Taxation Review Authority confirms the Commissioner’s ability to attribute income to a non-party in a transaction
2017 case note – CIR's ability to attribute income to a non-party in a transaction confirmed - issue exclusion, onus and standard of proof, allocation of income.
The disputant taxpayer had benefited from international money transfers, foreign currency purchases and domestic transfers and card expenditure which the Commissioner of Inland Revenue ("the Commissioner") considered had been conducted on the disputant's behalf through trusts and companies wholly owned and operated by the disputant's friend. The Taxation Review Authority ("the Authority") largely confirmed the Commissioner's assessments but found that certain isolated transactions had an insufficient link with the disputant and accordingly disallowed those amounts.
This is a useful decision which confirms that income amounts can be attributable to a non-party to a particular transaction pursuant to s BD 3(4) of the Income Tax Act 2007 ("ITA"), where there is a genuine case for suggesting that the amounts have been dealt with on the person's behalf or in his or her interest.
The Authority's finding is particularly helpful in determining that in attribution cases the onus and standard of proof remains unaffected and the Commissioner has no duty to undertake particular enquiries on behalf of the taxpayer. This is so even when the documents relating to the transaction underpinning the assessment are not in the taxpayer's immediate possession but held by the parties directly involved in the transaction.
The decision otherwise applies the standard principles regarding what constitutes income under ordinary concepts.
The disputant is a New Zealand citizen and tax resident, who during the disputed period (the 2005 to 2011 income years) spent considerable time in Australia where his family has lived permanently since 2001. He was bankrupted in both 1993 and 2003. The disputant filed nil income tax returns following the issue of default assessments. He did not return any income in Australia in the disputed period.
It was common ground that the disputant was involved in property trading and land development as a consultant during the disputed period. He primarily provided his consultancy services in connection with the business dealings of his father and two childhood friends "Mr Green" and "Mr Jones" ("his associates"). The Commissioner assessed deposits and expenditure of trusts and other entities of his associates as income to the disputant because she considered he received them in exchange for consultancy services provided. Other deposits from unknown sources into the disputant's personal bank account and the bank account of a related trust "the K Discretionary Trust" have also been assessed as income to the disputant.
Some of the disputed amounts were not received directly by the disputant but were amounts paid into bank accounts held in the names of the disputant's family members, payments to third parties, or expenditure via an eftpos card for expenses which were clearly of a personal nature.
Alternative taxing theory
The Authority found that the primary basis for the Commissioner's assessment had always been income under ordinary concepts.
The Authority rejected the disputant's contention that the approach taken by the Commissioner was not clear until after the issue of the adjudication report, discovery and the receipt of the investigator's brief of evidence. Both the primary ground (income under ordinary concepts) and the alternative ground (income pursuant to ss CB 6 and CB 7 of the ITA) had been clearly set out in the Commissioner's Notice of Response. The Authority therefore found that any issues which the disputant wished to raise relating to the Commissioner's basis of assessment could have been included in the disputant's Statement of Position ("SOP").
Furthermore, the Authority found that even if the issue did not arise until after the adjudication report was issued, the requirements of s 138G(2)(b) would not be met, as any issues with the assessments could have been satisfactorily addressed in the de novo hearing before the Authority. Therefore the Authority concluded that the disputant would not suffer any manifest injustice if the issue was not raised.
Provision of information
The Authority noted that the disputant had been provided with a breakdown of the assessed amounts and source documents for Mr Green's entities prior to the issue of his SOP. The Authority determined that it was reasonable for the Commissioner to assume the disputant could source for himself his own personal bank statements (which he knew the Commissioner had copies of) as well as his family members' bank statements and the statements of the K Discretionary Trust.
The Authority found that, even if it could be argued that the disputant did not know of documents held by the Commissioner or was not able to raise this process issue at the time he issued his SOP, the disputant would not suffer manifest injustice if the issue is not raised.
The Authority went on to hold that the Commissioner did not have a duty to undertake particular enquiries effectively on behalf of the disputant. Neither was there any basis for holding the Commissioner to a higher standard to assist a disputant in attribution cases. Accordingly, it was determined that the requirements of s 138G(2)(b) were not met and the disputant's application was dismissed.
Substantive issues - Income under ordinary concepts
The Authority noted that the character of income under ordinary concepts required consideration of a number of factors, including regularity of payments and the recipient's reliance on them to meet living expenses. The Authority quoted from Dunn v Commissioner of Inland Revenue ((1979) 1 NZTC 61,245 (SC)) and noted that amounts can be income derived by a person in spite of him or her not being the immediate recipient of the money or money's worth, if the income has been dealt with on the person's behalf or in his or her interest.
The disputant claimed that some of the amounts attributed as income to him were either loans to him from his father, repayments of loans from his father to Mr Green or loans from Mr Green to the disputant. He did not produce any supporting documents in evidence. The Authority was clear in finding that the disputant was not a credible witness and considered the disputant's description of his various business activities vague and unconvincing. Accordingly, the disputant's explanations that the amounts were loans were not accepted.
Findings for the Commissioner
The Authority found that the disputant had failed to discharge the onus in respect of the vast majority of the amounts assessed. Many amounts had also been conceded by the disputant during the final stage of the hearing.
The disputant's travel in and out of New Zealand coincided with the foreign currency purchases and the use of an eftpos card connected with Mr Green's entities. The disputant's acceptance and concession that he had used the card both for business and personal expenditure and estimate that 50% of the amounts assessed might be attributable to him, was not sufficient to discharge the onus.
International transfers from Mr Green's entities to the disputant's family members were also found to be income attributable to the disputant. The disputant had not called any family members, or Mr Green, to give evidence. International transfers from Mr Green's entities to third parties in Australia were also attributed as income to the disputant.
The majority of the amounts which had been transferred to the disputant's personal bank accounts and the bank account of the K Discretionary Trust were also held to be income to the disputant.
Findings for the taxpayer
The Authority found that one deposit for AUD $519,351.45 from X Marine Services into the disputant's Australian bank account was not assessable as income to the disputant. The disputant's evidence was that this amount was the sale proceeds from the disposal of his father's boat. The Authority found that the amount, being a one off substantial payment which could reasonably be inferred to be from the sale of a boat, did not have the quality of income under ordinary concepts. On the same basis, two deposits totalling $66,300 from the same entity into the K Discretionary Trust were also found not assessable.
Two further transactions of $10,020 and $12,020 from Mr Green's entities to an entity in Phuket were also found not to be income attributable to the disputant because the Authority considered that there was insufficient basis for their inclusion in the assessment (not being transfers to Australia, where the disputant lived with his family).
The Authority upheld the remainder of the Commissioner's assessments which totalled $7,024,988.76 (The total amount still disputed going into the final stage of the hearing, including the amounts which the Authority found not assessable as income to the disputant.).
Tax Administration Act 1994 ss 89A, 138G, Income Tax Act 2007 ss BD 3, CA 1, (CB 6, CB 7)