Case analysis – X and The Commissioner of Inland Revenue [2012] NZTRA 07

Introduction

On 28 August 2012 the New Zealand Taxation Revenue Authority (Barber J) handed down its decision in X and The Commissioner of Inland Revenue [2012] NZTRA 07.  The issue in the case was whether the applicant was entitled to register for GST purposes as a property developer and recover input tax credits with respect to the purchase price paid to acquire land.

The case provides a useful insight into the way the New Zealand Courts have viewed the question of when a “taxable activity” will be carried on in the context of the subdivision of land.  As in Australia, there is no “bright line test” and it comes down to a consideration of the particular circumstances of the case.

The law in New Zealand

The Tribunal summarised the legal position in New Zealand on what constitutes a “taxable activity”, being one that is carried on “continuously or regularly” and which involves, or is intended to involve, the supply of goods or services to any other person for consideration.  The Tribunal noted that the term had been the subject of many case decisions, the principles applicable from case law could be summarised as follows:

  • “activity” points to a combination of tasks undertaken in the course of conduct pursued.  It is the activity itself which must be continuous or regular, rather than the supply of goods or services” CIR v Bayly [1008] NZCA 8, (1991) 18 NZTC 14,073
  • the activity of a subdivision must be viewed as a whole and it is not appropriate to dissect it into its component parts: Newman v CIR [1994] NZCA 150, (1995) NZTC 17 12,097
  • in order to be carried on “continuously”, the activity cannot have ceased or been interrupted for any material period of time: Wakelin v CIR (1997) 18 NZTC 13,182;
  • to be carried on “regularly”, a subdivisional activity should occur as a course of action as part of a scheme or frequently or at uniform intervals.

The Tribunal stated that the leading case was Newman, which involved a builder who subdivided his personal residential property into two lots and sold the front lot.  The Court of Appeal, while emphasising that each case will be a matter of fact and degree, held that this was not sufficient to constitute a taxable activity.  The appellant had engaged in a straightforward subdivision with no development work, which was not repeated either continuously or regularly.  Also, only one lot was sold and there was a lack of a business element.

The Tribunal contrasted the decision in Newman with that in Case S70 (1996) NZTC 17 7,431, which involved the subdivision of a 5.7 ha section into five titles, together with the construction of a road and watertable improvements.  The Authority found that these differences were sufficient to distinguish it from a straightforward subdivision of a modest piece of land.  Similarly, in Wakelin the subdivision of property into six lots was held to constitute a taxable activity.

The Facts

The facts were as follows:

  • in May 2007 the applicant trust was settled with a sole corporate trustee.
  • in June 2007 the applicant purchased a city residential property for $8.7 million (including GST).  The applicant intended to subdivide and resell the property as the first of a number of property development projects.
  • on 8 July 2007 the applicant applied for GST registration on the grounds that it was carrying on a taxable activity of high-end residential property development.  Registration was granted with effect from 1 June 2007
  • the applicant engaged the services of an associated trust to provide management services in relation to the proposed development, subdivision plans were drafted and a surveyor was commissioned
  • nine days after the purchase, the property (less 650 square metres, which was to be subdivided and sold to an associated trust which would have erected units for resale) was listed for resale, but it did not sell
  • in early 2008 the subdivision plans were abandoned due to lack of funds – the applicant contended that this arosie because of the failure of the Commissioner to pay the input tax credit
  • In August 2008, after approximately $40,000 had been spent on repairs and maintenance of the property, the property was eventually resold back to the original vendor (as second mortgagee).
  • The applicant undertook no further property development activity

The decision of the Tribunal

The Commissioner contended that there was only to be a simple subdivision of the land and that there was insufficient activity to be a taxable activity.  This was simply the carving off of a small portion of land from what was essentially the family home (a director of the corporate trustee had used the property as his personal residence), that it was essentially a boundary adjustment, that no earthworks were involved and no utilities were provided.

The Tribunal rejected the Commissioner’s contention, while accepting that the case could be regarded as borderline.  In doing so, the judgment shows that the Tribunal found the following matters to be relevant:

  • the applicant had a business plan
  • the activity of the applicant had gone well beyond preparatory work
  • the witness was found to be credible and honest and the property was purchased for three prime reasons, first to sever part of it and sell it to an associated trust, second to substantially upgrade the house on the remainder of the property and sell it, third to reinvest those funds with profits into a similar project and so on indefinitely
  • significant expenses were incurred, including accounting ($6,800.48), legal ($70,541.88), survey ($17,457.45), refurbishment ($43,987.93)

In conclusion, the activities were found to be “continuous” and it was intended to be “regular” but did not get to that as events unfolded.

Concluding thoughts

Earlier this year I published a paper on this site entitled “GST and “Enterprise” in the context of the sub-division and sale of Real Property”.  This looked at the question of whether taxpayers are carrying on an “enterprise” for the purposes of the GST Act when they are looking to subdivide and sell real property and to the approach of the Australian Taxation Office to private rulings issued with respect to that issue.

This decision of the Authority shows that the relevant test in New Zealand for what constitutes a “taxable activity” in the context of land subdivision and sale is similar.  There is no “bright line test” and the circumstances of each case need to be considered.  However, the New Zealand approach does seem to provide a lower threshhold than what is applied by the ATO.  In particular, the New Zealand cases appear to take the view that a multiple lot subdivision will generally be a “taxable activity”, whereas a number of private rulings issued by the ATO accept that a multiple lots subdivision will not necessarily be sufficient.  For example, the ATO has given a private ruling that a 22 lot subdivision of land did not constitute an “enterprise”.

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