The front page of the standard ADLS Sale and Purchase of Real Estate Agreement includes the question:
“The vendor is registered under the GST Act in respect of the transaction evidenced by this Agreement and/or will be registered at settlement. Yes / No”
The question and answer comprises a warranty relating to the vendor’s GST registration status. As a factual point it should be easy to answer correctly. But, in another example of problems seen over recent years regarding the GST treatment of land transactions, the warranty clause was the subject of a High Court judgement dated 12 November 2020, in the case of Marr v Mills.
Ms Marr sold a property to the Mills at auction for $1.45m (inclusive of GST). The property comprised a mix of residential and commercial buildings. The Mills intended on becoming GST registered for a planned business venture to be operated from the commercial part of the property.
Because the vendor answered ‘no’, they were not GST registered, the purchaser expected to be able to make a second-hand goods deduction. This would be based on the amount paid for the commercial part of the property and use the GST refund as working capital.
As it turned out, Ms Marr was registered for GST. The Mills sought professional advice, which confirmed that if both the vendor and purchaser were GST registered, the transaction would be ‘zero rated’ and the Mills could not claim a GST refund. The purchasers decided not to pursue their planned business venture, on the basis that financially they could not take further risk setting up the businesses without the GST refund. Instead, the property was subdivided to sell the commercial premises with road frontage – ultimately no taxable activity was undertaken.
The Mills, however, asserted ‘breach of warranty’. They argued that regardless of whether a taxable activity occurred, their ‘intention’ to undertake it and the loss of a ‘prospective’ benefit were sufficient to support a viable GST refund that they could not make.
Ms Marr argued an intention to pursue a business was insufficient to support the Mills’ eligibility to register for GST. Without registering, a GST refund could not be claimed by the purchasers on the property’s acquisition. Whether a business venture was undertaken or not was contingent on other factors.
The District Court decided in favour of the Mills. The case was appealed to the Auckland High Court where it was dismissed. An amount was awarded to the Mills equivalent to the GST refund on the property transaction and related expenses.
While the vendor argued to undermine the lack of certainty of the benefit to the purchasers, the Court noted that this does not exclude the prospect of a benefit. The Mills’ intentions could be corroborated by their acquisition of collateral for the business and post-auction instruction for the value of the property to be apportioned for the purpose of a GST claim. These actions were all taken by the Mills prior to notice of Ms Marr’s breached warranty. Therefore, the actions of the Mills were deemed neither speculative nor opportunistic.
A ‘prospective’ benefit was denied in this situation because the purchasers were not in a financial position to take further risk to set up the business venture without the GST refund. The GST refund was quantified as the value of the loss to the Mills due to a failure by Ms Marr to uphold the warranty stated in the sale and purchase agreement.
The case has once again brought to light the problems that can occur in relation to the GST treatment of land transactions.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.