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27 Jul 2015
Appeal Status

Amounts held to be dividends, employment income or income under ordinary concepts

2015 case note – Court held CIR made honest appraisal of disputant's income tax - hearing de novo, dividend, employment income, income under ordinary concepts.

XXX v Commissioner of Inland Revenue [2015] NZTRA 12


This was a decision of the Taxation Review Authority ("the Authority") confirming that the Commissioner of Inland Revenue ("the Commissioner") had made an honest appraisal of the disputant's 2006 income tax. The Authority agreed with the Commissioner that amounts deposited into various business and personal bank accounts were the disputant's assessable income as dividends, employment income or income under ordinary concepts.


During the 2006 tax year the disputant was a director, shareholder and employee of three companies in the same industry sector. In addition, the disputant was the trustee of a property owning trust.

At the time the Commissioner commenced her review of the disputant's tax affairs he had not filed an income tax return for six years. The companies and trust were also in default of their tax obligations. Following a lengthy period of unsatisfied information requests, the Commissioner made a default assessment of the disputant's income tax and subsequently made an amended assessment following completion of the disputes process.

The Commissioner's assessments were made on the basis that amounts deposited into various business and personal bank accounts were the disputant's assessable income as dividends, employment income or income under ordinary concepts.

The disputant claimed that the amended assessment was incorrect and that the Commissioner had ignored business expenses, wrongly treated certain deposits and transfers as assessable income, and had failed to rely upon information provided by the disputant.


Assessments an honest appraisal and genuine exercise of judgement

The Authority held that while the Commissioner is required to make a genuine attempt to ascertain the taxpayer's assessable income, that obligation cannot be elevated into a requirement that the Commissioner is not to assess unless and until she is fully informed of the taxpayer's affairs. Rather, the Commissioner must do the best she can on the information in her possession and it is only when the Commissioner acts arbitrarily or in disregard of the law or facts known that the purported assessment will be set aside.

The disputant contended that the Commissioner failed to uphold an agreement to obtain an independent review from a qualified accountant, investigate an alternative method of calculation mentioned in an internal email and consider whether another legal connection (contractual arrangement) existed between the disputant and each company. The Authority held there was no merit in the disputant's arguments.

The Authority held that with respect to any alleged breaches of s 6 of the Tax Administration Act 1994 and/or of procedure or unfairness in the dispute process, a hearing before the Authority is a hearing de novo. The focus is not therefore on attacking the process, as the nature of the hearing will cure any breaches of natural justice, procedural unfairness and other procedural defects. Instead it is on calling evidence to enable the Authority to make an appropriate assessment or set the assessment aside.

The Authority was satisfied that the Commissioner's assessments were an honest appraisal of the disputant's tax position and a genuine exercise of her judgement.

Dividends, employment income and income under ordinary concepts

It was accepted that income from the companies was deposited into the companies' accounts and into personal accounts. However, the disputant denied any transfer of value occurred by virtue of his shareholding. The disputant claimed that as funds in personal accounts were used for business expenditure, another legal connection existed between himself and each company. The Authority held that the disputant's argument was without merit. Firstly, because there was no evidence to support another legal connection, and secondly, because business-related expenditure was not included in the amended assessment.

Additionally, the disputant contended that there was no transfer of value from each company to the disputant caused by the disputant's shareholding, because the disputant in fact received drawings which he was required to repay. After referring to the disputant's failure to produce contemporaneous evidence that he had borrowed money from the companies and that interest was charged, the Authority held that there did not appear to be any reason for the companies to have made transfers of value other than because of the disputant's shareholding. The Authority found that the disputant could be taken to have derived as dividend income an amount equal to his private expenditure.

The Authority agreed with the Commissioner that the disputant's declared salary was not commensurate with the work he had done. To the extent the funds the companies made available to the disputant were not dividends, the Authority held they would be included in the disputant's income as employment income.

The Commissioner submitted that the companies' incomes went into a variety of personal and business accounts that the disputant controlled and had access to. The Commissioner contended that it was reasonable to conclude that income "came in" to the disputant when the companies incurred personal expenditure on his behalf or when the disputant used the companies' incomes for his private benefit. The disputant depended on that income (quantified by expenditure) for his and his family's living expenses. The disputant was the companies' sole director, and sole or majority shareholder and received employment income. Accordingly, there was an element of reciprocity involved between the amounts that the companies either spent on the disputant's behalf or which the disputant spent himself. The Commissioner claimed this supported the conclusion that these amounts have the quality of income in the disputant's hands.

The Authority agreed with the Commissioner and found that to the extent that the amounts are not dividend payments or employment income, they are income under ordinary concepts. Rent was also deposited into the disputant's joint personal bank account on a weekly basis by tenants of various properties owned by the trust. The Authority agreed with the Commissioner that the rent had the quality of income in the disputant's hands and is also assessable to him as income under ordinary concepts.

Income Tax Act 2004, Tax Administration Act 1994