Goods and services tax — Sale of property by mortgagee — Whether goods and services tax payable prior to discharge of debts owed to mortgagees — Whether first mortgagee entitled to reimbursement of tax before payment of balance to second mortgagee — Appeal dismissed
The appellant held a second mortgage of a freehold property. The first mortgagee sold the property, following which, out of the proceeds of sale, it paid goods and services tax (GST) to the Inland Revenue, reimbursed itself for that payment and discharged the debt that was owed to it. The balance, which it paid to the appellant, was insufficient to discharge the debt outstanding under the second mortgage. The mortgagor was insolvent.
Section 5(2) of the Goods and Services Tax Act 1985 provided that where one person had a power to sell “goods” belonging to another person towards satisfaction of the other’s debt, the goods were deemed to be supplied in the course of a taxable activity carried on by the mortgagor. Under section 17(1)(b), the person selling the property – in this case, the first mortgagee – was to “pay to the Commissioner the amount of tax charged on that supply”. By section 17(2), the tax was recoverable as a debt due to the Crown.
The appellant brought proceedings against the first mortgagee and the respondents to recover, from the first mortgagee, the sum paid as GST. It contended that the first mortgagee had not been required to pay the GST until the debts owed to the appellant and any subsequent encumbrancer had been paid. Allowing the claim, the judge held that the obligation to pay, in section 17(1)(b), should be qualified so that it would arise only if any money remained over after paying off any charges on the property. That decision was overturned on appeal, the court holding that section 17(1)(b) had to be given its natural meaning. The appellant submitted that such an interpretation would conflict with the provisions in section 104 of the Land Transfer Act 1952 for the application of the proceeds of sale on a sale by a mortgagee.
Held: The appeal was dismissed.
Section 17 of the 1985 Act and section 104 of the 1952 Act did not conflict because section 17 did not purport to interfere with the order of priorities laid down by section 104. It did not say that the mortgagee had to pay the GST out of any particular fund, but simply that the mortgagee was obliged to pay it. The Crown was not concerned with how the debt thereby created would affect the distribution of the proceeds of sale, and, in claiming payment of the GST, it was not seeking to assert a priority in the distribution of the mortgagor’s assets.
Once the first mortgagee had paid the GST, the question arose as to the priority of its claim for reimbursement of that sum. It amounted to an “expense occasioned by the sale”, within the meaning of section 104(a) of the 1952 Act, and, in line with the order of priorities in section 104, the first mortgagee had been entitled to deduct it from the proceeds of sale before payment of the debt that was owed to it. The first mortgagee was therefore accountable to subsequent encumbrancers only for the balance.
Gary Judd QC (of the New Zealand Bar) appeared for the appellant; David Milne QC and Michael Lennard (of the New Zealand Bar) represented the respondents.
Sally Dobson, barrister
