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GST - Disputant held land as trustee not as registered entity; horticulture business sold as going concern [2006] NZTRA 2 (14 February 2006)

Last Updated: 19 July 2006

BEFORE THE TAXATION REVIEW AUTHORITY


Decision No. 02/2006

TRA No. 14/04

BETWEEN MR A

Disputant

AND THE COMMISSIONER OF INLAND REVENUE

Defendant

TRA 15/04

BETWEEN O LIMITED

Disputant

AND THE COMMISSIONER OF INLAND REVENUE

Defendant

HEARING at HAMILTON on 20 and 21 October 2005

COUNSEL


Mr D M O’Neill for disputants
Mr C J Shannon and Ms K Parkash for the Commissioner

DECISION ISSUED: 2.30 pm, 14 February 2006

DECISION OF TAXATION REVIEW AUTHORITY

TABLE OF CONTENTS

A. BACKGROUND
B. THE FACTS

The Input Credit

Mr A’s alternative position

Interest and backdating of the assessment
The Commissioner’s position on the facts
Release of the refund
Termination of taxable activity

C. CREDIBILITY

The Property Law Act 1952

D. RETENTION OF THE REFUND PAID BY THE COMMISSIONER
The Facts relevant to the payment of the refund
The Case against Mr A
Cessation of taxable activity/going concern
Conclusion on going concern
E. DECISION


A Background

[1]Two matters have been consolidated in this proceeding. Mr A is disputing an assessment in his own right and also in his capacity as a director of O Ltd and as trustee of the trust which owns the shares in O Limited.

[2]The dispute concerns the GST consequences of the purchase by O Ltd of land registered in the name of Mr A for the sum of $287,343.13 and business assets valued at $35,658.00. The disputant O Ltd has claimed, and been paid by the Commissioner, a GST input refund in respect of the land purchase in the sum of $31,927.02.

[3]It will be necessary to decide:

1. Whether the disputant O Limited is entitled to the refund; and if not:
2. Whether it is entitled in all the circumstances to retain the refund paid to it;
3. Whether Mr A is liable for output tax on the sale of the land;

[4]Two interlocutory matters were dealt with at the outset of the hearing. The first was an application by the disputants to strike out the Commissioner’s defence. For the reasons given orally this was declined.

[5]Secondly, an application by the disputants to admit further evidence. This was granted on the terms set out in my oral decision.

B The Facts

[6]Mr A and his former wife owned land near Hamilton. The couple lived on the land and were not registered for GST.

[7]Mr A used most of the land for growing asparagus. He was at all material times registered for GST. The taxable activity was the horticultural activity taking place on the land using the plant and equipment necessary for that purpose.

[8]In November 1993 Mr and Mrs A entered into an agreement with Transit NZ to sell to it 6.65 ha of their land for the purposes of roading. The agreement involved the creation of a roading corridor through Mr and Mrs A’s land. This took some time to effect, necessitating land being exchanged between the vendors and Transit, and the payment of an equality of exchange to Transit.

[9]The details of this protracted series of transactions are not relevant to the outcome other than to note that at the end of the day Mr A owned a block of land containing his house and the balance of the land resulting from the Transit transactions was sold to O Limited in March 2000.

[10]What is of significance is that it took from November 1993 to 29 March 2000 to finally resolve all outstanding disputes between Mr A and Transit.

[11]In the meantime Mr A and his former wife had separated in 1996. Outstanding matrimonial property and custody matters were finally settled in a written agreement dated 29 May 1998. By that agreement Mr A acquired all of the land and plant used for horticultural purposes and the house situated on that land. The agreement records that Mr A is the "sole and absolute owner of (such) property".

[12]The other event of significance pending the settlement with Transit was the formation of O Limited in July 1997. The disputant says that this was done in anticipation of him transferring all of the horticultural land to the company, the shares in which were to be held by trustees for a trust for the children of the marriage.

[13]Although the separation agreement does not say so Mr A contends that it was understood and agreed between himself and his wife that the horticultural land would be held by Mr A as a trustee upon a trust to transfer it to O Limited when that was possible following completion of negotiations with Transit.

[14]It is that assertion by Mr A that he held the horticultural land as a trustee for the children’s family trust which is at the heart of the dispute involving the company.

[15]The disputant says that it was agreed between he and his wife at the time of the separation that he would hold the legal title to the land in question. It was an unspoken basis of the matrimonial property settlements that both spouses agreed that the land was to be held on trust for the daughters as ultimate beneficiaries.

[16]What stopped this happening at the time of the separation was the delay in finalising with Transit the precise land holdings between the parties.

[17]As evidence justifying this conclusion Mr A points to the formation of the company in July 1997; the trust deed dated 1 April 2000 which recites that the purpose of the trust is to acquire and hold all of the shares in O Limited, and the agreement with Transit of 29 March 2000 which records that Mrs A consented to the land in question being vested in Mr A.

[18]Counsel contends that as Mr and Mrs A were not registered for GST and that Mr A held the land solely as trustee and not in his capacity as a registered GST entity the company O Limited, which was registered for GST on 9 March 2000, is entitled to an input credit for the purchase of second hand goods. This follows from the wording of s.20(3) of the GST Act as it stood on 31 March 2000. (The section was amended effective from 10 October 2000, and this would have denied O Limited the refund if the transaction had taken place after that date.) As Mr and Mrs A were not registered there is no corresponding output tax payable.

[19]At the same time as he transferred the land to the company Mr A also sold the business activities carried on from the land to the company. He claims that this sale was zero rated being a sale of a going concern.

The Input Credit

[20]Mr A says that the Commissioner declined to accept the company’s self-assessment and on 30 May 2000 issued a notice of proposed adjustment disallowing the input claimed. On the same date he issued a notice of proposed adjustment assessing Mr A for output tax on the sale of the land to the company.

