Aldwyn John Cockburn, Janet Elizabeth Cockburn and Keith Ian Jefferies v C S Development No 2 Ltd Ca

• Jurisdiction: New Zealand
• Judge: O'Regan,Baragwanath JJ,O'Regan J,Mr Carruthers,William Young,Regan,Baragwanath
• Judgment Date: 16 August 2010
• Neutral Citation: [2010] NZCA 373
• Docket Number: CA455/2009
• Court: Court of Appeal
• Date: 16 August 2010

BETWEEN

Aldwyn John Cockburn, Janet Elizabeth Cockburn and Keith Ian Jefferies

Appellants

and

C S Development No 2 Limited

Respondent

[2010] NZCA 373

Court:

William Young P

Regan and Baragwanath JJ

CA455/2009

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal concerning a dispute about the GST implications of an agreement for sale and purchase. After a property had been purchased the vendors initially submitted a settlement statement which provided for GST on top of the purchase price and after it was challenged, submitted one that provided for a zero rated supply. The terms of the agreement for sale and purchase set out that the purchase price was inclusive of GST–whether the sale was of a going concern and therefore attracted the zero rated GST, or whether the GST was included in the purchase price.

Counsel

C R Carruthers QC and R P Harley for Appellants

H B Rennie QC for Respondent

• A The appeal is dismissed, except to the limited extent set out at B below.

• B The appeal against the award of interest made in the High Court is allowed and the award of interest is quashed. The proceeding is remitted to the High Court for determination as to whether interest is payable and, if so, from what date and at what rate.

• C The appellant must pay the respondent costs calculated at 90 per cent of costs for a standard appeal on a band A basis plus 90 per cent of usual disbursements.

JUDGMENT OF THE COURT

REASONS

O'Regan and Baragwanath JJ	[1]
William Young P (dissenting)	[102]

O'Regan and Baragwanath JJ

(Given by O'Regan J)

Table of Contents

	Para No
Introduction	[1]
Factual background	[4]
Issues	[19]
Summary judgment criteria	[26]
Section 109 of the TAA	[28]
Construction of the agreement
Relevant provisions of the GST Act	[36]
Capable of being a going concern	[52]
Written agreement	[60]
Mutual intention	[82]
Supply of a separately operable taxable activity	[83]
Supply of all necessary goods or services	[84]
Conclusion	[87]
Section 78E of the GST Act	[88]
Interest	[95]
Conclusion	[100]
Costs	[101]

Introduction

1 This appeal and cross-appeal concern a dispute about the GST implications of an agreement for sale and purchase of a property in Oriental Bay, Wellington. The sale price was $5,000,000, including GST. A dispute has arisen between the parties as to whether the property was sold as a going concern and therefore zero rated for GST purposes, as the appellants (whom we will call the Cockburn trustees) contend, or not, as the respondent, C S Development No 2 Ltd (C S Development), contends. If C S Development is right, the Cockburn trustees are required to provide C S Development with a tax invoice reflecting a GST component of 12.5 per cent of the purchase price, so that C S Development may obtain a GST refund. The Cockburn trustees will need to pay GST of $555,555.56, thereby reducing the net amount received by them for the property to $4,444,444.44.

2 In the High Court, each party sought summary judgment against the other. Associate Judge Gendall found in favour of C S Development and ordered the Cockburn trustees to deliver a GST invoice reflecting GST payable of $555,555.56. 1 He also noted that the Cockburn trustees would be liable for interest on the GST amount for a period and a rate yet to be determined. He dismissed the Cockburn trustees' summary judgment application and awarded costs to C S Development.

3 In essence the parties renewed in this Court the positions they took in the High Court. In addition, the Cockburn trustees sought to introduce a new argument in this Court. As an understanding of the facts is required to understand the nature of the issues before us, we briefly summarise the factual background before setting out the issues which we are required to address.

Factual background

4 The Cockburn trustees owned a property at 148 Oriental Parade, Wellington, from which a business known as The Parade Cafe had operated for some time. On 26 May 2007, they agreed to sell that property to Hodge Properties Ltd or nominee for $5,500,000. The agreement was in the standard form agreement for sale and purchase of real estate issued by the Real Estate Institute of New Zealand and the Auckland District Law Society, 7th edition. The purchase price was specified to be $5,500,000. In the section of the front page of the contract dealing with GST, the following words appear:

Plus GST (if any) OR Inclusive of GST (if any).

