was part of Mr Grove's job to administer the Centres' financial records. He found this a difficult and time consuming task because the accounting systems were generic and not particularly well suited to a private tuition business such as that run by his mother. He raised the problems he was experiencing with his mother's accountant, Mr Giles Grimmett. As well as being an accountant and tax agent, Mr Grimmett had also done some work in the past as a computer programmer. [8] The two men had several discussions and a number of solutions were canvassed, including the idea of developing a dedicated database that could be tailored to the specific needs of Kip McGrath Education Centres. Over time, that idea became their preferred option, with Mr Grove seeing possibilities for such a product in the international market. There was interest from other Kip McGrathowners in New Zealand, and at one point Mr Grove and Mr Grimmett were hopeful of securing funding from the master franchisor. However, that did not eventuate. It was common ground that neither Mr Grove nor Mr Grimmett had the necessary resources to fully fund the development of the proposed software program themselves. [9] In early 2003, Mr Grove and Mr Grimmett made the decision to attempt to develop their own program. According to Mr Grimmett, they initially considered they would achieve regular sales of the program within two to three years. [10] They verbally agreed to the following: i) It would be Mr Grimmett who would undertake the actual work of developing the program. ii) They would establish two separate companies. One company would be owned by Mr Grimmett and would be responsible for developing the software. The other company would be owned by Mr Grove's family trust and would be responsible for marketing and selling the software once it was developed and in a form able to be used and applied. At all times, the software would be the property of Mr Grove's company, even during the development stage. iii) Mr Grimmett's company would have no right independently to market the software unless it considered the marketing being undertaken by Mr Grove's company was inadequate. In that eventuality, it would have the right to undertake its own marketing until the debt it was owed was extinguished. iv) Mr Grimmett's company would charge Mr Grove's company a fee for the development of the software at an agreed hourly rate of $160.00 plus GST. It would invoice Mr Grove's company for the full cost of the development work eachmonth, but would only require 10 per cent of each invoice to be paid immediately. Payment of the remaining 90 per cent was to be made from future sales of the software, Mr Grimmett's company having first call on sales revenue. v) Both companies would register for GST but on a different accounting basis and for different filing periods. Mr Grove's company would register on an invoice basis with a monthly filing period. Registration on an invoice basis would enable it to claim input tax credits on receiving an invoice. Mr Grimmett's company, however, would register on a payments basis with a six-monthly filing period. Registration on a six monthly payments basis would mean Mr Grimmett's company would only have to account for output tax once every six months and only in respect of money that it had actually received. [11] Mr Grimmett's company was duly incorporated on 26 August 2003. It was called Administration Systems Development Limited. [12] Mr Grove's company, Education Administration Limited, was incorporated shortly thereafter on 1 September 2003. The same day as it was incorporated, Education Administration also applied to be registered for GST on a monthly invoice basis. The application form, which was signed by Mr Grove, asked whether Education Administration expected its turnover for the next 12 months to be more than $40,000.00. In cross-examination, Mr Grove admitted he had made an error in answering "yes" to this question, because at the time their expectation was that it would in fact take two years for sales to come on line. [13] Administration Systems applied to be registered for GST on a six-monthly payments basis on 30 September 2003. [14] The combined effect of registering the two companies for GST purposes on a different basis, and the agreement requiring immediate payment of only 10 per centof each invoice, was that for the period in issue Education Administration was able to claim input tax credit on the total amount invoiced by Administration Systems and then use the resulting GST refund it obtained from Inland Revenue to pay Administration Systems the agreed 10 per cent. It did not have to account for any output tax because it had not itself made any supplies. [15] For its part, because Administration Systems was registered on a payments basis it only had to account for output tax on the cash it actually received from Education Administration. That meant the calculation was one-ninth of 10 per cent of the amount invoiced; not one-ninth of the full amount invoiced. [16] Mr Grimmett's company issued its first invoice on 30 September 2003, with Mr Grove's company Education Administration receiving its first GST refund based on the full amount of that invoice in November 2003. [17] In total, between September 2003 and September 2005, Education Administration paid Mr Grimmett's company the sum of $27,032.81, having received invoices totalling $342,414.00. During that same period, Education Administration filed 21 GST returns