NZLII Home | Databases | WorldLII | Search | Feedback

Taxation Review Authority of New Zealand
You are here:  NZLII >> Databases >> Taxation Review Authority of New Zealand >> 2009 >> [2009] NZTRA 6

Database Search | Name Search | Recent Decisions | Noteup | LawCite | Download | Help

Disallowance of GST imputs for legal fees [2009] NZTRA 6 (27 February 2009)

Last Updated: 9 April 2009


BEFORE THE TAXATION REVIEW AUTHORITY
WELLINGTON REGISTRY DECISION NO. 6/2009
HELD AT NAPIER

TRA NOS 67 & 70/05

IN THE MATTER OF the Goods and Services Tax Act 1985 and the Tax Administration Act 1994

BETWEEN *******************
Disputants

AND THE COMMISSIONER OF INLAND REVENUE
Defendant

Heard at Napier: 28 and 29 October 2008

Counsel: Messrs D Martin and G W O'Brien for disputants
Mr A Beck and Ms N Breedon for Defendant Commissioner

Judgment: 27 February 2009


RESERVED DECISION OF JUDGE P F BARBER AS TAXATION REVIEW AUTHORITY

The General Issue:

[1] Did the defendant Commissioner act incorrectly in disallowing the disputant trusts GST inputs for legal fees charged to them?
[2] The key point is whether the legal services acquired by the trusts were “for the principal purpose of making taxable supplies” in terms of the definition of “input tax” in s 3A(1) of the Goods and Services Tax Act 1985.
[3] However other issues are: what taxable activity was carried on by the disputants; whether legal services were acquired by the disputants; and whether there is appropriate documentation to satisfy the requirements of the GST Act? That involves whether the disputant trusts were GST-registered persons carrying on a “taxable activity” at the time the legal services were acquired; and whether tax invoices were held in respect of the legal services acquired by the trusts.

Background:

[4] This GST dispute arises out of very expensive and extensive trust litigation involving legal costs of about $5,000,000. That litigation has been ongoing since the late 1990s but seems to be coming to an end.
[5] The two disputant trusts are acting in a type of representative capacity for various other trusts and entities having similar claims for GST inputs on legal fees associated with the litigation. The cases of the latter have been stayed pending the outcome of this case which only involves a small number of GST periods for those trusts; ie. three two-monthly periods in the case of the TM trust and five one-monthly periods in the case of the M Trust.
[6] In terms of GST registration, the TM Property Trust carries on a taxable activity of commercial property operation and development. The M Trust carries on the taxable activity of sheep and beef farming.
[7] The main issue for all the trusts is essentially the same, namely, whether there can be GST inputs for legal services provided to the trustees of the trusts in connection with the said litigation, which was then an emerging dispute between the trustees and certain beneficiaries of the trust.
[8] Other minor accounting and valuation costs are involved as they were also charged and invoiced to the trustees of each trust in the relevant GST periods; although some of these have been allowed by the defendant Commissioner.
[9] At this point, a GST input for similar legal fees has not been claimed by the trusts in respect of many other GST periods for various reasons. These include that unless the “principal purpose” test can be satisfied by the disputant trusts as a threshold matter, there is little point in claiming such inputs.
[10] The two disputants are only two of the trusts involved in a complicate web of trusts and other entities set up by the families behind these trusts. There are a number of other entities whose activities have been subject to assessment by the defendant on a similar basis. As already indicated, there are also many other GST periods which will, ultimately, need to be brought to account but which have been left in abeyance pending resolution of the issues of this case.
[11] The litigation began in 1999 when the children beneficiaries of one family involved brought an application to the High Court in Christchurch seeking information regarding the trusts and, by and large, succeeded. Shortly afterwards, they brought a further application seeking the removal of certain trustees of the trusts. Since then, there have been many Court hearings and appeals which have gone as far as the New Zealand Supreme Court. At one stage, the High Court Judge referred to the plaintiffs considering and alleging that an uncle had unjustifiably turned against them as beneficiaries or discretionary beneficiaries of certain trusts so that he might act so as to minimise their inheritances and benefit others in the family. They also alleged that he had secured the appointment of trustees sympathetic to his views at the expense of fiduciary obligations to them. The High Court referred there being a fundamental breakdown in family relationships related to the trusts and, inter alia, to the incurring of large sums in legal fees and the diversion of energy away from more productive pursuits for the trusts.
[12] All counsel, very helpfully, dealt in some detail with governing legal principles, but I shall only refer to those and relevant statutory or case law as necessary from my approach to the issues.

Relevant Law:

[13] Section 3A(1) of the GST Act defines “input tax” as:

Meaning of input tax

(1) Input tax, in relation to a registered person, means—

(a) Tax charged under section 8(1) on the supply of goods and services made to that person, being goods and services acquired for the principal purpose of making taxable supplies: ...

[14] In order to fall within the definition of input tax, goods and services must have been acquired for the principal purpose of making taxable supplies. In order to make those, a person must carry on a “taxable activity” which is defined in s 6(1)(a) as:

(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.

[15] Accordingly, to comply with that definition, there must be a continuous or regular supply of goods or services for a consideration. Anything done in connection with the beginning or ending of a taxable activity is included in it – s 6(2).
[16] The principal provision regulating a GST-registered persons’ entitlement to an input tax credit is s 20(3)(a)(i) of the GST Act, which provides (emphasis added):

20(3) Deductions from output tax

(3) Subject to this section, in calculating the amount of tax payable in respect of each taxable period, there shall be deducted from the amount of output tax of a registered person attributable to the taxable period—

(a) In the case of a registered person who is required to account for tax payable on an invoice basis pursuant to section 19 of this Act, the amount of the following:

(i) input tax in relation to the supply of goods and services (not being a supply of secondhand goods to which section 3A(1)(c) of the input tax definition applies), made to that registered person during that taxable period: ...

[17] In terms of s 20(3)(a)(i) of the GST Act, therefore, a GST-registered person, when calculating the amount of GST output tax they are required to account for in respect of any GST taxable period, is entitled to deduct from the amount of output tax attributable to the registered person in that taxable period, the amount of input tax in relation to the supply of any goods and services made to that registered person during that taxable period if they are registered on an invoice basis.
[18] The first legal requirement in the above definition of “input tax” is that goods and services be acquired by a person. The concept of a thing being "acquired” for the purposes of the GST Act is well established. In Case T35 (1997) 18 NZTC 8,235, at 8,240 the Authority held that:

.... In order to acquire an item one must obtain legal rights in the nature of proprietary rights and one can be a legal owner or a beneficial owner.

[19] The second requirement in the above definition of input tax is that the person acquiring the goods and services must have acquired them for the “principal purpose of making taxable supplies”. Again, the meaning of this statutory phrase is now well established. The leading judicial description of its meaning is that contained in Wairakei Court Limited v Commissioner of Inland Revenue (1999) 19 NZTC 15,202 where Chisholm J stated at 15,206 (emphasis added):

Within a GST context the following features of the principal purpose test seems to be relatively well settled:

(1) Purpose is a reference to the object that the taxpayer had in mind or in view. This is not synonymous with intention or motive. Moreover, care must be taken to avoid confusing the means by which the taxpayer achieves its purpose with the purpose itself: C of IR v BNZ Investment Advisory Services Limited (1994) 16 NZTC 11,111; Norfolk Apartments Limited v C of IR (1995) 17 NZTC 12,003 (HC) and (1995) 17 NZTC 12,212 (CA).

