High Court "easily satisfied" that the Commissioner's assessment was an honest appraisal and a genuine exercise of judgement
2016 case note – Taxpayer's appeal dismissed, CIR's assessment an honest appraisal and genuine exercise of judgement - Income under ordinary concepts.
The High Court dismissed Mr Musuku's appeal and upheld the Commissioner of Inland Revenue's ("Commissioner's") assessment as an honest appraisal and genuine exercise of judgement. Justice Moore agreed with the Taxation Review Authority ("TRA") that the amounts assessed were dividend income under s CD 1 of the Income Tax Act 2004 ("Act"), employment income under s CE 1 of the Act or income under ordinary concepts under s CA 1 of the Act.
Mr Musuku ("the appellant") was a director and shareholder of three pharmacy owning companies which employed him as a pharmacist. The appellant was also the trustee of the Musuku Family Trust ("Trust") and a director and shareholder of another closely held company.
At the time the Commissioner commenced her review of the appellant's tax affairs, the appellant had not filed a tax return for six years, two of his companies had failed to submit goods and service tax returns since incorporation, one of his companies had last filed an income tax return three tax years prior and the Trust and one of his companies did not have an IRD number and had not filed any returns.
The Commissioner's investigation occupied some seven years. Finally, in the face of the appellant's effective refusal to co-operate, the Commissioner made a default income tax assessment for the 2006 tax year. The resulting disputes phase was also protracted. The Disputes Review Unit upheld the Commissioner's statement of position in late July 2013 and an amended assessment was made on the basis that amounts deposited into various business and personal bank accounts to which the appellant had access and that were spent on his behalf and to his private benefit or were made available to him, was his taxable income as dividend income, employment income or income under ordinary concepts.
The TRA delivered a reserved decision on 27 July 2015 confirming that the appellant had not discharged the onus on him to prove on the balance of probabilities that (a) the amended assessment (and/or default assessment) was arbitrary and not a genuine attempt by the Commissioner to assess the appellant's taxable income and/or (b) the amended assessment was incorrect and, if so, by how much.
The appeal proceeded by way of a re-hearing.
Did the Commissioner fail to issue a proper assessment?
The appellant made three claims. Firstly, that the default and amended assessments were arbitrary. Secondly, that the assessments were not made on a credible or reasonable basis. Thirdly, that the assessments did not fully apply known facts and law.
Justice Moore held that on the evidence it was apparent that the Commissioner went to considerable lengths to ascertain the appellant's correct tax position and exhibited commendable patience in the face of a wide range of frustrations and difficulties in completing the enquiry in a timely way.
His Honour held that he was easily satisfied that the Commissioner's amended assessment and earlier default assessment were, in each case, an honest appraisal of the appellant's tax position and a genuine exercise of judgement.
Was the Commissioner's assessment incorrect?
Justice Moore found that the appellant had received amounts into his joint bank account from his companies which he retained and used for his private benefit Furthermore, his Honour found that the appellant had received the benefit of amounts spent by his companies for his private benefit.
His Honour was satisfied that the transfers of value from the companies would not have been made but for the appellant's shareholding. Furthermore, his Honour held that no reliable or credible evidence of loans or drawings existed and the information provided with the appellant's notice of proposed adjustment (including the schedule of current accounts) appeared to have been created in an attempt to retrospectively justify the appellant's position, namely that the amounts were drawings and not dividends.
His Honour held that the appellant could be taken to have derived as dividend income under s CD 1 of the Act an amount equal to the private expenditure.
Justice Moore agreed with the Commissioner that s CE 1(1)(g) of the Act casts a wide net to include in a person's employment income a cash amount derived that has a connection with their employment or service, even if that amount falls outside of the specific categories in s CE 1 of the Act.
His Honour held that to the extent the funds the companies made available to him were not dividends they would be his employment income under s CE 1 of the Act. In reaching this conclusion Justice Moore referred to the appellant's income protection insurance and the appellant's $19,000 declared salary which was not commensurate with the work undertaken by him.
Income under ordinary concepts
Justice Moore was also satisfied that if the amounts were not dividend income or income received as an employee then it would be income under ordinary concepts under s CA 1 of the Act.
Furthermore, his Honour was satisfied that rent payments made into the joint account of the appellant and his wife were income to the appellant under ordinary concepts.
Appeal dismissed and costs awarded
The appellant's appeal was dismissed and costs were awarded in favour of the Commissioner on a category 3 basis.
Tax Administration Act 1994, Income Tax Act 2004