claiming GST inputs of $378,334.99 and GST refunds of $42,037.11, of which Inland Revenue paid $33,637.11. All of the fees Education Administration paid to Mr Grimmett's company during the relevant period were derived from the GST refunds. The GST refunds were the only funds going into Education Administration, and it only paid Mr Grimmett's company when the GST refunds had built up in its account. [18] In evidence, Mr Grove and Mr Grimmett acknowledged that the registration of Education Administration on an invoice basis and Administration Systems on a payments system had been done deliberately as a means of generating funding for the development of the software. However, they stated that had not been their original intention. It was an idea that only occurred to them at the last minute when they were on the verge of registering for GST. In particular, it had not been in their minds at the time they fixed the hourly rate and agreed that only 10 per cent of each invoice would be payable immediately. The original plan had been that Mr Grove would fund the 10 per cent by taking on extra employment. Mr Grimmett furthertestified that the reason for agreeing to invoice the full amount, despite only 10 per cent being immediately payable, was for transparency so as to make it clear exactly what was owing as the project developed. That way, he said, the potential for future disputes about costs would be avoided. [19] Mr Grimmett commenced "serious work" on the project in October 2003, albeit on a part-time basis. By March 2005 he had produced what he described in evidence as "a working version" of the program. The reason for the delay was that it was a second version, his first effort unfortunately having to be abandoned after 1000 hours of work because he had written it in the wrong computer language. As a result of this setback, he and Mr Grove agreed the development costs should be capped at a figure of $450,000.00. [20] Mr Grove's mother agreed to trial the software at her centres, and then in January 2006 four other Kip McGrath owners also agreed to install it. They did so on a free trial basis, with the understanding that when they became proficient at using the program, they would start paying. [21] Meantime, however, the Inland Revenue Department had begun to investigate Education Administration (Mr Grove's company) because it appeared to be consistently claiming and receiving input tax credits, yet not supplying outputs. Inland Revenue withheld payment of any further GST refunds, which led to Mr Grove's family stepping into the breach in August 2005 and advancing monies to Education Administration. [22] Inland Revenue's investigation culminated in April 2006 when it issued a Notice of Proposed Adjustment disallowing the tax input credits and requiring Education Administration to repay all the GST refunds it had received. It did so on the grounds of tax avoidance. [23] In addition to raising issues of tax avoidance, Inland Revenue also questioned the genuineness of the software program. It contended that Education Administration had not been conducting a taxable activity and that its purchase of services from Mr Grimmett's company had not been for the principal purpose ofmaking taxable supplies. [Registration under the Act, and therefore entitlement to obtain input tax credits turns on the existence of a taxable activity and the making, or intended making, of supplies]. [24] Education Administration invoked the disputes procedure, and in due course the dispute was referred to Inland Revenue's Adjudication Unit. The Unit delivered its report in September 2007. [25] The Unit rejected Inland Revenue's contention that Education Administration was not carrying on a taxable activity. The Unit found the company was carrying on a taxable activity and that its principal purpose in acquiring the services from Mr Grimmett's company was to make taxable supplies. As a result of those findings, those issues are not part of this proceeding and it is now accepted that the software developed by Mr Grimmett does genuinely exist and that it is functional. [26] The Unit did, however, uphold Inland Revenue's claim of tax avoidance. It found that the arrangement between the two companies had a purpose or effect of tax avoidance which was more than merely incidental to the non-tax-related purpose of developing software and was accordingly void against the Commissioner. [27] Dissatisfied with that outcome, Education Administration then issued the present proceedings in November 2007. [28] As at the date of the hearing, the only entities using the program are Mrs Grove's centres and the four other Kip McGrath owners who agreed to trial it in 2006. After some initial teething problems, their experience of the program appears to have been generally positive. However, Education Administration has only invoiced three of them, and then only once, in January 2007. The invoices that were issued have a note stating, "This debt has been assigned to Giles Grimmett. Please make payable to Giles Grimmett." Manual installation of the software is required, a task which Mr Grimmett has undertaken along with provision of training.