THE NATURE OF A SUPPLY FOR GST PURPOSES: The Decision in Tepe Holdings Ltd

There has been more litigation recently discussing the true nature of a “supply” for GST purposes, writes James Coleman.

On 13 September 2010, Ronald Young J issued his judgment in Tepe Holdings Ltd v Commissioner of Inland Revenue HC Wellington

CIV-2010-485-489, 13 September 2010. This is an interesting judgment, in that it deals with:

  • The fundamental issue of what is actually supplied for GST purposes, and how that issue  is determined;
  • What constitutes a going concern.

The judgment also deals with shortfall penalties in a manner that may be open to dispute. 


The context in which this litigation arose was the sale of shares in a flat or office-owning company in Wellington. The Wellington City Council owns a building called Central House in Brandon Street, Wellington. The building had been leased to a company called Central House Limited (CHL) pursuant to a 21 year lease. CHL then leased out each floor and did so via shares it issued in itself. The particular shares in question were the Group E shares, being shares numbered 89,501 to 109,250. Those shares gave the owner the right to occupy the fourth floor of the building.

In 2001 the plaintiff, Tepe Holdings Ltd, (Tepe) acquired the Group E shares. In 2007 it wanted to sell the right to occupy and so sought to sell the shares. Accordingly Tepe had to sign a transfer of shares to the new owner and surrender its lease with CHL. A new lease was then entered into between CHL and the purchaser.

The sale and purchase agreement was a standard Auckland District Law Society Contract for the sale and purchase of real estate. The key term of the contract provided that the transaction was for the:

 "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 numbered 89,501 to 109,250.”

The purchase price was $260,000 inclusive of GST, and the agreement required the vendor to give vacant possession on settlement.

After settlement on 30 March 2007, a dispute developed between the vendor and the purchaser over the tax invoice. The vendor first issued a tax invoice saying that there was zero GST charged because the transaction involved the sale of a going concern. That approach was challenged by the purchaser’s solicitors.

The vendor’s solicitor then provided a second tax invoice, which again showed zero GST; but this time because the transaction was said to be an exempt supply. That conclusion was again challenged by the purchaser’s solicitors. A third invoice was then issued by the vendor’s solicitors, reverting back to the going concern logic used in the first instance.

On 15 May 2007 the vendor filed a GST return in which it left blank the portion of the return requiring zero-rated supplies to be indicated, even though it did not return any output tax on the supply. Inland Revenue - presumably as a result of the purchaser claiming an input on the transaction - challenged the vendor’s treatment of the supply.

This led to the issue of disputes documentation. The parties then used the “truncation” provisions contained in s 89N(1)(c)(viii) of the Tax Administration Act 1994 to opt out of the rest of the dispute resolution process and go straight to court. These were the ideal circumstances for this sort of “opt out” to occur, because the GST in issue was only some $28,000, plus interest and penalties. Thus the amount at stake was not sufficient to warrant preparation of Statements of Position and progression through the full disputes resolution documentation. Further, it is arguable that the High Court has dealt with the disputein a much speedier manner..

There were five issues set out by the Court which were to be addressed :

  • What was the true nature of the agreement entered into;
  • If the true nature of the agreement was the sale of shares, whether the general terms of sale in clause 13.1 of the agreement applied;
  • If general clause 13.1 applied, whether the contract was varied such that the sale was of tenanted property;
  • Whether Tepe supplied a going concern at the time of supply;
  • Whether Tepe and the recipient agreed in writing to supply a going concern.

How to determine the character of what is supplied

In a GST context it is often necessary to identify precisely what has been supplied. This is because various different tax outcomes will result, according to the nature of what was supplied. In this case the ambit of the dispute was whether the supply was of shares in a flat or office-owning company, or the supply of taxable activity or part of a taxable activity that was a going concern at the time of supply.

While the Goods and Services Tax Act 1985 (GSTA 1985) defines the word “supply”, it does so merely by saying that it “includes all forms of supply.” In the early days of GST, the courts gave some more flavour to the word “supply” by holding that it meant “to furnish with or provide”: see Databank Systems Ltd v Commissioner of Inland Revenue (1990) 12 NZTC 7,227 (PC). Consequently virtually all transactions are supplies.

From an advisor’s perspective, however, the fact that virtually all transactions are supplies does not take us very far, because the principal tax consequences are determined by the particular nature of the supply. Consequently, the important issue here is the correct description of the nature or character of the particular supply.

The nature of a particular supply is determined by a contractual analysis of the transaction in question. Thus for example inDatabank Systems the contracts were pivotal. Lord Templeman, in delivering the judgment of the majority of the Privy Council in that case said that with respect to the transactions in question:

“There are two separate contracts, the contract between a bank and its customers, whereunder the bank supplies financial services, and the contract by a bank with Databank whereunder Databank provides computer services.”

His Lordship therefore drew a distinction between what the bank supplied, which was financial services, and what Databank supplied, which was computer services.

