TEPE HOLDINGS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC WN CIV 2010-485-489

TEPE HOLDINGS LIMITED V THE COMMISSIONER OF INLAND REVENUE HC WN CIV 2010-485-489 13 September 2010IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2010-485-489IN THE MATTER OF Goods and Services Tax Act 1985 BETWEEN TEPE HOLDINGS LIMITED Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 8 September 2010 Counsel: C J Royds and D J C Russ for Plaintiff P J Cassidy and H B Lee for Defendant Judgment: 13 September 2010JUDGMENT OF RONALD YOUNG JIntroduction[1] In July 1996 Central House Limited (CHL) leased the whole of Central House in Brandon Street, Wellington from its owner the Wellington City Council. In 2002 the plaintiff, Tepe Holdings Limited (THL) acquired a right of occupancy of the fourth floor of Central House. It did so by purchasing particular shares in CHL. [2] After THL's acquisition it continued the existing tenancies of a law firm and small business on the fourth floor of the building. In March 2007 THL sold its occupation rights to the fourth floor of the building. THL claimed this transaction was zero rated for GST because it was a sale of a going concern.[3] The Commissioner disagreed. He said this was a sale of shares and therefore not exempt from GST. With the agreement of the parties (pursuant to Tax Administration Act 1994, s 89N(1)(c)(viii)) the dispute was referred to this Court for resolution. [4] In May 2007 when THL filed its GST return for the period ending 31 March 2007 it claimed it had no zero rated supplies in the period covered by the return. Given THL had claimed the sale of the fourth floor of the building was a zero rated supply (which was settled on 30 March 2007) THL's assertion in its GST return was wrong. The Commissioner imposed a shortfall penalty (Tax Administration Act 1994, s 141B) on THL for taking an unacceptable tax position. THL in these proceedings also challenges the imposition of that penalty.Issues for resolution[5] As to the question of whether the transaction involving the fourth floor of Central House was the supply of a going concern, the parties agree that five issues identified by the Commissioner encompass the dispute between the parties. They are:20.1 The true nature of the agreement entered into between Tepe and Okato. (Issue 1) 20.2 If the true nature of the agreement was for the sale and purchase of shares, whether general term of sale 13.1 could apply. (Issue 2) 20.3 If general term of sale 13.1 could apply, whether the agreement was varied so that it related to the sale of a tenanted property. (Issue 3) 20.4 Whether Tepe supplied a going concern at the time of supply. (Issue 4). 20.5 Whether Tepe and the recipient of its supply agreed in writing, as required for zero rating, that the supply was of a going concern. (Issue 5)[6] The Commissioner's response in summary to the five issues is:Issue 1: Notwithstanding the description used by the parties to describe the property the subject of their agreement, the true nature of the arrangement entered into by Tepe and Okato was an agreement for the sale and purchase of shares.Issue 2: Accordingly, the agreement, being concerned with the sale of shares, could not relate to the sale of a tenanted property and general term of sale 13.1 could not apply. Issue 3: Even if general term of sale 13.1 could apply, the agreement was not varied. There was no clear, unequivocal, offer by the purchaser to vary the agreement to provide for the sub-tenancies to remain. Accordingly, there was nothing for Tepe to accept. Issue 4: Tepe did not supply a going concern at the time of supply.• Tepe's taxable activity was the activity of commercial leasing. To undertake that activity Tepe required a lease of the Fourth Floor of the Building to provide it with exclusive possession. At the time of supply, Tepe had surrendered its lease and its taxable activity had ceased.• To supply a taxable activity as a going concern Tepe needed to supply, to the recipient, all of the goods and services necessary for the continued operation of its taxable activity. The continued operation of Tepe's taxable activity required a lease of the Fourth Floor and Tepe did not supply a lease. That lease was supplied by Central House. Issue 5: Even if it were accepted, as Tepe appears to contend, that CBL was the recipient of its supply there was no requisite agreement in writing between Tepe and CBL that the supply was of a going concern.[7] After a brief summary of the relevant facts and law I consider the plaintiff's and the Commissioner's response to each issue. In doing so I am conscious that it is for the plaintiff to establish on the balance of probabilities that the Commissioner's view is wrong (Tax Administration Act 1994, ss 138P(1B), 149A). For reasons that will become clear Issue 2 is effectively subsumed with the consideration of Issue 1.Background facts[8] Central House in Brandon Street, Wellington, is owned by the Wellington City Council. In 1996 it leased the whole of the building to CHL for 21 years. CHL then went about leasing each floor of the building. It did so through the mechanism of the sale of particular shares in CHL, a particular parcel of shares giving a right to occupancy of a particular floor in the building.