TRA has jurisdiction to substitute an assessment

Summary

The Taxation Review Authority has jurisdiction to substitute an available assessment where the original assessment of the Commissioner is not upheld.

Facts

In 1992 and 1993 the appellant purchased two adjoining farms at Midgley Road, Mangonui in Northland for a combined price of $444,525.66. The total property, comprising some 375 hectares, was run as a beef cattle unit.

In February 1998 the appellant entered into a conditional agreement to sell the property to a developer, Stargate Holdings Ltd, for $2.1 million plus GST. Stargate intended to subdivide and develop the property into olive groves and on 14 July 1998 obtained resource consent from Far North District Council to do so. Stargate failed to perform its obligations under the contract and in October 1999 the appellant elected to cancel the contract.

On 8 February 2000, the appellant incorporated a company, Ocean View Olives Ltd (OVO), of which he was the sole shareholder and director. On 5 April 2000 he entered into a sale and purchase agreement to sell his Midgley Road property to OVO for $1.6m plus Goods and Services Tax (GST).

On 30 March 2001, the appellant filed an income tax return for the year ended 31March 2000. He did not include as a revenue item the proceeds of sale of the farm to OVO, which he showed as a capital transaction.

On 24 June 2002 the Commissioner issued a Notice of Proposed Adjustment (NOPA), showing the transaction as falling within paragraph (f) of section CD 1(2) of the Income Tax Act 1994 ("ITA94"). The appellant gave notice of response challenging the NOPA, which in turn led to the Commissioner issuing a disclosure notice in respect of the NOPA and a statement of position, to which the appellant issued his competing statement of position. The matter was referred to the Adjudication Unit of the Inland Revenue Department, which led to a Notice of Final Determination which confirmed the Commissioner's view that section CD 1(2) (f) of the ITA94 applied, but which also asserted that had section CD 1(2)(f) not applied, the sale of land would have been gross income under section CD 1(2)(e)(iii)(C) (subject to certain deductions allowable under section DJ 14).

The appellant filed a notice of claim in the Taxation Review Authority (TRA) challenging the assessment, contending that the sale proceeds were not taxable under paragraph (f) and further asserting that paragraph (e) had no application.

The Commissioner's notice of defence sought to uphold the assessment under paragraph (f) but also pleaded in the alternative that in the event that paragraph (f) did not apply, the sale was gross income pursuant to paragraph (e).

The TRA upheld the appellant's contention that the proceeds of sale were not taxable under paragraph (f) but determined that they were taxable under paragraph (e). The TRA indicated that it was prepared to make an assessment in favour of the Commissioner but withheld doing so, reserving leave to the appellant to make further submissions if he so wished.

The appellant did not do so, electing to appeal the TRA's decision to the High Court. The TRA then issued a final decision on the matter, which was also appealed.

In the High Court, the appeals were consolidated and dismissed by Frater J (Beckham v CIR (2007) 23 NZTC 21,499). The appellant then appealed to the Court of Appeal.

Decision

The appeal was dismissed.
Held:

1. The jurisdiction challenge was inconsistent with section 16 of the Taxation Review Authorities Act 1994, section 138P of the Tax Administration Act 1994 and the decision in Zentrum Holdings Ltd v CIR [2007] 1 NZLR 145. The TRA clearly had jurisdiction to substitute an assessment under paragraph (e), albeit for a lesser amount than the Commissioner's original assessment.
2. The Commissioner was not required to calculate explicitly a particular threshold amount. Even if he had it would have made no difference to the outcome.
3. As to the second point, the short answer to the appellant's submissions is that paragraph (e) does tax potential value if that highest and best use derives from potential or a fortiori, actual resource consent. And the evidence supporting the assessment was overwhelming.
4. Further the Commissioner's submission that by section 149A of the Tax Administration Act 1994 the onus of proof lay on the taxpayer was noted, and the Court found the submission that there was a potential value above $740,000 aside from the likelihood of resource consent was without evidential support. The appellant would have had to show that the land had a pre-consent value of $1,369,105 in order to fall outside of paragraph (e), and that was plainly untenable.