Keeping up with your tax obligations can sometimes seem a drag: forms to be filled in, changes to keep abreast of and an incessant focus on the detail.
Mistakes can be costly. A few dollars here and there might be overlooked but get it much more wrong and you can be facing penalties for not taking reasonable care.
The IRD doesn’t get penalised for mistakes however. As long as they get it right eventually, failure to comply with the law is of no consequence.
To quote the Court of Appeal:
Ms Deligiannis accepts that the Commissioner has acted incorrectly in accepting GST returns filed by Mr Cullen in the Society’s name for periods before May 2016. But the Commissioner cannot be estopped by her previous errors of law from performing her statutory obligations to apply the revenue statutes correctly
The case was CIR v RM Cullen CA239/2017  NZCA 448 a decision of the Court of Appeal issued on 12 October 2017.
The IRD won the case and the taxpayer was refused a $15,000 refund even though IRD had originally accepted it was due and payable.
The case is a reminder how costly it can be for taxpayers when they don’t get right some pretty basic housekeeping and how the playing field favours the tax collector.
The Tamaki Rugby League Club set up as an incorporated society under the Incorporated Societies Act in 2006. Over the next ten years the Club was struck off the Incorporated Societies Register and later reinstated twice and placed in liquidation once.
The second time it was struck off was in 2012 and it wasn’t reinstated again until June 2016. So, between 2012 and June 2016 it was operated as an unregistered unincorporated body or organisation.
The Club registered for GST while it was a valid incorporated society. It filed GST returns, made payments, and claimed GST refunds even during periods when it was struck off the Register of Incorporated Societies. IRD accepted these returns, processed them and paid out refunds.
The court case came about after the Club filed a return on 10 June 2016 covering the GST period April/May 2016. During April and May 2016 and at the time the GST return was filed on 10 June the Club was not a properly registered incorporated society. It had been struck off the incorporated societies register.
IRD initially accepted the GST refund was due but was not sure to whom it should be paid because the Club was not a validly registered incorporated society and the return had been filed using the GST registration number for the incorporated society.
IRD issued a notice of assessment reducing the refund from $14,951 to $101. A representative of the Club, Mr Murray, filed a Notice of Proposed Adjustment challenging the assessment and the IRD did not issue a Notice of Response. Mr Cullen started a court case asking for a declaration that the GST return was valid.
The High Court had found in favour of the Club deciding that in essence there was an entity, albeit an unregistered one, which was carrying on the taxable activity of the Club and which was entitled to the refund.
The IRD appealed to the Court of Appeal.
The Court of Appeal decided the Club was registered for GST as an incorporated society and there was no separate GST registered entity that was not an incorporated society. It was irrelevant that there might have been another entity carrying on the taxable activity. The fact was, there was no separate GST registration of any such entity. The Court of Appeal also held Mr Murray had no standing to issue the court case on behalf of the Club as an incorporated society. The IRD’s appeal was allowed and the taxpayer lost.
This would not have ended up this way if the Club had maintained its registered status as an incorporated society and not been struck off. In fact, the Club was reinstated as an incorporated society just a few days after the GST return was filed. However, that did not fix the problem. The IRD still won because the letter of the law said the Club did not exist as an incorporated society at the time it filed the GST return and during the period to which the return related.
So the taxpayer wasn’t allowed a slip up. Even though in substance the Club was conducting its activity just as it had before it was struck off and the IRD had been accepting and processing the returns up until June 2016, the fact was, at that date, technically it was not properly registered as an incorporated society and according to the Court of Appeal could not file a GST return while struck off the Incorporated Societies Register.
I’m a bit surprised there isn’t discussion in the judgment about section 51B of the GST Act. Often the full legal submissions are not included so it’s difficult to know whether the Court was asked to consider this section.
Section 51B provides that a person is treated as a registered person for GST purposes if they are not otherwise registered but supply goods or services representing that GST is charged on those supplies. Under the GST Act a “person” includes an unincorporated body of persons.
If the Club had been collecting subscriptions from members and making other supplies and purporting to charge GST on those supplies while not a valid Society section 51B(1)(a) may have operated so that the Club was “treated” as a registered person for GST purposes. There would still be issues to debate over whether a return filed purportedly using another GST registered person’s GST number is sufficient to amount to a “GST return” on behalf of the Club under section 16 or 18 of the GST Act. It was a return of sorts, even if the GST number on it was not the GST number of the unincorporated Club and, of course, the IRD had been accepting them in the past. But, that doesn’t count unfortunately.