Media Release - 17 November 2010
Ernst & Young New Zealand
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17 November 2010
Supreme Court deals a blow to cash strapped businesses
The highest court in the land has delivered its judgment in the GST case involving inbound tour operator Contract Pacific and the Commissioner of Inland Revenue. This is the final instalment in a dispute which started 10 years ago.
A lot of money was at stake for this taxpayer. But also at stake was a very important issue for all businesses. The case involves the right of the Commissioner to withhold a business' GST refunds while the GST return is being investigated. At issue was what time limits the GST legislation imposes on Inland Revenue investigators once a decision is made to examine a taxpayer's GST return further.
The outcome of this case has an important impact on businesses, particularly exporters, who in these cash constrained times need to know genuine GST refund claims are being processed expeditiously by the tax department. The Supreme Court says that as long as the Commissioner sends a letter within 15 working days saying he's investigating a GST return he can withhold the refund as long as he likes.
Contract Pacific argued the law imposed limits on how long the tax department could hold on to its money while it investigated a GST return. If the Commissioner breached those time limits he was obliged to release the refund while he continued with his investigation. If he later decided the refund should not have been paid he had access to a wide range of powers in the tax laws to recover the money from the taxpayer. The High Court agreed with this interpretation.
The Court’s judgment, delivered by His Honour Justice William Young, says:
"The requirement to make a refund could not revive unless and until the Commissioner subsequently determined that the GST was refundable and that Contract Pacific had complied with its tax obligations. Since the Commissioner never so determined, the refund claimed never became payable"
The Commissioner therefore may never decide whether the refund is payable and there's nothing the taxpayer can do about it because, according to the Supreme Court, there are no further time limits imposed by the GST legislation on the Commissioner's investigation once he's sent the initial notice.
This is despite specific wording in the GST Act which says if the Commissioner has decided to investigate a refund return then he must request any information concerning the return within 15 working days after the return was filed and any further information within a further 15 working days after receiving the first lot of information from the taxpayer.
According to the court, even though the legislation imposes time limits for follow up information requests by the Commissioner there is no sanction if he does not comply with those time limits. They accept this renders the time limits imposed by the legislation "of limited practical effect".
Rather than apply what appears to be pretty clear statutory time limits on the Commissioner the Court prefers to "assume that the Commissioner's staff will continue to" comply with the time limits.
It is unfortunate that clear wording chosen by Parliament, to provide some protection for businesses who have to collect tax on behalf of the Government, is watered down to such an extent, particularly in these difficult economic times.
New Zealand tax legislation imposes time limits on tax payers for a number of things and the penalties when we don't comply with those time limits can be crippling. Here was one provision imposing a time limit on Government officials and the Supreme Court does all it can to water down any protection that provision gave to taxpayers.
GST refunds are an ordinary incidence of our GST system and they need to be processed efficiently if that system is to have any credibility. Most refund claims will be legitimate and it is a vital feature of a GST system that the businesses to which they belong are not unduly denied the use of their funds. Balanced against that is a need to protect the Government's revenue and ensure an appropriate level of confidence in the entitlement to the refunds. A procedure in the GST law which limits how long the Commissioner can withhold payment to a taxpayer while he investigates a return is surely a reasonable feature of any tax regime, especially when you consider the already expansive powers the Commissioner has to recover unpaid tax from defaulting taxpayers.
This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.
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