(2) The principal purpose is the main, primary or fundamental purpose. This does not equate with a more than 50% test: BNZ Investment Advisory Services Limited; Norfolk Apartments.

(3) Where the taxpayer is a company its purpose is to be determined by examining the collective purpose of those in control: C of IR v National Distributors Limited (1989) 11 NZTC 6,346.

(4) The principal purpose is to be ascertained as at the time the goods and services were acquired: National Distributors Limited and Case M53 (1990) 12 NZTC 2,312.

(5) The focus should be on individual supplies: Norfolk at p 12,006.

[20] These principles have been subsequently endorsed by other authorities: see for example Wellington Regional Stadium Trust v Commissioner of Inland Revenue (2004) 21 NZTC 18,648 (HC) and Glenharrow Holdings Limited v Commissioner of Inland Revenue (2005) 22 NZTC 19,319 (HC)).
[21] Central to the requirement of being “registered” for GST purposes is the statutory notion of “taxable activity” as defined in s 6 of the GST Act set out above. It is well established that definition is an extremely broad one and most forms of economic and commercial activity constitute an “activity” (and hence a potential taxable activity) for GST purposes.
[22] The leasing of land or buildings “is plainly a taxable activity” for GST purposes: (see comments of Hardie-Boyes J in Variety Leisure Corporation v C of 1R (1988) 10 NZTC 5,256 (HC) at 5,257), as it involves the ongoing supply of the land (building) by the owner/lessor to the lessee over the term of the lease and all the other ongoing contractual obligations associated with that.
[23] The threshold for farming and leasing things to constitute a “taxable activity” is low. For example, in Case R38 (1994) 16 NZTC 6,212 the taxpayer acquired two blocks of land, the smaller of which was leased from time-to-time for grazing purposes and was also intended to be sold. When the taxpayer sold the small block of land he contended that it was a “private” asset and not subject to GST. The Taxation Review Authority rejected this contention and held that this small block of land formed part of the taxpayer's taxable activity and was subject to GST output tax when sold as part and parcel of that activity. The Authority stated:

... the [taxpayer] seems to me to have been carrying on the taxable activity of either grazing, or land investment, or both with regard to the B block. Certainly, he was carrying on a commercial activity and not merely a private recreational pursuit or hobby (at 6,218).

[24] However, the most important authority in this context is C of 1R v Bayly (1998) 18 NZTC 14,073 (CA). Bayly involved a number of separate trusts which owned certain farmland and, in one case, livestock. The farmland was operated by associated family partnerships in which the taxpayer (trustees) were partners. When the farmland (plus in one case livestock) was sold to a family partnership by the various trusts, the Commissioner contended that each trust had been carrying on a taxable activity and the termination of that activity by the sale of the farmland (and livestock) was a sale carried out in the course of that taxable activity and was subject to GST output tax. The Taxation Review Authority held in favour of the Commissioner. In its view, the fact that the use of the farmland, livestock and other farming assets had been made available to the relevant farming partnership for its use and occupation constituted a “taxable activity” (even though there was no express provision for the payment of rent or remuneration for the use of the farmland/livestock). Nor did it matter under these arrangements whether the land was provided under a lease or under a licence to occupy.
[25] The Court of Appeal upheld this finding, rejecting the view of the High Court that in making the farmland (and in one case livestock) available to the partnerships under these informal arrangements (and in circumstances where the operation of the lands were carried out by the partnerships not the trusts), the trustees/trusts were only acting passively. In the Court of Appeal's view, confirming that of the Authority, the arrangements involved ongoing contractual rights and obligations on the part of the trusts in respect of their making the farmland (and livestock) available for the use by the partnerships. It was implicit in the arrangements that the trusts were conducting continuing activity which enabled the partnerships to operate on the farm land (and in respect of the livestock) in the economic interests of all involved in the arrangements.
[26] The definition of “taxable activity” requires supplies to be made for a consideration. For GST purposes the concept of “consideration” is a very broad one and, importantly, is present and satisfied even where actual payment is from a person different from that receiving the goods and services being supplied. This proposition is settled by Court of Appeal authority, namely, Turakina Maori Girls College Board of Trustees v C of IR (1993) 15 NZTC 10,032, at 10,035:

The Act, however, does not require that the supply be to the person who pays the consideration. It is clear from this definition [that of "consideration" in section 2] that the supply of any service for consideration is part of a taxable activity under section 6, even though it is to a person other than the person who provides the consideration. Likewise, the value of the supply is to be measured by the consideration, whether or not the consideration is provided by the person to whom the service is supplied. It is not necessary that there should be a contract between the supplier and the person providing the consideration, so long as the consideration is "in respect of, in response to or for the inducement of the supply". (at 10,034, per McKay J)

[27] The “tax invoice” requirement is essentially an evidential requirement within the GST Act to ensure real supplies of goods and services have been made which are within the GST tax-base. It is a requirement which the Commissioner can, at his discretion, dispense with if he is satisfied there is sufficient records to prove the existence of a supply and it would be impractical to require that a tax invoice be issued. Section 24(6) of the GST Act provides:

24(6) [Sufficient records]

Where the Commissioner is satisfied that there are or will be sufficient records available to establish the particulars of any supply or class of supplies, and that it would be impractical to require that a tax invoice be issued pursuant to this section, the Commissioner may determine that, subject to any conditions that the Commissioner may consider necessary:-

(a) Any one or more of the particulars specified in subsection (3) or subsection (4) of this section shall not be contained on a tax invoice; or

(b) A tax invoice is not required to be issued.

[28] In order to “be satisfied” about the criteria in s 24(6) and the dispensing of tax invoices, the Commissioner simply has to “make up his mind” regarding the adequacy of “records” and the “impracticalities” associated with requiring a tax invoice: see Major Electricity Users Group v Electricity Commission and Others, High Court, CN-2007-485- 2508, 14 March 2008, Wild J.
[29] Unlike the position under the Income Tax Act 2007, the statutory focus of the GST Act in terms of the legal relationship of “trust” is with the trust itself: not the trustees or beneficiaries. This is confirmed by s 57 of the GST Act which deals with unincorporated bodies including trusts. It is also confirmed by our Court of Appeal in C of IR v Chester Trustee Services Limited [2002] NZCA 258; (2002) 20 NZTC 17,925, in which Baragwanath J noted at 17,933:

... (The section extends also to members of a partnership and of a joint venture, called “members”, which is why BFT [Brook Family Trust] GIFT [G & I Family Trust] is a legal entity distinct from each of BFT, GIFT and the trustee Chester. For the purposes of the present ground it is convenient to confine consideration to the case of trustees and their trust). By subs (2) it relieved the trustees of personal liability to registration; in respect of the taxable activity of the trust the registration must be in the name of the trust. A supply of goods and services made by the trust in the course of the activity was deemed conducted by the trust and not by a trustee. Subject to subs (3) any change of trustee had no effect for the purposes of the Act. [at para 33]