[9] As relevant to this case the CHL constitution provides that the holder of Group E shares being share numbers 89,501 to 109,250 (consisting of 19,750 shares) had the right to occupy floor four of the building. [10] To sell the right to occupy a floor in the building the vendor share owner has to sign a transfer of the shares to the new owner and surrender its lease with CHL. A new lease is prepared and signed by the purchaser of the shares. 1 CHL's consent is required to the share transfer. CHL may refuse or delay the registration of the share transfer but only on reasonable grounds. 2 Upon acceptance of the purchaser by CHL the share transfer is registered and the new lease signed. [11] THL was incorporated to purchase the Group E shares entitling it to occupy the fourth floor in 2001. The transaction was completed by November 2002. That transaction was said to be of a going concern. There were existing tenancies on the fourth floor which continued with the transfer of shares to THL. THL registered for GST, describing its business as "Property Investment – Commercial". [12] On 2 March 2007 THL and Okato Management Limited (OML) entered into an agreement by which THL transferred its interest in the fourth floor to OML. OML already had shares in CHL giving it the right to occupy the first and second floors of the building. [13] The agreement between THL and OML is in the standard Auckland Law Society form of an Agreement for Sale and Purchase of Real Estate. The 2 March agreement said the transaction was for the:exclusive occupation rights to the fourth floor of the building known as "Central House", 26 Brandon Street, Wellington being Group E of the shareholding in Central House Limited being 19,750 shares numbered 89,501 to 109,250.[14] The purchase price was $260,000, including GST if any, and the possession date 30 March 2007. The agreement records the vendor is to give vacant possession upon settlement.1 CHL constitution, cl 13.52 CHL constitution, c 13.6.[15] Further relevant clauses are:13.1 If this agreement relates to the sale of a tenanted property (not being an exempt supply within the meaning of the Goods and Services Tax Act 1985) ("the Act") then, unless otherwise expressly stated herein: (a) each party warrants that it is a "registered person" within the meaning of the Act; and (b) the parties agree that the supply made pursuant to this agreement is the supply of a going concern on which GST is chargeable at 0%. 13.2 If it subsequently transpires that GST is payable in respect of the supply and if this agreement provides for the purchaser to pay (in addition to the purchase price without GST) any GST which is payable in respect of the supply made under this agreement then the provisions of clause 12.0 of this agreement shall apply. ... 14.0 This offer is subject to the approval of the purchaser by the directors of Central House Limited pursuant to Regulation 13.6(e) of that company's constitution within 10 working days of the date of this contract. ... 16.0 Prior to settlement the purchaser shall comply with Regulation 13.5 of the constitution of Central House Limited. 17.0 On settlement the vendor shall give to the purchaser a good and registrable Transfer of the said shares and warrants and undertakes: (i) That the certificate of the said shares is not void or voidable; that all calls on the said shares are fully paid; that the said shares are not liable to forfeiture and that there is no money owing by the vendor to the company which would entitle the Company to a lien on the said shares. (ii) That all chattels included in the sale are the unencumbered property of the vendor. (iii) That all electrical and other installations in or on the premises the subject of this contract are free of any charge whatsoever. (iv) That there are no outstanding or known special levies or liabilities payable to the company. ...13.5 Executive LeaseThe holder of each group of shares shall prior to their registration as a shareholder holding such group, execute a lease with the Company in the form set out in Schedule 4 and the Company shall upon registration of such person, firm or corporation as a Shareholder be bound to enter into an [sic] execute such lease corporation as a Shareholder be bound to enter into and execute such lease PROVIDED HOWEVER that nothing contained in this Clause 13.5 shall affect any of the leases held by the Shareholders as at the date of adoption of this Constitution to the intent that each such lease shall continue to have full force and effect until such time as the lessee thereunder ceases to be a shareholder of the Company. 13.6 Power to refuse or delayThe Board may refuse or delay the registration of a transfer of shares if the transfer is to a transferee of whom the directors do not approve on reasonable grounds relating to the respectability, responsibility, solvency and suitability of the transferee.