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GST-offsets – a lesson why not to

The recent decision in Spicer v Boulcott Development Group Limited HC Wellington CIV-2011-485-714, 24 August 2011 highlights the dangers inherent in GST-offset agreements. Although these agreements will be less common with the amendment to the GST Act allowing zero-rating of land there are still occasions where GST-offset agreements may be contemplated.

The facts of Spicer v Boulcott Development Group Limited are simply that following a taxable supply of land the vendor’s GST liability was to be met through an off-set agreement with the purchaser that was conditionally approved by the Commissioner of Inland Revenue.

Unbeknownst to the receiver acting for the vendor (who was in receivership), the purchaser had other outstanding GST obligations. Accordingly, the offset did not take place and for reasons that are unclear the receiver was not made aware of this until 2 years later.

The receiver was subsequently successful in obtaining summary judgment against the purchaser for the outstanding GST and related penalties pursuant to an indemnity clause in the agreement in favour of the receiver. By this stage penalties and interest exceeded the original amount owing.

While the case illustrates the importance of confirming adherence to any GST off-set arrangements post-settlement, the case also shows how these arrangements can be de-railed and why GST off-sets should be used only in carefully controlled situations.

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