[30] The main GST implications of the statutory approach mandated by s 57 are that:
  1. A trust and not its beneficiaries, is the jurisdictional focus for GST purposes when considering a trust relationship. Indeed, a trust and its beneficiaries are legally separate and distinct persons for GST purposes which is why a transaction between a trust and a beneficiary will often be a “supply” which is subject to GST requirements in the ordinary way, as illustrated in The Trustee, Executors and Agency Company New Zealand Limited & Ors v Commissioner of Inland Revenue (1997) 18 NZTC 13,076 (HC). This case involved a sale of a farm to a major beneficiary of the trust. Sometimes, a transaction between a trust and a beneficiary will, for GST purposes, be between “associated persons” thereby giving rise to valuation and other issues in terms of ss 10, 10(3A) AND 10(3AB) of the GST Act. These latter rules, however, apply to transactions between “associates” and are not trust-specific.
    1. Conventional legal and trust principles applying to the trust relationship are trumped by the deeming rules in s 57, at least to the extent that they regulate certain statutory outcomes.
  2. Supplies made by, and acquisitions received by, a trust relationship are made and received for GST purposes by the trust, not the trustees or the beneficiaries in that relationship.
  3. It is the trust which carries on the taxable activity, not the trustees or the beneficiaries; and anything done by an individual trustee is done for GST purposes by the trust, at least to the extent that it is done by the trustee in his or her capacity as trustee of the trust and as part and parcel of carrying on the trust's taxable activity. Put another way, for GST purposes there are only activities conducted by a trust within the GST tax-base, at least in respect of the things being undertaken on behalf of and as part of that trust's GST registered taxable activity.
  4. A trustee of a trust is, along with his or her fellow trustees and the trust, are jointly and severally liable for all GST payable by the trust, and remain so until they have retired and notified the Commissioner of the fact of that retirement.

[31] Trustees acting as fiduciaries on behalf of a trust are, under general trust law principles, never acting for their own personal benefit. Put another way, everything which is done by a trustee legitimately on behalf of the trust is done for that trust and not in anyway for the trustee “personally”.
[32] Expenses are only likely to be improperly incurred if, in incurring them, the trustee has deliberately acted in breach of trust in which case the liability will fall back on the trustee personally. However, mere "slips” or "errors of judgment” do not constitute “improper” behaviour in this context.
[33] One specific illustration of this general right of recoupment or indemnity operating is where a trustee incurs legal costs on a normal solicitor-and-client basis (and similar bases) in seeking legal advice in respect of things like advice or directions from the Court on a matter such as the interpretation of the trust instrument, in defending actions brought against the trustees for breach of trust or otherwise to protect the trust property. It is well-established that where a trustee's conduct in terms of a trust is challenged by beneficiaries alleging breach of trust and the trustee incurs legal costs in defending those allegations, the incurring of those costs is a normal incident of the administration of the trust.
[34] Given that a trustee's principal legal functions are to give effect to the terms of a trust and to preserve its assets for the benefit of beneficiaries of the trust as a whole then, in reality, virtually everything a trustee does intra vires is related to the management and administration of the trust. This is because, whether the trustee's conduct involves investing trust moneys, running a business activity, or making distributions, those acts directly relate to the trust fund and the trust's economic affairs.
[35] A trustee has no legal authority to do anything unrelated to a trust's economic and other activities. His or her role is confined always to acting in the best interests of the trust. That is the same position for the director of a company. His or her role is confined to acting in the best interests of that company as a matter of law, as is also the position of any other fiduciary acting on behalf of other persons. This is confirmed by the statutory right in s 66(1) of the Trustee Act 1956 to seek directions, and under that section:

Any trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee.

[36] The New Zealand Court of Appeal has stressed the central importance of all GST input tax being deductible to a “registered” person, in L R McLean & Co Ltd v C of IR [1994] 16 NZTC, 11,214, at 11,216 per McKay J in terms:

To ensure that tax is paid only by the ultimate consumer, the registered supplier is entitled to deduct from the output tax the tax which he has paid to his own suppliers. This is called the input tax, and covers all the tax paid by that registered supplier on all the goods and services supplied to him in the course of his taxable activity (s 20).

[37] It is the carrying on of a taxable or economic activity which provides the central statutory basis for the deduction of GST input tax under ss 3A(1) and 20(3) of the GST Act, not the existence of a provable (invariably unprovable) link between GST-inclusive inputs and the making of supplies to GST output tax. Costs incurred by a GST registered trust carrying on a taxable activity on things like rates, insurance services, accounting services, legal services, electricity, stationery, coffee and tea, fuel and the other miscellany of things (inputs) that businesses require to carry on their activities, could never be linked to a particular output in the context of a continuing business operation and the Commissioner in practice does not require this ever to be done.
[38] The same principle was also identified in Wairakei Court by Chisholm J who noted:

In some cases it may be possible to achieve the principal purpose within the taxation period under consideration while in other cases achievement of the principal purpose may be much more distant in time. Each case will depend on its own facts.

[39] If the scheme and structure of the GST Act is designed to ensure that a person carrying on a taxable or economic activity gets to deduct and claim back all the GST-inclusive costs acquired as part of carrying on that activity in order to avoid that person being a consumer, then the question remains what role the principal purpose test in s 3A(1)(a) was intended to serve? Clearly, its only role is to operate as a filter between the making of taxable and exempt supplies, because it is only “exempt supplies” which are precluded from the scope of the GST tax base.
[40] That the principal purpose test operates as a filter between taxable and exempt supplies is confirmed also by s 8 of the GST Act, the principal charging section. That imposes tax on all supplies of goods and services made by a registered person in the course or furtherance of a taxable activity other than exempt supplies (which latter concept is defined in s 2(1) in terms of those supplies outlined in s 14).
[41] There are only three kinds of “supplies” recognised by the GST Act, namely, taxable, zero-rated, and exempt. It is only where the latter (exempt) are supplied (as in CIR v BNZ Investment Advisory Services Ltd) that GST input tax will probably be non-deductible (either wholly or on an apportionment basis) because, in respect of supplies of this kind, GST theory suggests that it is not possible to identify any “value-added” component.
[42] Under the GST Act there is no concept of a private supply. However, in s 14 there are supplies of things (like residential accommodation) which are deemed to be exempt under the GST Act. In .the context of a GST-registered trust, that “private” aspect could be fulfilled if, say, the trust supplied a farmhouse to a farmer to personally live-in on a farm. In practice, GST adjustments are made where there are elements of private use in respect of assets. The conventional case would be a car used for business and private purposes. In this latter case though, the correct GST analysis is that the vehicle does not form part of the taxable activity and, accordingly, a GST adjustment must be made to reflect that.
[43] Accordingly, a GST-registered person, such as a trust carrying on a taxable activity, will be fully in the GST tax base and eligible to claim all GST input tax on costs charged to it, unless the trust is making exempt supplies and those costs can be shown to be referable to those exempt supplies.
[44] To the extent that the GST Act recognises “private” things, those are all to do with whether there is the existence of a taxable activity, ie. a private recreational pursuit or hobby that is not within the GST tax base because it does not amount to a taxable activity. Generally speaking, a private recreational pursuit or hobby is not a taxable activity.
[45] In GST terms there is nothing unique about a GST registered person making a claim to deduct the GST input tax on a supply of GST inclusive legal services. Those legal services are just another business input, invariably an incidental overhead cost for most businesses.
[46] Almost universally, cases where GST input tax on legal costs have been disallowed have involved situations where it was clear, because of the transaction or conduct relating to the legal costs, that the costs being claimed were not incurred in the course or furtherance of the taxable activity being conducted by the registered person.
[47] In the absence of a clear disqualifying feature like an exempt supply or, say, criminal charges outside the scope of normal business activity, GST input tax on legal costs which are incurred in the course or furtherance of a GST registered person's taxable activity will be deductible in full; as they must be to avoid that person being a consumer.