[29] Education Administration has not made any other sales of the program. It has not filed any income tax returns since 2006, and the returns that were filed prior to that date record no income. [30] It appears Mr Grimmett's company, Administration Systems, did not issue any further invoices to Education Administration after September 2005, so the total amount charged for the development work stands at $342,414.00. Mr Grimmett was unsure exactly how much is still outstanding but thought he may by now have received more than 10 per cent because of capital introduced by the Grove family. When asked whether the debt was "$200,000, $300,000?" he said he thought it was "most likely about $200,000.00" and would work it out when he thought there was a chance of collecting it. Administration Systems is no longer an active company. It was struck off the Companies Register in June 2006 for failing to file its annual return. It only ever filed three GST returns, two of which were nil returns. It has also never filed any income tax returns. When asked about this in cross-examination, Mr Grimmett likened the situation to a plumber's leaky tap and said he intended in due course to apply to have the company reinstated. [31] In evidence both Mr Grove and Mr Grimmett blamed the Inland Revenue for the lack of progress with sales. Mr Grove stated he has seen no point in beginning a sales and marketing strategy until the dispute with the Department is resolved. The Commissioner's (wrong) assertion that Education Administration was not conducting a taxable activity was claimed to have been particularly inhibiting, and was also the reason why more invoices have not been issued to the Kip McGrath Education Centres that are using the software. Mr Grove was confident however that there was huge potential for the program both in New Zealand and overseas. [32] For its part, Inland Revenue contends there is no reason why a confidential dispute between the Commissioner and a taxpayer would prevent the latter from making further taxable supplies.Relevant legal principles[33] Section 76 of the GST Act is a general anti-avoidance provision. It states:76 Avoidance(1) A tax avoidance arrangement entered into by a person is void against the Commissioner for tax purposes. (2) A tax avoidance arrangement is one that directly or indirectly— (a) has tax avoidance as its purpose or effect; or (b) has tax avoidance as one of its purposes or effects, whether or not another purpose or effect relates to ordinary business or family dealings, if the purpose or effect is not merely incidental. (3) If a tax avoidance arrangement is void against the Commissioner, the Commissioner may adjust the amount of tax payable by, or the amount of tax refundable to, a registered person affected by the arrangement, whether or not the registered person is a party to the arrangement, in the manner the Commissioner considers appropriate to counteract any tax advantage obtained by the registered person from or under the arrangement. ... (8) For the purpose of this section—arrangement means a contract, agreement, plan or understanding, whether enforceable or unenforceable, including all steps and transactions by which it is carried into effecttax avoidance includes— ... (c) an increase in the entitlement of a registered person to a refund of tax: (d) an earlier entitlement of a registered person to a refund of tax:[34] Counsel agreed that in applying s 76 the two leading authorities for me to consider were the Supreme Court decisions in Ben Nevis Forestry Ventures Limited & Ors v Commissioner of Inland Revenue [2009] 2 NZLR 289 (SC), andGlenharrow. Counsel accepted that the principles articulated in both were applicable to this case, notwithstanding that Glenharrow was concerned with an earlier version of s 76 and Ben Nevis was concerned with the general anti-avoidance provision in a different statute, namely the Income Tax Act 1994.[35] It is clear, following Glenharrow, that the application of s 76 involves a two- stage process: i) The Commissioner must have been justified in coming to the view there was an arrangement entered into between at least two persons. ii) The Commissioner must have been properly satisfied that the arrangement was a tax avoidance arrangement [36] It was common ground that the agreement between Education Administration and Administration Systems did constitute an "arrangement" for the purposes of s 76. [37] It was also common ground that the inquiry at the second stage is an objective one. That is to say, it is not an inquiry into Mr Grove and Mr Grimmett's subjective intentions or motives, or whether they were consciously trying to achieve the end of defeating the intent and application of the GST Act. What is required is an objective assessment of the purpose and effect of the arrangement as distinct from the purpose of the parties. [38] Counsel were also agreed that while the arrangement may have complied with the black letter terms of the GST Act – the statute does permit mismatched registration – that of itself did not mean the arrangement was incapable of constituting a tax avoidance arrangement. An arrangement may technically comply with the substantive taxing provisions, yet still be caught by s 76. [39] Following Ben Nevis, what the Court must do is examine the taxpayer's use of the specific provision viewed in the light of the arrangement as a whole. If, when viewed in that light, it is apparent that the taxpayer has used the specific provision in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement.