Supreme Court rules IRD can hold onto GST refunds

The Supreme Court building in Wellington. Photo / Mark Mitchell

The Employers and Manufacturers Association (EMA) is up in arms at a ruling by the Supreme Court on the issue of the Inland Revenue Department (IRD) taking its time to determine GST refunds.

The EMA said small business could go bust if they do not receive GST refunds and the area of law needs to be clarified.

The Supreme Court has ruled the IRD can withhold company GST refunds for an indefinite period until it is satisfied the money should be refunded.

The ruling, released today, centres on whether the IRD was obliged under the Goods and Services Tax (GST) Act to refund GST of about $7.5 million to inbound tourism operator Contract Pacific Ltd.

IRD received the company's return on June 26, 2000. However, on July 10, IRD gave the company notice, within the required 15 days, that it planned to investigate the return.

The department said it was not obliged to refund the money until it was completely satisfied of the amount to be refunded and that Contract Pacific had met all its tax obligations.

In January 2001, Contract Pacific argued that a further request for information from the department was unauthorised under the Act and the money should be refunded.

However, the Supreme Court rejected that argument and said the department was within its rights to request the information and hold onto the refund until it completed its investigation.

The department's commissioner never determined the GST was refundable so the refund claimed never became payable, the court said.

However, the court acknowledged the section of the Act in question was "poorly drafted".

"Necessarily, therefore it has to be given a remedial construction so that it can operate without producing perverse results which can never have been within the legislative purpose."

The EMA said the ruling could bankrupt some businesses, which operated on tight margins.

"This is a serious issue that requires a law change to remedy... some refunds held up long enough could put businesses over the red line in terms of their solvency," said EMA chief executive Alasdair Thompson.

"We urge the Government to clarify the law to ensure the IRD cannot benefit from any lack of performance on its part. There needs to be clear criteria under which the IRD can withhold GST refunds."

The EMA accepted the court's ruling but noted the comment that the law was poorly drafted, he said.

Contract Pacific sells New Zealand holiday packages to overseas wholesalers, who on-sell them via retailers to tourists.

- NZPA