LING v YL NZ INVESTMENT LIMITED [2018] NZCA 133

LING v YL NZ INVESTMENT LIMITED [2018] NZCA 133 [2 May 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA499/2017[2018] NZCA 133BETWEEN LOUISE LINGAppellantAND YL NZ INVESTMENT LIMITEDRespondentHearing: 10 April 2018 (further submissions received 13 April 2018)Court: Asher, Wylie and Thomas JJCounsel: R E Harrison QC and A Hur for AppellantJ L Foster for RespondentJudgment: 2 May 2018 at 3 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on aband A basis and usual disbursements.C Funds held by the appellant's solicitor for the total judgment debt andcosts must be released to the respondent's solicitor.____________________________________________________________________REASONS OF THE COURT(Given by Thomas J)[1] The appellant, Ms Ling, sold property to the respondent, YL NZInvestment Limited (YL), for a price inclusive of GST. In the sale and purchaseagreement, Ms Ling warranted she was not registered under the Goods and ServicesTax Act 1985 (GST Act) in respect of the transaction and would not be so registeredat settlement. YL was registered under the GST Act. After settlement, YL's claim foran input tax refund of $365,869.57 was rejected by the Inland RevenueDepartment (IRD) on the basis the supply was from a registered person to anotherregistered person and was therefore zero-rated under the GST Act.[2] YL successfully applied for summary judgment against Ms Ling claimingbreach of warranty resulting in YL's inability to claim the input tax refund.1 Ms Lingappeals that decision.Background[3] On 2 July 2015, Ms Ling entered into an agreement to buy the property situatedat 170 Station Road, Pukekohe (the Property). On 21 December 2015, prior to havingsettled her purchase, Ms Ling entered into an agreement to sell the Property(the Agreement). The Agreement used the form approved by the Real Estate Instituteof New Zealand and the Auckland District Law Society. The purchaser was recordedas WHC Holding Ltd, the director of which was recorded as Judson Jianjun Li, and/ornominee. The purchase price was recorded as $3.5 million inclusive of GST.[4] On the front page of the Agreement was the statement:The vendor is registered under the GST Act in respect of the transactionevidenced by this agreement and/or will be so registered at settlement: Yes/No."No" was circled beside that statement.[5] Schedule 2 to the Agreement was headed "GST information — seeclause 14.0" and said:This Schedule must be completed if the vendor has stated on the front pagethat the vendor is registered under the GST Act in respect of the transactionevidenced by this agreement and/or will be so registered at settlement.Otherwise there is no need to complete it.[6] Notwithstanding that, parts of the schedule were filled in. The vendor'sregistration number was left blank. Answers in the affirmative were given to1 YL NZ Investment Ltd v Ling [2017] NZHC 1793.statements that the purchaser was registered under the GST Act and would be soregistered at settlement, and that at settlement the purchaser intended to use theProperty for making taxable supplies. The purchaser was identified asWHC Holding Ltd and its GST registration number was given. The answer "No" wasgiven to statements as to whether the purchaser intended to use the Property as aprincipal residence under the GST Act. The rest of the schedule, which dealt withnomination and the provision of further information as to the nominee's address andregistration number, was left blank.[7] Ms Ling became registered proprietor of the Property on 5 February 2016.Prior to that, on 30 October 2015, the then owner of the Property had granted amonthly tenancy of part of the Property to a company engaged in horse training andgrazing. There is no evidence as to whether Ms Ling continued the lease on herpurchase of the Property. However, the Agreement stated there were no tenancies.[8] Although the Agreement provided for settlement on 31 May 2016, settlementtook place on 13 June 2016. By deed dated 10 June 2016, WHC Holding Ltdnominated YL as nominee and notice to that effect was given to Ms Ling's lawyers.[9] On 15 July 2016, YL submitted a GST return to the IRD claiming the input taxrefund of $365,869.57 (the GST Refund) in relation to the purchase of the Property.The IRD queried the claim and was provided with further information.[10] On 15 September 2016, the IRD wrote to Ms Ling (the Letter), giving her aGST registration number and saying:You're now registered for GST as from 8 May 2015. From this date, you needto charge and account for GST on all goods and services you supply in yourtaxable activity using the hybrid accounting basis.[11] YL's advisers asked the IRD about the GST Refund and were advised by emailon 10 October 2016:I can confirm the vendor for the property sale at 170 Station Road, Pukekoheis GST registered and should have been at the time of sale.IRD sent a similar email to YL's advisers on 26 October 2016.