[108] it will often be the combination of various elements in the arrangement which is significant. A classic indicator of a use that is outside Parliamentary contemplation is the structuring of an arrangement so that thetaxpayer gains the benefit of the specific provision in an artificial or contrived way. It is not within Parliament's purpose for specific provisions to be used in that manner. [109] In considering these matters, the courts are not limited to purely legal considerations. They should also consider the use made of the specific provision in the light of the commercial reality and the economic effect of that use. The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament's purpose. If that is so, the arrangement will not, by reason of that use, be a tax avoidance arrangement. If the use of the specific provision is beyond Parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement.[40] It is clear from Ben Nevis that in applying the "Parliamentary contemplation" test the Court is not limited to purely legal considerations but must examine the factual matrix, including such matters as the relationship between the relevant parties, the manner in which the arrangement is carried out, as well as the economic and commercial effects of documents and transactions. [41] It is also clear from Ben Nevis that in examining the various components of the arrangement, the Court should not look at each component in isolation but in combination. [42] Similar comments are to be found in the Court of Appeal decision of Ch'elle Properties (NZ) Limited v Commissioner of Inland Revenue [2008] 2 NZLR 342 (CA), where the Court talked about s 76 requiring an overview and an objective assessment of the combined effect of the individual components of the arrangement to determine whether it defeated the intent and application of the Act, and was therefore void (at [25]). [43] As for the purposes and intent of the GST Act, the following points can be distilled from the authorities: i) The Act requires an accounting on the basis of an open market value for the goods and services (see Glenharrow at [44]).ii) The Act is predicated on the basis of an overall balance being achieved between the outputs and inputs of a registered person (see Ch'elle at [38]). iii) The wider the temporal gap between the eligibility of a taxpayer for an input tax credit and its liability for output tax, the less likely the arrangement conforms with the intent of the Act. A significant delay can indicate a crossing of the line into tax avoidance (see Ch'elle at [41]). iv) The Act permits accounting for GST on three different bases: invoice basis, payments basis and hybrid basis. It therefore contemplates the possibility of there being transactions between parties using different accounting regimes and hence a degree of mismatch in terms of timing between the time at which input tax credit is claimed and the time at which output tax is paid in relation to the same supply (see Ch'elle at [47]). v) However, while the Act permits a degree of mismatching, it seeks to limit the nature and degree of such mismatching. A gross mismatch in timing may accordingly be relevant in assessing the application of s 76 (see Ch'elle at [50]).Application of principles to the factsThe competing descriptions of the arrangement[44] Although there was a large measure of agreement about the relevant legal principles, counsel disagreed strongly about their application to the facts. [45] Counsel for the Commissioner, Ms Deligiannis, claimed this was a case of two non-arms-length taxpayers with a common financial goal manipulating the GST Act in order to obtain an unsecured interest-free capital venture loan, courtesy of the New Zealand taxpayer. She submitted the arrangement was deliberately structured to generate GST refunds well in advance of any supplies being made, in order tocapitalise an entirely asset-less company so that it could fund the development of a highly speculative software package risk-free. [46] Counsel for Education Administration, Mr Clews, however characterised the arrangements as permissible tax planning yielding a temporary and modest GST benefit which must have been within the contemplation of Parliament. A central theme of his argument was that s 76 should only be engaged where the mismatched registrations involve gross distortions brought about by extreme timing differences and gross inflation of consideration, neither of which were present here.Discussion[47] Mr Clews said all that could possibly be said on behalf of Education Administration, and he said it well. [48] However, applying the Ben Nevis test to the arrangement at issue, I have come to a clear view that it is caught by s 76. In my judgment, assessed objectively, the arrangement has tax avoidance as a more than merely incidental purpose or effect and has been structured in a way that cannot have been contemplated by Parliament. [49] I have come to that view after consideration of the following factors.The relationship between the parties[50] The creation of two separate companies was obviously pivotal to the obtaining of a GST benefit. [51] Mr Grove and Mr Grimmett however contended there were genuine commercial reasons for the establishment of two separate companies, quite independent of GST considerations. They testified that the reason for establishing two separate companies was because they each had different objectives. Mr Grimmett, in his 50s, was considerably older than Mr Grove and was seeking a relatively quick return. He was not a people person, and his expertise lay in programming rather than sales promotion. He did not wish to become involved in an ongoing business with Mr Grove. Mr Grove, on the other hand, was