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Cases, Corporate trustee, Taxation, Trusts

Corporate trustee associated for GST purposes

When vendor and purchaser are associated companies the amount of secondhand goods credit that can be claimed is limited to the lesser of the:

  • GST included in the original cost of the goods to the supplier
  • [GST] tax fraction of the purchase price, and
  • tax fraction of the open market value of the supply.

The tests of association include a backstop test where the question is whether a single person “has control of each of those companies by any other means whatsoever.”

Where two companies have the same director and ultimate shareholder through intervening companies, it would appear that the question of “control by any other means” is satisfied.  However, what about the situation where one of the interposed companies is a corporate trustee and the legal owner does not represent the entire beneficial ownership?

Consider the following facts from TRA 021/12:

  • Mr C is the sole director of the Company D (D). The shares in D are wholly owned by Company W (W)
  • Mr C is the sole shareholder and director of W
  • Mr C is the sole director of Company O (O). The shares in O are wholly owned by Company F (F)
  • Mr C is the sole shareholder and director of F
  • F holds 75% of the equity in O for the benefit of the FBH Trust and 25% for the benefit of Mr C

Mr C had control of O through his ownership of 100% of F, given F’s position as the trustee of the FBH Trust, with the capacity to appoint secondary beneficiaries, and personally, during his lifetime, holding the power of appointment in removal of trustees (See RWR v AJR)

W purchased property on the outskirts of a large metropolitan centre (the Property) for a total purchase price of $847,000. This included GST of $94,111.12.

W later nominated O as the purchaser of the Property. O subsequntly began to develop the Property into an apartment block complex.

After incurring costs of  $3,009,296 in acquiring and developing the Property, O entered into a sale and purchase agreement for the Property with D. The purchase price, which was paid in instalments was $8,034,750.

D claimed GST input deductions in respect of those instalment payments.  The CIR formed the view that D and O were associated and so D’s input tax credit was limited to the GST included in the price paid by O who was not GST-registered.

If D and O were not associated persons at the relevant time, the quantum of the input tax credit is the tax fraction of the consideration.

Although  the beneficial ownership of O’s shares has been separated from the legal ownership in part, the question is whether this alters the capacity in which F holds the shares so that there is no commonality between the D and O through Mr A’s 100% shareholding in W (shareholder of D) and F (shareholder of O).

D’s position is that F can only by associated with Mr A when F is acting in its personal (and not its trustee) capacity.

However, the CIR sucessfully argued that the policy to s 3A was to:

  • esure that second hand goods could not be sold by one person to an associated person simply to claim the input tax deduction where the vendor was not registered and therefore had not paid any output tax
  • address a concern in policy terms that no taxpayer should be entitled to claim a credit for more GST than has been paid on the acquisition of an asset. This means that if the goods are acquired from an unregistered taxpayer, the maximum credit allowable should be the GST output tax paid by the last registered seller of those goods. The Legislature recognised that it is difficult for a purchaser to know at what point and how much GST was last paid where the parties to the transaction are not associated. The amendment recognised that an associated person is likely to know the GST status of an asset and, as such, the policy principle should apply.

Effectively, restating a “parlimentary intention” argument that Parliament never intended that a structure such as that adopted should previal to overide the limitation on input tax credits between associated parties:

“The Commissioner says that s 3A(3)(a) was introduced to counteract the “mischief” where the on supply of goods to an associated company was being used to obtain an input tax deduction which would not have been available if there had been no on-supply. The Commissioner submits that s 2A(1)(a)(iii) should be interpreted having regard to the purpose of that provision.

The Commissioner submits that the language of “control” in relation to companies has predominantly been held to mean legal control, although control as a matter of fact may be relevant depending upon the context”: para 31 and 32 TRA 021/12.

In the context of control by “any other means whatsoever” the control by which Mr C controlled each of C and O was, in this context, the combination of Mr Cs’ voting interests in C and of his ownership and control of F, and his power of appointment and removal of trustees under the FBH trust deed.

That is, control is linked to the beneficial interest held in a company.   A “big picture” view demonstrates that Mr A is the controller of all the entities in a legal sense and thus has control over each of the companies.  Accordingly the input tax credit available was limited to the amount of GST originally paid.

The decision was upheld on appeal to the High Court  in a decision reported as Concepts 124 Ltd v C of IR.  The High Court  upholding the decision that the two companies were associated persons.  The High Court also noted that in terms of the overall scheme of the relevant statutory provisions, and their legislative history, the Commissioner’s approach that, because F held its shares in O as a trustee the voting interests “test” in s 2A(1)(a)(i) of the GST Act was not met, was wrong.  Further in terms of the overall scheme of the relevant statutory provisions, and their legislative history, the Commissioner’s approach that, because F held its shares in O as a trustee the voting interests “test” in s 2A(1)(a)(i) of the GST Act was not met, was wrong.

Through W and F, Mr C had 100% of the interests in C and O.

Importantly the GST Act makes no reference, directly or indirectly, to shares held on trust.  This is correct in accordance with the general law of trusts in that trustees act personally and not in some separate trustee personality.  For the purposes of the GST Act “held” is not qualified, in that definition, by reference to whether the shares in question are owned legally only (as when held on trust) or legally and beneficially (as when held personally.  Further as a matter of basic company law a share is held by the person registered as its holder for the time being in the company’s share register. Company law requires companies to ignore trust interests. That is the basis upon which questions of control of companies have also been determined in the tax context.

This is confirmed by the continuity provisions in the Income Tax Act, which has the policy intent of ensuring that the future benefit of tax losses is enjoyed by the economic owners of the company at the time the underlying economic losses were incurred. Section YC 9 of the Income Tax Act, which means attribution is not to be made to individual shareholders where there is an interposed company holding shares on trust further confirms this.

Section YC 4 does not contemplate that voting interests are to be traced through a corporate trustee to its shareholders. Rather, s YC 9 means that such tracing does not occur where voting interests are determined in the context of the continuity provisions. Where control is being determined, there is no reason not to attribute control to the (personal) shareholders of a company that holds shares in another company on trust.

Importantly s YC 4 does not deem the shareholders of a corporate trustee to be the economic owners of the company: rather it deems them to be, through the shareholding interests held by the corporate trustee, the controllers of the company. That is a different concept.

The case does raise questions about how the use of corporate trustees can provide  unexpected results and the importance of carefully considering the appropriate ownership and management structure for a corporate trustee.

References:

  • TRA 021/12 [2013] NZTRA 11
  • Goods and Services Tax Act 1985, s 2A, 3A(3)
  • Concepts 124 Ltd v C of IR  [2014] NZHC 2140
  • RWR v AJR [2010] NZFLR 82 (HC)
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