[12] On 30 October 2016, YL's lawyers wrote to Ms Ling's lawyer setting out thebackground and noting the IRD had requested YL to respond. YL's lawyers soughtthe following information:1. Whether or not the IRD is correct that your client was GST registeredin respect of the transaction evidenced by the Agreement, in whichcase the supply should have been zero rated.2. If the IRD is incorrect, please advise on what basis the IRD isincorrect.3. If the supply was [a] zero rated taxable supply, our client will seekrecovery from the vendor for her breach of the vendor's warranty inclause 14.1 of the Agreement and for the vendor's misrepresentationas to her GST position in respect of the supply.4. Please confirm whether the house was occupied as a dwelling by anyperson during the period that the property was owned by the vendor.[13] Ms Ling's lawyers responded to the effect they had forwarded the email toMs Ling and awaited instructions. No substantive response was received.[14] On 16 November 2016, the IRD wrote to YL's tax adviser saying:This email is to confirm the supply of land at 170 Station Road, [Pukekohe]from Louise Ling to your client was made from a registered person to anotherregistered person and was part of the vendors taxable supplies.Therefore, the zero rating criteria under section 11(1)(mb) of theGST Act 1985 has been satisfied and accordingly it is proposed the GSTrefund claimed by your client will be disallowed.[15] As a result, YL agreed to amend its GST assessment by excluding the claimfor the GST Refund.[16] On 14 February 2017, using the services of the estate agent who dealt with thesale and purchase of the Property, Ms Ling approached YL with a document headed"Variation To Sale and Purchase". As the incorrect address of the subject property wasreferred to in the variation, an amended version was sent on 15 February 2017. Thedocument stated:We the undersigned agree to the following Variation/s to the above Agreement:A Whereas the vendor and purchaser entered into an agreement dated21/12/2015 for the property situated at 170 station road [sic]Pukekohe1 The vendor is registered under the GST Act. The vendor GSTregistration number is 91-181-806.2 The purchaser nominated WHC Holding Ltd. This company is [sic]GST registration number is 92-394-999.3 The parties agree that the purchase price is now recorded as$3,134,130.43 plus GST. Further the parties agree that transaction iszero rated for GST purpose.4 Louise Ling agreed to return GST $365,869.57 before 31/5/17. Theparties will arrange the se [sic] settlement letter.[17] Ms Ling referred to this document in her affidavit opposing the application forsummary judgment, saying she "provided an amended agreement for GST refundpurposes".[18] Mr Li, director of YL, refused to sign the variation. He did so not only becauseit made no difference to his position as the transaction would still have been zero-ratedbut also because he was not comfortable altering an agreement which had alreadysettled and been the subject of a GST return and review by the IRD.Issues on appeal[19] Ms Ling considers Associate Judge Bell erred in granting summary judgmentand concluding there was a breach of the GST warranty in the Agreement. The appealwas advanced before us on the following grounds:(a) The Judge erred in his interpretation of the Agreement and warranty.Ms Ling claims that, as properly interpreted, she did not breach thewarranty because she was not in fact registered under the GST Act atsettlement.(b) The Judge erred in treating the Letter as proof that, as at settlement,Ms Ling was registered under the GST Act and therefore in breach ofwarranty.Meaning of the GST warranty[20] The warranty on which YL relied is contained in cl 14 of the Agreement.Clause 14 said:14.0 Zero-rating14.1 The vendor warrants that the statement on the front page regarding thevendor's GST registration status in respect of the supply under thisagreement is correct at the date of this agreement.[21] The statement on the front page of the Agreement, which is set out in full at [4]above, was to the effect that the vendor was not registered under the GST Act in respectof the transaction and/or would not be so registered at settlement.[22] Ms Ling's case is that she was not in breach of warranty because, as at the dateof the Agreement and as at the date of settlement, she was not in fact registered underthe GST Act. She was subsequently registered with effect from a date prior to theAgreement. That subsequent registration, in Mr Harrison QC's submission on behalfof Ms Ling, does not mean, on a proper construction of the Agreement, that Ms Lingbreached the warranty.