My Analysis:

[48] It is necessary for the disputants to show what legal services were actually acquired by them. Mr Beck submits that they have not been able to do that and that it is not enough for the disputants to point to a composite legal proceeding and argue that they acquired a pro-rata share of the legal expenses incurred.
[49] Mr Beck emphasised the importance of noting that the acts of a trustee in performing the duties of a trustee do not by themselves amount to the carrying on of a taxable activity and do not involve the supply of goods or services for a consideration. He must mean that, for GST purposes, the trust must carry on some activity involving supplies of goods and services by it for a consideration and that the existence of a trust with internal administrative work does not amount to a taxable activity. In fact, the latter situation may well amount to a taxable activity depending on the facts of the case.
[50] I have referred to the taxable activity of the M Trust as sheep and beef farming, but interrogatories referred to the activity of that trust as the “bailment of sheep and beef cattle” and that has been accepted as the appropriate description. The relevant taxable supplies made by the M Trust were of livestock in the ordinary course to an associated family company. Mr Beck referred to that taxable activity as having a narrow compass in that it was the activity of providing livestock to a farming operation where all the actual farm work was carried out by the farming company owned by members of the family.
[51] The taxable activity of the TM Property Trust has been referred to as that of “a commercial property operation and development” but, from interrogatories, the taxable activity is described as “commercial leasing of land for viticulture and stock grazing purposes”. The nature of the taxable supplies made by that trust was the supply of farmland for viticulture and grazing purposes to two wine production companies so that, again, the taxable activity is in quite a narrow range, ie. that of obtaining rental income. Mr Beck put it that this was an essentially “passive” activity of providing land for the purpose of farming or viticulture by other entities. I do not regard the activity of the TM Trust (nor of the M Trust) as particularly “passive”.
[52] In order to claim a deduction for input tax, the disputants must show that they, themselves, acquired goods or services. They claim that they (as trusts or as trustees) acquired legal services in the relevant periods and the appropriate invoices from lawyers were adduced to me. The majority of these invoices were addressed to “The Trustees of the Trust, the subject of the litigation with the [ ]”. Mr Beck submits that this does not state clearly who was actually acquiring the legal services. In other cases, the legal invoices were addressed to various trustees. Mr Beck accepted that all the invoices identify the legal services as relating broadly to the said long-running litigation, but observed that such litigation encompassed many diverse aspects.
[53] Mr Beck referred to the disputants putting it that the legal services acquired by them related to the “acquisition and / or retention of assets and / or the operation and / or the management of the taxable activity”; but submits that it is unclear precisely who “acquired” the legal services, and that the disputants are unable to show that the legal services were supplied to them. It seems to me that the defendant Commissioner must take into account that the invoices were sent to the trusts or trustees who expected them and who paid them.
[54] The defendant does not dispute that the legal services were provided in respect of a number of different disputes including:
[55] It is submitted for the defendant Commissioner that the above are not matters which can legitimately be regarded as being for the principal purpose of making taxable supplies by the disputants; and that the disputants have not produced the necessary documentation to satisfy the statutory requirements of the GST Act.
[56] Of course, Mr Beck referred to the onus resting on the disputants to show that the legal services in question were acquired by them for the principal purpose of making taxable supplies; and that they have the appropriate documentation to support a claim for input tax under the GST Act. I agree that there is such an onus, but it and the facts of the case must be considered in the light of business practice and common sense.
[57] Mr Beck referred to the High Court Judge in the said ongoing litigation noting that enormous legal costs were incurred as a result of a “litigation knot, or stalemate” which developed between the parties, and he identified that the plaintiffs in that litigation had ultimately been successful in the following respects, namely,

Principal Purpose:

[58] In order to satisfy the statutory definition of the Act for an input, goods or services must have been acquired “for the principal purpose of making taxable supplies”. This is the central issue in this case.
[59] In many cases, goods and services are supplied for more than one purpose. When that is the case, I must determine how significant the various purposes are in order to decide which is the principal purpose. The disputants must show that the principal purpose for which the services were acquired was for them to make taxable supplies.
[60] Determining the principal purpose of the disputants is, essentially, a factual inquiry. The Courts have provided some guidance as to how that inquiry should proceed, although in cases not directly on the point of this case.
[61] In CIR v BNZ Investment Advisory Services Ltd (1994) 16 NZTC 11,111, the High Court held that principal purpose is the main, primary or fundamental purpose for which goods or services are acquired. The Court also emphasised that the means by which a purpose is achieved must not be confused with the purpose itself.
[62] In Wairakei Court Ltd v CIR (1999) 19 NZTC 15,202, the High Court agreed that the meaning of "principal purpose” is the "main, primary or, fundamental purpose” for the acquisition of the supplies concerned. The Court said that it is necessary to consider both subjective and objective indicators when determining the principal purpose. The Court also held that (at 15,207):

My conclusion is that when determining the principal purpose it is necessary to make an overall evaluation of all relevant purposes.

