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Mortgagees liable for GST on sales of mortgaged property
A Privy Council decision last night has confirmed that, if a mortgagee (usually a bank) sells property (on which the mortgagor or borrower would have been liable for GST had it sold the property), then the mortgagee has to pay the GST to IRD ahead of itself and of other charge-holders.
Most mortgagees selling mortgaged property had accepted that they were personally liable for GST on sales – irrespective of whether the property was sold above or below the amount that was secured.
This practice was called into question in 2002 when the High Court decided in Edgewater Motel Ltd & Ors v Commissioner of Inland Revenue (2002) 20 NZTC 17,713 that the Commissioner had to take his place in the queue behind secured creditors. The High Court said that the primary question is:
“?.. whether, on sale by the first mortgagee of land of a mortgagor registered under the Goods and Services [Tax] Act 1985 (the Act), the Commissioner is entitled to payment of GST out of the proceeds of sale ahead of the debt and expenses of the second mortgagee. I am satisfied that the answer is no.
The decision turns on whether the Act should receive a literal construction that makes no practical sense; or whether it should receive a “strained construction” ?. that gives effect to the settled public policy that mortgagees are entitled to first priority. For the reasons that follow I prefer the second alternative. The superficially attractive argument to the contrary depends on inverting the relative importance of s104 of the Land Transfer Act 1952, expressing Parliament’s policy as to the rights of mortgagees of mortgaged land, and s17 of the [Act], on the literal language [on] which the Commissioner relies. The fallacy lies in perceiving s17, which is largely (not entirely) a machinery provision, as overriding s104, which states substantive rights. I have concluded that s104, not s17 must dominate.”
On appeal, the Court of Appeal found for the Commissioner i.e. that the mortgagee is obliged to pay GST to IRD irrespective of whether the sale generated a surplus. The matter was appealed to the Privy Council and judgment was delivered last night.
The Privy Council dismissed the appeal saying that “although a sale by a mortgagee is deemed to be a supply in the course of a taxable activity carried on by the mortgagor, it is the mortgagee who must pay the tax.”
The High Court had interpreted this obligation to pay the Commissioner as if it was qualified by the words “if there is any money left over after paying off any charges on the property”. The Court of Appeal rejected this and the Privy Council endorsed that rejection.
The Privy Council also confirmed that, in terms of section 104 of the Land Transfer Act 1952 (which regulates the application of the proceeds of sale arising on a sale by a mortgagee) payment of the GST is an “expense occasioned by the sale” and the mortgagee “is therefore entitled to deduct it from the proceeds before payment of his own debt and is accountable to subsequent encumbrances only for the balance.”
For further information
AUCKLAND
Niels Campbell
Partner
David Simcock
Partner
Willy Sussman
Partner
John Bassett
Senior Associate
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
