A recent case has highlighted the implications for a vendor of land of making incorrect written statements as to GST registration status in a standard sale and purchase agreement.
In YL Investment Ltd v Ling (2017) 28 NZTC ¶23-026, the High Court found that a vendor had breached her warranty as to her GST registration status and awarded the purchaser compensation for the loss occasioned by the breach.
The vendor, Ms Ling, had agreed to sell a rural property for $3.5m inclusive of GST. The parties used the agreement for sale and purchase of real estate approved by the Real Estate Institute of New Zealand and the Auckland District Law Society, 9th edition 2012(2) (“the ADLS agreement”). Clause 14 of the ADLS agreement deals with zero-rating and provides that the vendor warrants that the statement regarding the vendor’s GST registration status is correct as at the date of the agreement. Ms Ling gave a warranty that she was not GST registered. The purchaser, YL NZ Investment Ltd, was GST-registered. The sale duly settled and the purchaser claimed a GST input tax credit on the basis that it was GST registered and intended to use the land to make taxable supplies.
Inland Revenue queried the claim and ultimately rejected it. Inland Revenue had concluded following investigation that the vendor was in fact conducting a taxable activity and so registered her for GST. That meant the transaction was compulsorily zero-rated under section 11(1)(b) of the Goods and Services Tax Act (“GST Act”), and an input tax claim was not available.
The purchaser, presumably aggrieved that it was out of pocket to the extent of the anticipated input tax claim, applied for summary judgment against the vendor for breach of warranty under the agreement. It claimed the amount of the rejected input tax claim and the costs associated with making it. That sum was approximately $390,000.
The High Court found that by using the ADLS agreement, the parties had expressly adopted the terminology of the GST Act. This meant that the definition of “registration” as used in the GST Act applied such that the statement as to registration under the GST Act addressed not only whether the vendor was registered, but also whether the vendor was liable to be registered. When Ms Ling stated that she was not registered under the GST Act, she had warranted not only that she was not in fact registered but also that she was not liable to be registered. The Court added that even if the definitions in the ADLS agreement did not expressly adopt the statutory meanings, it would still find that registration under the GST Act means registration in terms of the statutory definition. It considered that clause 14 would be out of kilter with section 11(1)(mb) if it were to be interpreted in a way that runs counter to the legislation. To that end, it noted that the warranty is important in terms of section 11(1)(mb) in establishing the vendor’s status under the GST Act. It said (at paragraph 31):
“When entering into the agreement, the purchaser needs to know the GST implications of the transaction. It is no good for the purchaser to be told that the vendor is not registered if in fact the transaction turns out to be compulsory zero-rated because the Inland Revenue determines that the vendor was carrying on taxable activities in respect of the property the subject of the supply so as to bring her within the GST Act.”
Accordingly, Ms Ling’s interpretation that a vendor was required only to state whether they were in fact registered but did not need to turn their minds to the question whether they were liable to be registered was rejected.
The Court concluded that Ms Ling breached the warranty under clause 14.1 of the agreement for sale and purchase. The breach of warranty caused a loss to YL NZ Investment Ltd. The contract as entered into would have provided the company with an input tax credit. Its inability to obtain that credit resulted from the breach of warranty by Ms Ling.
Judgment was given against Ms Ling for the amounts claimed plus interest.
It is clear that the Court was concerned that purchasers who were informed that the vendor was not registered but were given no information as to whether a vendor was liable to be registered would be at risk if it found in favour of the vendor. Uncertainty would be introduced into the transaction when clause 14.1 was clearly intended to remove uncertainty. This is a good outcome for GST registered purchasers as it provides a clear path to a remedy in the event that that a representation by a vendor as to GST registration turns out to be incorrect.
It is arguable that the reasoning employed in the decision applies equally where a vendor is deemed to be registered by the GST Act. Logically, it must, on the basis that if such a person is treated as registered for the purposes of the GST Act, they must similarly be treated as registered pursuant to clause 14. For example, section 58 of the GST Act provides that a person (described as a “specified agent”) who acts on behalf of a registered but incapacitated person is treated as being a registered person carrying on the incapacitated person’s taxable activity. An otherwise unregistered specified agent could be at risk of a claim for breach of warranty where they incorrectly warrant that they are not GST registered, when they are deemed to be so.
A claim could be brought against a specified agent for breach of warranty in the event that an input tax credit is not available to a purchaser because the specified agent is treated as registered for GST. As in YL Investment Ltd v Ling, the purchaser could argue that it suffered loss as a consequence of the breach of warranty on the basis that it would not have agreed to purchase the property at the price it did had it known that the input tax credit claim would not be available. The loss arguably suffered would be the amount of the denied claim.
© G D Clews 2017