[63] The question to be resolved in this case is whether the principal purpose for which the legal services were acquired was the making of taxable supplies.
[64] In Case Q43 (1993) 15 NZTC 5,208, the Authority dealt with the issue whether a barrister’s fee was for services acquired by the taxpayer for the principal purpose of making taxable supplies. The Authority found that not to be so because the taxpayer had ceased making taxable supplies at the time of incurring the fee which could not be related back to some prior activity. At one point, the Authority put the issue as whether there was "sufficient nexus” between the taxpayers incurring of the barrister's fee for defending a GST prosecution and the objector's business activity. It held that there was no relationship between the fee and any future supplies. The fact that the expenditure was incurred in the course of the taxable activity was not sufficient. The fee seemed to have also been paid to support the taxpayer’s claim that it was entitled to an input on certain property transactions.
[65] In Case U30 (2000) 19 NZTC 9,286, the Authority rejected a claim for input tax in respect of legal services for defending a criminal prosecution, because there was only an indirect connection with the income earning process. The expenditure was not "intimately connected” with the carrying on of business or the production of income. The activity of the taxpayer was that of selling cannabis and the legal fees were not incurred for that, but to seek the best outcome in respect of the criminal charges.
[66] The direct connection test was also applied in Case W3 (2003) 21 NZTC 11,014, where it was noted that fees paid to protect business reputation might be regarded as a business GST input.
[67] I agree with Mr Beck that another way of expressing the question is to ask what effect the legal advice had on the making of taxable supplies by the present disputants. If the making of supplies is unaffected by the litigation undertaken, it seems difficult to contend that the legal services are acquired for the purpose of making those supplies.
[68] Mr Beck submitted that the judgments of Panckhurst J in the Kain v Hutton litigation make it plain that there were many facets to the proceedings in respect of which legal services were provided and none of those were directly related to the taxable supplies provided by the disputants; that the disputed legal services had nothing to do with the bailment of sheep or cattle; nor were they concerned with commercial property operation and development. However, it seems to me that, unless the said litigation was resolved, the respective taxable activities of the trusts were likely to collapse or, at least, be affected adversely in terms of good trading relations.
[69] Mr Beck notes that the disputants allege that the legal services in issue related to the acquisition or retention of assets; that the assets of the M trust are essentially livestock and current accounts, and it has also held shares in various companies. Mr Beck submits that there is no suggestion in the evidence that the legal services were obtained in order to acquire or retain these assets ie. livestock or lease of land.
[70] The assets of the TM Property Trust are lands held in three titles, a registered lease to a winery and an informal lease to another winery. Mr Beck submits that there is no evidence that the legal services in question were obtained in order to acquire or retain these properties or leases, and that where legal services have been directly related to the Trust property, eg. the subdivision of the TM land, they have been permitted as inputs by the defendant.
[71] Mr Beck referred to the alternative allegation made by the disputants that the legal services related to the operation or management of their taxable activity. There is evidence that the legal proceedings involving the trustees were "part and parcel of ordinary trust administration and stewardship”. He submits that the normal administration expenses of the MT were accounting fees and possibly valuation expenses.
[72] However, it seems to me that the trustees needed to resolve the litigation to protect the respective taxable activities of the trusts.
[73] The disputants also rely on the fact that the High Court allowed them an indemnity out of the trust funds for legal costs incurred. Mr Beck submitted that the fact of indemnity does not answer the question as to the principal purpose for which the services were acquired. I agree.
[74] The defendant has identified two categories of trust administration which could be regarded as “normal”; namely; administration related to any business carried on by trust; and administration related to the general administration of the trust. Mr Beck submits that the legal costs in this case did not fall into either category but related to how certain assets had been dealt with, how beneficiaries had been looked after, and how some beneficiaries had been excluded. He referred to the expert evidence that the litigation costs in this case “extend well beyond what would be regarded as the normal administration of a trust”. I disagree. My experience as a trustee is that any grievance of a beneficiary must be resolved to prevent retarding or destruction of the enterprise of the trust; to prevent continuance of unproductive costs to the trust, and to enable fair fulfilment of the trusts.
[75] Mr Beck submits that the quantum of the legal expenses serves to highlight an issue which has not previously been addressed, namely, the level of connection required between an expense incurred by trustees and the business activities carried on by a trust. The high level of the fees certainly flags the need to check that they are proper expenses of the trusts.
[76] Mr Beck noted that the disputants consider that input tax credits may be claimed in respect of all expenses incurred by trustees unless they are related to exempt supplies. Mr Beck submits that proposition cannot be correct as it ignores the vital importance of the principal purpose test. The expenses cannot be too far removed from the taxable activity. I agree.
[77] Mr Beck submitted that, viewed in light of the authorities, these legal expenses cannot be viewed as part of general business administration of the trusts; there was no direct link between the expenses and the business activities of the disputants; nor could the legal costs be regarded as “intimately connected” with those business activities. Those submissions are contentious, but I consider there was a sufficient nexus between the expenditure and the proper operation of the taxable activities of the trusts.
[78] Mr Beck put it that where a trust is carrying on a business, the trustees will face a number of different obligations. On the one hand, they will have to comply with the normal responsibilities resting on any trustee to act in the interests of the beneficiaries, and to do whatever is necessary to protect and promote those interests. I agree. He also puts it that, on the other hand, they will have to manage the business as one of the assets of the trust; and it is only the business aspect that constitutes a taxable activity. I think the last sentence is generally correct. However, the extent of a taxable activity does not require a restrictive approach, and management of trustee duties and obligations is part of the trust’s taxable activity as is the protection and promotion of beneficiaries’ interests in relation to the business outcomes of the trust.
[79] Mr Beck submits that the accounting treatment of expenses is not necessarily the same as their treatment for tax purposes. I agree; but the question in this case is whether the statutory definition of input in the GST Act has been satisfied. The mere fact that a trustee may have acted prudently in defending a legal proceeding, or in the interests of beneficiaries of a trust, does not automatically mean that this was for the purpose of making taxable supplies.
[80] Mr Beck also submits that if the situation is viewed in terms of effect, it is clear that the taxable supplies made by the disputants were able to continue perfectly adequately without incurring any of these legal expenses; and that without the complicated family trust structure, it is unlikely that any of these legal expenses would have been incurred. That latter point may be correct but I consider that a taxpayer is entitled to have complicated family trust structures and the nature of the litigation could have hindered the smooth operation of the taxable activities of the trusts.
[81] The disputants suggest that failure by the trustees to take legal action could have impaired the income and profit earning capabilities of the disputants. I agree. Mr Beck submits it is not evident that the litigation had anything to do with income-earning capabilities of the trust, and even if it did, that does not establish that the costs were for the purpose of making taxable supplies. I disagree.
[82] I agree with Mr Beck that, viewed overall, it seems clear that the enormous legal expenses were incurred for two main reasons:
  1. The family arrangements which had been put in place over the years involved a complex structure with many different entities and inconsistencies. Rearrangement of those structures was seen as necessary by various family members.
  2. There had been a breakdown in family relationships, which necessitated recourse to the courts. The resolution of the dispute was a difficult exercise, and made even more because extensive reorganisation of the complex family trust structures was required.

[83] He puts it that the legal expenses were not incidental to the carrying on of any business by the disputants and they were expenses concerned with questions of trusteeship, the correct ownership of various assets, and the restructuring of a group of entities to achieve various perceived benefits. I see all those aspects as integral to smoothly operating the trusts’ businesses, and a taxable activity need not amount to a business. Also, defending one’s good faith conduct as a trustee must be an incident of management of the activity of the trust. Expenditure for such a purpose must be sufficiently related to such activity.
[84] Mr Beck also put it that, even if one of the purposes for acquiring legal services could be seen as somehow related to the taxable activity of the disputants, it cannot be fairly concluded that the principal purpose for which legal services were acquired was to enable the disputants to make taxable supplies. It seems to me that the duty of the trustees was to fulfil the terms of the trusts which involved performing the taxable activities of the trusts. Anything relating to performing those must be for the principal purpose of making taxable supplies.
[85] The GST Act operates essentially on a self-assessment basis. Registered persons are required to account for GST on a periodic basis. The returns made to the Commissioner do not include supporting documentation. The system relies on the fact that registered persons keep full and accurate records relating to GST so that any claim can be substantiated if the person is called to account. The system requires that every person retain a proper record of input tax and output tax. In respect of input tax, the Act requires there to be a tax invoice.
[86] Section 20(2) of the GST Act provides:

(2) Deduction of input tax – Notwithstanding any other provision in this Act, no deduction of input tax and no deduction calculated under section 25(2)(b) or (5) shall be made in respect of a supply, unless-

(a) A tax invoice or debit note or credit note, in relation to that supply, has been provided in accordance with sections 24, 24BA, and 25 of this Act and is held by the registered person making that deduction at the time that any return in respect of that supply is furnished; or

(b) A tax invoice is not required to be issued pursuant to section 24(5) or section 24(6) of this Act, or a debit note or credit note is not required to be issued pursuant to section 25 of this Act; or

(c) Sufficient records are maintained as required pursuant to section 24(7) of this Act where the supply is a supply of secondhand goods to which that section relates; or

(d) The supply is a supply of services that is treated by section 5B as being made by the recipient and the recipient has accounted for the output tax charged in respect of the supply:

Provided that where a tax invoice or debit note or credit note in relation to that supply has been provided in accordance with this Act, the Commissioner may determine that no deduction for input tax in relation to that supply shall be made unless that tax invoice or debit note or credit note is retained in accordance with the provisions of section 75 of this Act.