[21]On 6 July Mr A provided the Commissioner with sworn evidence of the arrangements between himself and his wife detailed above. In the affidavit he made the point that the land in question was not referred to in the separation agreement as he and his wife had previously agreed to sell that land to O Limited for the benefit of their daughters.

[22]Following receipt of this information and the notices of response of Mr A and O Limited the Commissioner issued an assessment to the company on 2 January 2001 accepting that the input of $31,927.02 was payable and paid the refund of that amount to the company.

[23]The disputant company considered the matter at an end and dealt with the refund as its own.


On 16 August 2001, some 13 months after the filing of its notice of response, the Commissioner sought to reopen the matter. There was correspondence and meetings between the parties and on 21 August 2003, some 30 months after the filing of the notice of response, the Commissioner purported to issue a statement of his position. The disputant responded to this.

[24]It was not until 29 March 2004 that the Commissioner issued a further assessment against Mr A assessing his liability for output tax at $31,978.75 for the period ending 31 March 2000 (rather than the figure of $1,279.41 returned by him). This assessment was made during a time that the Commissioner contended the matter was subject to the disputes resolution process.

[25]On the same day the Commissioner reassessed O Limited by denying it the input claimed for the same period (and paid) and amending the refund payable to $38.13.

[26]In order to have the dispute referred to the adjudication unit Mr A agreed to time bar waiver. The Commissioner subsequently refused to accept these waivers and the matter did not go to adjudication.

[27]The disputants contend that having regard to this sequence of events the Commissioner cannot resile from the payment of input credit on 2 January 2001.


Mr A’s alternative position

[28]He contends that if the Commissioner is correct in his claim that he acquired the land from Transit for the purposes of his taxable activity of asparagus growing then he did so in March 2000 for the sum of $332,000 and is entitled to claim an input credit of 1/9 namely $36,888.89. As will become clear from this judgment I have not found it necessary to rule on this contention or the related point dealing with the absence of a tax invoice.


Interest and backdating of the assessment

[29]Mr A contends:

1. That if any interest on unpaid GST is to be considered then the Authority should have regard to the fact that the substantial (and unexplained) delays are solely of the Commissioner’s making.

2. That neither he or the company has been guilty of neglect or default in making a "due and complete return".

As will become clear I do not find it necessary to decide this matter.

The Commissioner’s position on the facts

[30]He contends that there is no evidence beyond that of Mr A that he held the land on trust for himself and his wife to transfer to the company when possible.

[31]All of the relevant titles are shown as registered in Mr A’s name and there is no evidence in Mr A’s dealings with a third party for finance that he held the land on trust.

[32]He contends that throughout the transaction Mr A acted as agent for himself and O Limited.


Release of the refund

[33]The Commissioner says this was an error on his part from which the taxpayer is not entitled to benefit. I will deal with the authorities later when considering this point.


Termination of taxable activity

[34]As a subsidiary argument but strongly pressed, the Commissioner contends that objectively viewed the facts lead to the conclusion that what occurred here was that Mr A decided in March 2000 to terminate his taxable activity and sell it to the company. This it is contended triggers s.10, and I deal with the point later in the decision.


C Credibility

[35]At the heart of the principal dispute as to whether or not Mr A held the land as a trustee for himself and his wife is the credibility of Mr A as a witness.

[36]Associated with this question of credibility is the legal issue of whether or not the disputant is able to prove the existence of a trust "respecting land or any interest in land" for the purposes of s.49A(2) of the Property Law Act 1952.

[37]This was not a matter adverted to in any of the pleadings or the submissions of counsel, but something to which I drew attention during closing submissions.

[38]Counsel have filed written submissions on the point. Before dealing with those matters however it is necessary to decide if the disputants have laid the factual basis for a finding that Mr A acted as a fiduciary for himself and his wife in relation to the land, and that requires me to determine questions of credibility.

[39]The Commissioner’s approach to Mr A’s credibility is illustrated by the following passages from the evidence:

"Mm. Now who do you say you’re holding the land in trust for ... [O Limited].

So when the land was transferred from yourself and your wife to yourself, that’s the certificate of title at tab 2 ... yes. That’s only the 10 acre title.

Yeah. You say that you were holding the land there as trustee for [O Limited] ... the residual yes. I was holding on behalf of [Mr and Mrs A] to be transferred to [O Limited] as per our Matrimonial Agreement.

Sorry. You say you’re holding as a trust. Trust for who ... in trust. I was holding in trust for [Mr and Mrs A].

Oh, so it wasn’t in trust for [O Limited] ... no, they were going to be the ultimate recipients of it. But at that point in time I held it in my name in trust for [Mr and Mrs A] to transfer when the title was made that residual was absorbed into the transit title.

Just so that I’m very clear. You’re holding. Which one was it you were holding in trust. For you and your wife or was it for [O Limited]. Which one ... for me and my wife.

For you and your wife ... we are the ones that sold it.

So you certainly weren’t holding it on trust for [O Limited] ... no. Because they’d purchased it.

Right. So you’re not trying to mislead this Authority about that ... not whatsoever.

Absolutely sure ... absolute sure.

Because you know it’s an important point who held this land don’t you ... it’s the whole crux of the case.

It’s important to tell the truth about that ... absolutely.

You’ve sworn an affidavit about this haven’t you ... yes.

Would you look at page 93 of your bundle. Now that’s an affidavit sworn by you which you’ve confirmed by you is true and correct haven’t you ... correct.

On page 9 you said you talk about the registered ownership was transferred to myself as trustee for [O Limited] don’t you ... mm.

That’s different to what you’re just saying now isn’t it ... correct.

The (inaudible) ... technically that’s not right.

So you’re ... there is a step between it.

So you accept that what you said in this affidavit is false ... it’s not false, it just.

Well it’s not true is it ... it doesn’t give the full picture. No I agree there.

So you accept that what you said in this affidavit’s false ... no.

Oh is it true ... it doesn’t give the full picture.

Well ... (inaudible). myself as trustee to be transferred to [O Limited].

