Musuku v Commissioner of Inland Revenue

[2016] NZHC 934

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-001947 [2016] NZHC 934

BETWEEN

JAWAHAR BHASKAR MUSUKU

Appellant

AND

THE COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:	3 February 2016
Appearances:	Gregory Thwaite for the Appellant Leia Herbert and Mark Bryant for the Respondent
Judgment:	10 May 2016

JUDGMENT OF MOORE J

This judgment was delivered by me on 10 May 2016 at 4:30 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

MUSUKU v THE COMMISSIONER OF INLAND REVENUE [2016] NZHC 934 [10 May 2016]

Contents

Paragraph

Number

Introduction ..............................................................................................................[1] Background facts

Mr Musuku and his business interests .................................................................[12]

The investigation ..................................................................................................[13] Default assessment (May 2009) ...........................................................................[30] Dispute process ....................................................................................................[35] The hearing...........................................................................................................[55] Decision of the Authority .......................................................................................[58] Grounds of appeal ..................................................................................................[64] Principles on appeal ...............................................................................................[65] Analysis ...................................................................................................................[68] (a)       Did the Commissioner fail to issue a proper assessment?.........................[69]

(i)     Was the assessment arbitrary?

Appellant’s submissions ....................................................................[70] Legal principles ................................................................................[71] Analysis.............................................................................................[78]

1. Was the assessment made on a credible and reasonable basis?........[97]

   (iii)    Did the assessment properly take into account the known

   facts and law? .................................................................................[102] (b)    Was the Commissioner’s assessment incorrect? .....................................[104]

   (i)     Dividend income – was the transfer of value by virtue of

   Mr Musuku’s shareholdings in the companies? .............................[108] Appellant’s submission ................................................................... [112] Analysis........................................................................................... [119]

   (ii)     Employment income – was the transfer of value by virtue of

   Mr Musuku’s employment with the companies?............................[130]

   Analysis...........................................................................................[135] (iii)   Was the transfer of value income under ordinary concepts? ..........[141] Analysis...........................................................................................[150] Conclusion.............................................................................................................[156] Result .....................................................................................................................[166] Costs ......................................................................................................................[167]

   Introduction

[1]      Jawahar Bhaskar Musuku, the appellant, was the sole director and the sole or majority shareholder of three companies which operated pharmacies in which he worked as a pharmacist during the 2006 tax year.

[2]      In August 2006 a tax investigator employed by the Commissioner of Inland Revenue (“the Commissioner”) commenced a review of Mr Musuku’s tax affairs over a number of tax years.  It would seem the decision to do so was sparked by a number of apparent irregularities in the taxpayer’s affairs including the fact that he had not filed any tax returns for six years, two of his companies had failed to submit any GST returns since incorporation, one of the companies had last filed a return of income for the 2003 tax year and the Musuku Family Trust (“the Trust”) and one of the companies did not have IRD numbers and had never filed any returns.

[3]      The investigation itself was far from straightforward.  It occupied some seven years.  In the first three years the investigator made repeated requests for documents and information in the face of non-compliance.   He engaged in extensive correspondence and numerous discussions with Mr Musuku and a procession of tax agents.  Finally, in the face of what was effectively Mr Musuku’s failure or refusal to co-operate, the Commissioner made a default assessment of his income for the 2006 tax year.

[4]      This step reflected the investigator’s conclusion that Mr Musuku had treated all the bank accounts, both business and personal, as though they were his own.1   He frequently transferred money between them.   He made business deposits into his personal accounts and he mixed business and personal expenditure.

[5]      It was also apparent to the investigator that Mr Musuku had attempted to frustrate the timely and orderly progression of the investigation and, significantly, had still not filed an income tax return for the 2006 year.2     It was only after the

Commissioner issued the default assessment that some response was excited from

1      11 bank accounts were operated either exclusively or in part by Mr Musuku.  These included trading accounts for the companies, credit card accounts and personal accounts.

2      Mr Musuku’s personal return of income for the 2006 year was not filed until September 2009.

Mr Musuku.   He filed a Notice of Proposed Adjustment (“NOPA”) and his 2006

income tax return.3

[6]      The resulting disputes phase was protracted.  The conference stage concluded in August 2012.   In 2013 Mr Musuku issued a response to the Commissioner’s Statement of Position (“SOP”) and in April 2013 the Commissioner issued the SOP Addendum.

[7]      The Commissioner made generous concessions during the conference stage and as further information was provided by Mr Musuku and/or his tax agents further concessions were made.

[8]      The Disputes Review Unit upheld the Commissioner’s SOP in late July 2013 and an amended assessment was issued.  This was made on the basis the amounts deposited into various business and personal bank accounts to which Mr Musuku had access and which were spent on his behalf and to his private benefit or made available  to  him,  were  his  assessable  income  as  dividend  income,  employment income or income under ordinary concepts.

[9]      Mr Musuku then brought challenge proceedings before the Taxation Review

Authority (“the Authority”).

[10]     In   the   Authority’s   reserved   decision,   delivered   on   27   July   2015, Judge A A Sinclair determined she was not satisfied Mr Musuku had discharged the onus on him to prove on the balance of probabilities that the Commissioner’s amended assessment (and/or default assessment) for the 2006 year was arbitrary and not a genuine  attempt  to  assess  his  taxable income,  and/or  the Commissioner’s amended assessment was incorrect and, if so, by how much.  Her Honour dismissed Mr Musuku’s  challenge  and  confirmed  the  Commissioner’s  assessment  of  his

income tax for the 2006 year.

3      On or about 25 September 2009 the tax inspector received a letter from Mr Musuku’s then tax agent  dated  24  September 2009  which constituted the  NOPA and  enclosed  schedules and incomes of tax return for the disputed 2006 period.  The letter also contained a response to an enquiry made three months earlier, including applications for the issue of IRD numbers for those entities which did not have them, and an income tax return for two of the companies and the Trust.

[11]     It is against that determination Mr Musuku now appeals.

Background facts

Mr Musuku and his business interests

[12]     During the 2006 tax year Mr Musuku operated three retail pharmacies.  He was the onsite pharmacist.  While his efforts were divided between the businesses, his responsibilities included dispensing prescriptions, management, human relations (including hiring, PAYE and wages), operating the various bank accounts, etc.  The relationship between Mr Musuku and the various relevant entities in the tax year ending 31 March 2006 is set out in the appendix attached to this judgment.4    The various entities were as follows:

(a)       Mission Bay Pharmacy Ltd (“MBP Ltd”)

This company was incorporated in 1996.   Mr Musuku was its sole director and held 75 per cent of the issued shares.  His wife held the balance.    The  company  operated  the  Mission  Bay  Pharmacy  on Tamaki Drive.   Following a dispute with the landlord the company was evicted from the premises in May 2005 and was placed in liquidation in July 2006.

(b)      Mission Bay Pharmacy (2005) Ltd (“MBP (2005) Ltd”)

Following MBP Ltd’s eviction, the pharmacy’s business was relocated a short distance away in Patterson Avenue, Mission Bay.  MBP (2005) Ltd operated the business from the new premises.  The company was incorporated in June 2005 and Mr Musuku was its sole director and

shareholder.

