Clarity over GST and Court awarded costs

New Zealand Venue and Event Management Limited v Worldwide NZ LLC [2016] NZCA 282

The uncertainty as to how GST ought to be take into account in court awarded costs and disbursements has long vexed practitioners, particularly those not accustomed to dealing with tax issues on a day-to-day basis. Conveniently, the Court of Appeal has now clarified how and when GST is relevant to the calculation of an award of costs and disbursements in a clear and concise judgment.

The underlying dispute between NZ Venue and Worldwide was resolved in Worldwide’s favour by the Supreme Court in 2014, and following the Court’s decision, the parties agreed that NZ Venue should pay Worldwide’s costs, plus disbursements. However, an issue subsequently arose as to whether GST should be included in the award and the dispute came before the Court of Appeal.

The Court recognised that a successful party that was unable to recover GST on its legal costs could be detrimentally affected by an award of costs calculated on the basis that a GST input credit had been claimed on those costs. In this light, the Court confirmed that in determining whether court awarded costs and disbursements should include a sum representing GST, account should be taken of:
  • whether the successful party was GST registered (and able to recover GST); and
  • the nature of the costs award.  
The Court then considered the different types of costs awards in turn and noted:
  1. Scale costs represent a reasonable contribution to the costs actually incurred by a successful party. The assessment of what is reasonable does not depend on the actual costs incurred. Given this, scale costs are GST neutral and GST is not to be included in any award.
  2. Increased costs are an uplift from the scale. The award may take into account the costs actually incurred by the successful party, including the GST component of those costs. A successful party that is unable to recover GST should inform the Court so that it can take that factor into account in calculating the award, otherwise the Court will award increased costs on the basis that the successful party is able to recover GST.
  3. Indemnity costs aim to provide a successful party with full recovery. As there cannot be a proper determination of full recovery without knowing the GST liabilities of the successful party, a party not able to recover GST should inform the Court so that this may be taken into account. The aim when allowing disbursements is also full recovery. So as to not leave the successful party out of pocket, the Court needs to know whether it is GST registered.
The Court considered that its practice of proceeding on the basis that a successful party is GST registered and entitled to a GST input credit ensures double recovery is avoided and puts the onus on the successful party to inform the Court of its inability to recover GST if it wants to fully maximise the recovery of its costs.

The Court’s guidance in this area will be welcomed by the profession. Although nothing has been produced to date, we may well see a practice direction or other guidance from the judiciary or Ministry of Justice setting out how and when GST registration information might be provided during the course of proceedings.

© G D Clews, 2016  

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