When you said you were holding this land as trustee for yourself and your wife. And then previously you said it was trustee for [O Limited]. Were you lying then or are you lying now ... no. This is just not quite worded correctly. I’m sorry to say. I’m not lying at all.

Even though you’ve confirmed on oath that it was true ... mm.

Oh, so when you confirmed on oath it was true, that’s not right is it. Clearly the difficulty you’re having here in saying who you held as trust, the land as trust for, is because you’re making the story up as you go along aren’t you ... excuse me. I find that rather offensive.

Answer the question. You’ve been making it up as you go along haven’t you ... (inaudible). Absolutely not.

And. So I take it that when the land was. When you say the land was held ah, as trustee for you and your wife, it wasn’t held as a trustee for any sort of family trust was it ... no. It was held pending our matrimonial settlement where we had agreed that our daughters would acquire that land through [O Limited]. That’s why it was incorporated in 1997 in readiness for the transaction.

Now you say that you held this land with your wife as trustee for you and your wife. Ah. Would you look at tab 28 of the Commissioner’s bundle. Your name is the vendor there aren’t you ... yes.

No mention of any trust is there ... no. There doesn’t need to be.

And ... that’s the name on the title.

Yes because it reflects that you were the registered proprietor and the only one that could sell it ... I’m not the proprietor. I disagree with you.

[Mr A] this agreement’s dated 24 of the 8th of 2000. If you look at tab 2 you were the registered proprietor of the land. Of at least some of the land weren’t you ... what does the word proprietor mean.

Registered owner on the title ... I was not the owner.

[Mr A] look at. Do we have to go back to the certificate of title at tab 2.

JUDGE WILLY
Can I interrupt. Just a moment [Mr A]. You’re arguing at cross purposes. What the witness is saying is he was the owner in equity. The title will only reflect the legal ownership. You cannot have an equitable ownership on the title. Is that what you’re saying.

MR A
... correct Sir.

JUDGE WILLY/MR SHANNON
You understand that Mr Shannon ... yes Sir.

[MR A] XXD BY MR SHANNON
On the Deed of Acknowledge of Debt, you alone were named as the creditor. Weren’t you ... correct.

No mention of any trust there was there ... no.

And in the agreement with the Crown, you would have been the transferee of the plan hadn’t you ... when I settled (inaudible). I settled in my name. Yes. Back in March 2000 we settled. In March 2000 my wife said and signed yes you can settle on my behalf into my name because we had to merge the titles. And as you quite rightly have pointed out it the other title was in my name. So to merge titles you need the same name.

Now that residual that was in your name. You actually mortgaged that to Westpac Bank didn’t you ... no, I mortgaged my house.

Put the residual amounts in this title ... the title. Yes, the title has the mortgage recorded on it.

Yes. And you made various finance applications with Westpac ... over the years I have made them. Yes.

You actually refer to the land at Tamahere as being some of your assets, doesn’t date you ... for the purposes of borrowing I have recorded all the (inaudible) of all parties. Even my wife."

[40]Counsel later drew to the attention of Mr A apparent discrepancies between the printed terms of the two agreements for sale and purchase of the land and the stock and plant to O Limited. The following passage occurs:

"Perhaps if you answer the question. Ah, if you really thought the dispute was settled (inaudible) ... I (inaudible). I can give categoric assurance to this Court as far as I was concerned the process was settled in January and I used the money.

And there were several more letters going back and forth claiming the dispute was settled weren’t there ... yes.

And then the next year there was this meeting in June 2002. The meeting that we’ve seen the notes for. Now I mean I take it you can’t remember everything said at that meeting now can you ... I did a lot of talking. I was on my feet the whole time at the meeting. I was the one at the whiteboard doing the drawings and explaining. Ah, I think after three years I think it would be fair to say there’ll certainly be certain things that I don’t remember no.

And you accept the notes aren’t a verbatim record are they ... no. They’re not. No. They were notes that um, C made.

It actually says on the notes ah, not every last thing, just important bits as I interpreted them ... correct.

And she was from your firm (inaudible) ... she’s from the tax section (inaudible).

And she was there acting for you as the taxpayer wasn’t she ... as a minute taker.

And these are the minutes taken as she interpreted them aren’t they ... correct.

She’s not here so we can’t really know how she came about her interpretation can we ... no we can’t.

Now in terms of the transactions themselves. If you just look at your, the business. The sale of the business agreement. That’s on page 50 of your bundle ... page what.

Page 50. Now pages 50 through to 52 are they true copies of that agreement ... yes. 52, 52. That’s the business.

50, 51 and 52 are they all true copies of that agreement ... yes.

Are you absolutely certain about that ... yes. (inaudible).

The Commissioner actually asked you whether there were any variations to the first and back page of the agreement didn’t he ... just refresh my memory where that was asked.

Well if you look at tab 47. That’s the Commissioner’s bundle. Tab 46. Turn first to tab 46 ... 47 sorry.

It’s the first of tab 46 on the second page .4. Please advise whether the parties used the complete agreements as the basis of their contract and if so please provide full copies including the general conditions and terms. (inaudible) that ... yes.

Then at tab 47 you responded by saying the copies at .4, the copies provided to you are quite clearly agreements. The page is not forwarded to not have any variations on ... correct. There was no conditions to the contract whatsoever.

No variations for the conditions you say ... no. The only on page special conditions, pages blank and that’s there. And the schedule is there. But if there was any variations they would be on the special conditions page but they’re not.

Are you trying to mislead the Authority regarding variations for this agreement ... no.

Page 51 there’s been an amendment to the, to clause 13 hasn’t there ... yes and that’s been supplied.

When was it supplied ... with the documents.

When ... whenever they got. Whenever you got 50, 51 and 52. Are they the same as what you’ve got in your bundle.

The first time they were supplied to the Department was in your bundle ... yes.

Never previously supplied ... no, no.

When did you supply them ... no, no.

[Mr A] where are the original copies of these agreements ... with my solicitor.

Have you got them here now ... no.

