Whether sale of property was of tenanted property or shares

Summary

The Court of Appeal rejected an appeal against the decision of the High Court that the sale of the property by the taxpayer was a sale of shares.

Impact of decision

The case reaffirmed the cases of CIR v Gulf Harbour Development Ltd [2005] 2 NZLR 162 and Marac Life Assurance Ltd v CIR [1986] 1 NZLR 694, as authorities for the proposition that the true nature of a transaction is ascertained by careful consideration of the legal arrangements.

Facts

Tepe Holdings Ltd ("THL") acquired a right of occupation of the fourth floor in the building known as "Central House" at 26 Brandon Street, Wellington which was let to two tenants on a monthly tenancy basis. THL acquired the right of occupation through the shares it held in Central House Ltd ("CHL").

On 2 March 2007, THL entered into an agreement with Okato Management Ltd ("OML") to sell the property described as: "exclusive occupation rights to the Fourth Floor of the building known as Central House, 26 Brandon Street, Wellington being Group E of the shareholding in Central House Limited being 19,750 shares …".

In May 2007, THL filed its goods and services tax (GST) return for the period ending 31 March 2007, claiming the supply in the sale was of tenanted property and therefore to be zero rated, being a sale of a going concern.

The Commissioner disagreed that it was a sale of tenanted property and imposed GST of $28,821.64 (core tax) on the grounds that it was a sale of shares of a company.

At the High Court, it was held that the supply was a sale of shares in CHL. Accordingly clause 13.1 of the agreement relating to a sale of tenanted property as a going concern did not apply and that meant the requirements of section 11(1)(m) of the Goods and Services Tax Act 1985 were not met.

The taxpayer appealed against the decision of the High Court.

Decision

At the Court of Appeal the taxpayer's counsel advanced two arguments that the sale was for tenanted property:

1. As the sale agreement mentioned the partitions and chattels, it was a sale of tenanted property as well as shares.
2. There was a transfer of tenancies to suggest that the sale was converted to a sale of tenanted properties.

The Court of Appeal held on the two points:

1. There was no evidence to say the partitions and chattels were separate items from the shares because no monetary value was ascribed to them.
2. There was no transfer of tenancies because at the time of settlement of the sale, THL had surrendered its lease to CHL.

The Court of Appeal upheld the decision of the High Court.