[16] Clauses 13.5 and 13.6 are from CHL's constitution. [17] Before settlement there was further discussion between the parties relating to the terms of the contract. Firstly on 14 March 2007 the solicitors for the purchaser wrote to the solicitors for the vendor and said (amongst other matters):The purchaser intends to retain the existing tenants on Level 4 on the same terms, at least for the moment. The majority of the space is occupied by a law firm and one office on the floor is occupied by a small business. The purchaser intends to leave tenancies and tenants as they are. The space would remain as office space for business.[18] And secondly, on 15 March the solicitors for the purchaser advised the vendor's solicitors:I refer to our discussion yesterday. Okato Management Limited would like to supplant, as purchaser, a new company called Central Beehive Limited. Central Beehive Limited will be owned 50% by Okato Management Limited and 50% by George E Stock Investments Limited. We enclose searches of both Okato Management Limited and George E Stock Investments Limited. Kindly seek your client's consent to this change. If consent is given, I suggest that we vary the agreement by attaching copies of this letter and your reply to our respective copies of the agreement.[19] The solicitors for THL replied:Thank you for your fax of even date. The vendor will consent to the new entity Central Beehive Limited becoming the transferee of the shares provided the Board of Central House approves that entity and that Okato Management Limited remains liable as purchaser until settlement is completed. We agree to your suggested method of varying the agreement, which is now provisional upon Board approval being given.[20] By 26 March it was clear all necessary approvals had been given and over the next few days appropriate resolutions were completed so that settlement could be completed on 30 March 2007. Central Beehive Limited (CBL) was incorporated on 29 March and subsequently applied for GST registration from 2 March 2007 and was registered for GST from that date. [21] The 30 March settlement involved the necessary surrender of the lease over the fourth floor of the building by THL. THL transferred its shares in CHL to CBL. CBL in turn paid the purchase price and signed the new lease of the fourth floor with CHL. [22] The settlement statement from THL to CBL apportioned the rent from the tenants of the fourth floor between it and CBL with rent to 30 March payable to THL and from 31 March onwards to CBL. The settlement statement therefore made it clear that THL had accepted CBL's desire (expressed by OML) that the tenants remain in occupation after the transfer of the shares. 3[23] On 30 March 2007 THL issued a tax invoice for the sale asserting GST thereon – exempt supply 0.00. [24] And stating:This tax invoice is issued on the basis that this supply constitutes the supply of a taxable activity in the course of a going concern and therefore GST has been charged at the rate of 0%. However if it subsequently transpires that the supply is not of a going concern then the purchaser will pay to the vendor GST together with any default GST as defined in cl 12 of the Agreement for3 See [17] above.Sale and Purchase of Real Estate entered into between the parties and comply with the obligation set out in the Agreement for Sale and Purchase of Real Estate.[25] It is common ground that 30 March 2007 was the time of supply pursuant to the Goods and Services Tax Act 1985, s 9(1). [26] In late April 2007 the solicitors for CBL asked THL's solicitor for an amended tax invoice. The solicitors said that they did not consider that the transaction was a sale of a going concern. The solicitors on behalf of THL then issued a further tax invoice with respect to the transfer of the fourth floor which said in part GST thereon – exempt supply. [27] And further this tax invoice is issued on the basis that it is an exempt supply. [28] CBL was not satisfied with this approach. Its solicitors wrote to THL's advising their view that the transaction was not GST exempt, that GST was payable, and that the payment of GST was the responsibility of THL given the sale price had been GST inclusive. [29] Having further reconsidered the matter THL's solicitors reasserted that the sale was in fact a sale of a going concern and therefore zero rated. They issued a third tax invoice replacing the two previous tax invoices claiming that the sale was of a going concern of a taxable activity and therefore zero rated. [30] The parties agree in this litigation that the essential issue is whether the transaction was the supply of a going concern. If it is the supply of a going concern then subject to compliance with the Goods and Services Tax Act 1985 the transaction is zero rated, if not, GST is payable on the transaction.The law[31] Some brief legislative context is appropriate. The Goods and Services Tax Act 1985 provides for the imposition of tax on the supply of goods and services in the case of a taxable activity. Goods have a wide definition which includes "allkinds of personal or real property". 4 Taxable activity is defined in s 6(1)(a) and (2) in this way as relevant:6(1) ... (a) Any activity which is carried on continuously or regularly by any person, whether or not for a pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association or club." ... (2) Anything done in connection with the beginning or ending, including a premature ending, of a taxable activity is treated as being carried out in the course or furtherance of the taxable activity.