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Getting quickly to the ‘GST’ of the issue

The property purchase

In 2012 Tim and Caroline met with their financial adviser John to arrange finance to purchase a property. Tim and Caroline were interested in a semi-rural property which was currently owned by a large company which had been using the land for business purposes.


This meant that the property was being sold with a GST component. Tim and Caroline’s trust (which was GST registered) was going to purchase the property. Tim and Caroline said that John advised them that once the property purchase had been completed, they would be able to claim back the GST component of the purchase price ($112,500), from the IRD.


As part of the overall arrangement to finance the purchase, John assisted Tim and Caroline in securing bridging finance with their bank for the $112,500 GST portion of the purchase price. The bridging loan term was short (3 months), and the interest rate was high at 19.15% per annum. However, as it was intended that the loan be paid back quickly after claiming the GST amount back from the IRD, Tim and Caroline accepted the loan terms.


The IRD delivers bad news

However, in due course, the IRD concluded the $112,500 GST could not be claimed back because the property was primarily going to be used as the family home, and not for Tim and Caroline to run their small business from. The IRD then carried out a full investigation of Tim and Caroline because they had technically made an incorrect tax declaration when they tried to claim back the GST.


This was a very stressful process for Tim and Caroline, and especially for Caroline because they could have potentially faced criminal charges. Criminal charges would have various flow on effects including their ability to carry on trading their small business. Fortunately, the IRD’s investigation did not lead to charges being laid. In addition, John was able to refinance Tim and Caroline’s short-term and high interest bridging loan, onto longer and more favourable terms.


The dispute

Tim and Caroline complained to John. They said John had told them that he had provided financial advice to other people in the same situation as Tim and Caroline, and that claiming back the GST always happened without any issues and was an easy process.


John said he had told Tim and Caroline that he does not give tax advice, and that they would need to seek both legal advice from their lawyer and specific tax advice from their accountant, to ensure that the GST could be claimed back. Tim and Caroline said John did not make this clear to them.


What did Tim and Caroline want to resolve their complaint?

Tim and Caroline wanted John to compensate them for the $112,500 and the interest they were continuing to pay at the high rate on that amount (they had paid about $20,000 in interest by this time). Tim and Caroline also wanted John to compensate them for their accounting bills (around $6,500), and for their personal time in dealing with the issue (estimated at $5,000). This was around $144,500 in total.


In addition, part of Tim and Caroline’s complaint was that their financial position had become particularly strained, because they had an additional $112,500 loan they did not think they would have, with a comparatively high interest rate. In addition, the IRD investigation was very stressful for them.


FSCL assists

Unfortunately, Tim, Caroline and John were unable to resolve the complaint, and John referred Tim and Caroline to FSCL for our assistance in December 2014. With a short delay due to the Christmas holidays, we scheduled a face to face conciliation conference between the parties in mid January 2015, facilitated by our case manager. John had also submitted a claim to his professional indemnity insurer which agreed to provide some cover, depending on the outcome of the conciliation conference. Mary, the solicitor for John’s insurer, also attended the conciliation conference.


The crux of the complaint and the focus of discussion at the conciliation conference was what was said about the GST issue when John was first advising Tim and Caroline when they were looking to purchase the property. John, Mary, Tim and Caroline engaged in a very constructive discussion at the conciliation conference. There was helpful discussion around the contributions of the various parties to the very unfortunate situation Tim and Caroline had found themselves in. It was clear the situation was disappointing for everyone, as Tim and Caroline had had a very good working relationship with John. It was also clear that John was not solely to blame for the problem.


The conciliation conference resulted in a full and final resolution of the complaint, which was that John agreed to make payment of compensation to Tim and Caroline of $33,000.