[87] The requirement for a recipient of supplies to hold and retain a tax invoice is mandatory as is the information to be included on the tax invoice.
[88] Section 75 provides:

75 Keeping of records

(1) [Records defined] For the purposes of this section, the term records includes books of account (whether contained in a manual, mechanical, or electronic format) recording receipts or payments or income or expenditure, and also includes vouchers, bank statements, invoices, tax invoices, credit notes, debit notes, receipts, and such other documents as are necessary to verify the entries in any such books of account.

(2) [Contents of records] Without limiting the generality of subsection (1) of this section, the records required to be kept and retained, pursuant to subsection (3) of this section, shall contain-

(a) A record of all goods and services supplied by or to that registered person showing the goods and services, and the suppliers or their agents, in sufficient detail to enable the goods and services, the suppliers, or the agents to be readily identified by the Commissioner, and all invoices, tax invoices, credit notes, and debit notes relating thereto; and

(b) The charts and codes of account, the accounting instruction manuals, and the system and programme documentation which describes the accounting system used in each taxable period in the supply of goods and services; and

(c) Any list required to be prepared in accordance with section19B(3) or section 78B(7) of this Act.

(3) [Sufficient records] Subject to subsections (4) and (5) of this section, every registered person who supplies in New Zealand goods and services shall keep in New Zealand copies of records issued by that registered person, and sufficient records in the English language to enable ready ascertainment by the Commissioner or any officer authorised by the Commissioner in that behalf, of that person's liability to tax and shall retain in New Zealand all such records for a period of at least 7 years after the end of the taxable period to which they relate:

Provided that the Commissioner may, in the Commissioner's discretion, on application in writing being made to the Commissioner in that behalf, authorise any such registered person, by notification in writing, to keep and retain outside New Zealand or, as the case may be, in a language other than the English language, such of those records as the Commissioner determines.

[89] Section 24 of the GST Act deals with tax invoices and s 24(3) provides:

(3) [Particulars of invoice] Except as the Commissioner may otherwise allow, and subject to this section, a tax invoice shall contain the following particulars:

(a) The words "tax invoice" in a prominent place:

(b) The name and registration number of the supplier:

(c) The name and address of the recipient:

(d) The date upon which the tax invoice is issued:

(e) A description of the goods and services supplied:

(f) The quantity or volume of the goods and services supplied:

(g) Either-

(i) The total amount of the tax charged, the consideration, excluding tax, and the consideration, inclusive of tax for the supply; or

(ii) Where the amount of tax charged is the tax fraction of the consideration, the consideration for the supply and a statement that it includes a charge in respect of the tax.

[90] I agree with Mr Beck that the intention of the legislation appears to be that the recipient of any supply should be clearly identifiable on the tax invoice. The particular goods and services supplied to that person must also be shown. Without this information, it is not possible for adequate accounting for GST to take place.
[91] Mr Beck emphasises that, in some cases, the disputants have not been able to produce a tax invoice addressed to them at all. They rely on invoices provided to other persons, and he submits that they are therefore unable to comply with the Act. In other cases, the disputants rely on invoices addressed to "The Trustees of the Trusts the subject of the litigation”. Mr Beck submits that this vague description is not sufficient compliance with the terms of the Act and it is impossible to determine from the invoice either which trusts are actually involved, or the extent of supply being made to each trust. As I said above, account must be taken of the fact that the respective trustees sought, expected, understood, and paid particular fees in a complex structure.
[92] Mr Beck also submits that the description of the services acquired is inadequate in many instances, and it must be determinable from the invoice whether the particular services were of a type which could relate to taxable activities of the disputant; and where there is no narration, or insufficient detail, the requirements of the Act have not been met. Mr Beck submits that the purpose of the legislative requirements relating to tax invoices would be defeated by permitting vague and generic descriptions such as those relied on by the disputants in this case. I agree with that approach, but the fees were in standard form from leading reputable lawyers and were rendered and paid in terms of commercial practice.
[93] Mr Martin commented that it has never been entirely clear to the disputants what the Commissioner's intention has been in disallowing the GST input tax on the legal fees charged to the Disputant Trusts. In an e-mail exchange with Mr Denham Martin on 14 September 2006, Mr Wellik of Crown Law summarised the Commissioner's theory (emphasis added) by Mr Martin:

You have asked for the authority for the CIR's position. As stated in the NOPAs, it is section 3A of the GST Act. The NOPA also refers to Case L53 [1989] NZTRA 6; (1989) 11 NZTC 1,304, and while it is not directly on point, the reasoning of Barber DJ is in principle - the position of the CIR. Legal expenses can be incurred, which concern matters other than the income earning process (or the taxable activity, in the present case).

The CIR's view is that there are some services that can be acquired by a GST registered trust that -and while those services are for the administration of the trust - the services are not for the principal purpose of making taxable supplies.

The plain words of the section contemplate that goods and service may be acquired for making taxable supplies, yet not be acquired for the "principal purpose" of making taxable supplies. Otherwise the words "for the principal purpose" have no effect. The Wairakei case is consistent with the view, at page 15,207, where an overall evaluation of all the relevant purposes must be considered.

The CIR sees no reason why section 3A should be restricted only to a distinction between taxable and exempt supplies. If that were the case, again the words “for the principal purpose" have no effect.

[94] I agree with Mr Martin that it is hard to see on what principled basis legal services could be acquired for the "administration” of a trust and yet those services not be part of the course or furtherance of its taxable activity. As already noted above:
  1. A trustee would never be acquiring legal services (or anything else for that matter) for a GST registered trust which was part of its "administration” not related to its taxable activity. Trust law would not allow a trustee to do so.
  2. This point is particularly reinforced in the context of the GST Act by s 57 as there can be no acquisitions by a trustee which are not acquisitions by the trust and for its taxable activity.
  3. Nor could any rational distinction in this context be made in respect of the type, timing and content of legal services acquired by a GST registered trust which formed part of its administration. An application by a trustee to obtain the directions of the court on an interpretation matter, authorisation to resettle trust assets, to make a distribution to a beneficiary, or to pay lawyers to undertake a discovery of documents, or to assess the strength of a case, or to advise the trustees on the scope of their powers or duties, or to sell a trust asset, are all squarely trust "administration” matters and as a consequence part of the trust's taxable activity;
  4. In short, I agree with Mr Martin that there is no sub-set of trust "administration” matters involving legal advice or assistance which fall outside a GST- registered trust taxable activity unless (as also noted above), those related directly to an exempt supply or some other clear disqualifying feature;
  5. As a practical matter, it would be very burdensome for trustees of registered trusts filing GST returns on a monthly basis, and receiving dozens if not hundreds of inputs to that economic activity, to somehow cherry-pick between those inputs in terms of their administration role and their connection to the making of taxable supplies. No such thing is required in practice by the Commissioner for other types of legal entities (like companies or partnerships) and there is no reason in theory or principle why it should be required for trusts.

[95] The words "principal purpose” have an absolutely clear role because, as noted already, unless GST-inclusive inputs can be shown to reach the threshold of the "principal purpose of making taxable supplies” in the context of that particular economic activity, no up front deduction, for GST can be claimed. That criterion serves as a filter between taxable supplies and exempt supplies and, if the latter predominate (as they will from time-to-time), then GST input tax can only be recovered on a return-by-return basis and not on an upfront all or nothing basis, which is what the test is designed to do.
[96] A GST -registered trust providing ongoing leasing services of land or other assets, or bailing stock as part of a farming business, is accounting for GST on those ongoing supplies as part of its taxable activity. Furthermore, it would account again for GST output tax if it disposed of the land subject to the lease or the stock subject to the bailment. A failure to get all GST input tax back would mean that that trust was always out of pocket in a GST and economic sense. The administration and management of a trust should not be isolated from any commercial activity it may undertake.