4      The diagram shown in this appendix is a modification of the operational diagram prepared by the tax inspector, Mr Ward.   It has been slightly amended to reflect the submissions of counsel before me.

(c)      Mission Bay Holdings (2005) Ltd (“Holdings Ltd”)

This company, which was incorporated in November 2005, purchased a pharmacy business in Remuera which traded as Wylie’s Pharmacy. It commenced trading in early March 2006.  Mr Musuku was its sole director and shareholder.

(d)      Mission Bay Holdings Ltd (“MBH Ltd”)

This company owned various rental properties.  Mr Musuku and his wife were the directors.   Each held 50 per cent of the shares.   The company was incorporated in May 2004.

(e)       Musuku Family Trust (“the Trust”)

Mr Musuku and his wife were trustees of the Trust which was settled in either May 1997 or July 1998.5

The investigation

[13]     In August 2006 Mr Ward, a tax investigator employed by the Commissioner, started to review Mr Musuku’s tax affairs.   At that time the Inland Revenue Department’s (“IRD”) records disclosed the following:

(a)       Mr Musuku had not filed an income tax return for six years.  His last return was filed for the tax year ending 31 March 2000.

(b)      MBP (2005) Ltd and Holdings Ltd had failed to submit any GST

returns since their incorporation in 2005.

5      The uncertainty of the date of settlement arises for two reasons. First, some pages of a trust deed dated 12 May 1997 were provided in September 2009 by KPMG. The pages showed the settlors and trustees of the Trust to be Mr Musuku and his wife.  However, the signatures were said to be witnessed by Sharmi Shah, Accountant of Auckland.  Doubt arises because if the 1997 date is correct Sharmi Shah would have been a child.   Another trust deed dated 10 July 1998 was obtained from the BNZ.  The relevant pages showed a Mr Vallant as settler and Mr Musuku, his wife and Ravi Musuku, Mr Musuku’s brother, as trustees.

(c)       MBP Ltd had failed to file any returns of income since the 2003 income tax year.

(d)The Trust did not have an IRD number and had not filed any tax returns.

(e)       Holdings Ltd did not have an IRD number and had never filed any tax returns.

[14]     In  October 2006 Mr Ward sent a letter to Mr Musuku’s then tax agent, Mr Reddy.6   The letter advised that various tax years were being investigated.  These included the 2006 tax year.   Mr Ward asked that certain specified documents be made available within a month.

[15]     Some days later Mr Ward received a telephone call from a Mr Martin Smith. He introduced himself as Mr Musuku’s new tax agent.  This change was to be the first of at least six in Mr Musuku’s tax agent/advisors over the following seven years of the Commissioner’s dealings with Mr Musuku.

[16]     The Authority’s  judgment  provides  a  detailed  description  of  Mr  Ward’s investigation, his dealings with a procession of tax advisors and the various phases which the investigation included.  Before the Authority, Mr Ward filed a lengthy and detailed brief of evidence which dealt with the primary issues before the Authority. To this were attached seven appendices which related to aspects of the investigation which were not central.   His evidence, including the appendices, ran to over 100 pages. At the hearing he was cross-examined for half a day.  However, a summary of the central events, which gives a flavour to the way the investigation and dispute process unfolded, follows.

[17]     What emerged from Mr Ward’s evidence is that the material received from

Mr Musuku and his agents was inadequate.  It was often incomplete and drip-fed in response to repeated requests.

6      Also copied to Mr Musuku.

[18]     For example on 30 June 2007, relatively early in the evolution of the enquiry, Mr Ward, on the Commissioner’s behalf, issued a letter to Mr Musuku’s then tax agent acknowledging receipt of the documentation which had been supplied but noting specific material which had not been supplied.  He advised that if Mr Musuku had provided all items under his control the notice would have been complied with. He also stated that items which had not been supplied were, therefore, inferred to have been lost and gave notice that the Commissioner intended to proceed on the basis of the information then available.

[19]     The following day Mr Musuku’s tax agent couriered eight cheque books which he said Mr Musuku had located that day.   Mr Ward asked the tax agent to confirm that all documents under Mr Musuku’s control had been provided.  This was confirmed.

[20]     Another example is that in July 2007, four boxes were delivered to IRD’s Takapuna office.  None had courier stickers on them.  When the documentation was reviewed it was evident no documents had been provided in relation to Mr Musuku personally or the Trust, MBP Limited or MBH Ltd.   Furthermore, although some documentation relating to MBP (2005) Ltd (the company which owned the Patterson Avenue pharmacy) was provided, what was received was deficient in that it included no invoices issued by the company, nor any documents relating to the subsidies the company had claimed from the Ministry of Health.   Conversations Mr Ward had with Mr Musuku’s advisors disclosed increasing levels of frustration on their part at Mr Musuku’s lack of willingness and readiness to comply.

[21]   The examples cited above represent only a modest fraction of the communications  between  Mr Ward,  Mr  Musuku  and  his  tax  agents  and  the unsatisfactory  nature  of  Mr  Musuku’s  responses.    These  are  fully  set  out  in Mr Ward’s evidence.

[22]     On 24 June 2008, following protracted attempts to set up a meeting, Mr Ward interviewed Mr Musuku in the presence of his then tax agent, Mr Nair.  Mr Ward’s evidence was that many of Mr Musuku’s responses were inconsistent with the information and documentation then held by the Commissioner.

[23]     Following the interview Mr Ward sent Mr Nair a list of transactions from the bank accounts of Holdings Ltd which he required further details of.  That letter also included various matters which had arisen in the interview.  These included rental properties which Mr Musuku had failed to mention, the disparity between funds which he appeared to have taken for personal use and his reported shareholder salary, and the substantial volume of deposits to the joint bank account he held with his wife and others.

[24]     On 12 November 2008 Mr Ward visited Mr Nair’s business premises where he met with Mr Nair and Mr Musuku.   Further correspondence and requests for information were made.

[25]     Mr  Ward  examined  a  summary  of  cheques  paid  to  Mr  Musuku  from MBP Ltd’s account.   The summary had been provided by Mr Nair.   Some items which had previously been described as “accounts payable” were re-characterised as “personal  expenses”.    Other  cheques  could  not  be  characterised  at  all.    Some appeared to be for purposes other than those stated.

[26]     Mr Ward told the Authority that during the course of his investigation he reviewed many thousands of documents in an attempt to identify the nature of the particular bank transactions.

[27]     In   the   absence   of   receiving   satisfactory   documentary   material   from Mr Musuku, Mr Ward was compelled to make numerous information requests to third parties including banks, insurance companies, legal advisors, customers and others.

[28]     Following the interview there was further correspondence and another change in Mr Musuku’s tax agent.   In November 2008 KPMG was instructed to act for Mr Musuku following which there were discussions between that accounting firm and Mr Ward.  This led to a meeting in February 2009 with Mr Ward, other IRD staff, Mr Musuku and KPMG personnel.   With yet another change in tax agent, progress in the investigation continued to be slow.  Much of the information sought

in earlier correspondence remained outstanding.  Given the unsatisfactory progress

Mr Ward advised KPMG that:

“… it was looking increasingly likely that disputes procedures would be commenced.”