young with anoutgoing personality. He had an education background and was looking to establish a business for capital gain. Mr Grove and Mr Grimmett, as well as Mr Grove's mother, strenuously denied any suggestion of there being a joint venture. [52] However, having reviewed the contemporaneous documentation and having seen and heard the witnesses, I accept the Commissioner's submission that in reality and substance this was in the nature of a joint venture and the parties were not operating separate businesses. There were constant references to "our" project and "our" development in both the documentary evidence and in the testimony, while all the evidence regarding the gestation of the idea and its development pointed to a joint enterprise, as did matters such as Mr Grimmett's continued involvement after producing the program and the agreement that his company would be entitled to assume the marketing function if dissatisfied with the efforts of Mr Grove's company. [53] Further, there was no reason why the professed different objectives could not have been easily accommodated or recognised within a single company. Those objectives did not necessarily require two separate entities. [54] The assertion about there being important independent commercial reasons for establishing two separate companies also sits uneasily with Mr Grimmett's conduct in allowing his company to be struck off the register in mid-2006 and only filing minimal GST returns in relation to that company. [55] I find there was an element of artifice or contrivance in the creation of two separate companies and that these were not dealings between parties at arms-length. This is further reinforced by other terms of the agreement (discussed below), the lack of formality, as well as evidence of the central role played by Mr Grimmett in the affairs of Mr Grove's company. It was Mr Grimmett who advised Mr Grove on the most appropriate business structure and who attended to the incorporation of both companies and their registration for GST purposes. He was Education Administration's tax agent and, after Mr Grove departed for the United Kingdom in 2004, acted as its New Zealand agent for all other purposes. For all intents and purposes he controlled Education Administration. The few invoices EducationAdministration has ever issued were all written and issued by Mr Grimmett and as I have mentioned required payment to be made to Mr Grimmett. It emerged at the hearing that Mr Grimmett was even personally underwriting the costs of this litigation. [56] There was also evidence that in agreeing to pay Mr Grimmett an hourly rate of $160.00 plus GST, Mr Grove never made any independent inquiry of his own but simply relied on information about market rates provided to him by Mr Grimmett.The terms of the agreement between the two companies[57] On anyone's view of it, there were some unusual aspects to the agreement between the two companies, most notably the fact that Education Administration was only required to pay 10 per cent of each invoice immediately with the remaining 90 per cent payable at some unspecified time in the future, without any component of interest being charged, and only from revenue generated by sales which were not guaranteed. [58] Mr Clews pointed to evidence (including expert evidence called by the Commissioner) which suggested that Mr Grove's expectations regarding potential sales were realistic. He further submitted that the business was poised for success, that there was a reasonable expectation the debt would be paid within the timing tolerance that Parliament can be expected to have had in mind under the GST system, and that the only reason the expectations have not been realised to date is due to this dispute. [59] I accept there was some foundation for Mr Grove's expectations, but what the more favourable of the two experts called by the Commissioner said was that the debt could potentially be repaid in two to three years if certain events occurred relating to market penetration. Sufficient sales to generate the necessary revenue were never a foregone conclusion. Further, the fact remains that legally Education Administration's liability to pay the 90 per cent was only ever of a purely contingent nature. Under the contract its obligation to pay was not absolute, but solely conditional on revenue from sales. The contract thus contemplated the possibility ofwhat was in effect an interest-free loan of several hundred thousand dollars never being repaid. [60] I am satisfied that Education Administration was therefore claiming GST refunds on amounts that might never become payable, and that even on the best view of it for the plaintiff there was at least a two- to three-year gap between when the expenditure was incurred and when it was expected to be paid. [61] As Mr Clews himself elegantly put it, a core value upon which the granting of the GST input tax credit is based is that the party claiming it should have been subjected to a real and genuine economic burden. On the facts of this case Education Administration was not in my view subject to a real economic burden, and accordingly was using the Act in a way Parliament did not intend. [62] Another important feature of the arrangement was the high hourly rate of $160.00 plus GST charged by Mr Grimmett's company. The higher the hourly rate, of course, the larger each invoice and the larger the resulting GST refund. The Commissioner contends the rate agreed was contrived and so