Why not ... I haven’t got them, the solicitor’s got them. He gave me copies off the file.

Why have you never made full copies available to the Department despite request ... because there is no changes on them. There is no conditions. The contracts have been settled. The contract existed for one week. The sale and purchase agreement was dated the 24th. Settlement possession took place on the 31st. It’s gone. There was no conditions.

Page 51. You’ve just inserted that page in later in an attempt to mislead this Authority haven’t you ... I have not.

JUDGE WILLY/MR SHANNON
Mr Shannon. These are very serious allegations. Do you have any basis for making them. It’s an allegation of fraud. What basis do you have for putting that allegation to the witness ... I’ll explain the basis for it.

Please do.

[MR A] XXD BY MR SHANNON
Would you look at the agreement for sale and purchase at page 50 ... yes.

The second edition July 1995 isn’t it. Page 52, also 2nd edition July 1995 isn’t it ... yes.

Whereas the middle page, page 51 is seventh edition July 1999 isn’t it ... yes.

It’s from a different agreement isn’t it ... I don’t see the relevance because if that page had to be taken out to put this change in here. It’s what the solicitor’s got on it.

And on the front page, page 50 where it talks about GST, it says. See clause 16 zero rated for GST purposes. And yet the page you’ve inserted in the middle is a clause 13 isn’t it ... I cant explain that. But is it of any relevance.

Well it’s been inserted. It’s seen to claim the transaction zero rated ... but it says on the front page that it’s zero rated for GST purposes.

Isn’t it an attempt to say there was an agreement that the transaction was a going concern ... the front page says zero rated for GST purposes. That means going concern. And it is. All the assets of my asparagus business including the shares in the pack house.

You know that agreements for sale and purchase like this are core key documents for assessing tax implications aren’t they ... they are one of the documents yes.

Would you like the opportunity to get these originals from your solicitor ... yes if he’s still got them.

Now if one looks at the ah, sale and purchase of real estate agreement page 53. Am I correct in understanding it that you’re seeking an input credit in relation to $332,000 ... I claimed an input credit on $287,000. In the course of the preparing the responses, it became obvious that the area of land that was valued was the incorrect area. The area that was valued for the valuer was 8.79, 78, 79 where in actual fact it should have been 10.194.

So did you amend this document after you’d put in an input credit claim ... yes. But I haven’t claimed. The 287 was the figure that was in the claim.

Right. Now the sale of the business assets, do you say that that was a sale of a going concern ... yes, that was the entire business that I owned. That was it."

[41] Following the evening adjournment Mr A was able to locate the original contracts for the sale of the land and the sale of the business which had been held by his solicitor. They were produced to the Court, and it became immediately clear that the solicitor had inadvertently mismatched some of the detachable printed pages with the partly printed and partly typed and written pages.

[42]Nothing turned on this as between Mr A and O Limited. It was an entirely "in house" family transaction. The company and the trust received the full benefit of the land and business. Mr A is content with the result. There is no question of either party having to further enforce the contracts. They are fully performed.

[43]At no time did the Commissioner or his legal advisers advert to these discrepancies or give the disputant an opportunity to answer them. No request was made to sight the original contract.

[44]The matter was simply sprung on the witness in cross-examination at the hearing.

[45]To make such serious allegations of fraud and deliberate misleading of a Court counsel needs a strong factual base. Here there was none.

[46]The New Zealand Law Society Rules of Professional Conduct in relation to making allegations of fraud in cross-examination provide as follows:

"8.04 Rule

A practitioner must not attack a person’s reputation without good cause.

Commentary

1. This rule applies equally both in Court during the course of proceedings and out of Court by inclusion of statements in documents which are to be filed in the Court.
2.A practitioner should not be a party to the filing of a pleading or
other Court document containing an allegation of fraud, dishonesty, undue influence, duress or other reprehensible conduct, unless the practitioner has first satisfied himself or herself that such allegation can be properly justified on the facts of the case. For a practitioner to allow such an allegation to be made, without the fullest investigation, could be an abuse of the protection which the law affords to the practitioner in the drawing and filing of pleadings and other Court documents. Practitioners should also bear in mind that costs can be awarded against a practitioner for unfounded allegations of fraud.
3.If necessary, a practitioner must test the instructions which
have been given, by independent inquiry, before making such allegations."

(my emphasis)


[47] In Rondel v Worsley [1969] 1 AC 191 Lord Reid said:

"Every counsel has a duty to his client fearlessly to raise every issue, advance every argument, and ask every question, however distasteful, which he thinks will help his client’s case. But, as an officer of the court concerned in the administration of justice he has an overriding duty to the court, to the standards of his profession, and to the public, which may and often does lead to a conflict with his client’s wishes or with what the client thinks are his personal interests. Counsel must not mislead the court, he must not lend himself to casting aspersions on the other party or witnesses for which there is no sufficient basis in the information
(my emphasis)

And:

"The same public duty applies when drawing pleadings or conducting subsequent stages in a case as applies to counsel’s conduct during the trial ([1969] 1 AC 191, 231; [1967] UKHL 5; [1967] 3 All ER 993, 1001)."


And in Clyne v NSW Bar Association [1960] HCA 40; (1960) 104 CLR 186, 200, 201 the judgment of the High Court of Australia puts it this way:

"But, from the point of view of a profession which seeks to maintain standards of decency and fairness, it is essential that the privilege, and the power of doing harm which it confers, should not be abused. Otherwise grave and irreparable damage might be unjustly occasioned. The privilege may be abused if damaging irrelevant matter is introduced into a proceeding. It is grossly abused if counsel, in opening a case, makes statements which may have ruinous consequences to the person attacked, and which he cannot substantiate or justify by evidence. It is obviously unfair and improper in the highest degree for counsel, hoping that, where proof is impossible, prejudice may suffice, to make such statements unless he definitely knows that he has, and definitely intends to adduce, evidence to support them. It cannot, of course, be enough that he thinks that he may be able to establish his statements out of the mouth of a witness for the other side."