[32] The tax is payable upon the "supply" of the goods. 5[33] The time of supply6 is as I have noted 7 agreed by the parties in this case to be 30 March, the date of supply of the goods. [34] Section 11 of the Act relates to the zero rating of goods. As relevant it provides:(1) The supply of goods that is chargeable for tax under s 8 must be charged at the rate of 0% in the following situations: ... (m) the supply to registered person of a taxable activity, or part of a taxable activity, that is a going concern at the time of the supply, if – (i) the supply is agreed by the supplier and the recipient, in writing, to be the supply of a going concern; and4 Section 2.5 Section 8.6 Section 9.7 See [25] above.(ii) the supplier and the recipient intend that the supply is of a taxable activity, or part of a taxable activity, that is capable of being carried on as a going concern by the recipient; ...[35] "Going concern" is defined in the Act at s 2(1) as follows:Going concern, in relation to a supplier and recipient, means the situation where – (a) There is a supply of a taxable activity, or of part of a taxable activity where that part is capable of separate operation; and (b) All of the goods and services that are necessary for the continued operation of that taxable activity or that part of a taxable activity are supplied to the recipient; and (c) The supplier carries on, or is to carry on, that taxable activity or that part of a taxable activity up to the time of its transfer to the recipient.[36] Finally, although an interest in the share capital of a company is a financial service and thereby generally exempt from GST, a share in an office owning entity (as here) is not exempt from GST. GST is therefore generally assessable on the transfer of the shares of such company. 8[37] I turn now to each of the issues identified by the parties requiring resolution.What was the true nature of the agreement entered into by THL and OML (later CBL)? (Issue 1)[38] I am satisfied that the true nature of the transaction was the sale of the shares of a company not the sale of a going concern. The appropriate approach to such an assessment is objective, focussing on "the true nature of the transaction". 9[39] Thus as Richardson J in Marac Life Assurance Limited v Commissioner of Inland Revenue observed this requires a "careful consideration of the legal arrangements actually entered into and carried out". Further, as I have identified, a8 Section 14 and the definition of financial services and equity security, s 3.9 Marac Life Assurance Limited v Commissioner of Inland Revenue [1986] 1 NZLR 694 (CA)."going concern" is defined in the Act. That definition must guide this assessment. The date at which the assessment is to take place is 30 March 2007. [40] The plaintiff's case is that the sale, correctly viewed, is the transfer of a going concern of the lease of the fourth floor of the building. It says that the Agreement for Sale and Purchase involved not just the sale of the shares but also the transfer of the chattels and partitions. The Agreement also required the parties to agree on the future status of the existing tenants. This illustrated that the sale was much more than just the sale of shares. Further, the plaintiff was operating a commercial leasing business which it transferred to OML/CBL. [41] The plaintiff relied upon the principles identified in Case S91.10 I noteCase S91 related to the supply of goods in 1993 which pre-dates the 1995 amendment to the Goods and Services Tax Act which introduced the current definition of going concern (Goods and Services Tax Amendment Act 1995). That case therefore in this context is of limited assistance. [42] Here all of the essential rights and obligations of the parties to the transaction stem from the transfer of the shares. No interest in land is directly conveyed by the transaction. The sale of the shares in CHL triggers all the substantive obligations and rights of the parties. By agreeing to transfer the shares the right to occupy the fourth floor arises, subject to the consent of CHL, and a lease executed between the purchaser and CHL. [43] The Agreement obliges the seller to transfer the shares and surrender the lease. It obliges the purchaser together with CHL to sign a new lease subject only to CHL's rights to assess the proposed purchaser. Although the Agreement for Sale and Purchase records that it is the sale of the exclusive right to the fourth floor in fact the purchase of the shares does not provide, according to CHL's constitution, any exclusive rights. The right given in CHL's constitution11 is a "right to occupy" and in any event is subject to other rights in the constitution of CHL. The "right to occupy" only arises with ownership of the shares in CHL. Prior to the registration of10 Case S91 (1996) 17 NZTC 7,573 (TRA)11 Cl 53.1.shares in the new owner's name the purchaser and CHL are obliged to enter into the new lease. 