Onus on taxpayer
2012 case note - decision confirms that a taxpayer has the onus of proof and must have sufficient evidence to be entitled to deductions for income tax.
The disputant conducted a property development business, operated companies, sold cars and had boarders. He failed to register for goods and services tax (GST) or to return the relevant income. Assessments were made by the Commissioner after a review of his bank accounts was undertaken. The disputant later attempted to claim GST for expenditure incurred but he had no invoices. He also claimed some of the money in the bank accounts was from re-banking. It was found that the re-assessment by the Commissioner using the information available was the most reliable. Some extra expenditure was allowed but generally the disputant had failed to prove the extra expenditure, to show that money paid into the bank was not income or to provide evidence or tax invoices which would allow him to claim GST input tax credits.
Impact of decision
This decision confirms that a taxpayer has the onus of proof and must have sufficient evidence to be entitled to deductions for income tax. Further, a GST invoice is necessary before input tax credits can be claimed and if not, a waiver of the need for an invoice should be sought before the filing of the GST return.
This case concerns the disputant's income tax liability for the years ended 31 March 1995 to 31 March 2000 (inclusive); and GST assessments for the periods between 1 April 1994 and 31 March 2001 (ie, 42 two-monthly periods). The disputant operated as a property developer with other sources of income including motor vehicle dealing and residential boarders. The disputant did not keep useful or complete records nor did he file income tax or GST returns. This led to default assessments based on unexplained deposits in the bank accounts of the disputant and his companies. He was convicted of income tax evasion for the 1997-2001 income years and GST evasion for GST periods between June 1997 and March 2001.
The disputant claimed that, while in the process of briefing his accountant during an Inland Revenue investigation, he lost records from his motor vehicle. During the initial three years of the investigation (1998-2001), he approached no less than three accountants, but none were successful in producing accounts for him as he failed to provide sufficient records. A fourth accountant (the accountant) did produce some accounts using some original documentation and bank statements. This put into question the disputant's claims regarding the loss of substantial records. The Commissioner's analysis was based on the accounts prepared by the accountant.
The disputant based his claims on the reconstruction on what his property development work might have cost and what cash flows and transactions might have occurred at that time. In terms of his building projects, he cast aside the accounts prepared by his accountant. The disputant used his own estimates and memory to challenge the assessments and claim additional expenditure. He attempted to claim GST on all his alleged costs despite not having the necessary invoices to support the claims. He further attempted to claim a payment he made personally as a guarantor for one of his companies (which were not registered for tax purposes). The disputant also claimed costs for property purchases in the wrong years. He said that many of the deposits in his bank accounts were from: re-banking, loans, re-payments of advances to his companies and boarders.
Claims for additional expenditure for development projects
The disputant claimed significant additional expenditure for each of his development projects. Each of these projects and the expenditure claimed was considered separately by Judge Barber (refer  to ).
Judge Barber disallowed most of the additional expenditure claimed by the taxpayer, essentially due to the lack of evidence of the payments being made (ie, the taxpayer had not satisfied the onus of proof).
GST on expenditure
The disputant claimed GST on all expenditure included in the accounts prepared by the accountant. He also claimed GST on the additional expenditure that he estimated he had incurred over and above the amounts included in the accounts. The disputant submitted the following:
- The Commissioner forced his registration and claimed output tax, therefore he ought to be allowed to claim input tax credits for the expenditure that he allegedly incurred.
- When a deduction is allowed for income tax purposes, the Commissioner must have accepted that goods and/or services were provided.
- The two-pronged test for dispensing with the requirement to hold GST invoices pursuant to section 24(6) of the Goods and Services Tax Act 1985 ("GST Act") is met.
Judge Barber held that the disputant ignored the requirements of section 20(2) of the GST Act that no input tax credits are available unless a tax invoice in relation to the supply has been provided. His Honour held that bank statements and cheque butts do not give sufficient particulars of a supply in terms of section 24(3) of the GST Act. He referred to Case Z12 (2010) 24 NZTC 14,371where it was confirmed that a tax invoice is an evidential requirement "to ensure real supplies of goods and services are being made which are within the GST base".
When discussing the ability of the Commissioner to waive the need for a GST invoice under section 24(6) of the GST Act, Judge Barber referred to Case Y6 (2006) 23 NZTC 13,056 and confirmed that the waiver should be applied for prior to filing the GST return claiming the tax. His Honour noted that section 24(6) of the GST Act does not apply to a situation where a tax invoice has been issued and then lost by its recipient.
The disputant argued that he deposited all money from car sales into the bank (including cash). He also stated that he deposited cash into bank accounts to withdraw it again on the same day.
The Commissioner argued that the taxpayer operated wherever possible in cash, offered cash to lure sellers and the taxpayer's arguments seemed highly unlikely and lacked credibility. This was accepted by Judge Barber.
Judge Barber held that where there were deposits in the bank accounts that cannot be shown to be capital, these sums should be treated as "net" assessable income without discounting for assumed expenditure.
Expenditure for development carried out by the disputant's companies
In the final week of the hearing, the disputant presented new tax invoices, letters and notes which related to developments carried out by him personally and companies he controlled. The Commissioner undertook an analysis of the invoices and argued that most of the invoices had already been claimed or belonged to the companies not the disputant (see ).
Judge Barber held that if the recipient of an invoice who has made payment of it wants to claim deductibility against their own income, they need to show that it was incurred by them in deriving their gross income or necessarily incurred in carrying on their business for the purpose of deriving gross income. He held that in the current situation, the expenditure was primarily incurred for carrying out the companies' business. The expenditure could have been "necessarily incurred in carrying on a business" but it was questionable that the disputant was carrying on his own development business at the time. Judge Barber held that the disputant had not demonstrated a sufficient relationship between the expenditure and his on-going income earning process as a developer in his own right, nor had the disputant demonstrated that the income-earning process was intricately tied up with his reputation as a professional.
The disputant claimed GST input tax credits for services provided to him (ie, the contract was with the disputant) but the goods and services were acquired for the principal purpose of making his companies' taxable supplies.
Judge Barber held that to claim an input tax credit personally, the disputant must show that the goods and services were supplied to him for the principal purpose of making his taxable supplies.
Judge Barber held that if a contract to provide services was made with the disputant personally (and not as agent for the companies) but the services were acquired for the principal purpose of making his companies' taxable supplies, the disputant may find himself in a situation where neither he nor the company can claim GST input tax credits. He held that the Commissioner was correct to only allow the disputant to claim input tax credits for supplies that relate to the disputant's personal development activities.
The Taxation Review Authority is entitled to take into account propensity evidence and contextual evidence in the course of a civil proceeding. No leave is required for a defendant to raise propensity evidence in a civil proceeding, the only barrier is relevance. Judge Barber outlined a number of matters that arose in the course of the hearing and held that he had no reason to doubt the general credibility of any witness in this case except for the disputant.
Judge Barber held that the revised schedules prepared by the Commissioner were seen as the most reliable reconstruction allowed by tax law subject to various further allowances he allowed and otherwise dismissed the disputant's challenge.
Goods and Services Tax Act 1985, Income Tax Act 1994, Tax Administration Act 1994