That advice proved to be prophetic.

[29]     A few weeks later Mr Ward received advice that the accounting firm, KPMG, had been instructed by Mr Musuku.  A meeting was arranged and, in February 2009, Mr Ward met with Mr Musuku and Ms Mar and Ms Roberts and amongst other requests, asked that his letter of 7 August 2008 to Mr Nair be replied to.  On 12 May

2009 Ms Roberts, of KPMG, told Mr Ward that a response to his letter of 7 August

2008 would be sent on 18 May 2009.  This time Mr Ward informed Ms Roberts it was looking increasingly like that dispute procedures would be commenced.

Default assessment (May 2009)

[30]     On 29 May 2009 Mr Ward, on the Commissioner’s behalf, issued a default assessment of Mr Musuku’s disputed income for the 2006 year.  This assessment was based on a taxable income of $591,080.74 with tax payable of $221,791.20.

[31]     A few days before the notice of assessment was formally issued Mr Ward sent Mr Musuku and KPMG a letter explaining how the assessment had been reached and enclosing his workings to illustrate the calculation.   More particularly, Mr Ward explained the methodology he had adopted in calculating the default assessment.  As Mr Ward explained in this evidence, a significant challenge he faced in assessing Mr Musuku’s income was that Mr Musku appeared to treat all bank accounts as though they were his own.  He frequently transferred money between them, made business   deposits   into   personal   accounts   and   mixed   business   and   personal expenditure throughout the various accounts.

[32]     To arrive at a default assessment, Mr Ward first identified the nature of as many  transactions  as  possible  within  the  various  accounts.    Bank/credit  card accounts   containing   sizeable   numbers   of   business-related   transactions   were identified.  He then categorised the transaction types into transfers, evident business

income/expenses, evident personal income/expenses, items where there would be a personal and business component and items of an unknown nature.

[33]     Transfers between each of the accounts was excluded.  Deposits which were clearly non-business related were also excluded.   All expenditure from individual bank accounts which could be identified as being business-related was subtracted from the business income from those bank accounts.  This was undertaken by reviewing many of thousands of documents supplied by Mr Musuku, conducting bank traces and obtaining third party documents.  An annual adjustment was then made for each bank account to account for the opening and closing bank balances. The calculations treated every amount debited for bank fees and debit interest as being “business-related”. A small proportion of motor vehicle expenses were treated as business-related where the vehicle was unknown.  Several vehicles were owned between Mr Musuku’s household and MBP Ltd. The remaining amounts related to either Mr Musuku’s expenditure, monies transferred to his interests or on his behalf or to unknown expenditure.  This amount was the sum that had been withdrawn from the bank accounts but could not be shown to be expenditure of a business nature. Further expenditure of a business nature incurred from other accounts where no business income existed was subtracted from these amounts.  This total, from each bank account, was aggregated to obtain an overall annual figure of monies “withdrawn” from business income for the tax year to be assessed as income to Mr Musuku.

[34]     On 26  May 2009 Mr Ward made a default  assessment  of Mr Musuku’s income tax for the disputed period.  The default assessment was based on a taxable income of $591,080.74 with tax payable of $221,791.20.  On that date Mr Ward sent a letter to KPMG  and Mr Musuku setting out how the amounts were calculated and enclosed his workings.  On 29 May 2009 a notice of assessment was issued.

Dispute process

[35]  Following the issuing of the default assessment there was further correspondence between Mr Ward and KPMG.   About a month later, at KPMG’s request,  Mr Ward met  with  Mr Musuku  and  his  advisors.   The purpose of the

meeting was for Mr Ward to explain his workings.  It was agreed that KPMG should focus on responding to the default assessment and that for the time being the Commissioner would not issue any NOPAs relating to the earlier periods being investigated.  Following the meeting there was further correspondence between the parties.

[36]     On  25  September  2009  Mr  Musuku  filed  a  NOPA  with  supporting documents. Also enclosed was his personal income tax return for the 2006 year.  He reported a taxable income of $32,378.   This amount was claimed to comprise of income  of  $19,000  in  the  form  of  shareholder/employer  salary,  $12,750  rental income and $628 interest (with RWT deducted).

[37]     Mr Ward analysed the underlying supporting documents.   These included unsigned and undated financial statements for MBP (2005) Ltd for the nine month period to 31 March 2006 and various calculation sheets and spreadsheets.   The financial statements had been prepared by an earlier tax agent and contained an express disclaimer to the effect that the accounts had been prepared based on information provided by Mr Musuku.

[38]     Mr Ward found a number of discrepancies in the financial information.  He set these out in some detail in his evidence before the Authority.  I shall mention a number by way of illustration.   For example, a document entitled, “Schedule of Current Accounts as at 31 March 2006” included a breakdown of Mr Musuku’s current account in the financial statements for MBP (2005) Ltd at that date.   The account was ostensibly overdrawn by $148,785.   It recorded cash deposits from Mr Musuku of $140,766 less cash drawings of $282,286 and interest charged on the overdrawn account of $7,265.  No calculations or documentation were provided in support of these figures.  Mr Ward observed that despite his extensive investigations he  was  not  aware  of  any  of  Mr  Musuku’s  own  funds  being  introduced  into MBP (2005) Ltd.  Mr Ward also told the Authority that the treatment of monies used by or transferred to or used on behalf of Mr Musuku as though they were loans was incorrect.  The financial statements had been prepared more than three years after the end  of  the  disputed  period.    There  was  no  evidence  that  Mr Musuku  or  the companies had treated any amounts as loans.   Mr Musuku did not provide any

contemporaneous records of any loans being made by him or how they would be treated.

[39]     Mr  Ward  said  that  Mr  Musuku’s  historic  income  tax  returns  showed insufficient levels of income to introduce the large cash deposits recorded.  He told the Authority that a loan cannot be retrospectively created for accounting purposes and thus clothe transactions with a character they never had when they were made. He  said  that  the  outcome  of  such  treatment  was  to  suppress  the  real  level  of Mr Musuku’s taxable income.

[40]     Mr Ward listed what he described as issues with Mr Musuku’s NOPA.  These

were:

(a)       Mr Musuku’s tax position included rental income from a property he

did not own;

(b)frequently his workings incorrectly characterised the nature of transactions;

(c)      the  unsigned  and  undated  financial  records  of  MBP  (2005)  Ltd contained  amounts  which  Mr Musuku’s  accountant  was  unable to reconcile and contained unverifiable totals;

(d)outward transfers of funds from bank accounts appeared to have been retrospectively  treated  as  loans  to  Mr  Musuku  for  accounting purposes;

(e)      transfers of funds from personal bank accounts to business accounts were treated as funds introduced to the businesses by Mr Musuku notwithstanding that the majority of funds in the personal bank accounts were deposits from the businesses;

(f)      despite  the  preparation  of  the  unsigned  and  undated  financial statements of MBP (2005) Ltd a $19,000 shareholder-employer salary was quantified and characterised separately on an unknown basis; and

(g)Mr Musuku’s reported income level for the disputed period was not commensurate  with  the  evident  non-business  expenditure  sourced from the proceeds of the business operations.