12 This obligation arises from the purchase of the shares. [44] The Agreement for Sale and Purchase identifies the sale of shares as the essence of what is transferred. THL owns nothing other than the shares. Thus, the Agreement for Sale and Purchase properly describes the transaction as the sale and purchase of shares. [45] The Agreement for Sale and Purchase therefore requires THL to provide a "good and registrable" transfer of the shares. 13 The agreement itself does not provide for surrenders of lease nor the execution of a new lease. These obligations only arise from the sale of the shares and the obligations of the shareholders in CHL to its constitution. This illustrates also the sale is of shares not any interest in land. In combination the factors I have identified satisfy me the true nature of the transaction here is the sale of shares in CHL.Accordingly, the agreement, being concerned with the sale of shares, could not relate to the sale of a tenanted property and general term of sale 13.1 could not apply (Issue 2)[46] At [7] I observed that Issues 1 and 2 effectively merged. I have concluded that this transaction was the sale of shares. In those circumstances cl 13.1 of the conditions of contract of the Agreement for Sale and Purchase could have no relevance. Clause 13.1 provided that if the agreement was a "sale of a tenanted property" then the parties agreed this was a supply of a going concern. 14 This clause was inserted no doubt to meet the requirements of the Goods and Services Tax Act 1985, s 11(1)(m). [47] However given my conclusion that this was a sale of shares and not a sale of a tenanted property there was therefore no "sale of the tenanted property" in terms of cl 13.1, and it can therefore have no application.12 CHL constitution, s 13.5.13 Clause 17.0.14 See [15] above.Conclusion as to Issues 1 and 2[48] Given my conclusions, that this transaction is a sale of shares which is neither exempt from GST nor zero rated (not being a going concern) the plaintiff's action must fail. [49] Issues 3, 4 and 5 only arise if I rejected the Commissioner's claim that this was the sale of shares and accepted that it was a sale of a going concern. However if I am wrong in my conclusion that this was a sale of shares I consider Issues 3, 4 and 5 as if this was a sale of a going concern.Issues 3, 4 and 5If general term of sale 13.1 could apply, whether the agreement was varied so that it related to the sale of a tenanted property (Issue 3)[50] THL's case is that as a result of the correspondence between it and OML the contract was varied so that the sale was of THL's interest in the fourth floor with existing tenancies intact and not with vacant possession. This variation meant, the plaintiff claims, that there was a sale of a going concern being the business of leasing the fourth floor of Central House. Before the sale, during the sale and after the sale the business continued because the tenants remained in occupation of the fourth floor. In terms of cl 13.1 of the Agreement for Sale and Purchase therefore this was a sale of a tenanted property and by agreement between the vendor and purchaser, the sale of a going concern. [51] The Commissioner initially in submissions before me took the position that to vary the original Agreement for Sale and Purchase there had to be a clear offer and acceptance and the facts of this case illustrated that there was no such thing. However, after discussion the Commissioner sensibly abandoned this claim. [52] The original Agreement for Sale and Purchase required vacant possession. OML asked THL, subsequent to signing the agreement, to leave in place the existingtenancies which it proposed to take over. 15 In those circumstances if THL accepted the variation of the contract it was not required to give the tenants on the fourth floor notice to quit. While THL did not specifically agree to the proposed variation at the time it was made it did not give notice to quit to the tenants. Clearly THL accepted OML's proposed variation to the contract. [53] The clearest evidence of the agreement regarding the variation is in the settlement statement prepared by THL. In that statement THL apportioned the rent received by the tenants, which spanned the settlement day of 30 March and beyond between itself and the purchaser, CBL. If there had been no variation agreed then no such apportionment was required because no tenancy would have existed after 30 March and therefore no rental would have been payable after that date. [54] This variation, providing as it did for a continued tenancy, triggered cl 13.1 of the Agreement for Sale and Purchase. In the words of cl 13.1 the contract was now the sale of a tenanted property. Thus in terms of cl 13.1(b) the parties recorded their agreement in writing that this was the supply of a going concern. This notation meant that the Goods and Services Tax Act 1985, s 11(1)(m)(i) was complied with. The answer to Issue 3 is therefore that this was the sale of a tenanted property, cl 13.1 did apply, and the requisite notice was given.Tepe did not supply a going concern at the time of supply.