(my emphasis)

These standards were adopted by the Full Court in Gazley v Wellington District Law Society [1976] 1 NZLR 452. White J giving the judgment of the Court said:

"The privilege and the immunity bring with them a professional responsibility not to make allegations ‘without a sufficient basis’ or ‘without reasonable grounds’. This responsibility applies irrespective of the persons against whom allegations are made."

[48]At the conclusion of the oral evidence I gave counsel an opportunity to apologise to the witness and the Court for his disregard of these important ethical standards. He declined to do so in these terms:

"DISCUSSION BETWEEN JUDGE WILLY and MR SHANNON

Mr Shannon yesterday you made a serious allegation against a professional man of some 40 years standing which could only be construed as an assertion that he had acted fraudulently and your evidence for that was because there was a mismatch between documents beginning at page 650 and ending at page 654, a mismatch being that one appeared to have inserted in a seventh edition of the relevant agreement for sale and purchase standard terms. Do you wish to adhere to that submission? ... What I would say is he confirmed yesterday that this was a true copy when it simply wasn’t. I’m not saying now that it was a fraudulent altering, I didn’t actually say that yesterday –

Not saying what, I’m sorry I missed that ... I didn’t say that it, yesterday I didn’t actually say it was fraudulent in any way but I did say I had concerns with this document being altered and presented as a true copy and it’s not and I stand by that. It’s not a true, it wasn’t a true copy.

The evidence when it’s typed back I think will show that you suggested to the witness that he had deliberately attempted to mislead this Court by putting in evidence incorrect copies of the agreements for sale and purchase. If that is what the evidence shows do you wish to adhere to that contention? ... I’m not in a position to be able to say it’s deliberate.

Sorry ... I can’t say it’s deliberately done Sir. I can’t, I can’t adhere to any contention it was deliberately done.

Then I think you owe the witness an apology ... Frankly Sir I think there were grounds for it at the time. Here’s a document he was saying true and correct, I don’t, I have no intention of apologising for an allegation which at the time I thought was fairly based.


Very well."

I regret that, and have considered whether or not I should refer the matter to the appropriate authority for further consideration.

[49]In the result I will not do so. Counsel was thrown into the case late and I am prepared to accept that his unacceptable approach to this part of the cross-examination was activated by his enthusiasm to do the best he could for his client, and an apparent ignorance of his duty to the Court and the wider interests of justice.

[50]It is also apparent that the result was largely counterproductive to his case. I had the opportunity of assessing the demeanour of the witness during this provocative and harsh cross-examination. My assessment is that he conducted himself with dignity and transparent honesty. He accepted his errors, and on reflection incorrect characterisation of his words and deeds such as asserting in an affidavit that he held the land on trust for O Limited. He explained his reasons for this incomplete description and accepted he should have phrased the matter more accurately.

[51]Against those explicable errors is the fact that Mr A has been a chartered accountant for some 40 years, and until his retirement a senior partner in a large accounting firm. He is highly experienced in advising on the GST Act. The amount of money at stake in this transaction is small. It is inconceivable that he would sully his reputation at this late stage of his career over such a small sum of money by deliberately concocting a trust arrangement between himself and his wife where none existed and worse by bringing into existence false and misleading agreements for sale and purchase. The plain fact is that when the original agreements were obtained from the solicitor he had inadvertently allowed part of the contents of one to become mixed up with the other. That would have become immediately apparent if the Commissioner had insisted that the originals form part of the agreed bundle of documents. If he had, these unfortunate aspersions against the character of Mr A would not have been possible.

[52]I have no doubt at all that it was central to the separation and matrimonial property agreement between Mr and Mrs A that the land in question which was originally used for the asparagus business together with that which was finally acquired from Transit in March 2000 was excluded from the matrimonial property agreement because it was earmarked to be held by Mr A on trust for their daughters.

[53]The fact that only Mr A’s name appeared on the relevant titles says nothing about whether or not a trust existed. The law deals only with the legal estate. It does not allow evidence of a trust on a land transfer title.

[54]Any trust which does exist can only be enforced in equity against the conscience of the trustee. Had it become necessary to do so the trust could have been enforced by Mrs A as one of the settlors together with the intended beneficiaries. All of this was made clear to the Commissioner’s staff but they either failed to understand the point or chose to disregard it. Certainly as the record shows the witness who gave evidence for the Commissioner failed to understand the difference between the legal and equitable estates. That misunderstanding appears to have coloured the dealings between the parties, and led to the unfortunate exchanges between counsel and Mr A.

[55]Having had a full opportunity to hear and observe Mr A and to consider his answers against the relevant documents including the evidence that as soon as he was able to he did transfer the land to the trust through the medium of the company, I have no doubt at all that he regarded himself as holding the land on trust for the benefit of his daughters.

[56]It is now necessary to consider whether or not the intentions of Mr and Mrs A are legally enforceable.


The Property Law Act 1952

[57]Section 49A provides:

"49A Certain instruments to be in writing
(1) No [legal] interest in land may be created or disposed of except by writing signed by the person creating or conveying the same or by his agent lawfully authorised in writing in that behalf, or by will, or by operation of law.
(2) A declaration of trust respecting any land or any interest in land shall be manifested and proved by some writing signed by some person who is able to declare such trust or by his will.
(3) A disposition of an equitable interest or trust subsisting at the time of the disposition shall be in writing signed by the person disposing of the same or by his agent lawfully authorised in writing in that behalf, or by will.
(4) This section does not affect the creation or operation of resulting, implied, or constructive trusts.
...
(6) This section is in substitution for sections [1 to 3 and] 7 to 9 of the Statute of Frauds 1677 of the Parliament of England, and those sections shall cease to be in force in New Zealand, except in respect of the creation or conveyance of any interest in land, or a declaration of trust, or a disposition of an equitable interest or trust, before the commencement of this section."
[58]Mr Shannon for the Commissioner contends:

(a) That there is no certainty of the objects and beneficiaries of the trust; and

(b) That there is no evidence in writing that the trust contended for exists.
[59]As to the former I find as a fact that Mr and Mrs A were certain from the outset that the trust was for the sole benefit of their daughters. That they have in fact taken this benefit reinforces this finding, but that said I find it to be proved by the independent evidence of Mr A which I accept.

