Court ruling on GST could be costly for IRD

The Inland Revenue Department is facing potential costs of tens of millions of dollars after a High Court decision limited its right to GST payments.

The judgment, given by Justice David Baragwanath, said the IRD did not have to be paid GST when funds from a mortgagee sale were not enough to repay the debts.

The case was brought by Edgewater Motel, the second mortgagee over a property owned by a development company.

A mortgagee sale of the property did not repay the two mortgages, and Edgewater brought a claim against the IRD seeking priority of payment.

Justice Baragwanath said the decision turned on "whether [Goods and Services] Act should receive the literal construction that makes no practical sense, or whether it should receive a 'strained construction' that gives effect to the settled public policy that mortgages are entitled to first priority ... I preferred the second alternative".

He said land law legislation, which predated GST legislation, took precedence in this case. That meant any funds received would be paid to debtors over the IRD.

Tax consultant Alastair McKenzie said while the precise amount of GST paid under past mortgagee sales was unknown, he believed it would be tens of millions of dollars.

The IRD's director of litigation, Mike Lennard, said the case was being appealed. Irene Chapple