[41]     On 18 November 2009 Mr Ward, on behalf of the Commissioner, issued a Notice  of  Response  (“NOR”)  to  Mr  Musuku.     The  Commissioner’s  position remained unchanged from the default assessment.   Not long afterwards the 2006 income tax return for the Trust was received.  However, the 2006 income tax return for MBH Ltd was not supplied until 26 June 2013 and even then included neither income nor expenses.

[42]     At  about  this  time  a  dispute  over  fees  erupted  between  KPMG  and Mr Musuku which lead to another change of tax agents.   In mid-January 2010 a letter from Mr Talekar, Mr Musuku’s newly instructed agent, was received.   This correspondence contained multiple annexures and was written in response to the NOR.  Based on the analysis undertaken in this document, Mr Musuku claimed that his taxable income for 2006 should be reduced to $32,376.

[43]     In late May 2010 Mr Ward invited Mr Musuku and Mr Talekar to attend a conference.  The following month Mr Talekar replied.  He advised that Mr Musuku agreed  to  attend  a  conference but  wished  a  facilitator  be  appointed.    This  was arranged.   The conference took place in late September.   This was followed by further    correspondence,    delays    and    the    intervention    of    the    2010/2011

Christmas/New Year period.

[44]     In the meantime, Mr Ward reviewed bank records and examined specific transactions in an attempt to identify their nature.  From this he prepared a further letter and spreadsheets and forwarded them to Mr Musuku and Mr Talekar.   He requested specific information in respect of the 2006 year which would enable him to understand the transactions undertaken in that year.   In particular he requested

details of funds recorded to have been introduced to MBP (2005) Ltd exceeding

$140,000.  The attached spreadsheets included details of bank statements and “pivot tables” which summarised those transactions.  Mr Ward also invited the addressees to provide information on specific transactions the nature of which was obscure. Mr Musuku responded.  In short, Mr Ward described the response as follows:

“In general, I found [Mr Musuku’s] letter to be of a similar theme to much of this other correspondence.  That is, overtly stating a desire to work towards resolving disputes whilst failing to co-operate with requests for information.

I observe that the letter was consistent with other correspondence in that [Mr Musuku] made factually incorrect statements and emphasised his degree of honesty and tax compliance.”

[45]  There followed another meeting which, in turn, generated further correspondence.    Then  yet  another  meeting  took  place  in  mid-2011  at  which Mr Ward, on the Commissioner’s behalf, made a number of generous concessions. These included:

(a)      treating all items of expenditure under $1,000 from bank accounts in company names as though they were business related expenditure by the   relevant   entity,   notwithstanding   the   actual   nature   of   the transactions or the lack of substantiating documentation;

(b)treating  all  expenditure  which  had  the  appearance  of  being  legal services as business-related (whether business or personal);

(c)      treating a deposit of $150,000 on 3 March 2006 as being from non- business income; and

(d)apportioning payments to utility providers (where it was unknown whether the expenditure was business-related or not) on a 50/50 basis and 80 per cent of unknown telephone costs as business related.

[46]     On 14 August 2012 Mr Ward issued a Disclosure Notice to Mr Musuku regarding the 2006 tax year.   The notice required him to issue a SOP within two months.  This was followed by a telephone call which Mr Ward made to Mr Talekar in which Mr Talekar asked if the parties could meet.  Mr Ward agreed.

[47]     On 12 October 2012 Mr Musuku’s SOP was delivered.  He claimed his 2006 income tax return was correct.   He claimed his tax position was the same as that contained in his response to NOR and his NOPA.  However, while the tax position disclosed in the response to NOR differed by only $2 the methodology used to calculate Mr Musuku’s tax liability was completely different.

[48]     On 6 November 2012 a compulsory enquiry was held under s 19 of the Tax Administration  Act  1994  (“the  TAA”)  with  Mr  Reddy.    Mr  Reddy  had  been Mr Musuku’s tax agent when Mr Ward commenced his investigation more than six years earlier.  In certain material respects Mr Reddy’s responses were irreconcilable with those Mr Musuku had given at his interview on 24 November 2008.

[49]     On   7   December   2012   the   Commissioner   issued   her   SOP.      The Commissioner’s tax position was amended from the default assessment as a result of the concessions made during the conference stage.  The taxable income was reduced from $591,080.74 to $201,740.90.

[50]     At Mr Musuku’s request, the Commissioner gave Mr Musuku two extensions of time for filing his response to the Commissioner’s SOP.   On 8 February 2013

Mr Musuku’s response to the Commissioner’s SOP was received.  This was in the form of a large volume of files, a request for further information, a request that once the response phase was completed, subsequent correspondence should be directed to Keith Turner of NSA Tax Ltd and recording that logistical issues relating to the running of the businesses were difficult.   Mr Ward formed the view this correspondence, together with other delays and information requests, was a tactical device  adopted by Mr  Musuku  to  obstruct  the  orderly progress  of  the disputes procedure.

[51]     On 12 February 2013 Mr Musuku delivered a further folder of documents

entitled, “Response to Schedule B of the SOP.”

[52]     This  was  by  followed  up  by  an  email  from  Mr  Musuku,  stating  that  a Mr Kuperus  was  now  authorised  to  act  on  his  behalf.    Mr  Kuperus  contacted Mr Ward and requested a further meeting but this request was ultimately declined.

[53]     On 5 April 2013 the Commissioner issued her SOP Addendum confirming that nothing within the additional information had changed the position set out in her original SOP.

[54]     On  31  July  2013  the  Commissioner’s  dispute  review  unit  issued  its

adjudication report.

The hearing

[55]     The hearing before Judge Sinclair occupied six days.  Mr Musuku did not file any evidence or give evidence on his own account.  He did not attend the hearing. Three  witnesses  were  called  on  his  behalf.    None  had  been  involved  in  the preparation of the NOPA or the 2006 income tax return.  As such, none was able to identify the provenance of the underlying information.  Mr Musuku’s witnesses were as follows:

(a)      Mr Johnson was the accountant and business consultant who first started representing Mr Musuku in 2011 during the conference phase. He had been not been involved in the preparation of Mr Musuku’s tax return, or the NOPA, instead deferring to Mr Talekar in respect of those  matters.    In  response  to  questions  about  the  adequacy  of Mr Musuku’s ledgers attached to his SOP, Mr Johnson conceded that only summary totals were ever provided, with no details of what was comprised within these totals.  However, he was able to give evidence of arranging the meeting in mid-2011.   He claimed that the Commissioner  and  her  staff  were  not  open  minded,  cancelled meetings at the eleventh hour and reneged on an agreement to have an independent review of Mr Musuku’s file undertaken by an accountant; an agreement which included an undertaking that no steps would be taken  by the Commissioner until  the review had  been  completed. Mr Johnson complained that the report following the review was not

released  until  March  2013  despite  it  being  completed  in  July the previous year.   He later learned that the review did not include the

2006 year and it appeared the reviewer reported to a senior who was involved in the investigation, was not an accountant, and had not rigorously  checked  the  calculations  but  seemed  to  have  accepted Mr Ward’s  assessment  at  face  value.     Furthermore,  Mr  Johnson complained that despite the agreement the Commissioner continued with formal objection procedures despite the report not having been released.