is another indicator of tax avoidance. [63] At the hearing, the Commissioner called two software experts. They assessed the complexity and value of the program, the time such a program could reasonably be expected to take to complete, as well as Mr Grimmett's level of expertise and experience. [64] One of those experts testified that having regard to Mr Grimmett's limited prior experience and general knowledge, his time would be valued somewhere in the range of $50.00 to $90.00 per hour in a consulting environment, or $30.00 to $60.00 per hour in a more full-time arrangement. The same witness also testified that the market rate for contracting an expert software programmer well beyond the level of Mr Grimmett's expertise would be at most $120.00 per hour. [65] Mr Clews argued that the experts were not comparing apples with apples and that the comparison should be between an hourly rate of $160.00 plus GST and whatsoftware firms charge their clients. However, I am not persuaded that comparison is necessarily apt, given that Mr Grimmett did not have any business overheads. [66] I am satisfied on the evidence that in the circumstances the rate agreed for this particular project was not a market rate, even allowing for the added risk factor and for the fact that Mr Grimmett was to have no proprietary interest in the program. [67] The effect of adopting an inflated hourly rate was of course to artificially increase the amount of the invoices and hence the amount of the GST refund that could be claimed. [68] In submissions, Mr Clews contended that the high hourly rate should not be taken as indicating the parties never expected the 90 per cent to be eventually paid by Education Administration. That would not make sense, he argued, because it would mean the venture had been "cooked up" to pay Mr Grimmett a return of only $16.00 an hour, when as an experienced accountant he could earn considerably more. For that reason alone, the debt must have been genuine. [69] However, that argument has to be tempered against the evidence that at the time Mr Grimmett was living in a caravan, had no overheads and had stated he only needed an income of $10,000.00 to $11,000.00 a year. Mr Grove and Mr Grimmett may well have hoped the project would be a success, in which case Mr Grimmett would receive more, but there was no certainty.The fact that Education Administration had no independent source of funds[70] The evidence established that during the periods in question Education Administration had no independent source of funds. Its sole source of funding was through the receipt of the GST refunds. Thus, the Commissioner says, it was not required to bear the economic burden of funding the development of the software. Instead that burden and the risk of the project being a failure was borne by the New Zealand taxpayer. Education Administration bore no risk because it used the GST to pay the 10 per cent and was under no liability to pay anything else unless the project was a success.[71] In answer to the Commissioner's submission that Parliament could not have intended taxpayers to use GST as venture capital, Mr Clews pointed out that there is nothing in the Act which dictates how a taxpayer must spend their GST refund. Nor, as he also pointed out, is there any obligation on a taxpayer to capitalise a business to a certain level or to have expended capital before being able to claim GST. [72] Mr Clews further contended it was wrong to say Education Administration did not have any capital at risk, having regard to the fact it owned the software at all stages of the development. [73] However, given that it was the GST refunds that were creating the capital in the first place, that argument appears somewhat circular. [74] In my view, the fact that Education Administration had no capital of its own would not in itself be sufficient to bring the arrangement within the ambit of s 76. However, when taken in combination with the other factors I have mentioned, it does assume some significance. Those other factors being the creation of two companies by parties essentially engaged in a joint venture, the inflated hourly rate, the registration of those companies on different accounting bases, the issuing of invoices for the full amount but only requiring immediate payment of 10 per cent, and the contingent nature of the liability to pay the remaining 90 per cent. [75] I am satisfied that in combination they point to an arrangement that was artificial and contrived in the manner described by the Supreme Court in Ben Nevis. [76] In coming to this conclusion, I have not overlooked a further point made by Mr Clews relating to s 19D of the GST Act. [77] Section 19D is a specific anti-avoidance provision. It provides:19D Invoice basis for supplies over $225,000(1) A registered person who makes a supply of goods and services for a consideration of more than $225,000 must account for tax payable on an invoice basis for that supply. (2) Subsection (1) does not apply if the supply of goods and services is a "short term agreement for the sale and purchase of property orservices", as that term is defined in section YA 1 of the Income Tax Act 2007, except the reference to "93rd day" is to be read as "on or before the day that is 1 year". (3) For the purpose of subsection (1), the Commissioner may treat a registered person as having made a supply of goods and services for a consideration of more than $225,000 if— (a) the person has made more than one supply and the sum of the consideration for each supply is more than $225,000 irrespective of whether each supply is one to which subsection (2) applies; and (b) the Commissioner considers that the person made more than one supply to avoid the application of subsection (1).