[23] The Judge relied on the fact that the Agreement incorporated definitions fromthe GST Act and, even had it not, reference to registration under the GST Act mustmean registration in terms of the statutory definition.2 He also identified the riskinherent in Ms Ling's argument and the impact of her interpretation of the Agreementon conveyancing transactions generally.3[24] Clause 1.1 of the Agreement was a definitions clause and included thefollowing:2 At [30]–[31].3 At [33].1.1 Definitions(1) Unless the context requires a different interpretation, words andphrases not otherwise defined have the same meanings ascribed tothose words and phrases in the Goods and Services Tax Act 1985, theProperty Law Act 2007, the Resource Management Act 1991 or theUnit Titles Act 2010.(8) "GST" means Goods and Services Tax arising pursuant to the Goodsand Services Tax Act 1985 and "GST Act" means the Goods andServices Tax Act 1985.(28) The terms "going concern", "goods", "principal place of residence","recipient", "registered person", "registration number", "supply" and"taxable activity" have the meanings ascribed to those terms in theGST Act.(Emphasis added.)[25] The GST Act provides:4registered person means a person who is registered or is liable to beregistered under this Act[26] A person's liability for registration is governed by s 51 of the GST Act. Aperson becomes liable to be registered if, in a 12 month period, he or she carries ontaxable activities exceeding the relevant threshold ($60,000 at the time) or there arereasonable grounds for believing that will occur.5 Subsection 4 provides two ways fora person to be registered:(4) Where any person has—(a) made application for registration pursuant to subsection (2),(3), or section 54B, and the Commissioner is satisfied that thatperson is eligible to be registered under this Act, that personshall be a registered person for the purposes of this Act witheffect from such date as the Commissioner may determine; or(b) not made application for registration pursuant tosubsection (2), and the Commissioner is satisfied that thatperson is liable to be registered under this Act, that personshall be a registered person for the purposes of this Act witheffect from the date on which that person first became liableto be registered under this Act: provided that the4 Goods and Services Tax Act 1985, s 2.5 Section 51(1).Commissioner may, having regard to the circumstances of thecase, determine that person to be a registered person fromsuch later date as the Commissioner considers equitable.[27] Therefore, if a person applies for registration, the person will be registered witheffect from such date as the Commissioner may determine. If a person has not applied,and the Commissioner is satisfied a person is liable to be registered, he or she isregistered with effect from the date on which that person first became liable to beregistered, provided the Commissioner can determine that person to be a registeredperson from a date the Commissioner considers equitable.[28] In Mr Harrison's submission, the front-page statement in the Agreement cannotbe interpreted as a representation by Ms Ling that she was not liable to be registeredunder the GST Act. He submitted that cl 14.1 specifically limits the representationand warranty to the vendor's current GST registration status. That, he said, waslogically inconsistent with providing for a future liability of being deemed to beregistered for GST with retrospective effect. Mr Harrison contrasted other referencesin the Agreement at cl 14.3(1) and (2) and cl 15.1(1) which expressly used theexpression "registered person". Furthermore, in his submission, "liable to beregistered" in terms of the GST Act definition of registered person means liable interms of s 51(1) which requires matters of law and fact to be established on evidence.[29] The question is, therefore, whether "registered under the GST Act" as used onthe front page of the Agreement means the same as "registered person", being adefined term used later in the Agreement. In our view, the terms "registered person"and "registered under the GST Act" as used in the Agreement are clearly synonymous.This is emphasised by cl 14.3 of the Agreement, which provided:14.3 Where the particulars stated on the front page and in Schedule 2indicate that:(1) The vendor is and/or will be at settlement a registered personin respect of the supply under this agreement;(2) The recipient is and/or will be at settlement a registeredperson;(3) The recipient intends at settlement to use the property formaking taxable supplies; and(4) The recipient does not intend at settlement to use the propertyas a principal place of residence by the recipient or a personassociated with the recipient under s 2A(1)(c) of theGST Act—GST will be chargeable on the supply under this agreement atzero per cent pursuant to section 11(1)(mb) of the GST Act.