(b)Mr Talekar was the tax agent who prepared Mr Musuku’s response to the NOR.  He gave evidence he had undertaken the analysis set out in the response relying entirely on the spreadsheets which accompanied the NOPA.   He was unable to assist the Tribunal on where the information contained in those spreadsheets had come from. Furthermore,  Mr  Talekar  referred  to  what  he  described  as,  “An Income Analysis” for the 31 March 2006 tax year.   This analysis relied on the default assessment figure of $591,080.74.   From this figure Mr Talekar deducted amounts totalling $558,704.74 arriving at a taxable income of $32,376.   The analysis followed that which he undertook in preparing the response to the NOR.  As the Authority observed, it was unclear from his evidence why Mr Talekar continued to use the default assessment figure when the amended assessment provided for assessable income of $201,740.90.

(c)      Mr Livingston was the chartered accountant engaged by Mr Musuku to arbitrate the quantum of fees in the dispute between Mr Musuku and KPMG.   As part of that arbitration he reviewed the quality of KPMG’s services.   Surprisingly, he confirmed he was not giving evidence in support of the tax position taken by Mr Musuku.   The Authority  observed  it  was  quite  apparent  from  his  evidence  that Mr Livingston did not have any particular knowledge of Mr Musuku’s business activities or the relevant documentation.  This limited role is, perhaps, reflected in Mr Livingston’s evidence that the Commissioner

had prepared default assessments relating to MBP (2005) Ltd from incomplete records.  However, as there was no default assessment of MBP (2005) Ltd Mr Livingston conceded he might have been wrong. He also conceded that KPMG did not prepare the accounts attached to the  NOPA.     It  is  not  surprising  the  Authority  determined  that Mr Livingston,   “Did   not   have   any   particular   knowledge   of [Mr Musuku’s] business activities or the relevant documentation.”

[56]     Four witnesses were called by the Commissioner, including Mr Ward.

(a)      Mr Porter gave evidence of the tenancy dispute involving MBP Ltd and its eviction from the premises on Tamaki Drive.

(b)Ms  Bell  gave  evidence  of  working  as  an  assistant  in  the  three pharmacies operated by Mr Musuku.  In particular, she described how Mr Musuku was responsible for the operation of the pharmacies.  She described how she maintained a record of her hours of employment and ordinarily met with Mr Musuku when he was calculating her wages.   By reference to bank statements and cheque stubs she confirmed the specific payments made to her were in the nature of wage payments.

(c)      Mr  Duggan  was  a  senior  analyst  with  the  IRD  with  particular expertise   in   industrial   benchmarking   and,   more   particularly, examining gross profit percentages as an indicator of business performance used to determine whether a tax audit should be undertaken.

[57]     The  common  bundle  which  formed  the  documentary  record  before  the Authority ran to several thousand pages.   Extensive closing written submissions were filed by both parties.

Decision of the Authority

[58]     In a detailed and careful judgment, Judge Sinclair set out the history of the Commissioner’s investigation of Mr Musuku’s tax affairs.  Against that background she considered the preliminary threshold issue of whether the Commissioner, in making  her  assessment,  had  genuinely  exercised  her  judgment  in  determining Mr Musuku’s assessable income.  After examining each of Mr Musuku’s criticisms of the Commissioner in this regard her Honour determined that none had any merit.

[59]     In   the   course   of   doing   so   her   Honour   reviewed   the   exchange   of correspondence between the Commissioner and Mr Musuku and/or his various tax agents.     She  concluded  it  was  plain  the  Commissioner  had  considered  the information which was provided by the taxpayer, observing that the Courts have long recognised the need for evidence beyond a taxpayer’s bald assertions.  Her Honour thus concluded it was entirely reasonable for the Commissioner, in light of the state of the evidence before her, to undertake her own analysis concluding there was no basis to support the claim that either of the Commissioner’s assessment was arbitrary or demonstrably unfair.   Her Honour concluded that the amended assessment and earlier default assessment were, in each case, an honest appraisal of the taxpayer’s position at the time they were made and amounted to a genuine exercise of the Commissioner’s judgment.

[60]     Her  Honour  then  went  on  to  consider  the  Commissioner’s  amended assessment and whether Mr Musuku had discharged the onus on him to prove, on the balance of probabilities, that the amended assessment was wrong and, if so, by how much.  In this context Judge Sinclair separately examined whether income from the companies was dividend income of an amount equal to Mr Musuku’s private expenditure.  Following a careful review of the evidence her Honour found herself in agreement with the Commissioner that there did not appear to be any reason for the companies to have made transfers of value other than because of Mr Musuku’s shareholdings.

[61]     Her  Honour  then  examined  whether,  in  the  event  that  Mr  Musuku’s

expenditure was not dividend income, it was employment income or income under

ordinary concepts.  Again, her Honour carefully reviewed the evidence and agreed with the Commissioner that any salary paid to Mr Musuku was not commensurate with the work undertaken by him in the business.   She found that in return, the companies either provided him with funds or spent money to his benefit without any arrangement for him to pay those amounts back.   She thus concluded that to the extent the funds made available to Mr Musuku by the companies were not dividends they would be included in his income as either employment income or income under ordinary concepts.

[62]     Finally, her Honour examined the rent payments paid into Mr Musuku’s and his wife’s joint account.  These payments were made on a weekly basis by tenants of various properties owned by the Trust.  Judge Sinclair reviewed the evidence and the inferences available to be drawn from it, agreeing with the Commissioner that the rent received had the quality of income in Mr Musuku’s hands and was thus assessable as income under ordinary concepts.

[63]     She    thus    dismissed    Mr    Musuku’s    challenge    and    confirmed    the

Commissioner’s income tax assessment for 2006.

Grounds of appeal

[64]     On appeal, Mr Musuku claims the Authority erred in the following ways:

(a)      by finding the Commissioner’s assessment represented an honest appraisal  and  genuine  exercise  of  judgment  as  required  by  law, because sufficient evidence was available;

(b)      in finding that the Commissioner’s assessment was correct;

(c)      in holding there was no sufficient evidence as to the amount by which the Commissioner’s assessment was correct and Mr Musuku’s assessment was or could be correct.

Principles on appeal

[65]     It is settled law that, in challenging the Commissioner’s amended assessment, the onus of proof is on the appellant to establish that the assessment is wrong, and by how much.7  The standard of proof is the balance of probabilities.8

[66]     This reflects the well established principle that a taxpayer must be able to prove the tax position they claim is correct.   The reason for this is obvious.   The taxpayer has unique and in many instances exclusive knowledge of their tax affairs, as well as access to the relevant documentation.9    This being the case, it would be illogical for the burden to rest with the Commissioner.

