Taxation Review Authority confirms amounts received not loan repayments, but deemed dividends

Summary

During the 2010 to 2014 tax years (disputed period), the disputant was a shareholder of or was associated with a shareholder of "GPBL", "STL" and "KMRL" (together referred to as "the Companies"). The disputant received various payments from the Companies during the disputed period and had personal expenditure paid on her behalf by STL and KMRL. The disputant filed nil returns for each of the tax years in the disputed period. The Commissioner of Inland Revenue ("the Commissioner") reassessed the disputant in respect of the amounts received from the Companies as wages and dividends or alternatively as income under ordinary concepts.

Impact

The decision applies established principles and confirms that transfers of value from a company to a person is caused by a shareholding if there is no other reasonable explanation for the payment to be made.

Facts

GPBL

The disputant's husband, Mr Smith, was the sole director and shareholder of GPBL during the disputed period. GPBL was placed in receivership in June 2013 and ceased trading.

GPBL's bank statements and bank statements for the disputant's joint account held with Mr Smith (Joint Account) showed regular and recurrent transfers from GPBL to the Joint Account during the disputed period annotated as "Repay MLS [Joint account bank number]", "MLS loan [Joint account bank number]" or similar.

The Commissioner assessed 50% of these amounts as taxable to the disputant as dividends or, alternatively, income under ordinary concepts.

STL

STL was incorporated in October 2006. The disputant and Mr Smith were appointed directors on incorporation. The disputant resigned in May 2011. The disputant was also the sole shareholder until April 2009 when all the shares in STL were transferred to GPBL. STL was placed into liquidation in July 2013.

STL's bank statements showed STL paid the disputant's and Mr Smith's personal expenses. The Commissioner assessed half of these amounts as income to the disputant for being in the nature of dividends, or alternatively as income under ordinary concepts.

STL's bank statements and the disputant's bank statements showed regular (approximately weekly) amounts of $300, $400, $500, $600 or $750 being paid by STL into one of the disputant's personal bank accounts. These amounts were annotated in the disputant's personal bank account as "Disputant STL wages" or similar wording. These amounts were assessed as income to the disputant for being in the nature of wages.

Further amounts transferred from STL into the disputant's personal bank accounts during disputed period were assessed to the disputant as dividends or, alternatively, as income under ordinary concepts.

KMRL

KMRL was incorporated in May 2011 with Mr Smith as sole director. The disputant and Mr Smith each held a third of the shares with the remaining third held by a company also owned by them. KMRL was removed from the Companies Register in October 2012.

Bank statements for one of the disputant's personal bank accounts showed regular (approximately weekly) deposits of $500 annotated as "KWA market wages". These amounts were assessed as income to the disputant for being in the nature of wages.

Bank statements for KMRL showed the disputant's and Mr Smith's personal expenses being paid from the company's bank account. The Commissioner assessed half of these amounts as income to the disputant for being in the nature of dividends, or alternatively income under ordinary concepts.

Decision

Wages

The Tax Review Authority ("the TRA") found the amounts paid to the disputant annotated as 'wages' in the bank statements was assessable income to the disputant. The coding of the payments in the bank statements as 'wages' was consistent with the payments' regularity. The disputant also said in her evidence she did do some minor work for the companies.

At the hearing, the disputant argued the amounts recorded in bank statements as "wages" had been wrongly coded as a consequence of an anomaly in the payroll software used. However, the TRA found the explanation difficult to reconcile with the fact that the disputant received amounts coded as "drawings" on the same day that she received amounts coded as "wages".

In an interview in 2015 and in a document dated 2016 the disputant stated that the amounts described as wages were coded in the Profit & Loss Statement to reflect hours spent working in the business (STL) in order to show whoever purchased the business, the amount of time that Mr Smith and the disputant had invested. That way, it was said that their accountant could reconcile the time the disputant spent on the business(es). The TRA did not find it convincing that an accountant would advise or otherwise allow a company to code amounts that were capital repayments as wages in its accounts.

Dividends

The disputant argued that the amounts paid to her or on her behalf were returns of capital amounts she had lent to the Companies prior to the disputed period. However, the disputant was unable to produce documentary evidence to prove that the amounts she received from the Companies were repayments of loan advances. Documents which could have been expected included loan agreements, minutes or resolutions, journal entries or ledgers kept by either the Companies or the disputant.

The TRA was satisfied in terms of the requirements of s CD 6(1) of the Income Tax Act 2007, that the transfers in value from the Companies to the disputant were made because of a shareholding in each of the Companies and noted that the disputant had either been a direct shareholder or associated with a shareholder of each of the Companies during the disputed period. The TRA considered that once the disputant's explanation for the nature of the payments had been discounted, there was no reason for the Companies to have made transfers of value other than because of the relevant shareholdings in the Companies.

Income under ordinary concepts

The TRA also agreed that the amounts in dispute constituted income under ordinary concepts. The amounts received by the disputant involved a regular flow of funds that had "come in" to the disputant or had been paid on her behalf. The amounts were used to meet the disputant's day to day living expenses and she had no other income to rely on during the disputed period.

Shortfall penalties

The TRA held the disputant had been grossly careless in taking nil tax positions in the disputed period and was liable for shortfall penalties under s 141C of the Tax Administration Act 1994.