Since that seminal case there have been a series of appellate decisions that have emphasised this contractual analysis as the basis on which the character of a supply is determined. For example, see Commissioner of Inland Revenue v New Zealand Refining Co Ltd (1997) 18 NZTC 13,187 (CA), Chatham Islands Enterprise Trust v Commissioner of Inland Revenue (1999) 19 NZTC 15,075 (CA) and Commissioner of Inland Revenue v Motorcorp Holdings Ltd (2005) 22 NZTC 19,126 (CA).

The emphasis on the contractual position to determine the character of the supply for GST purposes can be seen as a specific example of the general approach in both tax law and in commercial law that the rights and obligations of a taxpayer (in a tax context) and the parties (in a commercial context) flow from the contractual documentation. See for example, Mills v Dowdall[1983] NZLR 154 (CA) at 159, line 50 per Richardson J; A Taxpayer v Commissioner of Inland Revenue (1997) 18 NZTC 13,350 (CA) at 13,360, per Tipping J; Re Security Bank Limited (No 2) [1978] 2 NZLR 136 (CA) at 168, lines 25 to 35; Buckley & Young v Commissioner of Inland Revenue [1978] 2 NZLR 485 (CA) at 490, lines 8-14; Commissioner of Inland Revenue v Europa Oil (NZ) Ltd [1971] NZLR 641 (PC) at 647 and 648, Finnigan v Commissioner of Inland Revenue (1995) 17 NZTC 12,170 (CA) at 12,173-12,174.

The Judge in Tepe adopted this approach. Ronald Young J states at [38] that “[t]he appropriate approach to such an assessment is objective, focusing on the “true nature of the transaction””. The Judge then refers to the case of Marac Life Assurance Ltd v Commissioner of Inland Revenue [1986] 1 NZLR 694 (CA), which is in the same general class as the cases referred to above. The Judge noted that the classification of the true nature of the transaction and hence the supply can only be ascertained by a “careful consideration of the legal arrangements actually entered into and carried out.”: at [39].

Armed with the correct legal reference point, the Court immediately concluded that the true nature of the transaction was the sale of shares of a company, not the sale of a going concern: at [28].

Analysis of the Going Concern issue

Out of an abundance of caution, Ronald Young J also went on to consider, in the alternative, whether, if he was wrong as to the transaction being the supply of shares, it was the supply of a going concern. In this regard there are overlaps with the recent case of Cockburn Trustees v CS Development [2010] NZCA 373.

The latter case also concerned the question of whether the supply of land was of a going concern. Cockburn involved a situation where vacant possession was required as at the date of settlement. The majority of the Court of Appeal held that the presence of the clause requiring vacant possession meant that there could be no supply of a going concern. This was not the view of the minority in that case, however.

William Young J, who delivered the minority judgment, disagreed with the majority on the basis that the time of supply is when the deposit was paid. That occurred when the variation agreement was signed, and hence the time of supply was 2 July 2007. As at that date there was not vacant possession. As at 2 July 2008 there was a tenant in possession. Thus William Young J concluded that the supply was of a going concern. In reaching this conclusion, his Honour pointed out that s 11(1)(m) of the GSTA 1985 provides that the supply must be of a taxable activity that is a going concern at the time of supply.

In the Tepe case, the time of supply was at the date of settlement: at [55]. There was a variation requiring the subleases to remain in place at settlement. It was that variation that ultimately lead Ronald Young J to conclude that as at the date of settlement, there was (if the contract was not the supply of shares) the supply of a going concern. With the abovementioned assumption in place, the Judge concluded that there was:

  • The supply of a going concern at the time of supply.
  • Written agreement that there was the supply of a going concern. This element was established by the operation of clause 13 on the above mentioned assumption.
  • An intention that the taxable activity is capable of being carried on as a going concern. This was established through a series of letters exchanged between the solicitors prior to settlement.

Shortfall penalties

The final issue addressed by the Court in Tepe was the imposition of shortfall penalties. Tepe had not disclosed on the GST return that there were zero-rated supplies, but had treated the supply as zero-rated by not including the GST output tax in relation to the supply. Ronald Young J imposed shortfall penalties primarily because there was an inconsistency between the position adopted in the return in terms of disclosure: at [91]. The Judge considered that it could not be said that the returned position was as likely as not to be correct, given that the zero-rated portion was not filled in.

It may be that this approach is open to debate. The test for shortfall penalties is intended to be objective. It is determined by tax positions[u1]. The tax position taken was that transaction was zero-rated, not that a box was not ticked. Objectively, it would seem that there was at least an argument that the transaction was zero-rated by virtue of the fact that Judge thought it prudent to set out his alternative reasoning, if his assumption that the transaction was a sale of shares was wrong.


Overall, in the author’s opinion the judgment in Tepe is sound, and confirms the contractual approach to the identification of the character of supplies.

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