[67]     This general appeal proceeds by way of re-hearing.  The correct approach is that set out by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar.10

The Court is required to undertake its own assessment of the merits of the case.  It has been confirmed that the weight to be given to the findings of the lower court is a matter for the appellate court’s assessment.11

Analysis

[68]     I now turn to consider each of the grounds of appeal in the same order in which they are listed in the notice of appeal and as argued before me at the hearing.

(a)      Did the Commissioner fail to issue a proper assessment?

[69]     Under this heading Mr Musuku makes three claims.   First, he claims the assessment is arbitrary.   Secondly, he claims it was not made on  a credible or reasonable basis and thirdly, he claims it did not fully apply the known facts and law and, in particular, the businesses’ duty to reimburse Mr Musuku.  I shall deal with

each of these questions in turn.

7      Tax Administration Act 1994, s 149A(2); Buckley & Young Ltd v Commissioner [1978] 2 NZLR

485 (CA) at 498, affirmed by the Court of Appeal in  Beckham v Commissioner of Inland Revenue [2008] NZCA 301, (2008) 23 NZTC 22,066 at [39] and by the Supreme Court in Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2

NZLR 289 at [171].

8      Tax Administration Act 1994, s 149A(1).

9      Buckley & Young Ltd v Commissioner, above n 7 at 498.

10     Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR.

11     K v B [2010] NZSC 112, [2011] 2 NZLR 1 at [31].

(i)       Was the assessment arbitrary?

Appellant’s submissions

[70]     Mr Thwaite, for Mr Musuku, submits that the Commissioner’s assessment did not represent a honest appraisal or a genuine exercise of her judgment as required by law because there was sufficient evidence before the Authority of the following:

(a)       the initial assessment was greatly overstated and insupportable; (b)    the conference phase was not conducted properly;

(c)       no independent review was obtained on the basis it was agreed;

(d)the status and effect of the payments between Mr Musuku and any company were not properly assessed;

(e)       the response to information requests was inadequate;

(f)       negotiations   were  not   conducted  and   brought   to   a  reasonable conclusion;

(g)      the Commissioner’s assumptions were arbitrary;

(h)      the Commissioner’s enquiry was unnecessarily protracted; and

(i)       the Commissioner evinced a hostile attitude towards Mr Musuku.

Legal principles

[71]     The  parties  are  largely in  agreement  with  the principles  engaged  in  this appeal.  Ms Herbert, for the Commissioner, accepts the Commissioner is required to

make a genuine attempt to ascertain the assessable income of a taxpayer.12     The

12     Commissioner of Inland Revenue v NZ Wool Board (1999) 19 NZTC 15,476 (CA) at 15,489.

assessment must have a credible and reasonable basis.  It must not be arbitrary.  It must take into account the known facts and applicable law.13

[72]     However, I accept Ms Herbert’s submission that this obligation cannot be elevated into a requirement that the Commissioner may not make an assessment unless  and  until  fully  informed  of  the  taxpayer’s  affairs.    That  would  be  an unrealistic   expectation.      The   Commissioner   is   charged   with   the   care   and management of taxes and has a duty to collect over time the highest net revenue that

is practicable within the law.14 .  In exercising this duty, the Commissioner is heavily

reliant on the co-operation of the taxpayer who not only possesses or has access to the relevant information but who would ordinarily be expected to be familiar with their income producing and tax assessable activities.

[73]     This principle was discussed by Baragwanath J in Duncan v Commissioner of Inland Revenue15 where his Honour stated the more unreasonable the position of the taxpayer in the maintenance and provision of records and other information, the greater must be the entitlement of the Commissioner to make assessments in broad or even rough terms.   Similar observations are reflected in other Court of Appeal judgments such as Lowe v Commissioner of Inland Revenue and Commissioner of Inland Revenue v Canterbury Frozen Meat Co Limited16  where McKay J noted the duty on  the  Commissioner  is  to  make  an  assessment  based  on  the  information available to them.   It may not be arbitrary or chosen at random; but it may be an assessment  which  the  Commissioner  believes  is  not  necessarily correct  or  even probably wrong to some extent so long as the Commissioner believes it to be the best which can be done until further information is obtained. As his Honour observed:

“What is essential is that the figure must represent the honest judgment of the Commissioner as to what the correct figure, as best he can determine it in the state of his knowledge at the time.”

13     Lowe v Commissioner of Inland Revenue [1981] 1 NZLR 326 (CA); Commissioner of Inland Revenue v Canterbury Frozen Meat Co Limited [1994] 2 NZLR 681 (CA) at 691; Commissioner of Inland Revenue v Dandelion Investments Limited (2001) 20 NZTC 17,293 (HC), 1, 297.

14     Tax Administration Act 1994, s 6A.

15     Duncan v Commissioner of Inland Revenue (2004) 21 NZTC 18,735 (HC) at [41]; quoted with approval in Clarke v Commissioner of Inland Revenue (2005) 22 NZTC 19165 (HC) at [32].

16     Lowe v Commissioner of Inland Revenue, above n 13; Commissioner of Inland Revenue v

Canterbury Frozen Meat Co Limited, above n 13 at 692.

[74]     In the same case Richardson J noted that there must be a genuine attempt to ascertain the taxable income of a taxpayer even if carried out cursorily or perfunctorily.17

[75]     Furthermore, it has been held that an assessment remains valid even where the Commissioner believes that further enquiries will be required in order to arrive at the correct taxable position.18

[76]     In support of his submission that the Commissioner failed to issue a proper assessment, Mr Thwaite points out the Commissioner had three attempts at calculating the income.   The first  was the May 2009  default assessment which assessed  Mr Musuku’s  income  at  $591,080.74.    The  second  was  the  internal reassessment in May 2011 which reduced this figure to $250,417.21 and finally the current, amended assessment of $201,740.90 issued on 7 December 2012.

[77]     He submits the assessment was arbitrary because ss 6 and 6A of the TAA requires  fairness,  impartiality and  lawfulness  as  part  of  the  integrity of  the  tax system.  He submits these provisions were contravened because the assessment was not peer reviewed, not well articulated and not reviewed by an accountant, as was agreed.   Furthermore, he submits the Commissioner breached an undertaking to suspend taking further steps until the independent review had been completed and the report furnished.   In support of that claim Mr Thwaite relies upon email correspondence in 2011 in which an IRD staff member advised Mr Johnson that the request for an independent review of the file by a qualified accountant had been agreed to and that until this review had taken place it was not possible to have “a meaningful discussion as the Inland Revenue attendee would not have the required information”.   Mr Thwaite complains that no proper review, as promised, was undertaken.  He says, as a consequence, good progress ceased.  The enquiry by the Commissioner was not objective and in particular an internal check was not provided

to Mr Musuku before the adjudication procedure continued.

