GST on land - Holdway and Ellwood
It is common for disagreements to arise between taxpayers and Inland Revenue on the GST treatment of land transactions, but less common for these disputes to arise between a vendor and purchaser.
However, this was the case in a recent High Court case, Holdaway v Ellwood (2019). The case highlights the importance of completing the GST disclosures in the Sale and Purchase Agreement (S&P) correctly.
The standard ADLS S&P agreement includes provision for both vendor and purchaser to disclose whether they are GST registered in respect of the transaction. The responses determine whether the sale is subject to GST at 15%, 0% or not subject to GST at all.
If the purchaser changes their position before settlement, clause 15.5 of the S&P requires them to notify the vendor of the change.
Where both parties are GST registered, transactions are often zero-rated. Conversely, where the vendor is not GST registered, but the purchaser is and intends to use the land to make taxable supplies, the purchaser is entitled to make a “second hand goods claim”, allowing them to make a GST claim.
In this case, both the vendor (Mr Ellwood) and purchaser (the Holdaways) had stated on the S&P that they were not, and did not intend to be, GST registered in respect of the transaction, with the purchase price stated as $355,000 ‘inclusive of GST, if any’. On the basis of the disclosures, GST did not need apply.
On the advice of their accountants, one week before settlement the Holdaways registered for GST without informing Mr Ellwood. Relying on Mr Ellwood’s statement that he was not GST registered, the Holdaways subsequently lodged a second hand goods claim.
However, Inland Revenue rejected the GST refund claim on the basis that Mr Ellwood was in fact GST registered, such that the transaction should have been subject to GST at 0%. The Holdaways claimed damages against Mr Ellwood for the denied GST refund. The District Court initially ruled in favour of Mr Ellwood. However, on Appeal, the High Court overturned the District Court’s decision, requiring Mr Ellwood to compensate the purchasers for an amount equivalent to the value of the denied secondhand goods credit, plus accounting and interest costs.
As a GST registered person, Mr Ellwood should have accounted for GST on the sale of the land. The disclosure by Mr Ellwood comprised a warranty that they were not GST registered, and it was reasonable to anticipate the purchasers might make a second hand goods claim. Mr Ellwood’s breach of warranty meant the Holdaways did not receive the input credit they anticipated, hence they were worse off than expected. The fact that the Holdaways did not notify the vendor of their change in GST position was not considered to be a valid defence, given the vendor himself was at fault.
The outcome in the High Court aligns with the “common sense” outcome, and is a warning for both parties to ensure they complete S&P agreements correctly.