The Authority finds no taxable activity and upholds the Commissioner's reassessments

Summary

Decision of the Taxation Review Authority ("the Authority") dismissing the disputant's claim and confirming the Commissioner of Inland Revenue's ("the Commissioner") assessments. The Authority found that the disputant was not carrying on a taxable activity. The Authority also found that even if the disputant was carrying on a taxable activity, he was not entitled to input tax credits as he had failed to produce the required documentary evidence.

Impact

This case upholds the current position of the law. In order to claim input tax deductions, a taxpayer must be carrying on a taxable activity.

Facts

The disputant challenged reassessments made by the Commissioner denying input tax deductions claimed by him for goods and services tax ("GST") purposes.

The Commissioner deregistered the disputant and denied the deductions on the basis that the disputant was not conducting a taxable activity in the GST periods in dispute.

The Commissioner contended that even if the disputant was found to be carrying on a taxable activity, the disputant had not provided sufficient evidence to show he acquired goods and services for the principal purpose of making taxable supplies.

The Commissioner also imposed shortfall penalties for gross carelessness for each of the periods in dispute.

Decision

The Authority dismissed the disputant's claim and confirmed the Commissioner's assessment.

Issue 1: Taxable activity

The disputant gave evidence that he was engaged in a number of taxable activities (set out below).

The Authority was not satisfied on the evidence provided that any of the alleged activities fell within the definition of "taxable activity" for the below reasons.

1. Acting as a tax agent

The Authority found that while the disputant asserted he acted for many clients, he only produced six invoices for two clients.He did not provide any bank statements showing payment of any of these invoices nor did he provide any other supporting documentation of the work being performed.

Furthermore, the Authority found that even if it were to accept the disputant acted as a tax agent, it was performed on a spasmodic basis at best. Judge Sinclair was not satisfied on the evidence that the disputant was "continuously" or "regularly" engaged in providing accounting services to other persons for consideration in any of the GST periods in dispute.

2. Holding patent rights as patentee

The disputant gave evidence that he held patents and that there was an accrual of profits of $290,364.42 for the period up to 31 March 1986. The disputant explained that authority to enforce equities in a patent is conferred by the Patents Act, and that the profits are "equities" he wished to enforce.The disputant saw his taxable activity as being his continual attempt to enforce the equities in the patents.

The Authority found the disputant did not detail what activities he was engaged in during the periods in dispute to enforce the "equities" nor did he produce any supporting documentation. Furthermore, the Authority could not see how any activity to enforce the alleged activities involved, or intended to involve, the supply of services to another person for consideration.

3. Devising inventions and patenting them

The disputant told the Authority that devising inventions was a "continuous process" and that he was working on various inventions during the periods in dispute. However, he did not produce evidence of his design work and time spent on his inventions during any of this time. Accordingly, the Authority was not satisfied that the disputant was engaged in a taxable activity devising inventions and patenting them in any of the GST periods in dispute.

4. Supplying services to trusts

The disputant produced two documents which he told the Authority were invoices issued by him to a trust for work enforcing rights which he asserts are held by the trust.He gave further evidence that he had not been paid.

The Authority, after careful consideration of the disputant's evidence, was not satisfied that the disputant was engaged in activity in the relevant GST periods that involved, or was intended to involve, the supply of services to the trust.

Issue 2: Entitlement to input tax deductions

In the event that the Authority was wrong in its view that the disputant was not engaged in a taxable activity in any of the disputed periods, the Authority considered whether the disputant was entitled to the input tax deductions he had claimed.

No deduction of input tax is allowed unless a tax invoice is held by the registered person. Registered persons are also required to keep all invoices relating to goods and services supplied by them or to them for a period of at least seven years after the end of the taxable period to which they relate.

The Authority found that the disputant had every opportunity since 2011 to produce the invoices and evidence of payment to enable him to prove his claims to a refund in the GST periods in dispute. He simply failed to do so. On the evidence before it, the Authority was unable to be satisfied that the disputant was entitled to any or all of the input tax deductions claimed by him. His claim failed accordingly.

Issue 3: Shortfall penalties

A taxpayer can be liable for a shortfall penalty for gross carelessness where the taxpayer has taken an unacceptable tax position. A taxpayer takes an unacceptable tax position if, viewed objectively, his tax position fails to meet the standard of being "about as likely as not to be correct".

The Authority found that while the disputant strongly believed that his actions were taxable for the purposes of the Goods and Services Tax Act 1985, the test is objective, and a belief by the disputant that the position which he took was correct is irrelevant.

The Authority considered that the disputant showed a high level of disregard for the consequences when he filed his GST returns and that his conduct was a flagrant breach of the GST regime. The Authority noted that the disputant was an accountant by profession and held himself out as a tax agent. Furthermore, he had extensive dealings with the Commissioner over many years and he considered himself to have knowledge of GST and other tax matters.

The Authority was satisfied that the disputant's conduct created a high risk of a tax shortfall and that risk would have been recognised by any reasonable person in the circumstances. Accordingly, the Authority found the disputant liable for shortfall penalties for gross carelessness in each of the GST periods in dispute.