The Commissioner of Inland Revenue v The Fishing Company Ltd

JurisdictionNew Zealand
CourtHigh Court
Judgment Date14 December 2010
Neutral Citation[2010] NZHC 2244
Docket NumberCIV-2010-404-004955
Date14 December 2010

[2010] NZHC 2244




In the Matter of the Companies Act 1993

The Commissioner of Inland Revenue
The Fishing Company Ltd

D M Brabant and S L Law for Plaintiff

T M Chemaly for Defendant

Application for an order placing the defendant company in liquidation — plaintiff served a statutory demand for outstanding GST and income tax — defendant claimed a GST input credit which would clear debt — whether defendant was entitled to a GST refund — whether the GST input credit could be used to off-set the debt owing under s310 Companies Act 1993 (mutual credit and set-off) — whether the plaintiff could use r5.61(1) High Court Rules (restriction when the Crown involved) as a pay now, argue later provision — whether defendant unable to pay its debts — whether the defendant was solvent.

Held: There had to be clear and persuasive grounds to set-aside a statutory demand on the grounds of a cross-claim or set-off.

Because pay now, argue later provisions such as r5.61 HCR did not operate once a taxpayer was placed in liquidation, the CIR did not succeed in his argument that the Court should disregard the Fishing Company's claim for a GST input credit. The claim for the credit was a relevant factor in deciding whether to place the Fishing Company into liquidation. The CIR's claim as a creditor was subject to the claim for the GST input credit. The Court could not consider the correctness of a claim for a refund on a liquidation application but neither could it disregard it.

The Fishing Company had failed to provide substantial evidence in support of its claim for a GST input credit. It had not shown any material to show the vessel was used for charter operations nor had it provided any business feasibility plans for the charter operation. It appeared that a pleasure craft, insured for racing and previously owned by the director of the Fishing Company had been transferred to the company and the evidence supplied by the company was consistent with the vessel still being used for pleasure purposes. On that basis it had failed to show to the required standard that it had a GST input refund that should be taken into account in exercising the discretion whether to put it into liquidation.

It was not possible to make any findings regarding solvency; that was because the application for liquidation had not been advertised which left creditors uninformed. It was premature to decide the issue of solvency without allowing creditors the opportunity to be heard. The present application was to be advertised with a final hearing then to take place.



The Commissioner of Inland Revenue applies for an order that The Fishing Company Limited be put into liquidation. On 9 June 2010, the Commissioner served a statutory demand on The Fishing Company Limited for $217,217.55 for arrears of goods and services tax ($95,748.93) and arrears in income tax ($121,468.42), including penalties and interest. The Fishing Company Limited paid $96,261.93, leaving $121,468.42. The Commissioner says that further penalties and interest have accrued so that the amount due at 19 November 2010 was $134,082.05. The Commissioner says that he is an unpaid creditor and The Fishing Company Limited is unable to pay its debts as they fall due.


The Fishing Company Limited says that it has made payments of $96,261.93. It also claims that it lodged a GST assessment with the Commissioner in July 2009, under which it is entitled to a refund of $122,426.75. This claim for GST input credits is enough to eliminate its debt to the Commissioner at the end of June 2009 and it is accordingly not a debtor of the Commissioner. It also says that it is solvent.


The two matters for consideration are:

  • a) How should the Court treat the claim for the GST input credit?

  • b) Is The Fishing Company Limited solvent?

The Commissioner's prima facie case

The Commissioner says that he has not accepted the claim for the GST input credit. It is under investigation. He complied with the provisions of the Goods and Services Tax Act 1985 allowing him to withhold payment in the meantime. The Fishing Company Limited is not allowed to raise its claim to the credit as a relevant consideration in this proceeding. The Commissioner also challenges the company's assertion that it is solvent.


Leaving aside the claim for the GST input credit, there is no dispute about the amounts of income tax and GST set out in the statutory demand and the statement of claim. The Commissioner refers to the provisions of the Tax Administration Act 1994 to show that those amounts can no longer be disputed. The Fishing Company Limited did not file a notice of proposed adjustment within time under s 89B of the Tax Administration Act. Under s 109 of the Tax Administration Act, the amount of GST and income tax assessed for the relevant periods is deemed to be correct and cannot be disputed, other than by judicial review (and then only in limited circumstances).


