Issued
2014
Decision
14 Jul 2014
Appeal Status
Not appealed

Income - onus on disputant

2014 case note – decision confirms that where deposits are linked to a particular source, the onus remains on the disputant to prove the deposits are not income.

Case
TRA 26/11 [2014] NZTRA 09
Legal terms
Income, onus of proof

Summary

The disputant claimed that apart from wages and interest earned in 2000 and 2001, he had not earned any money since 1988. The disputant gave evidence of having received inheritances and money from friends and family so that he could spend his time on charitable work. He also gave evidence of having withdrawn money from his various banks accounts and deposited it in his Global Plus accounts.

The Taxation Review Authority ("TRA") found that the disputant had not discharged his onus of proof to satisfy the TRA that the deposits are not income. In addition the TRA found that the disputant knew that he could rely upon gifts to fund his living expenses and to be able to continue his charitable activities. He accepted these gifts and used the funds to live on. On this basis, the TRA considered the amounts were income.

Impact of decision

The decision confirms that where deposits are able to be linked to a particular source, the onus still remains on the disputant to prove that those deposits are not income. Further, where a disputant has come to rely upon monetary gifts to live on, those amounts are income.

Facts

The Commissioner of Inland Revenue's ("the Commissioner") investigation into the disputant's tax affairs identified multiple unexplained deposits in the disputant's bank accounts in the 2000-2006 tax years. The Commissioner issued income tax default assessments for the 2000 to 2006 income tax years and registered the disputant for goods and services tax ("GST") with effect from 1999.

The disputant maintained that he had not earned any income from any paid employment or business activity since 1988. He claimed that the multiple deposits were inheritances, savings, gifts, loans and loan repayments from friends. He claimed he was involved in charitable work and did not earn any income in the relevant tax years, apart from some wages and interest earned in 2000 and 2001.

In particular, the disputant also gave evidence that he created a charitable trust ("A Trust"). As part of A Trust's initiatives, he established a martial arts school and with his wife he established a modelling school. He explained that he spent much of his time working on the curriculum for his martial arts school and building websites so that the programmes were available on the internet. He also worked on a business development programme for young people.

The disputant also gave evidence that together with his colleagues he set up the E Group. It was set up to be the commercial division of the A Trust with the intention that income earned would be used to fund the charitable activities of A Trust.

In addition, the disputant gave evidence of particular deposits that he said accounted for the unexplained deposits identified by the Commissioner. In particular, the disputant and his wife gave evidence that it was their practice to withdraw money from their various accounts (CBA account, Paritate Bank and ASB) using ATMs and then deposit the cash into his Global Plus accounts.

Decision

Judge Sinclair considered the particular withdrawals and deposits that the disputant said accounted for the unexplained deposits identified by the Commissioner. In relation to the cash withdrawals from the CBA account, Judge Sinclair found as follows:

  1. In the 2000 tax year, $6,880 could be matched to withdrawals.
  2. In the 2001 tax year, on a generous approach, there was sufficient linkage between the date and amount of the withdrawal and deposit in the transactions in the period from 4 April 2001 to 3 May 2001 and the further withdrawal and deposit from 5 May 2001. These amounts totalled $12,140.
  3. There was no such linkage for any of the other deposits.

However, Judge Sinclair accepted the Commissioner's submission that it is not a question of simply adding up all the deposits over the course of the income year and setting them off against withdrawals from the CBA account. Evidence is required linking the withdrawal to the deposit and the onus of proof is on the disputant to satisfy the TRA that those deposits are not income. Judge Sinclair was not satisfied on the evidence that the deposits into the disputant's Global Plus account (identified as linked to withdrawals from the CBA account) were not income.

The disputant alleged that Mr LM, an associate, paid his rent and that these amounts were repayment of amounts he had loaned to Mr LM in the 1980s. Judge Sinclair did not consider that any of the unexplained deposits could be linked to any payment by Mr LM and in any event it was unclear whether they were loan repayments or gifts.

Judge Sinclair found that it was possible to identify approximately $13,000 only deposited into the disputant's bank account from withdrawals from the Paritate Bank. Even if it had been possible to identify other deposits as being from this source, Judge Sinclair was of the view that they would still be taxable as income.

The disputant gave evidence he received NZ$246,000 from a friend and he invested $220,000 of it in an offshore investment which failed. He was able to recover NZ$125,000. Judge Sinclair found that there was no evidence as to where the recovered funds were deposited nor in fact any evidence of the investment.

Judge Sinclair found that there was no deposit that matched the purported $5,000 that the disputant claimed had come from his family trust and been deposited into his ASB Moneymaker account.

The disputant gave evidence that he was given money by complete strangers who heard of his charitable work. In cross examination, he said the moneys given to him by friends and others were gifts with no obligation to repay and he told the TRA he had not paid back any of the money received by him over the years. He also told the TRA that some of the deposits were for the repayment of loans and that he neither documented the loans nor kept any repayment schedule. Judge Sinclair found that no loan repayments were specifically identified and linked to any deposit.

The disputant gave evidence of his "money pots" system where money was held in different pots depending upon its usage. Judge Sinclair found the disputant had no way of accounting for the funds he put into or took out of these pots, or how those funds were used.

Judge Sinclair found that some of the amounts assessed were gifts. However, the TRA considered that it was plain on the evidence that the disputant knew that he could rely upon that support to fund his living expenses and to be able to continue his charitable activities. Rather, he accepted these gifts and used the funds to live on. On this basis, Judge Sinclair considered the amounts were income. Judge Sinclair confirmed the Commissioner's assessments for income tax (subject to an adjustment on the incorrect inclusion of reimbursement costs and the reversal of the GST assessments).

Judge Sinclair found that E Group did not trade and she was satisfied on the evidence that in the income years in question, the disputant's activities were focused on his charitable work. Judge Sinclair was satisfied on the balance of probabilities that the only income included in the undisclosed deposits had been derived from charitable work. The disputant made supplies in the form of his charitable work. However, there was no consideration for those supplies and therefore no taxable activity. Accordingly, Judge Sinclair was satisfied that the disputant was not liable to account for GST and reversed the GST assessments.

Judge Sinclair confirmed the Commissioner's assessment for shortfall penalties under section 141C of the Tax Administration Act 1994. Judge Sinclair found that a reasonable person with the disputant's background and experience would have foreseen that his conduct would have resulted in a tax shortfall occurring. The disputant did not meet the standards of a reasonable man in his position in complying with his tax obligations.

Tax Administration Act 1994