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28 Mar 2017
Appeal Status
Not appealed

TRA upholds Commissioner's reassessments for undisclosed income

2017 case note – Taxation Review Authority upholds CIR's reassessments - undisclosed income, asset accretion method, credibility.

TRA 023/15 [2017] NZTRA 02


The Commissioner of Inland Revenue (“the Commissioner”) reassessed the taxpayer for undisclosed income and imposed gross carelessness shortfall penalties. The taxpayer challenged the reassessments claiming that the money had come from various sources, including the sale of gold Krugerrand coins and an interest free loan from her uncle in China. The Taxation Review Authority (“the Authority”) found the taxpayer's explanations to not be credible, and consequently upheld the Commissioner's reassessments.


The decision reiterates the fundamental principles applying to the Commissioner when making amended assessments, and is an example of the appropriate use of the asset accretion method.


The Commissioner reassessed the disputant for undisclosed income in the tax years ended 31 March 2005 to 31 March 2011, and imposed shortfall penalties for gross carelessness or in the alternative, for failing to take reasonable care. The disputant challenged the reassessments and imposition of shortfall penalties.

The disputant first came to the Commissioner’s attention during an audit of the X Restaurant (“the restaurant”). The disputant had been employed at the restaurant as a waitress and at times, acting manager since 1996. As part of the restaurant’s audit, the Commissioner checked bank statements of a small sample of its employees including the disputant’s. The bank statements of the disputant recorded a high frequency of large deposits and withdrawals over a number of years. Notably, a substantial number of the deposits were made in cash, and in 2008, the disputant had purchased a house mortgage free for $405,000.

On 1 February 2012, the disputant filed income tax returns for the 2000 to 2011 tax years. The returns disclosed that the disputant had earned income from the following sources: (a) wages from the restaurant; (b) interest on her New Zealand bank accounts and term deposits; and (c) overseas income consisting of interest earned on a bank account in Australia. Following receipt of these tax returns, the Commissioner commenced an audit into the disputant’s tax affairs.

The disputant claimed that her money had come from several sources (apart from the income which she had declared) including: (1) the sale of gold Krugerrands coins which had been given to the disputant by her grandparents in China; and (2) an interest free loan of NZ$286,000 from her uncle in China. The disputant also alleged that the funds deposited in her Australian account and on which she had declared the interest earned, were funds belonging to her parents.

The Commissioner maintained that the disputant’s explanations for her increase in assets were not credible, and accordingly reassessed the disputant for undisclosed income.


Sale of Krugerrands

The disputant claimed that she had been gifted a number of gold Krugerrand coins, which she had brought to New Zealand and sold. During cross-examination the disputant changed her evidence as to when she brought the coins to New Zealand. The disputant told the Authority that she sold the coins to tourists dining at the restaurant. The amounts she said were paid for the coins greatly exceeded the spot price of gold in the period (expert evidence was provided by a gold trader and investor).

The Authority held that overall it did not find the disputant to be a reliable or credible witness and held her answers to be often vague and inconsistent.

The Authority found it was implausible that over a period of six years, the disputant had sold 73 Krugerrands to Asian tourists at the restaurant for sums very considerably above the spot price of gold at the time.

Accordingly, the Authority did not accept the disputant’s explanation that one of the sources of her money was the sale of Krugerrands at the restaurant.

Loan from Uncle

The disputant gave evidence that in 1999 on a visit back to China she and her uncle Mr SP entered into an agreement for an interest free loan of RMB1,250,000 (“the Loan Agreement”). The Loan Agreement provided for the money to be used by the disputant to purchase a house, and the disputant gave evidence that this house was to be used by Mr SP’s children when they came to New Zealand to study. Under the Loan Agreement the disputant was to pay the children’s education and living expenses and deduct these sums from the loan amount.

Mr SP gave evidence by video link from China. Under cross-examination Mr SP initially conceded that the Loan Agreement was not signed in 1999 and volunteered that it had been signed “just because of the tax department matter”. However, following further questioning he changed his evidence to say that he could not remember when it was signed. The Authority held it was satisfied the Loan Agreement was prepared and signed after the Inland Revenue investigation commenced.

Overall, the Authority found the evidence of both the disputant and her uncle to be unconvincing. The Authority noted that it was plain the disputant had received large amounts of money over the years and the onus was on her to satisfy the Authority as to its source. The Authority was not satisfied that there was a loan agreement between the disputant and her uncle, and accordingly did not accept the disputant’s explanation that a source of her funds was money advanced under this alleged agreement.

Australian Bank Account

Evidence was given by the disputant and her father Mr XD in relation to the money in the disputant’s Australian bank account. The disputant contended that the funds paid into the account belonged to her elderly parents.

The disputant told the Authority that when her parents first moved to Australia they would withdraw their pension payments, and keep the money at home as they did not trust banks. On one of the disputant’s visits to Australia it was decided that she would manage her parents’ money; she opened an account in her own name and her parents’ savings were deposited into that account.

The Commissioner produced evidence from the Australian Taxation Office detailing Mr XD and his wife’s pension payments. The received payments differed from those used by Mr XD in his own calculations, and were significantly less than the total amounts deposited into the disputant’s account.

The Authority agreed with the Commissioner that it could properly be inferred that the deposits paid into the account by the disputant on her visits to Sydney were not sourced from her parents’ income and were income of the disputant.


The investigator for the Commissioner gave evidence that because it appeared that the disputant’s income and expenses were mostly in cash, she formed the view that the disputant’s income could not be assessed by simply looking at the deposits made into her account. The investigator therefore decided to use the asset accretion method.

The Authority found that, in the circumstances of the case, the Commissioner was justified in reassessing the disputant for undisclosed income using the asset accretion method.

Shortfall penalties

The Authority held that any reasonable person in the disputant’s position would have foreseen that their failure to disclose income would create a high risk of a tax shortfall. Accordingly, the Authority held that the imposition of gross carelessness penalties was appropriate.


The Authority upheld the Commissioner’s reassessments and imposition of shortfall penalties for gross carelessness.

Tax Administration Act 1994: ss 141C and 149A