Issue 1: Whether the Disputant Acquired GST-Inclusive Legal Services?

[97] The first Issue which the Authority needs to be satisfied about is whether each Disputant Trust "acquired” legal services.
[98] The Trusts engaged Chapman Tripp and other professional advisers to assist them defend the various legal challenges brought against the trustees of the Trusts by members of the plaintiff Kain family.
[99] As the evidence of Mr S makes clear, and as the individual invoices addressed to the "trustees of all the trusts involved in the Kain litigation” (or similar formulations) show, the Trusts (through the trustees) had the legal obligation to pay the suppliers of the various legal and other professional services (including the major legal costs of Chapman Tripp). The Trust (or trustees) never acquired these services personally. That would have been a contradiction in legal terms.
[100] The Trusts acquired those costs in a GST and legal sense. The fact that those costs may have been indirectly funded at times by a third party (the W-C Farming Co) is of no relevance to the GST position in terms of an input tax claim because the claim is with the GST-registered person which has the contractual liability to pay for the relevant supply of legal or other services (see Turakina Mäori Girls v CIR) - ie. each Disputant Trust.
[101] The Trustees had the legal “payment obligation” in respect of the legal and other services as a matter of law because no one else did or could have had it. The evidence is clear that the Trust, in the relevant GST period (post October 2000), paid for the invoices as a matter of law.
[102] I agree that the disputant trusts satisfy the requirements of Issue 1 above and have met the onus of proof on this point.

Issue 2: Whether the Disputant Trusts were Carrying on a Taxable Activity, and were Legal Costs Acquired in the Course or Furtherance of that Activity?

[103] The second Issue which has to be determined is whether each of the Disputant Trust's was, in the GST periods in which the GST input tax was disallowed, carrying on a taxable activity and whether the legal fees were acquired as part of the course or furtherance of that taxable activity.

TM Property Trust:

[104] I consider that TM Property Trust was carrying on a "taxable activity” at the time the relevant legal services were acquired because:
  1. It carried on the activities of leasing its land to a leading winery for viticultural purposes and the balance of its land was used for cattle and sheep grazing, breeding and fattening.
  2. These activities constitute “taxable activities”: Variety Leisure, Bayly and Case R38:
  3. Mr Lazelle (for the Commissioner) confirmed that a commercial / leasing of land without any operational requirement would constitute an economic activity (like that involving TM Property Trust).
  4. The lease to the winery had a commencement date of 1 July 1998 at an annual rental of $198,000. The financial statements for this Trust record the rent being paid.
  5. There is nothing “passive” about the leasing and farming operations being conducted on the TM Property Trust's land. Bayly makes it clear that the supply of farmland (and livestock) to another operational farming vehicle is typical farming practice and a taxable activity, even if all practical operational elements are undertaken by third parties, as many were in this case by the W-C Farming Co Ltd and its staff under informal arrangements with the Disputant Trust.
  6. These leasing and farming activities were squarely within the GST tax-base and deemed to be carried on by the Trust, and only by the Trust, in accordance with s 57 of the GST Act.
  7. TM Property Trust was not involved with any exempt supplies as part of its taxable activity. All its economic activity was taxable. There is a small farmhouse in the grazing land which remained after the leases to the wineries. GST input tax was not claimed on any of the costs relating to that.
  8. The share of GST input tax incurred on the Chapman Tripp legal services was “an ordinary incident of administration of the Trust” (National Trustees v Barnes) and proper and reasonable costs for a Trust to incur, and Panckhurst J gave a full indemnity for them.
  9. Mr S confirmed in his brief, and on cross-examination, that the claims against both Trusts were designed to protect the income-earning of the Trusts and to protect their capital.
  10. The Trustees could not have refused to undertake a defence of the allegations, a point made by Pankhurst J. Clearly, this was a matter of commercial and trust necessity for this Disputant Trust. The trustees would have been in breach of trust in not defending the claims.
  11. The particular legal services and work done by Chapman Tripp were of a type and quality which was part and parcel of the trust's day-to-day administration. Many legal disputes are unexpected. Where trusts like the disputants and companies defend disputes as part of their business activities, the cost is no different from any other (unexpected) business input. Trust disputes will often involve the trust's capital and this feature is irrelevant for GST purposes as would also be any suggestion regarding the establishment of the Trust (s 6(2)).

The M Trust:

[105] I also consider that the M Trust was carrying on a "taxable activity” in the relevant GST periods and its pro-rata share of the legal services and other costs were acquired for and in the course or furtherance of that “taxable activity”. This is so because:
  1. There is no dispute that the M Trust provided bailment services and performed other bailment activities. Mr Lazelle confirmed, as did Mr S, that the M Trust owned a large amount of livestock and that bailment activity per se was an economic activity and not a hobby;
  2. While there was no formal bailment arrangement between the Trust and the W-C Farming Co Ltd or other third parties, the arrangements operated in practice (and had been in place for some time according to Mr S) and this, without more, would constitute a "taxable activity” under the authority of Bayly and Case R38 notwithstanding its informality , as it involved ongoing contractual obligations and rights and responsibilities (Bayly);
  3. The fact that W-C Farming Co Ltd provided staff from time-to-time to assist with the running of the Trust's farming / economic activities would not alter this conclusion as many farming arrangements, particularly on this scale, often involve shared and informal arrangements;
  4. The Financial Accounts in the Agreed Bundle disclose bailment rental being received by the Trust in the relevant GST periods. The Trust’s accounts also recorded substantial stock as being on hand at material times.
  5. Bailment rental calculations are recorded. That also confirms the existence of the Trust's "taxable activity”;
  6. The fact that the Trust also had a shareholding in a farming station company does not alter that a taxable activity was being conducted by it. Many trusts operating in farming and related contexts own shares in farming companies, but this investment is incidental to the principal taxable activity being carried on – ie. provision of bailment services and stock under bailment arrangements;
  7. The taxable activity was that of the Trust (see s 57 GST Act) and all acquisitions for the Trust (like the legal services) were deemed to be part of the Trust's taxable activity and in the course or furtherance of that activity;
  8. As with the TM Property Trust, the legal costs incurred were proper and reasonable ones (covered by indemnification) and a commercial and trust necessity and were an incidence of ordinary trust management and administration.

Issue 3: Whether GST Input Tax was claimed on Legal Services Acquired for the Principal Purpose of Making Taxable Supplies?

