Procedural irregularities in tax assessments
2008 case note – Appeal against decision that income tax assessments valid and correct - assessment process, irregularities in assessment, jurisdiction of TRA.
Taxpayers' appeal against TRA decision which held that the income tax assessments were valid and correct. Taxpayers alleged that the assessments were invalid as they failed to quantify the amount of tax due and that the TRA lacked jurisdiction to hear a case where there were no valid assessments before it. Alternative argument on the correctness of the assessments. Appeal dismissed.
This was an appeal by the taxpayers against a decision of the Taxation Review Authority in which the Authority upheld the validity and correctness of the Commissioner's income tax assessments.
The High Court dismissed the taxpayers' appeal.
The taxpayers operated as a partnership. Following an investigation, the Commissioner issued manual notices of assessment for the 1992-1995 income tax years on 17 September 1996. The notices of assessment set out the adjustments to be made to the assessable income of the taxpayers but did not state the amount of tax to be paid. On 15 October 1996, the Commissioner issued statements of account setting out the amount of tax to pay.
Following discussions with the taxpayers, further notices of assessment were issued on 20 February 1997. These notices were manually prepared and specified the adjusted assessable income of the taxpayers without specifying the amount of tax to be paid. On 26 February 1997 statements of account were issued which set out the amount of tax to be paid as a result of the reassessments.
Following a disagreement over the validity of the Commissioner's assessments and the taxpayers' purported dispute of the assessments, the taxpayers commenced Judicial Review proceedings against the Commissioner. The Judicial Review proceedings were subsequently settled. The settlement deed stated that there were "exceptional circumstances" that permitted the Commissioner to invoke his power under section 89K of the Tax Administration Act 1994 to accept the taxpayers' late notices of proposed adjustment. The deed stated that the notices of assessment issued on 17 September 1996 were to be treated as if they had been issued after 1 October 1996, which enabled the dispute to be dealt with under the statutory disputes procedure. The taxpayers' challenge proceedings in the TRA were unsuccessful.
- Tax liability has to be quantified and recorded for there to be a completed assessment. At the time the notices of assessment dated September 1996 and February 1997 were issued the assessment process was not completed. However, there is specific statutory authority which provides that procedural irregularities will not invalidate an assessment. In this case, what occurred was that the Commissioner made assessments that were irregularly notified to the taxpayers.
- The settlement deed entered into between the Commissioner and the taxpayers cannot be read to confine the parties to only disputing the assessments dated September 1996 and February 1997. When the parties entered into the deed they were aware that it was the Commissioner's income tax assessments for the 1992-1995 tax years which were being disputed. The deed was executed against a statutory background in which Parliament made express provision that procedural irregularities could not invalidate an assessment. The judge reaffirmed the Court of Appeal in Miller, which referred to the need to avoid permitting "formalism run riot". Her Honour stated that to hold otherwise would be "overly formal, unrealistic and nonsensical".
- The taxpayers had incorrectly included a $6,400 capital payment as income in the 1992 year; the Commissioner's assessment in 1993 was to correct this error. There is nothing to suggest that the appellants were prejudiced by the adjustment not being made in the same tax year.
- The Commissioner had treated the overdrawn current account as a deemed dividend to Mr Henson and assessed it as income. The onus of proof was on Mr Henson to prove that he held half of his shares in the company on trust for his wife (and as such the deemed dividend was assessable income to the partnership). The evidence provided at the hearing as to whether the shares were held on trust was "at best, equivocal" and there was no contemporaneous material to support the contention. This appeal failed on the evidence.
- The Commissioner had disallowed the partnership's claim for a deduction for management consulting fees of $27,000 and $24,000 in respective tax years, for fees charged to the partnership by Standard 88 Limited. The burden of proof is on the taxpayers to prove that either the expenses had been incurred or that the alleged burglary resulting in loss of the documentation had occurred and her Honour noted that "more than self-serving oral evidence is required."
Income Tax Act 1976, Tax Administration Act 1994, Taxation Review Authorities Act 1994