[60]As to the submission there was no written declaration of trust relating to the land at the time of the separation of Mr and Mrs A. The writing affecting the matter that does exist is the trust deed of 11 April 2000. Mr A is a settlor of that trust and the purpose of the trust is to hold all the issued capital of O Limited.

[61]The value of that issued capital in the balance sheet of the company reflects the value of the land and stock and plant transferred to the company by Mr A. On the facts as I find them to be Mr A was obliged in equity to transfer the land to the company as the vehicle later chosen by him as trustee to hold that asset.

[62]Section 49A does not require any contemporaneous writing evidencing the trust. Indeed it may be found in a will many years after the event. Neither does it require that the writing be in the form of a declaration. All that is required is "some writing signed by some person who is able to declare such trust".

[63]Although I was not referred to any of the relevant authorities I consider the law to be clear as follows:

(a) In declaring a trust of personal or real property no special form of words is necessary
Mountain v Styak [1921] NZGazLawRp 168; [1922] NZLR 131 (CA) at p.135.
Bellamy v Burrow Talbot, 97 25 ER 684 and Tierney v Wood 19 Beave 330.

(b) The Court must consider in each case what was the intention of the person using the words.
Knight v Broughton 11 Cl and F 513

(c) The Court in considering what was the true intention of the party using the words will not be deterred by merely precatory language if the intention is clearly established from all of the relevant surrounding circumstances.
Knight v Broughton (above)

(d) It matters not when the writing sufficient to satisfy s.49A comes into existence. It may be after the oral creation of the trust.
In Re Gordon [1920] 2 Ch. C.A. 523.

(e) A trust manifested and proved by a writing signed by the trustee admitting the trust is sufficient to enforce the trust against the trustee.
Ambrose v Ambrose [1716] EngR 1; 1 P. Wms, 24 24 ER 407

(f) The Property Law Act s.49A and its predecessor the Statute of Frauds cannot be relied up by a person in whom a trust is reposed as the basis for denying the existence of the trust.
Rochefaucauld v Baustead [1897] 1 Ch. 196


It may follow from that established principle that a third party to the transaction creating the trust (such as the Commissioner of Inland Revenue) cannot be heard to rely on s.49A to defeat a trust which the disputant not only regarded throughout as binding on him but which he has perfected. The effect of allowing such an outcome would by a side wind defeat the interests of the beneficiaries and vest the land in Mr A. A strange and unjust result.

[64]These principles were recently restated and applied by Williams J in Team Barry Limited & Ors v Forlong and Ors (unreported, High Court Auckland, CIV 2003-404-5393, 21 April 2005) and I apply them to the facts as I find them to be in this case.

[65]The starting point is the oral evidence of Mr A given on oath in these proceedings that a trust existed in respect of the land for the benefit of his daughters. What is then required is there be "some writing" which manifests and proves the trust.

[66]As to that requirement there are the following "writings" signed either by Mr A or his former wife:

(i) The agreements for sale and purchase between Mr A and the company.

(ii) Mrs A’s written consent to the land being vested in Mr A to the exclusion of herself and omission from the assets to be divided between husband and wife.
(ii) The deed of "on demand" loan signed by Mr A and the company on 31 March 2000.

(iv) The deed of trust of 1 April 2000 which actually gives effect to the proven intention of Mr and Mrs A at the time of the separation.
(v) Mr A’s letter to the Commissioner of 5 May 2000 saying:

"It must firstly be considered as if the vendors were (Mr and Mrs A) which is who would have been the vendors other than for the Matrimonial Property agreement."

A letter not questioned by the Commissioner.

(vi) Para 4 of Mr A’s affidavit of 6 July 2000 in which he says:
"That my wife and I since entering into the agreement referred to in paragraphs 1 and 2 have separated and as part of the division of matrimonial property it was agreed that the 10.114 ha block was to be transferred to O Limited."

That only has significance in the context that all of the shares in O Limited are held by the trust.

Paragraph 8 reinforces the point where it says:

"My wife and I signed a matrimonial property agreement on 29 May 1998. This agreement made no reference to the property referred to in paragraph 3 as we had agreed that it was sold to O Limited."
(my emphasis)

The emphasis makes it clear that the intention to sell the land to the company as the vehicle of the trust existed at or before the signing of the matrimonial property agreement.

The same point is made at para 2 "facts in error" of the disputant’s notice of response to the Commissioner’s notice of proposed adjustment.

(vii) The deed of removal of Mr A as a discretionary beneficiary of the trust dated 15 October 2003, making clear that only his daughters and their offspring should benefit from the trust.
(viii) Para 4 of Mr A’s statement of position of 17 October 2003 declaring that Mr A stood as trustee in relation to the subject land.

[67]These various "writings" evidence beyond any doubt what was the intention of Mr and Mrs A in relation to the land in question at the time of their separation. I am therefore satisfied that the disputant Mr A has discharged the onus of proving that at all material times a trust existed in relation to the relevant land in favour of the beneficiaries set out in the trust deed as later amended by excluding himself as a possible beneficiary.

D Retention of the refund paid by the Commissioner

[68]Having decided that the input claim made by the company is properly payable the question of whether or not the disputant is entitled to retain the refund of $31,972.02 paid to it by the Commissioner on 2 January 2001 does not arise.

[69]However, in the event my conclusions on the trust issue are called into question I deal with the payment matter.

[70]The disputant contends that in all the circumstances it is entitled to retain the monies whether properly payable or not.

