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02 May 2014
Appeal Status
Not appealed

Evasion shortfall penalties

2014 case note – Taxation Review Authority found that disputant was subjectively reckless which can amount to evasion - liability for evasion shortfall penalties.

TRA 004/12 [2014] NZTRA 03


The Taxation Review Authority ("TRA") found that the disputant was subjectively reckless because, with full appreciation of the risks, he made a conscious decision to understate his income and advanced his own interpretation of the tax legislation. The disputant was found liable for evasion shortfall penalties.

Impact of decision

The decision confirms that subjective recklessness can amount to evasion.


The disputant was a director and shareholder of X Limited. He received a shareholder salary in the 2007 and 2008 income years which he omitted from his tax returns. The Commissioner of Inland Revenue ("the Commissioner") assessed the disputant for evasion shortfall penalties for those two years. The disputant accepts that gross carelessness penalties apply but disputes that he is liable for evasion penalties.

The Commissioner issued default assessments in respect of the 2000 and 2001 income tax years. The disputant filed a notice of proposed adjustment ("NOPA"). However, subsequently following professional accounting advice (from his own accountant and the accountants for X Limited), he filed amended returns which included his shareholder salary as income.

The disputant correctly returned his shareholder salary in his 2002 and 2003 income tax returns.

The disputant was introduced to Mr A and his associates. The disputant said Mr A showed him material which said that where a person exchanges labour for reward there is an equal exchange of value so that no amount of income arises and there is no "profit" which might be taxable ("reward for labour argument"). The disputant was so convinced that he stopped listening to his accountants and appointed a member of Mr A's group as his agent to deal with his tax matters.

The agent prepared the disputant's 2004 and 2005 returns which included the disputant's shareholder salary but deducted an amount described as "reward to [disputant's name]" which was roughly equivalent to the shareholder salary. The disputant filed his 2006 tax return on the same basis.

The Commissioner issued a NOPA in respect of the 2004, 2005 and 2006 returns.

The disputant filed a notice of response which argued that under section 109, his returns were deemed to be correct and could not be challenged by the Commissioner. He also made the reward for labour argument.

The Commissioner issued a statement of position ("SOP") which set out the Commissioner's position on the reward for labour argument and the meaning and effect of section 109. The disputant did not file an SOP. Accordingly, he was deemed to have accepted the Commissioner's position.

The disputant's income tax returns for 2004, 2005 and 2006 were adjusted and shortfall penalties for evasion were imposed.

In March 2008, the disputant filed his 2007 income tax return and did not return his shareholder salary.

In May 2008, the disputant filed amended returns for the 2004, 2005 and 2006 income years, but did not include his shareholder salary in his amended returns.

In August 2008, the disputant filed his 2008 income tax return and did not return his shareholder salary.

In February 2009 the Commissioner advised that discrepancies had been found in the 2007 and 2008 tax returns and penalties would be considered under Part IX of the Tax Administration Act 1994 ("TAA").

In 2010, the disputant pleaded guilty to charges under section 143A(1)(c) of the TAA for knowingly providing false or incomplete information to the Commissioner by filing false or incomplete tax returns in respect of the 2007 and 2008 income years. He was convicted and fined on both charges.

The disputant entered arrangements with the Commissioner to pay the outstanding tax but he disputed the imposing of evasion shortfall penalties.


Sinclair DCJ confirmed the Commissioner's evasion shortfall penalty assessments for the 2007 and 2008 income tax years.

The Commissioner argued direct intention: that the disputant intended to avoid the assessment and payment of tax which he knew he was obligated to pay. In the alternative, the Commissioner argued subjective recklessness: the disputant appreciated there was a positive risk that in taking his tax position he would breach a tax obligation and proceeded regardless.

Counsel for the disputant, submitted the disputant honestly believed that the arguments he relied upon when he filed his returns were correct. She referred to Case S100 (1996) 17 NZTC 6,626 at 7,634.

Sinclair DCJ found that at the time the disputant filed his 2007 income tax return, he knew that the Commissioner was of the view that he was required to file a tax return declaring his shareholder salary. He also knew that the accountants for X Limited were of the same view, and he had previously been advised by his own accountants to file amended returns including his shareholder salary as income.

Sinclair DCJ considered the disputant's submission - that the disputant did take note of the advice given by the Commissioner and that it was a question of how the disputant construed that advice - lacked any merit. Sinclair DCJ held that "the disputant simply cherry picked what the Commissioner had to say to continue his own argument" [43].

Sinclair DCJ put weight on the fact that the disputant had chosen at an early stage not to take tax advice from a tax accountant.

Taking into account all the evidence, the TRA was not satisfied to the requisite standard that the disputant had the necessary intention to evade his tax obligations when he filed his 2007 and 2008 returns.

However, Sinclair DCJ found that the disputant was subjectively reckless:

  1. Whilst accepting that the disputant had strongly held views and even if the disputant was convinced that his interpretation of the law was correct, Sinclair DCJ was not satisfied, on the facts, that as a consequence of those views that the disputant did not appreciate, or was somehow blind to, the risk that he was taking in understanding his income if he was wrong. [48] 
  2. Sinclair DCJ was satisfied that it could be inferred from the facts that the disputant knew the risk that if he was wrong he would be liable to pay tax on his shareholder salary. [49]
  3. Sinclair DCJ was satisfied to the requisite standard that the disputant, with full appreciation of that risk, made a conscious decision to return the understated income advancing his own interpretation of the tax legislation. [50]

Tax Administration Act 1994