[30] Clause 14.3 demonstrates that the Agreement does not intend there to be twodifferent GST registration concepts under the Agreement, that is, "registered under theGST Act" and "registered person". It links the particulars on the front page (whichlogically refer to the GST statement) and Schedule 2 (which contains only GSTinformation) with whether the vendor is and/or will be at settlement a registered personin respect of the supply made under the Agreement. Clause 14.3 reinforces that apositive response to the GST statement on the front page means the vendor is or willbe a registered person at settlement. A registered person is a person registered or liableto be registered under the GST Act. If the criteria for registration are met, a person isa registered person whether or not they have applied to be registered under theGST Act.6[31] By responding "No" to the statement on the front page of the Agreement,Ms Ling said she was not and would not at settlement be a registered person, thatis, registered or liable to be registered under the GST Act. Clause 14.1 of theAgreement makes that statement a warranty.[32] In support of this interpretation, the Judge referred to the purpose of provisionsabout the supply of a going concern in the GST Act and the need for agreementbetween a supplier and recipient in that regard.7 He noted this Court's observation inFatac Ltd (in liq) v Commissioner of Inland Revenue that the implied purpose was toremove confusion and uncertainty where a purchaser seeks an input tax credit and thevendor seeks to resist an output tax debit.8 He also noted this Court's observation inStarrenburg v Mortre Holdings Ltd in relation to the clause which corresponds to cl 15of the Agreement, the supply of a going concern.9 This Court said the provisions of6 Section 51(4)(b).7 YL NZ Investment Ltd v Ling, above n 1, at [22].8 Fatac Ltd (in liq) v Commissioner of Inland Revenue [2002] 3 NZLR 648 (CA) at [78]–[79].9 Starrenburg v Mortre Holdings Ltd (2004) 6 NZCPR 193 (CA).the standard agreement concerning GST and the supply of a going concern were forthe purpose of avoiding any confusion as to the GST liability position of the parties.10[33] The Judge identified that, while those comments applied to the supply of agoing concern, they were equally applicable to the present case.11 We agree.[34] The purpose of a warranty in a commercial contract is to assign risk betweenthe parties. A party provides a warranty in respect of matters which are or can beexpected to be within that party's knowledge but not within the knowledge of the otherparty. This is plainly the situation in this case. YL could not know Ms Ling's GSTstatus, that is, whether she was in fact registered or whether she was liable to beregistered. YL could not challenge the Commissioner's decision as to Ms Ling'sregistration and its retrospective effect. In those circumstances, it is right that the riskas to GST registration lies with Ms Ling. The GST warranty was for the purpose ofavoiding any confusion as to the GST liability position of the parties.[35] We also agree with the Judge's analysis of the ramifications should Ms Ling'sinterpretation of the GST warranty be correct. It would introduce uncertainty on anessential term of agreements for sale and purchase of property, namely, the liability topay GST and the impact that would have on the purchase price.Did YL prove Ms Ling had no defence to the claim?[36] On an application for summary judgment, the onus is on the plaintiff to showthe defendant has no defence to the claim.12 In light of that, Mr Harrison submittedthe Judge incorrectly relied on inadmissible evidence in assessing the application.Specifically, Mr Harrison maintained the Letter was inadmissible hearsay and therewas no onus on a defendant to a summary judgment application to answer inadmissibleevidence.[37] The issue of hearsay was not raised in the High Court, although Ms Ling haddifferent counsel acting at the time. While we have some reservations as to whether10 At [30].11 YL NZ Investment Ltd v Ling, above n 1, at [23].12 Krukzeiner v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 (CA) at [26].the Letter was indeed hearsay or whether it was a business record which would beadmissible, we do not need to determine the issue.13 In our view, there was sufficientother evidence to establish Ms Ling was registered under the GST Act in relation tothe transaction, or liable to be so, as at the date of settlement. The other evidence was:(a) The Agreement provided that the purchase price of $3.5 million wasinclusive of GST. In the Agreement, Ms Ling said she was notregistered under the GST Act and would not be so registered atsettlement. YL was GST registered as at settlement. On this basis, thetransaction was not a supply which would be subject to zero-rating.