• Tepe's taxable activity was the activity of commercial leasing. To undertake that activity Tepe required a lease of the Fourth Floor of the Building to provide it with exclusive possession. At the time of supply, Tepe had surrendered its lease and its taxable activity had ceased.15 See [17] above.• To supply a taxable activity as a going concern Tepe needed to supply, to the recipient, all of the goods and services necessary for the continued operation of its taxable activity. The continued operation of Tepe's taxable activity required a lease of the Fourth Floor and Tepe did not supply a lease. That lease was supplied by Central House. (Issue 4)[55] This issue was concerned with whether THL supplied a going concern at the time of supply the emphasis being on the time of supply. As I have noted it is common ground that the time of supply was 30 March 2007. [56] The Commissioner submitted that the following three circumstances must be satisfied before there could be a supply of a going concern at the time of the supply. They are: 16a) there is a supply of a taxable activity or a part of a taxable activity where that part is capable of separate operation; and b) all of the goods and services that are necessary for the continued operation of that taxable activity or that part of a taxable activity are supplied to the recipient; and c) the supplier carries on, or is to carry on, that taxable activity or that part of the taxable activity up to the time of its transfer to the recipient. [57] In response to (a) the Commissioner says that at the time of supply, 30 March 2007, THL had already surrendered the lease on the fourth floor. Thus, on surrender, its taxable activity ceased and by 30 March, the date of supply, it had no taxable activity to transfer. [58] The claim that THL surrendered its interest in the lease before 30 March appears to be based on some of the exchange of correspondence between the solicitors for the parties before settlement. On 30 March 2007 THL's solicitor wrote to CBL's solicitors and in part said:16 Section 11(1)(m).As previously indicated we have provided Kensington Swan (solicitors for CHL) with our client's Deed of Surrender of Lease.[59] The Commissioner says that it can be inferred from this letter that THL's lease of the fourth floor was surrendered prior to 30 March given the letter appears to talk about a time prior to that date. [60] There is no direct evidence when the Deed of Surrender was provided, nor any direct evidence as to the date of the Deed of Surrender of Lease nor the actual date of surrender in the Deed. [61] There is nothing in the evidence to suggest the solicitors adopted anything other than the "ordinary" conveyancing process in the settlement of the transfer of the shares. Ordinarily the share transfer, the surrender of the lease, CHL's consent to the new lease, the signed new lease and the settlement sum would all be exchanged on the same day. After all the vendor would hardly wish to be in a position of having surrendered the lease if the purchaser defaulted on settlement. [62] Further, THL's settlement statement made it clear it considered it was entitled to the rent from the tenants until 30 March. 17 This illustrated, that in its view at least, its rights under the lease existed until 30 March. [63] Further, while the deed may have been dated earlier than 30 March there is no reason to suppose the surrender under the deed took place before 30 March and every reason to believe it was surrendered on 30 March. [64] The words used by THL's lawyers on 30 March relating to the surrender of the lease do not indicate that the date of surrender was earlier than 30 March although they may have sent the Deed to CHL's solicitors before then. In the absence of evidence to the contrary I reject the Commissioner's assertion that there was evidence that the lease was surrendered before 30 March. I am satisfied on balance that the evidence establishes THL's interest in the lease was not surrendered until 30 March 2007.17 See [22] above.[65] I therefore reject the Commissioner's claim there was no taxable activity at the time of supply. [66] As to [56](b), the Commissioner's point is that given THL's taxable activity required a lease of the fourth floor unless THL could supply such a lease to CBL (the recipient of the supply) it could not be said to be supplying the goods and services required of its taxable activity. The Commissioner says it was CHL that supplied the lease to CBL on the settlement date of 30 March, not THL. Thus THL did not supply a going concern given it did not supply an essential part of a taxable activity to CBL, namely the lease. [67] I am satisfied that this was the supply of all goods and services necessary for the continued operation of the taxable activity by THL to CBL. The fact that the new lease was "supplied", in the sense claimed by the Commissioner, by CHL to CBL in my view does not effect this proposition. [68] The Agreement for Sale and Purchase provided for the sale of the right to occupy the fourth floor of the building. The agreement was subject to CHL's consent to the new lease. However it is the sale of the shares which importantly triggers the entitlement to a new lease in favour of the purchaser. The business of leasing the fourth floor continues uninterrupted