If neither is deleted the purchase price includes GST (if any).

5 In the present case neither was deleted, so the effect of the provision was that the price was a GST inclusive price.

6 The property had been subject to a lease from the Cockburn trustees to a company called Torta Holdings Ltd, which was associated with the Cockburn trustees. The lease had been assigned to Torta by the then tenants, the A J and J E Cockburn Partnership, in August 2004. The lease expired on 23 May 2007, three days before the agreement for sale and purchase was entered into. In the section on the front page of the agreement for sale and purchase headed “TENANCIES (if any)” the detail “Name of Tenant” was filled in as “A J and J E Cockburn Partnership trading as Parade CafÉ” and the item headed “Term” was filled in as “Expiry Date 23 May 2007”. The headings “Bond”, “Rent”, and “Right of Renewal” were not filled in. In fact, the lease had been assigned by A J and C E Cockburn to Torta nearly three years earlier so the name of the tenant was wrong.

7 Although the lease had gone past its expiry date by the time the agreement for sale and purchase was entered into, there was a holding over provision in the lease and so it continued as a monthly tenancy.

8 The fact that the tenancies section on the front page of the agreement for sale and purchase was completed is significant, because cl 13 of the standard form section of the agreement provides as follows:

13.0 Supply of a going concern

13.1 If this agreement relates to the sale of tenanted property (not being an exempt supply within the meaning of the Goods and Services Tax 1985) [ “the Act”] then, unless otherwise expressly stated herein:

• (a) each party warrants that it is a “registered person” within the meaning of the Act; and

• (b) the parties agree that the supply made pursuant to this agreement is the supply of a going concern on which GST is chargeable at zero per cent.

13.2 If it subsequently transpires that GST is payable in respect of the supply and if this agreement provides for the purchaser to pay (in addition to the purchase price without GST) any GST which is payable in respect of the supply made under this agreement then the provisions of clause 12.0 of this agreement shall apply.

9 Clause 12 requires, among other things, that the vendor will deliver a tax invoice to the purchaser. The obligation was to do this at settlement. A similar obligation exists under s 24 of the Goods and Services Tax Act 1985 (GST Act). C S Development successfully enforced the obligation under cl 12 in the High Court.

10 At the end of the printed form, a number of pages appeared containing “further terms of sale” which had been agreed by the parties. The first of these was cl 15.0, which provided that, where there was a conflict between “these special conditions” and the general conditions of sale, the special conditions applied. This is somewhat oblique because there are no “special conditions” as such: the additional terms are “further terms of sale”. But it is obvious from the context that the intention was that “these special conditions” meant the typed clauses 15–20 appearing after the printed clauses. It is less obvious, however, that cl 15.0 also applies to later agreed variations to the printed terms. We will revert to this issue later.

11 Another further term of sale was cl 16, dealing with due diligence. This provided that the agreement was conditional on the purchaser being entirely satisfied with the property as a suitable commercial investment and provided for a due diligence process to occur. The open-ended nature of this provision effectively turned the agreement for sale and purchase into an option in favour of the purchaser. A two month period was provided for this due diligence process to occur.

12 On 22 June 2007, Hodge Properties Ltd nominated an associated company, Hodge Trustee Services Ltd and/or its nominee, as purchaser under the agreement for sale and purchase. On 2 July 2007, Hodge Trustee Services and the Cockburn trustees agreed to vary the agreement for sale and purchase. This document was headed “Variation of S and P Agreement”. It provided for:

• (a) the purchase price to be varied from $5,500,000 to $5,000,000;

• (b) the payment of a deposit of $100,000 upon the agreement becoming unconditional;

• (c) the transfer of all the chattels and equipment used in the Parade Cafe business to pass to the purchaser on settlement;

• (d) “that settlement shall be 1 April 2008 with vacant possession ” (emphasis added);

• (e) that upon the signing of the variation the agreement was unconditional.

13 The 2 July variation did not make any change to the tenancy details on the front page of the agreement for sale and purchase or to cl 13.

14 On 4 July 2007, a further variation agreement was signed. This provided that the price was the lowest price the parties would have agreed for the sale and purchase of the property for the purposes of the accrual rules in the Income Tax Act 2004. There were two further clauses, providing that Hodge Trustee Services would have the right to use the name Parade Cafe in the conduct of the business from the time of settlement and that the Hodge Trustee Services would have complete access to the Parade Cafe business including all of its records. These appear to indicate an intention on the part of Hodge...