(b) YL's claim for the GST Refund was rejected by the IRD. Theirresistible inference in the circumstances is that the claim was rejectedbecause Ms Ling was liable for GST registration as at settlement andthe transaction was zero-rated.(c) The IRD informed YL's advisers the reason for its decision disallowingYL's claim for the GST Refund was that Ms Ling was GST registeredand should have been at the time of sale. The IRD said the transactionwas zero-rated.(d) YL, through its lawyers, then made Ms Ling aware of the position withthe IRD and gave Ms Ling the opportunity to respond. Theyspecifically asked Ms Ling to advise on what basis the IRD wasincorrect. Ms Ling remained silent on the issue.(e) In her affidavit in response to YL's application for summary judgment,Ms Ling said:3. By way of explanation I wish to add that, while I was actuallyregistered for GST on or about 15 September 2016, the [IRD]backdated my registration, for their internal assessmentpurposes, to an earlier date namely 8 May 2014 [sic]. In otherwords, the IRD deemed me to have been registered from adate that was much earlier than the date on which I wasactually registered.13 See Evidence Act 2006, ss 16, 17 and 19.4. The backdating of my GST registration was partly to myadvantage and partly to my disadvantage financially. It is,however, a situation that I could not have foreseen, and didnot foresee, at the date on which I signed the agreement. Atthat date I was not registered for GST and did not intend tobe. The need to register for GST arose because ofcircumstances that arose after the agreement was signed andsettled.Ms Ling therefore accepted she was registered for GST and the IRDhad backdated her registration to 8 May 2015. She then said thebackdating was partly to her advantage and partly to her disadvantage.The inference from that is she had been engaged in taxable activity inthe period covered by the backdating which would enable her to obtainsome advantage in being GST registered.(f) Ms Ling's claim that the need to register arose because ofcircumstances which occurred after settlement cannot be right. It is forthe Commissioner to determine the date of Ms Ling's liability forregistration, regardless of whether she herself applied to be registeredor whether the Commissioner decided she was liable to be registered.14(g) In her affidavit, Ms Ling did not challenge the IRD backdating of herGST registration. Any information as to why the registration shouldnot have been backdated was entirely within Ms Ling's knowledge.There was no evidence before the High Court and no application forleave to admit evidence before us to the effect the backdating waswrong. The date of backdating is immaterial and, as referred to at [27]above, the date of registration is for the Commissioner to determine.The only issue is whether Ms Ling was GST registered or liable to beso as at the date of settlement.(h) By proposing on two occasions that YL sign the "Variation To Sale andPurchase", Ms Ling confirmed she was registered for GST in relationto the transaction as at the settlement date. The proposed variation wasin relation to the transaction. It recorded that Ms Ling was registered14 Goods and Services Tax Act, s 51(4).and advised her GST number. It proposed the parties agree thetransaction was zero-rated. Zero-rating is mandatory if both parties areGST registered, pursuant to cl 14.3 of the Agreement.[38] When assessing whether a defendant has no defence to the claim on a summaryjudgment application, the court is entitled to take a robust and realistic approach wherethe facts warrant it.15 In the civil jurisdiction, the court is entitled to draw an adverseinference where a party can reasonably be expected to provide information within thatparty's knowledge but fails to do so.16[39] We are satisfied the Judge was correct to conclude, on the balance ofprobabilities, Ms Ling was liable to be registered for GST at the settlement date. Shewas therefore in breach of the GST warranty in the Agreement and there was nodefence to the claim.Result[40] For the reasons given, the appeal is dismissed.[41] The appellant must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.[42] Without opposition, we order the funds held by Ms Ling's solicitor in respectof the total judgment debt and costs be released to the respondent's solicitor.Solicitors:Hong Hu Lawyers, Auckland for AppellantBen Liu & Co, Auckland for Respondent15 Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA); and Krukziener v Hanover Finance Ltd,above n 12, at [26].16 Pepi Holdings Ltd v BMW New Zealand Ltd CA22/97, 25 August 1997 at 23–24; and Perry Corpv Ithaca (Custodians) Ltd [2004] 1 NZLR 731 (CA) at [153]–[155], cited with approval inForivermor Ltd v ANZ Bank New Zealand Ltd [2014] NZCA 129 at [15].