High Court confirms amounts dealt with on property consultant’s behalf attributable as income

Summary

Ethnik Krasniqi (“Mr Krasniqi”) had not filed any returns for the 2005 to 2011 income years. The Commissioner of Inland Revenue (“the Commissioner”) conducted an investigation which revealed Mr Krasniqi had undertaken consultancy work in New Zealand during this period. Substantial payments had been made from entities which Mr Krasniqi had worked for to his family members and third parties in Australia, where Mr Krasniqi’s family was based. Mr Krasniqi also had access to an eftpos card connected to one of these entities and he used that card to cover personal expenses. The investigation also revealed Mr Krasniqi was the primary beneficiary of a family trust. The Commissioner issued default assessments in respect of payments she considered had been received by Mr Krasniqi or paid or dealt with on Mr Krasniqi’s behalf or in his interest. The Taxation Review Authority (“TRA”) upheld the majority of the Commissioner’s assessments. Mr Krasniqi appealed the High Court and the Commissioner cross-appealed. The matter was heard before Wylie J in the High Court. His Honour dismissed both Mr Krasniqi’s appeal and the Commissioner’s cross appeal.

Impact

The decision 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 judgment confirms 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.

Note should be taken of the Judge’s expressed view that costs should lie where they fall as a result of the Commissioner being unsuccessful in her cross-appeal. In considering whether to cross-appeal in future cases, the possibility of not being awarded costs should be taken into account.

Facts

Mr Krasniqi is a New Zealand citizen and tax resident, who was involved in property trading and land development as a consultant during the disputed period (being the 2005-2011 income years). He primarily provided his consultancy services in connection with the business dealings of his father and two childhood friends “Mr Brown” and “Mr Smith” (“associates”). The Commissioner assessed deposits and expenditure of trusts and other entities of his associates as income to Mr Krasniqi because she considered he received them in exchange for consultancy services provided. Other deposits from unknown sources into Mr Krasniqi’s personal bank account and the bank account of a related trust “the Krasniqi Discretionary Trust” have also been assessed as income to Mr Krasniqi.

The Commissioner was largely successful in the Taxation Review Authority (“TRA”), but certain isolated amounts which had either been paid by Mr Brown to an outfit in Thailand or which had not originated from entities controlled by his associates had been found not assessable as income to Mr Krasniqi under ordinary concepts.

Mr Krasniqi appealed to the High Court in respect of certain (but not all) of the payments which had been found attributable as income to him and the Commissioner cross-appealed in respect of all of the amounts which the TRA found not assessable.

Decision

Section 138G(2) Application

The High Court confirmed the TRA’s decision not to allow new issues, which had not been included in the Mr Krasniqi’s Statement of Position (“SOP”), to be raised.

Wylie J noted that the Commissioner had provided substantial information to Mr Krasniqi and his solicitor throughout the disputes process and had reasonably informed Mr Krasniqi of certain documents in the Commissioner’s position which it was expected that Mr Krasniqi could source for himself. Mr Krasniqi had been given lists of documentary evidence held by the Commissioner, but had not requested copies of those and had not taken up the opportunity to attend a facilitated conference when offered to him, instead sending his legal advisor. Mr Krasniqi himself had not been forthcoming in providing documents despite promises being made to this effect.

In the circumstances, Mr Krasniqi’s argument that it was not until after discovery had been provided that he had been able to understand the basis for the Commissioner’s assessments was not accepted.

Mr Krasniqi’s Appeal

Wylie J dismissed Mr Krasniqi’s appeal on all points, noting that Mr Krasniqi had failed to discharge the onus of proof and had not provided any corroborating documentation or witness statements to support his various explanations.

With respect to the $1,309,185.04 worth of deposits into the Krasniqi Discretionary Trust, his Honour found that the TRA had correctly found the amount assessable to Mr Krasniqi on the basis of the evidence that he was the primary beneficiary of the trust and had some (albeit limited) authority with respect to the trust’s bank account. The Court further noted that there was a correlation between the use of Mr Krasniqi’s personal account and the use of the trust account with eftpos transactions on the same dates and places and transfers between the accounts.

With respect to the $105,000 payment by Mr Brown’s entity to an outfit called “Roverland”, Wylie J noted that there were several avenues open to Mr Krasniqi for corroborating his blanket denial that this vehicle was not purchased for his personal use. For example, he could have called Mr Brown or other business associates or personal friends to give evidence about his usual mode of transport while in New Zealand. Accordingly, Mr Krasniqi had failed to discharge the onus on this issue also.

More finely balanced was the $100,025 international payment from Mr Brown’s entity which contained a reference to Mr Krasniqi’s brother, Flamur Kransiqi. The Court noted that while there was a reference to Flamur Krasniqi on the payment reference, the payment was not itemised in Flamur Krasniqi’s Australian bank statements in the same way as other payments from Mr Brown’s entities had been. Again, the onus being on Mr Krasniqi, who had not called any witnesses or produced any documents to show this payment was not his, the High Court found that the TRA had correctly found the amount assessable as his income.

Finally the Court also dismissed Mr Krasniqi’s appeal in respect of certain payments which Mr Krasniqi argued were related to the acquisition and subsequent sale of a residential property in Remuera which he claimed he had used as his private home. Mr Krasniqi had originally put forward both in his Notice of Proposed Adjustment and his SOP that he did not have a permanent place of abode available to him and thus was not a tax resident (an argument abandoned early in the proceeding as Mr Krasniqi was clearly caught by the day count test). Wylie J noted that Mr Krasniqi’s recent claim that the amounts related to the acquisition and sale of his private home was not only uncorroborated, but “conflicting, unconvincing and totally self-serving”.

The Commissioner’s Cross Appeal

The High Court agreed with the TRA’s finding that one deposit for AUD $519,351.45 from Sun Marine Services into Mr Krasniqi’s Australian bank account was not assessable as income to Mr Krasniqi because it was not a payment from any of Mr Krasniqi’s associates, but from an unrelated third-party entity and was likely the sale of a boat which would not ordinarily be taxable and thus not income under ordinary concepts. On the same basis, two deposits totalling $66,300 from the same entity into the Krasniqi Discretionary Trust were also found not assessable.

Two further transactions of $10,020 and $12,020 from Mr Brown’s entities to an entity in Phuket were also found not to be income attributable to Mr Krasniqi because Mr Krasniqi could not be connected to the payments in Thailand.