by the sale. The position of THL as the owner of the shares then becomes, on settlement, CBL's position. All that is necessary to carry on the activity undertaken by THL by CBL has been achieved by the transfer of the shares and obligations arising from that transfer. [69] I am therefore satisfied that all of the goods and services that are necessary for a continued operation of a taxable activity were supplied to CBL by THL. [70] As to [56](c), the third pre-requisite, I have already concluded that the Agreement for Sale and Purchase was varied to provide for a transfer of the shares with the existing tenants continued occupancy and that at transfer THL was carrying on a taxable activity. Therefore, if there was a going concern it was a going concern as at 30 March the time of supply.Whether THL and the recipient of its supply agreed in writing, as required for zero rating that the supply was of a going concern. (Issue 5)[71] The Commissioner submits that given THL's claim that CBL was the purchaser of THL's shares then there was no written agreement between CBL and THL that the supply was of a going concern (as required by the Goods and Services Tax Act 1985, s 11(1)(m)(i)). The only Agreement for Sale and Purchase was an agreement between THL and OML. The Commissioner says therefore there was no written agreement between THL and CBL when the later was substituted as the purchaser of the shares (contrary to s 11(1)(m)(i)). This meant the transaction could not be zero rated. [72] I reject this submission. I am satisfied the arrangement between THL and OML was that CBL would be substituted in every sense as the purchaser for OML in the Agreement for Sale and Purchase. [73] The three parties, THL, OML and CBL all agreed that the exchange of correspondence between the solicitors, which substituted CBL as the purchaser, could be attached to the Agreement for Sale and Purchase and would illustrate the variation of contract. The Commissioner suggested that the solicitors for THL did not expressly agree to CBL being substituted for OML but only agreed to CBL being the "transferee" of the shares. This is based on the exchange of letters between the solicitors for the parties of 15 March. [74] On 15 March the solicitors for OML indicated that it would "like to supplant" OML as purchaser with CBL. [75] The solicitors for THL responded as follows:The Vendor will consent to the new entity Central Beehive Limited becoming the transferee of the shares provided that the Board of Central House approves that entity and that Okato Management Limited remains as purchaser until settlement is completed. We agree to your suggested method of varying the agreement which is now provisional upon Board approval being given.[76] Although the words used by the solicitors for THL did not directly match the request from OML's solicitors, in my view it is clear in the exchange of correspondence that the solicitors for THL agreed that CBL could be substituted as a purchaser for OML subject to: a) the board of CHL approving CBL as a purchaser; and b) OML remaining liable as purchaser until settlement. [77] Condition (b) was an assurance to THL to protect the integrity of the settlement, in effect a form of guarantee. Although the solicitors for OML and CBL did not directly respond clearly the parties considered that they had an agreement and proceeded accordingly. [78] In those circumstances I am satisfied that viewed objectively what the parties intended was that CBL would become the substituted purchaser and take on all of the rights and obligations of OML set out in the Agreement for Sale and Purchase. This of course was subject to the two conditions mentioned in [76]. [79] Given that conclusion I am satisfied that there was an agreement in writing between CBL and THL. This was a sale of a going concern in that the Agreement for Sale and Purchase was by virtue of the exchange of correspondence of the parties an agreement in writing not only as originally between THL and OML but by variation an agreement in writing between THL and CBL. [80] I therefore reject the Commissioner's claim that there was no agreement in writing as required by the Act, s 11(1)(m)(i). [81] The Commissioner also raised what it said was the uncertain contractual position and therefore the uncertain GST position arising from the arrangements by which the shares in CHL were transferred by THL to CBL rather than OML (the original purchaser in the Agreement for Sale and Purchase). [82] The Commissioner suggested that on one view of the facts it could be said that there were two supplies here, one from THL to OML and another from OML toCBL. If that were the case the plaintiff would have no particular interest in that event. The plaintiff has obviously only concern as to whether there was one supply which affected it. Neither OML nor CBL are parties to this litigation. [83] In any event I am satisfied for the reasons I have previously given that there was only one supply in this case from THL to CBL on which GST was able to be assessed. Whether the "transfer" of contractual rights and obligations agreed to by the original parties to the agreement (THL and OML) is a