Appeal Court GST ruling backs landlords

The Inland Revenue Department has lost a Court of Appeal case against taxpayers involved in residential property dealings.

The Commissioner of Inland Revenue sought to overturn a ruling from the High Court at Christchurch last year in favour of the Lundy family trust and Behemoth Corp over GST payments on Christchurch properties.

But Justice Susan Glazebrook, Justice Grant Hammond and Justice O'Regan have ruled against the commissioner and for the taxpayers.

Inland Revenue wanted to recoup money it had refunded the taxpayers - $15,482 to the trust and $13,728 to the corporation. The money was for GST paid when the two bought properties they intended to develop and sell, making them eligible to reclaim part of their costs. The calculation of those costs was at the heart of the case.

Inland Revenue said the taxpayers had rented the properties out for about three years. Because there was a significant time lag between buying and selling it was entitled to claw back some of the GST claimed.

But the court ruled in favour of the taxpayers, dismissing the commissioner's appeal and backing the Taxation Review Authority and High Court at Christchurch.

Karen Whitiskie, Inland Revenue's litigation management director, said this week the commissioner would not seek an appeal in the Supreme Court and "appreciates the clarification that has been given".

Paul Smith, a principal of accountants Ernst & Young and a GST specialist, said the crux of the matter was that property developers and landlords were at risk of paying too much GST.

"The case shows it is possible to get refunds for past over-payments," he said. "The case revolves around how much GST people should pay and this shows that landlords should be paying less GST than they thought was owed."

He cited a case where a landlord was paying $50,000 GST annually based on the market rental (one-ninth of the income) but said the bill could be cut by $30,000 if the landlord opted to instead pay tax on the costs of the property. Those costs would include rates, insurance, depreciation and maintenance. Few landlords would appreciate the implications of the ruling, issued this month.

"It's an area fraught with confusion and complexity and property developers will opt to pay GST on the market rental because it's an easier calculation to make. But they're paying too much tax," Smith said.

"Few landlords or developers realise they owe much less GST because so few use the cost formula."

Asked why the taxpayers would litigate over relatively minor amounts, Smith said it was the principle.

"This is one of the peculiarities of case law that you come across - cases that have a minimal amount of tax at stake but with far-reaching, wider ramifications for the industry," he said.

Andrew King, president of landlord group the Auckland Property Investors Association, said the ruling would affect residential developers rather than investors.

"Landlords who buy with the intention of holding a property long term can't claim back GST on the purchase price."

But King advised caution, saying the area was complicated and required accountants' skills to ensure tax laws were being followed.