[71]The Commissioner submits that the cheque was paid in error because one of his staff allowed an "account halt" placed on the disputant’s self-assessment to expire. He notes that this error was drawn to the disputant’s attention by letter dated 4 October 2001 in which it is said that the debate concerning the input claim is ongoing and needed to be dealt with in the disputes resolution process.

[72]The disputant did not accept this and advised the Commissioner on 9 October that "the matter has now been terminated ..." and "no further correspondence will be entered into."

[73]The Commissioner did not accept this and the dispute continued. Beyond saying that the payment was made in error the Commissioner does not elaborate in his written submissions on the legal principles involved.

[74]The disputant refers to Paul Finance Limited v CIR [1995] 3 NZLR 521 and Sea Hunter Fishing Limited v CIR (2001) 20 NZTC 17,206 and (2001) 20 NZTC 17216.

[75]In fact the law is now settled by the Court of Appeal in Sea Hunter [2004] NZCA 47; (2004) 21 NZTC 18,569. Glazebrook J giving the judgment of the Court is able to summarise how the Commissioner manages computer generated payments of input credits within the time limitation of 15 working days imposed by ss.20(5) and 46 of the Goods and Services Tax Act 1985. The Judge did this in a way which invites a conclusion that she took judicial notice of the Commissioner’s practices, or received further evidence at the appeal hearing. There is no suggestion in the judgment of the Court as to the latter. Neither was any evidence on the point referred to by Randerson J. It therefore seems the former must be the case and I approach the matter in the same way.

[76]The procedures of which Glazebrook J took notice are:

(i) A paper GST return is entered into the Commissioner’s computer manually.

(ii) The computer program checks for arithmetical errors.
(iii) It also determines whether or not the refund claimed is "an approved refund level" for the individual taxpayer. Such level being set by the Commissioner for each registered GST taxpayer.

(iv) If the claim is below the preset level, and otherwise correct the computer is programmed to issue a refund check automatically.

(v) If the return fails this process it then goes to an "assessment review officer". If it passes that scrutiny the claim is further assessed electronically (for what is not clear). If it fails those steps it passes to an "account review" and goes no further until an authorised Departmental officer either approves the return. In that event it returns to the system for the issue of an assessment and refund cheque.

If the refund is not approved then the file passes to the audit department and a halt is placed on the account "to prevent any refund claimed from being automatically issued by the computer".

[77]Given that is the process it follows that the return in this case must have ended up with the audit people and a stop placed on the issue of the claimed refund. It is clear from Sea Hunter that what follows this event is crucial to the outcome because in that case the taxpayer was granted a summary judgment on a refund cheque issued by the Commissioner and later dishonoured (CIR v Sea Hunter Fishing Limited (2002) 20 NZTC 17,478 (CA).

The Facts relevant to the payment of the refund

[78]It is now necessary to summarise what happened in this case.

1. On 3 April 2000 the disputant company filed a GST return for the period 1 March 2000 to 31 March 2000 claiming $31,927.02.

2. The Commissioner did not accept that the refund was payable and his officer Ms Forno visited the principal at the company to discuss the matter on 17 April 2000.

3. On 4 May 2000 Ms Forno wrote to the disputant questioning the transaction and requesting comment. This was supplied by the disputant on 5 May 2000.

4. On 31 May 2000 the Commissioner advised the disputant that the input claim was not accepted and gave notice of a proposed adjustment disallowing the claim. A corresponding adjustment was made in the case of the other disputant.

5. The disputant filed a notice of response on 17 July 2000. The Commissioner wrote on 27 July requesting two items of information and advising the disputant he would be in touch.

6. On 2 January 2001 the Commissioner issued an assessment to the company accepting that the input was payable and paying the refund cheque of $31,927.02.

[79]Nothing then happened until Ms Forno wrote on 16 August 2001 requesting further information.

[80]The GST refund was payable 15 days after the return was received by the Commissioner. Adopting the analysis of Glazebrook J above it must have failed to pass the automatic refund payment procedures and instead ended up with the audit people. There is no evidence when the account stop was put in place or for how long. Presumably, it was there from the time the file reached audit (unknown) until 2 January 2001 when the cheque was paid. That must have been some time between 4 May and 2 January 2001.

[81]From the time the return was filed on 3 April 2000 to the time the file was reactivated by the department some 19 months elapsed. In that period the return was questioned, a notice of proposed adjustment issued, a notice of response filed, an assessment made and a refund cheque paid to the disputant.

[82]The question then is does this sequence of events establish that the payment of the refund was some conscious and intentional act on the part of the Commissioner or was it the result of a computer error as contended for by Ms Forno. As the Court said in Sea Hunter [2004] NZCA 47; (2004) 21 NZTC 18,569 above) the intention to pay will only be inferred if the Commissioner has been satisfied as to any concerns raised in the correspondence with the taxpayer.

[83]Unlike Sea Hunter the Commissioner was in full possession of the disputant’s explanation of the transaction and most of the supporting information when he made the assessment of 2 January 2001 and paid the refund. He also had available to him his own notice of proposed adjustment and the taxpayer’s response.

[84]At the time of payment some six months after the taxpayer’s notice of response there was no indication that the Commissioner had any further concerns about the propriety of the refund, or that he was other than satisfied with the information received from the disputant.

[85]In Sea Hunter ((2002) 20 NZTC 17,478) the Court of Appeal held that the taxpayer was entitled to a summary judgment for the amount of the dishonoured cheque notwithstanding the Commissioner’s right to make a later reassessment in effect cancelling the right of the taxpayer to receive the refund.

[86]The Commissioner made such further assessment in this case on 29 March 2004. This was made notwithstanding that the case was in his view still subject to the disputes resolution process.

[87]The disputant does not accept this and it remains a moot point whether the assessment is lawful for the purposes of the argument concerning the payment of the cheque. On the facts as I find them to be I am satisfied that the disputant was entitled to receive and retain the cheque. Objectively viewed the refund was made by the Commissioner after he had full possession of all relevant facts and was a conscious decision on his part.