[106] The third Issue which needs to be satisfied by each of the Disputant Trusts is that the GST input tax claimed was on the legal services acquired by those Trusts for the principal purpose of making taxable supplies. I consider that the principal purpose test is met for each of the Trusts because:
  1. Each of the Trusts was carrying on a taxable "activity” and as such fully within the GST-base in terms of s 57 and the GST Act as a whole;
  2. The legal costs acquired were no different conceptually than the costs for valuation and accounting and consulting services which each of the Trusts acquired in the same GST periods. Indeed, the Commissioner allowed the pro-rata cost claims for the accounting fees and almost certainly would have for the “valuation” services if they had not been incorrectly coded. It seems illogical for the Commissioner to have allowed the Trusts’ claims to deduct the GST input tax on the accounting/ consulting costs and yet to deny the legal costs in the same periods;
  3. The pro-rating used by the trustees to allocate the legal and other costs to each of the Disputant Trusts was a reasonable and fair thing to do. It was done after careful consideration and at the point where the work being done by Chapman Tripp was being billed for all the Trusts and where all the Trusts were embroiled in the litigation. There was never any judicial criticism of this approach by Justice Panckhurst or other judges. The trustees of each Trust pro-rated the legal costs (and other costs associated with the breach of trust proceedings) across the Trusts. This they did after careful consideration and discussion with their legal advisers. That must be a sensible commercial practice.
  4. The legal costs charged to the disputants came essentially from Chapman Tripp. An analysis of the relevant invoices discloses a range of entirely orthodox and general legal costs associated with a breach of trust pleading. That involved telephone discussions with opposing counsel, drafting court documents, security for costs, meetings and research regarding the ownership of trust assets, meetings at Chapman Tripp involving a retained QC (acting for Disputant Trusts) and members of Chapman Tripp's instructing team, listing of documents and discovery matters, and drafting memoranda for Court. All these are matters one would expect to see in an action against the trustees of a trust where breach of trust was alleged. Indeed, many are the types of things one would expect to see in any legal proceeding initiated against the trustees of a trust for any legal matter;
  5. There is no question that the legal costs incurred in the relevant GST periods related to the defence of the breach of trust proceedings. That is to do with management of the trust and its activity. The legal costs do not relate in any way in a legal sense to the advancements and assignments which took place at an earlier point. The source of the legal proceedings is the action against the trustees and the Trusts. These were not legal costs incurred in respect of resettlement or matters involving distributions to beneficiaries or loans, but only advice and assistance given to defend the breach of trust claim;
  6. As noted already, this type of costs (or components of these costs) are/is part and parcel of the ordinary administration and management of a GST-registered trust. They cannot relate to anything else, because they could only have been acquired by the trustees for the Disputant Trusts in a GST sense and could not have been acquired as a matter of trust law other than for the purpose of the Trust and its income-earning and taxable activities;
  7. There is nothing in particular about the legal services to distinguish them from other legal (and other professional) services which the trustees of each of the Disputant Trusts may have had to acquire from time-to-time, other than that they arose from beneficiaries’ concerns.
  8. It would be curious (and burdensome) to try and separate out and distinguish between the “interactions” involving a trust's taxable activities and those relating to “fiduciary duties”.

[107] At the time the Disputant Trusts each acquired the legal services from Chapman Tripp, there was no doubt as to what the object or end in view was. It was simply to defend the allegations made against the Trust by the Kains so as to preserve the trusts’ economic income-earning potential and their assets as trustees are required to do as a matter of law. Panckhurst J held that the trustees were to be indemnified. That the trustees had no choice but to defend the proceedings confirms that the “purpose” was clear and was part and parcel of the Trust’s economic activity.
[108] TM Property Trust was only involved in the making of taxable supplies leasing services. It had a GST-registered economic activity and the Chapman Tripp legal costs were simply overhead costs incurred as part of the ordinary administration and management of TM's leasing and farming activities. GST on overhead costs like this is deductible in full.
[109] The same position obtains for the MT. Its share in the GST input tax on the legal costs was incurred as part of its ordinary administration to enable it to keep making taxable supplies. While it is true that it had a shareholding in M Station Ltd, a farming company, that exempt supply is irrelevant to the deductibility of GST here because the legal costs are not incurred by this Trust with reference or relevance to the exempt shares.
[110] If GST input tax is not allowed to each of the Trusts as GST-registered persons, they will effectively be consumers for GST purposes, and would bear the actual GST cost charged to them by legal services providers like Chapman Tripp. That seems contrary to the scheme and purpose of the Act. Even if either Trust never made a taxable output again, the GST charged to it should be an input because, until the Trust exits the GST tax-base, any inability to recover the GST charged to it will always leave it in a position of economic loss. That would not fairly reflect the value-added position of that Trust as carrying on a taxable activity. For example, TM Property Trust will be accounting for GST output tax on its leasing services, as will the M Trust on its bailment arrangements. Also, any termination of those activities (for example a sale by the TM Property Trust of its freehold interest in the land subject to the lease to the winery) would be subject to GST output tax in full in the normal way. Thus, any loss of GST input tax to either Trust would be contrary to normal GST principles and statutory entitlement.

Issue 4: Are the Tax Invoices Adequate?

[111] The fourth and final requirement for the Disputant Trusts to satisfy, in order to claim the GST input tax on the legal costs in the relevant GST periods, was that they held “tax invoices” in respect of those claims.
[112] I consider that on a sensible commercial practice basis, the invoices for legal services held by the Trusts in the relevant GST periods satisfied all the necessary statutory requirements to support the deductions of GST input tax in terms of s 20(2) of the GST Act. Importantly, the relevant invoices from Chapman Tripp and other services providers constituted tax invoices for the purposes of s 24(3) of the GST Act.
[113] This is so because the relevant Chapman Tripp invoices expressly contained on their face and as part of their terms:
  1. The words "tax invoice” in a prominent place (ie. at the top of the invoice) - s 24{3)(a);
  2. The name Chapman Tripp and Chapman Tripp's GST registration number, as supplier – s 24(3)(b);
  3. The name and address of the recipients -ie. it identified the trustees of the Trusts (as these were trusts involved in the Kain litigation) or identified the three trustees expressly by name;
  4. The “date” on which the invoice was issued - s 25(3)(e);
  5. A description of the “services” supplied (ie. the Chapman Tripp invoices outlined in detail the content of the work done for the Disputant Trusts in their narrations - s 24(3)(e);
  6. The “quantity or volume” of the services supplied - ie. the dollar value of services provided to the trustees of the Disputant Trusts is specified – s 24(3)(f);
  7. The “total amount of tax charged, the consideration, excluding tax, and the consideration, inclusive of the tax for the supply” – s 24(3)(g)(i).

[114] Every statutory requirement for a valid tax invoice was met in respect of the legal services provided by Chapman Tripp and by the other legal services providers and other professional advisers. Mr T’s evidence on cross-examination confirmed that these tax invoice requirements would have been met. Mr Lazelle did not dispute this evidence.
[115] Even if it were that not to be the case, the Commissioner clearly could be “satisfied” in terms of s 24(6) that this was a situation where the tax invoice requirement could be dispensed with. This is because there clearly is sufficient evidence about the legal services provided (in a documentary and other sense) and it would be impractical in a dispute of this type to require anything more (were there to be more required). There is no risk to the GST tax-base associated with the services provided and being claimed in the ordinary manner.
[116] The Commissioner can make this determination (and should have) of his own volition.
[117] I consider that the Disputant Trusts have satisfied the requirements of Issue 4 and have met the onus of proof on this point.

Conclusion:

[118] For the above reasons I find:
  1. That the Defendant Commissioner acted incorrectly in disallowing the GST input tax claimed by each Trust on the legal services charged to them in the particular GST periods;
  2. That each Trust acquired the legal services for the principal purpose of making taxable supplies;
  3. That the invoices held by each Trust, in respect of the disallowed legal and other services provided, constitute valid tax invoices and enable a deduction of GST input tax under s 20(3)(a) of the Act.

[119] I order that the relevant assessments be accordingly amended in favour of the disputants. In case of any arithmetical or consequential issues, I reserve leave to apply.

___________________
P F Barber
Taxation Review Authority
Wellington

NZLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.nzlii.org/nz/cases/NZTRA/2009/6.html