TRA's alternative assessment upheld

Summary

The TRA upheld the taxpayer's challenge to the Commissioner's assessment but then assessed an alternative ground. The High Court dismissed the taxpayer's appeal against the TRA's decision.

Fact

This is a consolidated appeal from two decisions of the Taxation Review Authority ("TRA") concerning the taxpayer's liability to pay income tax on the proceeds of sale of farmland. The decision was deferred pending the final outcome of Zentrum Holdings Ltd v The Commissioner of Inland Revenue as it was relied on by the taxpayer. (On 23 May 2006 the Court of Appeal released its judgment in Zentrum Holdings Ltd allowing the Commissioner's appeal. In September 2006 the Supreme Court granted the taxpayer leave to appeal, but in the event that appeal was abandoned and the parties accepted that the High Court was bound by the Court of Appeal's judgment.)

The taxpayer was a farmer who sold farmland to a company of which he was the sole shareholder and director for the purpose of subdivision. He did not declare the sale receipt for income tax purposes.

The Commissioner assessed the taxpayer's liability to pay tax under section CD1(2)(f) of the Income Tax Act 1994. He contended that the taxpayer was party to an undertaking or scheme for the sale and subdivision of the land and that the work done on the land was of more than a minor nature and was carried out within ten years of the date of acquisition of the property: section CD1(2)(f), and, in the alternative, that the taxpayer was assessable on the profit on the sale, as at least 20% of the profit was due to resource consent being granted: section CD1(2)(e).

The taxpayer challenged the assessment to the TRA. In a decision dated 19 July 2005 the TRA upheld the challenge, concluding that the taxpayer was not the developer of the subdivision. However the TRA decided that the evidence established that the granting of resource consent resulted in an increase in value of the property by at least 20%, which meant the Commissioner could assess the taxpayer under the alternative ground of section CD1(2)(e). The TRA reasoned that as the Commissioner had the power to do so, so did he, and it was not necessary to refer the matter back for reassessment under the alternative provision. The TRA gave the taxpayer leave to call further evidence or make further submissions.

The taxpayer appealed and the Commissioner cross‑appealed. The TRA then issued a "final decision" endorsing the earlier decision and assessing the taxpayer's tax liability.

Decision

In relation to the first issue the taxpayer argued that the challenge considered by the TRA related only to the validity of the assessment under section CD 1(2)(f), and that once that challenge was determined the TRA's role and jurisdiction came to an end. There was no basis to reassess under a different section. He relied on the HighCourt decision in Zentrum Holdings Ltd v Commissioner of Inland Revenue in which the Commissioner was prohibited from arguing on appeal a ground that was not the ground of assessment. That decision was overturned by the Court of Appeal.

The Commissioner argued that the TRA was correct in holding that section CD 1(2)(e) had been raised in the challenge and that the Commissioner was not precluded from relying on it. That provision was raised in both the Commissioner's and the taxpayer's statements of position, as well as in the taxpayer's notice of claim to the TRA and the Commissioner's notice of defence. The taxpayer contended that these references merely provided background material. The assessment was made under section CD1(2)(f), but the Adjudication Unit's Notice of Final Determination stated that "had section CD1(2)(f) not applied, the amount Mr Beckham derived from the sale of the land would have been gross income under section CD 1(2)(e) ...."

The High Court rejected the taxpayer's arguments. FraterJ held that where a disclosure notice is issued and the taxpayer subsequently challenges the assessment, the matters in issue are limited to the legal and factual issues identified in the statements of position, but all of those issues are legitimate matters of dispute in the challenge proceedings. The alternative ground of assessment was clearly foreshadowed in the communications between the parties and there was no procedural impropriety or unfairness involved in applying it.

Given the decision that the TRA had jurisdiction to consider the alternative ground, it followed that it also had the power, like the Commissioner, to reassess the quantum of tax payable under that ground. The Court rejected the taxpayer's argument that the issues were fully determined at the point where the challenge to the first assessment was upheld. It followed that the September decision constitutes the final determination of issues by the TRA and any right of appeal must be from that decision.

In relation to the merits of the substantive assessment, the High Court held that, on the evidence, it was open to the TRA to hold that at least 20% of the difference between the value of the land as a farm and the sale price was attributable to the resource consent.