Again putting the GST input credit and solvency questions to one side, The Fishing Company Limited does not take issue with those parts of the Commissioner's case.


The Commissioner has established a prima facie case for the Court to make an order that The Fishing Company Limited be put into liquidation. In particular, The Fishing Company Limited did not comply in full with the statutory demand served on it on 9 June 2010. Under s 287(a) of the Companies Act 1993, The Fishing Company Limited is presumed to be unable to pay its debts, unless the contrary is proved. The Commissioner can rely on that presumption, because he began the present proceeding on 16 July 2010, within 30 working days after the last date for compliance (s 288(1)).

The GST input credit – the Commissioner's argument

The Fishing Company Limited carries on a commercial fishing business. It has two subsidiary companies, TFC Vessels Ltd and TFC Sails Ltd. Its director says that the group employs 16–17 people. In 2009, it began a boat charter operation to supplement the commercial fishing activities. The fishing operation is still the major part of the company's business and the charter operation is still in a growth phase. He says that last year the company's turnover was $2.5 million, of which only $40,000 came from the charter operation.


The Fishing Company Limited is registered for Goods and Services tax on a payments basis with two-monthly filing of returns. On 22 July 2009, The Fishing Company Limited filed its GST return for May/June 2009. In that return, its GST taxable outputs were $346,836.30 and its GST input credits were $1,448,677.12. It claimed a net GST input credit of $122,426.75. It says this GST input arose from buying a charter boat costing $1,448,677.05.


On 30 July 2009, the Commissioner wrote to the company's accountant, copying the letter to the company's director. The letter advised that the refund claimed by the company would be delayed until the circumstances of the return had been investigated. The letter referred to s 46 of the Goods and Services Tax Act as the basis for withholding payment. It also asked for records and information by 27 August 2009. The Commissioner continued his investigation leading to the issue of a notice of proposed adjustment on 17 November 2010. The circumstances of the investigation will be referred to later.


The Commissioner's position is that the GST input credit claimed by The Fishing Company Limited can be disregarded. The Commissioner says that under s 46 of the GST Act, he is not required to pay a refund where he has decided to investigate the circumstances of the refund and has given timely notice to the taxpayer that the matter is to be investigated. For this, the Commissioner relies on the decision of the Supreme Court in Contract Pacific Ltd v Commissioner of Inland Revenue [2010] NZSC 136. The Commissioner says that the refund is payable only when he determines that the amount is refundable after having investigated the matter, or there is a determination that it is refundable under the disputes resolution provisions of the Tax Administration Act 1994.


Section 46 of the Goods and Services Tax Act says:

46 Commissioner's right to withhold payments

  • (1) Subject to this section, if the Commissioner is required to refund an amount to a registered person under section 19C(8) or section 20(5) of this Act, the Commissioner shall refund the amount—

    • (a) Except when paragraph (b) applies, not later than 15 working days following the day on which the registered person's return was received by the Commissioner; or

    • (b) The day after the working day on which the Commissioner—

      • (i) Determines the amount is refundable, after first having—

        • (A) Investigated the circumstances of the return in accordance with subsection (2); or

        • (B) Reviewed the information requested in accordance with subsection (2); and

      • (ii) Is satisfied that the registered person has complied with the person's tax obligations.

  • (2) If the Commissioner is not satisfied with a return made by a registered person, the Commissioner—

    • (a) May investigate the circumstances of the return:

    • (b) May request the registered person to provide further information concerning the return.

  • (3) If a registered person fails to provide a return for any taxable period as required by this Act, the Commissioner may withhold payment—

    • (a) Of any tax otherwise refundable under this Act or the Tax Administration Act 1994; or

    • (b) Of any interest payable under Part 7 of the Tax Administration Act 1994—

    until the registered person complies with the requirement.

  • (4) The...

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