17     At 690.

18     Commissioner of Inland Revenue v Dandelion Investments Limited, above n 13.

Analysis

[78]     I   do   not   accept   the   Commissioner’s   assessments   were   arbitrary   or demonstrably unfair.    First, to the extent that criticisms are made of the Commissioner’s process and, in particular, allegations of unfairness, unreasonableness, bias and delay are advanced, it is well settled that the focus of a de novo hearing before the Authority is in determining the correctness of the Commissioner’s assessment rather than attacking the process.  This is because the nature of the hearing will necessarily cure any breaches of natural justice, unfairness

and procedural defects.19

[79]     As Salmond J said in Dandelion Investments Limited v Commissioner of

Inland Revenue:20

“That means that the Taxation Review Authority can hear the taxpayer’s case   without   examining   in   detail   the   process   which   led   to   the Commissioner’s assessment.   In reaching its own decision as to the appropriate assessment to be made the Authority can cure any defects that might  have  existed  in  the  Commissioner’s  assessment.    A challenge  to process is effected, therefore, not by attacking the method by which the Commissioner reached his decision, but by calling the evidence necessary to enable the Taxation Review Authority to make the correct decision.

…

It is unnecessary for the Taxation Review Authority to allow in a hearing before it a ‘lengthy inquisition into the alleged behaviour of the Commissioner and his staff in arriving at a particular assessment’.   The correctness of the assessment can be determined on the evidence called before the Authority.   It is also unnecessary for the Taxation Review Authority to hear evidence as to whether the conduct of the Commissioner’s staff led the Commissioner to arrive at his assessment taking into account impermissible matters and failing to have regard to relevant matters.  Once again,  the  evidence  relevant  to  the  assessment  can be  called  before  the Taxation Review Authority.”

[80]     This  principle  was  discussed  by  the  majority  of  the  Supreme  Court  in

Tannadyce Investments Limited v Commissioner of Inland Revenue, which held that whatever the claimed ground of error, illegality or invalidity a hearing Authority is

19     Case 12/2015 [2015] NZTRA 12, (2015) 27 NZTC 3-0111 at [78] and [79].

20     Dandelion Investments Limited v Commissioner of Inland Revenue [1997] 2 NZLR 96 (HC) applied in Case 16/2014 [2014] NZTRA 16, (2014) 26 NZTC 2-026 and Case 2/2014 [2014] NZTRA 02, (2014) 26 NZTC 2-012.

empowered to adjudicate upon it.21   The majority held that the hearing Authority can determine whether the Commissioner’s assessment is correct and, if not, what the correct assessment ought to be.If there is no assessment at all the Authority has the power to cancel.

[81]     It follows I reject the submission that the assessment did not represent an honest appraisal or genuine exercise of the Commissioner’s judgement by reason of flaws in the process or through breaches of natural justice.

[82]   Neither do I accept the other criticisms which include claims that the Commissioner’s assumptions were arbitrary, that the enquiry was unnecessarily protracted and the status and effect of the payments between Mr Musuku and his companies were not properly assessed.

[83]     On  the  evidence,  it  is  apparent  the  Commissioner  went  to  considerable lengths to ascertain Mr Musuku’s correct tax position and exhibited commendable patience in the face of a wide range of frustrations and difficulties in completing the enquiry in a timely way.   I am satisfied her assessments amounted to an honest appraisal and a genuine exercise of her judgement.  My reasons follow.

[84]     First, at the time the initial default assessment was made on 26 May 2009 no tax return had been filed.   Two and a half years earlier, on 9 October 2006, the Commissioner announced to Mr Musuku that his taxation affairs were being investigated and required him to make certain documentation available.   As the factual  background  set  out  above  reveals,  throughout  the  investigation  which followed and the subsequent dispute processes, the Commissioner was repeatedly required to follow up previous requests made to Mr Musuku and his procession of tax agents.   He was asked to provide documents and was explicitly warned, on multiple occasions, that if the documentation was not provided the Commissioner would be obliged to undertake her task on the basis of the limited information available.   There are numerous instances of serial requests made by Mr Ward to

Mr Musuku and his agents including the Commissioner’s letter to Mr Musuku’s then

21     Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012]

2 NZLR 153 at [55].

new tax advisor of 30 July 2007 advising that the items requested had not been supplied and the Commissioner would thus infer that the documents were lost and the  Commissioner  intended  to  proceed  on  the  basis  on  the  information  then available.

[85]     Furthermore, at no time did the Commissioner receive any records of sales made by Mr Musuku’s companies nor did the Commissioner receive, as she repeatedly requested, copies of bank deposit  slips or other records showing the amounts banked.  Literally thousands of documents were reviewed by Mr Ward in order to identify the nature of particular bank transactions.

[86]     Notably,  before  the  default  assessment  was  issued,  Mr  Ward  wrote  to Mr Musuku on 26 June 2009 enclosing his workings.  He explained how the default assessment was calculated.  He enclosed copies of his workings.  Nearly 100 pages of  detailed  analysis  was  provided  in  relation  to  each  of  the  accounts  to  assist Mr Musuku and his agents in understanding how the Commissioner had come to her decision.

[87]     Then in September 2009 Mr Musuku filed his NOPA and his 2006 income tax  return.   These  were  plainly inadequate.   As  noted earlier in  this  judgment, Mr Ward listed the many shortcomings.

[88]     The Commissioner then issued a NOR to Mr Musuku on 18 November 2009. Further correspondence followed including a response from Mr Musuku’s then tax agent. This was carefully reviewed by the Commissioner.

[89]   The Commissioner made generous concessions during the non-statutory conference stage as discussed earlier which operated to Mr Musuku’s considerable tax advantage.

[90]     Furthermore, the analysis compiled by KPMG in Mr Musuku’s NOPA, which is relied upon by him, was based on information supplied by an earlier tax agent and Mr Musuku himself.   No detailed ledger was  provided to support the financial statements.

[91]     There were two sets of worksheets for MBP (2005) Ltd.  One was a general ledger for MBP (2005) Ltd for the nine months from 1 July 2005 to 31 March 2006. This was emailed to Mr Musuku on 11 May 2012.   The other worksheets were emailed  to  the  Commissioner  by  Mr  Musuku’s  tax  agent.    The  same  set  of information appears in the NOPA prepared by KPMG but the workings behind the figures were not made available.   There were also inconsistencies between those documents and the transactions which appeared in the bank statements.

[92]     Additionally various issues of credibility and reliability arose in relation to Mr Musuku and how he maintained his business records.   This was detailed in Mr Ward’s evidence.  Mr Ward found discrepancies between the reported PAYE and the amounts paid to employees as evidenced from bank statements and other source documents.  During the year in question MBP Ltd and MBP (2005) Ltd submitted employer  monthly  schedules  in  respect  of  staff  employed  in  the  pharmacy businesses.    An  analysis  of  these  schedules  indicated  that  nine  staff  received payments of salary or wages from the businesses during the 2006 tax year.   One member of staff, Ms Bell, gave evidence before the Authority.  From that evidence it was apparent that MBP (2005) Ltd had failed to record payments made to more senior staff to whom she reported.

[93]     Against this background of incomplete information, contradictory statements and unreliable or incorrect, if not misleading, documentation the Commissioner was bound to make an assessment on the information then available to her.  This was not an arbitrary exercise. The evidence reveals it was not random.

[94]     Additionally, it emerged in evidence that the salary or wages paid to those staff were either understated or completely omitted in the employer monthly schedules filed.

