GST Refunds may be Withheld Indefinitely

Contract Pacific Limited v CIR [2010] NZSC 136

The Supreme Court has ruled against the taxpayer in this long running case over GST refunds.

The case involved an argument over the time within which the IRD must pay a GST input tax credit. Commentators have observed that the timely payment of GST credits is often crucial to the healthy cash flow of a business. There have certainly been instances when the IRD has used the advent of an investigation as a basis to withhold GST credits and to exert pressure on the taxpayer to concede a position.

Under section 46 of the Goods and Services Tax Act 1985 the IRD must normally make a refund of GST within 15 days of the relevant return being filed. However, that time limit may be extended in certain circumstances. The case involved an argument over the way the extension provisions work.

The taxpayer had made a large GST credit claim in excess of $7 million and was notified within 15 days of its filing that the Commissioner would be withholding the refund pending investigation. The Commissioner subsequently, but outside the original and subsequent 15 day periods, sought information from the taxpayer in pursuit of the investigation. The High Court upheld the taxpayer’s argument that the information request had to be made within the statutory time frame. That position was overturned on appeal and the Supreme Court has essentially upheld the appeal finding. The core finding of the Court of Appeal was that once an investigation was notified the Commissioner was entitled to seek further information in the context of the investigation and was not bound by the section 46 time limit in doing so.

The Supreme Court has held that, once the extension of time is engaged by the Commissioner notifying an investigation, the extension remains in place until the Commissioner is satisfied as to the matters referred to in the section. That is to say that he may take what time is needed (within the limits of ordinary administrative law expectations) to be satisfied that the GST refund is payable and that the taxpayer has met all its compliance obligations. The Court considered that the fact there was no meaningful limitation on how the Commissioner followed up his notification of an audit was not a sufficient reason to depart from the clear meaning of the section.

The case is a reminder that the withholding of GST refunds can be a potent weapon for the Commissioner. Once an investigation has been notified, a refund can be withheld until the Commissioner is satisfied that the taxpayer has met all its obligations. This allows the Commissioner to withhold the refund even if he has reached a view that it is properly payable but there are other issues of non compliance which he requires the taxpayer to address. There have been instances, for example, where the IRD has notified an investigation on a GST credit claim, withheld the GST and insisted that it will not be paid until overdue income tax returns are filed. When GST credits represent a substantial element of business cash flow the risk this poses to a business can be considerable.

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