Issued
2014
Decision
04 Jun 2014
Appeal Status
Not appealed

Commissioner awarded discovery orders

2014 case note – application by CIR for discovery of documents - discovery orders, particular discovery, evidence exclusion rule.

Case
TRA 022/12 [2014] NZTRA 06
Legal terms
Discovery orders, particular discovery, evidence exclusion rule

Summary

This case concerned an application by the Commissioner of Inland Revenue ("the Commissioner") for discovery of documents supporting the disputant's statement in her Statement of Position ("SOP") explaining how she funded her losses.

Impact of decision

The evidence exclusion rule will not preclude a discovery order over documents supporting a statement in a SOP even when that statement is not identified as a separate legal issue or proposition of law. The statement forms part of the disputant's case and therefore the Commissioner is entitled to reply to it.

Facts

This was an interlocutory application by the Commissioner for discovery orders.

The substantive dispute involves a claim for deductions. The disputant failed to file income tax returns for the 2006, 2007 and 2008 income tax years (inclusive). In June 2009, the Commissioner issued default assessments based on annualised sales from GST returns filed for the periods in dispute.

The disputant subsequently filed income tax returns for the 2006, 2007 and 2008 income tax years and issued a Notice of Proposed Adjustment. The disputant claimed expenses exceeding income derived in two of the three years in dispute. The expenses claimed represented 139%, 99% and 113% of income for those years respectively.

The disputant's SOP stated that she was handling work for which she would not be paid until the end of the matter. Therefore, her taxable income was not greater than her expenses resulting in taxable losses. She claimed she funded the losses by loans from a family trust.

The Commissioner sought discovery of the following documents:

  1. a copy of the disputant's diary for the 2006 to 2008 income years;
  2. all documents/material that evidence or explain what funds the disputant or her family used to fund her losses and to support her and her family's lifestyles during the 2006 to 2008 income years; and
  3. all documents relevant to the deductions claimed by the disputant in each income year.

Subsequent to the hearing, the parties reached agreement for informal discovery of the documents referred to in 1 and 2 above.

The remaining issue for determination related to discovery of documents identified in 2 above.

Decision

An order was made for discovery of the documents identified in 2 above.

Relevance of documents

The Commissioner argued that whether the disputant has satisfied her onus of proof will in part turn on her credibility, assessed in the context of the background facts. A key background fact is whether it is credible that the disputant had virtually no net income in the years in dispute given that she claims to be successful in her chosen career.

The Commissioner further argued that the documents sought are relevant, as such evidence has a tendency to disprove that all the deductions claimed are genuine business expenses (section 7(3) of the Evidence Act 2006); that the Commissioner is entitled to respond to the disputant's statement that her net income is temporarily low and that she has lived off loans from her family trust; and that the disputant cannot justify her returns and then not discover the documents relevant to that justification.

The disputant argued that neither party in her SOP identifies the disputant's source of funds as a legal issue in dispute and, therefore, the discovery sought is not relevant.

The Taxation Review Authority ("TRA") agreed with the Commissioner and found that the discovery sought is relevant to the legal issue for the following reasons:

  1. for the purpose of assessing the credibility of the taxpayer;
  2. the documents sought have a tendency to disprove that all the deductions claimed are genuine business expenses; and
  3. it is necessary for the Commissioner to be able to respond to the disputant's statement that her net income is temporarily low and that she has lived of loans from her family trust.

Applicability of evidence exclusion rule

While the disputant accepts that the operation of section 138G(1) of the Tax Administration Act 1994 ("TAA") (the "evidence exclusion rule") does not preclude an order for discovery of relevant material, she argued that the Commissioner has failed to establish that discovery of the documents is either relevant or necessary to resolve the present challenge.

The disputant argued that the scope of the evidence exclusion rule refers back to the requirements to be included in the parties' respective SOPs. Sections 89M(4) and 89M(6) of the TAA provide that SOPs must, with sufficient detail to fairly inform the other party, give an outline of the facts and the evidence on which the party intends to rely; an outline of the issues that the party considers will arise; and specify the propositions of law on which the party intends to rely.

The disputant argued that neither party identified any legal issues or propositions of law relating to the question of how the disputant funded her expenditure or supported her family.

The disputant argued that no reasonable person reading the parties' SOPs would think either party had made an issue of her source of funds.

The Commissioner argued that it is necessary under sections 89M(4)(b) and 89M(6)(b) that SOPs only contain an outline of evidence. The discovery sought is within the outline of evidence in the disputant's SOP and therefore cannot be excluded under the evidence exclusion rule.

The Commissioner argued that when the disputant explained her ability to fund her losses from her family trust, she put in issue how she funded her losses and it now forms part of the outline of the case.

The TRA found that it is not necessary for the matter to be identified as a separate legal issue or proposition of law. The disputant clearly raised the issue of the source of her funds in the context of her claim for deductibility of expenditure when she sought to explain how she funded her losses. That explanation now forms part of the disputant's case and the Commissioner is entitled to rely on it.

Tax Administration Act 1994, High Court Rules, Taxation Review Authorities Regulations 1998