[78] Mr Clews submitted that s 19D lends strong support to his central argument that it is only arrangements that involve a gross distortion of time and value that should attract the general anti-avoidance provision. In his submission, by choosing to mark out specific thresholds of time and value as Parliament as done in s 19D, it has thereby given a clear signal as to what it considers to be acceptable and unacceptable in relation to timing mismatches and the consequent risks to the revenue that might be occasioned by those. To invoke s 76 in a case far removed from those thresholds would be to use a general anti-avoidance provision to change the law, something which the Privy Council has said in Commissioner of Inland Revenue v Auckland Harbour Board [2001] 3 NZLR 289 should not be done. [79] Mr Clews also referred me to two papers published by the Policy Advice Division of Inland Revenue: Options for strengthening GST neutrality in business- to-business transactions, an officials' issues paper published in July 2008; and GST: accounting for land and other high-value assets, a Government discussion document published in November 2009. Both papers discuss amongst other things the problems created by registration mismatches and propose new specific measures, none of which would apply to this case. Mr Clews contended the papers were significant not only for that reason but also because they indicate that Parliament regards the way in which these mismatches are to be regulated as essentially a matter for it, with the general anti-avoidance provision being properly reserved for the sort of gross distortions involved in cases such as Glenharrow.[80] I accept Mr Clew's point that in other anti-avoidance cases the sums involved and the temporal gaps between incurring of liability and payment, between inputs and outputs have been significantly greater than those at issue here. In Glenharrowfor example the amount of the GST refund at issue was $4.5m, while in Ch'elle it was over $9m and the temporal gap which was held to defeat the intended balance between output and input was in the order of ten to fifteen years. In contrast to the millions of dollars involved in these other cases, the sum at issue in this case (before application of interest and penalties) is a relatively modest $42,037.11, of which the plaintiff has only received $33,637.11. [81] However, even if the amount of money at stake were a relevant consideration, it cannot possibly be determinative. There is no monetary limit as to when something will be tax avoidance, while "gross" is arguably a relative concept, not an absolute one. Further, as submitted by Ms Deligiannis, if an arrangement of this sort were held to be within the intent and purpose of the GST Act, there would be nothing to stop other small businesses doing likewise, with the result that very large amounts would soon become involved. [82] As regards s 19D, the first point to be made is that it relates to deferred payments, whereas correctly analysed the present case concerns a contingent payment. [83] Secondly, as Mr Clews himself acknowledged, it is now well established that a specific anti-avoidance provision does not oust a general anti-avoidance provision or override it. As stated in Ben Nevis at [103] the two work in tandem, the existence of a general provision suggesting that Parliament intended it to be the principal vehicle by which tax avoidance is addressed. Thus, the fact this case is outside the terms of s 19D does not preclude the application of s 76, and there is nothing to suggest otherwise in the discussion papers. As submitted by Ms Deligiannis, what the discussion papers highlight is that mismatches are a significant problem for the regulators and that although s 76 has been successfully applied in the past, the officials are looking for more certainty to promote voluntary compliance.[84] The Commissioner's decision in this case does not mean that every mismatch, every timing advantage will be susceptible to the application of s 76. The reason this particular mismatch crossed the line is because it was part of an arrangement that, viewed objectively, was structured so as to gain a tax benefit in an artificial and contrived way. [85] The final issue I must consider is that of reconstruction. [86] In cases where avoidance is found to exist, s 76(1) requires the Commissioner to treat the arrangement as void and to adjust the amount of tax refundable so as to counteract the tax advantage. [87] In this case, the Commissioner has decided to deny the total amount of input tax claimable by Education Administration. [88] I am satisfied that was an appropriate decision for the Commissioner to have made in the circumstances and see no reason to interfere with it.Outcome of hearing[89] The Commissioner's assessments are confirmed. [90] As regards costs, my expectation is that these should be able to be resolved by the parties. In the event the parties cannot agree on costs and require a ruling, then I direct that Ms Deligiannis is to file submissions first, with any submissions in reply from Mr Clews 10 working days thereafter.Solicitors: Crown Law, Wellington Russell McVeagh, Auckland (Counsel: G D Clews, Auckland)