The Case against Mr A

Cessation of taxable activity/going concern

[88]A cornerstone of the Commissioner’s case is that when the land used for growing the asparagus passed to the disputant company that marked the end of the vendor’s taxable activity and he became liable for output tax on the value of the land and business assets.

[89]That would undoubtedly be so unless the sale to the company was of a going concern, and that is the position taken by Mr A. If the sale was of a going concern then it is rated at 0% GST and the Commissioner’s case against Mr A will fail.

[90]There are numerous cases involving going concerns. Section 2 of the GST Act defines going concern as:

"[going concern, in relation to a supplier and a recipient, means the situation where--
(a) There is a supply of a taxable activity, or of 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 a taxable activity up to the time of its transfer to the recipient:]

[91]It is accepted by the Commissioner that Mr A’s asparagus growing business was a "concern" within the definition. It is also accepted that the asparagus business carried on by O Ltd is a "concern" within the definition.

[92]The only question is whether or not the business carried on by Mr A was "going" at the point of sale to O Ltd.

[93]Before considering the detail of this transaction it is necessary to recall what lay behind it.

[94]Mr A and his wife had separated. They had two daughters whom they both wished to advantage financially. I have found it proved that an agreement existed between Mr and Mrs A that Mr A would, inter alia, transfer the asparagus growing business which hitherto he had owned and operated to a trust for the benefit of the girls.

[95]He elected to honour this agreement by setting up O Ltd, the shares in which were held by trustees for the sole benefit of the daughters.

[96]The transfer of the land was hindered by the time it took to settle the giving and taking of land with Transit. The conveyance to O Ltd could not be finalised until that was done.

[97]The sale to O Ltd was effected by two separate agreements both dated 24 March 2000, one for the sale of the land and one for the sale of the business.

[98]The form of contract used in each case was that put out by the Real Estate Institute of New Zealand and the Auckland District Law Society. The agreement for the sale of the business was the "second edition July 1995". The form used for the sale of the land was the seventh edition July 1999.

[99]The forms are differently composed. The second edition comprises three joined up double-sided sheets of part printing, part typing and part handwriting. The seventh edition comprises two sets of two joined up pages of printing, typing and writing. In each case the printed paragraph numbers run consecutively.

[100]The agreement for the sale of the business comprises the sale of five business assets:

Shares in a company
Asparagus crowns
Ford tractor
Tractor shed
Holden station wagon

[101]The purchase price is $35,658.00 being the agreed value of the assets. The purchaser is O Ltd described as "asparagus grower". The vendor is Mr A. The agreement provides that the transaction is zero rated for GST i.e. a going concern and that is made clear beyond doubt by cl.16 of the agreement.

[102]The evidence of Mr A is that those assets comprise all that is needed to operate an asparagus growing business on any land of the purchaser’s choosing. The Commissioner argues that it is impossible for the purchaser to continue as a going concern the business operated by Mr A unless he also sells to the purchaser the land on which that business was carried on.

[103]In fact the agreement for sale and purchase does evidence a sale of the same piece of land on which Mr A had carried on his asparagus growing business. It is true that the conveyance of the land was not competed until the transfer was registered on 4 April 2001, which was nearly a year after the settlement date provided for in the agreement. Nothing turns on that delay. The memorandum of agreement between Mr and Mrs A and the Crown relating to the land exchange and compensation payment makes it clear that with Mrs A’s consent the land acquired is to be registered in Mr A’s name, and on the same date 24 March 2000 that land is sold by Mr A to O Ltd. That company was the owner in equity of the land. It registered for GST on 1 March 2000 as an "asparagus grower" and began the asparagus growing business on the land as the season permitted.

[104]In its first GST return for the period 1 March 2000 to 31 March 2000 the company claimed the cost of the land purchase as a GST purchase resulting in an input claim of $31,927.02.

[105]In his GST return for 1 February 2000 to 31 March 2000 Mr A made no mention of the zero rated transaction. He explained that he omitted it because "it makes no difference to the calculation of the input or output tax".

[106]He should have shown the transaction as provided for in Box 6 of the form, but if he is correct in his assertion that the transaction in question was zero rated then he has not misstated his liability for output tax or his entitlement to an input credit.

[107]Having regard to that sequence of events it is impossible for the Commissioner to contend that the asparagus growing concern was not carried on by the purchaser company O Ltd in an unbroken sequence and from the same land as it had been carried on by Mr A. I am satisfied that the taxpayer has discharged the onus of proving that in fact it was so carried on.

[108]But even if that were not so the focus must be on the business not the land from which it is carried on. If the company wished it could abandon growing on the land acquired from Mr A and transfer the business elsewhere. Indeed there might be compelling horticultural or economic reasons for doing so and that would not mean the business ceased to be a going concern.

[109]The fact that on 28 September 2000 in the course of making application to his bank for finance he listed the land sold to the company as an asset cannot alter the fact that it was sold to the company on 24 March 2000. But in any event such mention of the land is explicable by the fact that Mr A was a director of the company and a trustee of the trust.


Conclusion on going concern

[110] I am therefore satisfied that the disputant Mr A has satisfied all of the requirements of proving the sale of a going concern. They may be summarised:

a. There was an asparagus business growing concern established on the land at the point of sale.

b. The purchaser acquired all of the elements of the business necessary to carry it on.
c. The purchaser did carry on the business.

d. The vendor was registered for GST.

e. The purchaser was registered for GST.

f. There was an agreement in writing for the sale and purchase of a going concern.

g. Both parties intended that there should be the sale and purchase of a going concern, see Pine v C of IR (1998) 18 NZTC 13,570.


E Decision

[111]I am therefore satisfied that both disputants succeed. The company is entitled to the input claimed by it and Mr A is not liable for any output tax on


the sale of the land. He did not merely terminate his taxable activity. He sold it as a going concern to O Ltd.

[112]I therefore cancel the Commissioner’s reassessment.









A A P Willy
Taxation Review Authority

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