novation; the making of a new contract between THL and CBL; the common law right of a purchaser to nominate another to take title on the sale of property; or simply an agreement by all three parties (THL, OML and CBL) to vary the original contract so that CBL took over OML's obligations (subject to the "back stop" of OML's continued obligation until settlement) was not the subject of detailed submissions before me. [84] However, I am satisfied in assessing the contractual arrangements between the parties objectively that the arrangement however categorised in law was to substitute CBL for OML as the purchaser of the shares and for CBL to take on all of OML's rights and obligations under the Agreement of Sale and Purchase on 2 March 2007. In those circumstances there is, in my view, only one supply for GST purposes from THL to CBL on 30 March 2007. [85] To return to the issues posed in this case. Section 11(1)(m) of the Act provides that a supply of goods is zero rated where there is, as the plaintiff identified: a) Going concern at the time of supply. The goods supplied must have been a taxable activity or part of a taxable activity that is a going concern at the time of supply; b) Written agreement that the supply is of a going concern. It must have been agreed by the supplier and the recipient in writing that the supply is the supply of a going concern; and c) Intention that the taxable activity is capable of being carried on as a going concern. The supplier and the recipient must have intended thesupply of a taxable activity or part of a taxable activity that is capable of being carried on as a going concern by the recipient. [86] I have found that the goods supplied were not part of a taxable activity that was a going concern at the time of supply. The supply therefore did not qualify for zero rating. The Agreement for Sale and Purchase was a sale and purchase of shares in CHL. [87] As I have noted, if however I am wrong in this assessment and a going concern was supplied, then I am satisfied that there was a going concern supplied at the time of supply, 30 March 2007. I am satisfied that there was a written agreement between the supplier THL and the recipient CBL that this was a supply of a going concern. [88] Finally I am satisfied that THL and CBL intended the supply of the taxable activity capable of being carried out and indeed was carried out by CBL given the continued tenancies of the fourth floor.Shortfall penalty[89] The final issue related to an unacceptable tax position and the shortfall penalty. Some brief facts are necessary to understand this issue. [90] As I have previously identified THL after its third tax invoice concluded that this was zero rated tax activity. On 15 May 2007 it filed its GST tax return for the period ended 31 March 2007. THL accepts that when it did so it took a tax position on that date. The 31 March return said THL had had no zero rated activity during the period covered by 31 March. THL accepts that was inaccurate in that it did have a zero rated supply during the period covered by the return namely the sale of the lease of the fourth floor of Central House. [91] The question therefore arose as to whether the Commissioner should impose a penalty for this failure. Whether a penalty can be imposed depends on whether or not the tax position taken by THL was "about as likely as not to be correct". THLcannot claim that its tax position was "about as likely as not to be correct". On its own admission it had made either a zero rated supply or a tax exempt supply by virtue of the 30 March 2007 sale. In either case it needed to identify that transaction in its GST return for the period ended 31 March 2007. It did neither. It failed to mention the transaction at all. [92] In those circumstances therefore THL cannot possibly assert that its tax position, that is, its failure to identify this transaction at all in its GST return, was "about as likely as not to be correct". In those circumstances the obligation to pay a shortfall penalty was triggered. The 20% penalty imposed was well within the discretion available to the Commissioner. It cannot be said to be wrong. [93] The GST system is essentially a system based on trust. The Commissioner relies upon those obliged to file returns to do so accurately and honestly. In this case if the purchaser CBL had not complained to the Commissioner and itself issued a tax invoice with regard to the transaction asserting that the plaintiff's position was erroneous then there is no reason to suspect the Commissioner would ever have found out about the transaction. In those circumstances THL would not have paid the goods and services tax it was obliged to pay by law. I therefore reject THL's challenge to the penalty. [94] For the reasons given the plaintiff's action must fail.Costs[95] Should the defendant seek costs it should file memoranda within 14 days with the plaintiff filing a response within a further 14 days. __________________________________ Ronald Young JSolicitors: C J Royds, Fletcher Vautier Moore, PO Box 90, Nelson 7040, email: croyds@fvm.co.nz P J Cassidy, Crown Law, PO Box 2858, Wellington 6140, email: peter.cassidy@crownlaw.govt.nz