[95]     As Judge Sinclair observed, the Courts have long recognised the need for

evidence beyond a taxpayer’s mere assertions.22    I agree with Judge Sinclair that it was entirely reasonable for the Commissioner to undertake her own analysis.  There

22     Case E69 (1982) 5 NZTC 59,378 (TRA); J23 (1987) 9 NZTC 1,129 (TRA); Case F42 (1983)

6 NZTC 59,773 (TRA); Case L40 (1989) 11 NZTC 1,249 (TRA).

is simply no basis to suggest that either of the Commissioner’s assessments was arbitrary or demonstrably unfair.  Indeed, the evidence reveals the very opposite is the case.

[96]     As was Judge Sinclair, I am easily satisfied the Commissioner’s amended assessment and earlier default assessment were, in each case, an honest appraisal of Mr Musuku’s tax position at the time they were made and a genuine exercise of the Commissioner’s judgement.

(ii)      Was the assessment made on a credible and reasonable basis?

[97]     Mr Thwaite submits that in respect of Mr Musuku’s personal account for the nine  months  ending  31  March  2006  the  Commissioner’s  calculation  showed  a running balance of payments involving business payments into the accounts and business expenses being paid out of those accounts.  He submits that such a balance is consistent with a current account.

[98]     He further submits that if a payment is treated as a dividend then on the Commissioner’s theory it should retain that character.    He says that the Commissioner’s theory appears to be that Mr Musuku was not entitled to reimbursement for expenditure incurred by a company and that no payment that is deemed to be a dividend can be offset against expenditure.

[99]     He submits the defect in the Commissioner’s theory is that, in the practical calculations, the nature of the deposits change as expenditure amounts.  He submits that  an  adjustment  is  needed  in  relation  to  the  nature  of the  deposits  which  is consistent with an open account but inconsistent with income vested in the hands of the appellant.

[100]   The difficulty with this submission, as recognised by the Authority, is the absence  of  any  evidence  of  the  existence  of  such  an  arrangement  between Mr Musuku and the companies particularly where he also contends the amounts are drawings made under his shareholder’s current account.  I shall deal with this issue more fully later in this judgment when considering Mr Thwaite’s submission in the context of his criticisms of the Authority’s decision that the payments to Mr Musuku

were  either  shareholder  dividends  or  income  earned  as  an  employee  or  under ordinary concepts.

[101] However, I agree with the Authority there was no obligation on the Commissioner to consider various possible contractual and other arrangements between Mr Musuku and the companies in the absence of any evidence that such arrangements existed.

(iii)     Did the assessment properly take into account the known facts and law?

[102]   This   is   Mr   Thwaite’s   final   submission   under   this   general   heading. Mr Thwaite  submits  the  Commissioner  did  not  properly  recognise  the  general principle that a shareholder has no obligation to spend personal funds for product for a company or for expenses of the company.   He submits Mr Musuku personally funded a high level of expenditure for the benefit of his companies.  He thus submits as follows:

“Therefore, another legal connection must exist between [Mr Musuku] and each  company.     If  that  connection  obliges  a  company  to  reimburse [Mr Musuku], then payments by the company are not made solely because [Mr Musuku] is a shareholder of the company.”

[103]   This submission fails for the same reason.  I agree with the Authority for the reasons given  The Commissioner had no obligation to consider other possible contractual arrangements in the absence of any evidence they existed.  In my view this submission calls for speculation.   No evidence exists to support these claims and, as earlier noted, the alternatives are inconsistent with Mr Musuku’s claim that the amounts are drawings.

(b)      Was the Commissioner’s assessment incorrect?

[104]   Mr Thwaite, consistent with his submission before the Authority, argues that any transfer of value between the companies and Mr Musuku was not by virtue of his shareholding in the companies, nor was it employment income or income under ordinary concepts.  He submits that the payments to Mr Musuku were made pursuant to an obligation to reimburse a director or were reimbursements to Mr Musuku as an agent of the companies, or was a “running account”.  He submits Mr Musuku was

not being paid as a shareholder.  Alternatively, if he was being paid as a shareholder, a current account existed between each company and Mr Musuku as advances by way of loan to him in the context of indebtedness.

[105]   Further, he submits there was no employee income as the relationship was that of a debtor/creditor or the payments did not show regularity and periodicity and had no connection to his effort.

[106]   Finally, under this heading, he submits there was no other income as the relationship  was  that  of  a  debtor/creditor  or  Mr  Musuku  declared  salary,  rental income and interest; other payments were part of a current account which embraced the personal payment of business expenses.

[107]   I shall deal with each of these submissions in turn.

(i)       Dividend  income  –  was  the  transfer  of  value  by  virtue  of  Mr  Musuku’s

shareholdings in the companies?

[108]   Section  CD1  of  the  Income  Tax  Act  2004  (“the  ITA”)  provides  that  a dividend derived by a person is income of that person.   A dividend includes a transfer of value from a company to a person caused by their shareholding in that company.23   A transfer of value occurs where a company provides money or monies worth to a person.24

[109]   Section CD4(3) provides that a transfer of value does not occur to the extent that the money’s worth provided by a company is the only provision of services. However, under s CD4(4) there is a transfer of value if the provision of services by a company is the benefit of a company’s expenditure and the company is a closely held company.

[110]   Dividends under tax law do not have to reflect the character of dividends as generally understood.   For example, there is nothing in the ITA which requires

dividends to be paid out of company profits or that dividends must be minuted or

23     Income Tax Act 2004, ss CD3(1)(a) and CD5.

24     Section CD4(1)(a).

officially declared.   Where companies incur expenditure for the benefit of a shareholder, or where a shareholder treats company funds as their own, there may be a deemed dividend to that shareholder.25

[111]   The numerous authorities which comment on this principle make it plain that a dividend for the purposes of the ITA does not have to correspond to a payment that is a dividend under the general law. The breadth of the definition is such that there is no requirement that dividends must be paid from profits.

Appellant’s submission

[112]   Mr Thwaite submits the relevant provision engaged in the present case is s CD5 of the ITA which provides as follows:

“CD 5 When is a transfer caused by a shareholding relationship?

General test

(1)      A transfer of value from a company to a person (recipient) is caused by a shareholding in the company if—

(a)      the recipient at any relevant time—

(i)       holds shares in the company; or

(ii)      is associated with a shareholder; or

(iii)      is the trustee of a trust, and a beneficiary of the trust is either a shareholder or the spouse, civil union partner or de facto partner of a shareholder; and

(b)      the company makes the transfer because of that shareholding of the relevant shareholder.

Indication that test met

(2)       One indication that a transfer is caused by a shareholding is if the terms of the arrangement that results in the transfer are different from the terms on which the company would enter into a similar arrangement if no shareholding were involved.

…”

25     McIlraith v  Commissioner of  Inland Revenue [2007] 23 NZTC 21,456 (HC);  Alexander v Commissioner of Inland Revenue (1996) 17 NZTC 12,543 (HC); Alexander v Commissioner of Inland Revenue (1998) 18 NZTC 13,921 (CA); Case J58 (1987) NZTC 1,327 (TRA); Case Q6 (1993) 15 NZTC 5,047 (TRA) at 5,050.

[113]   Mr Thwaite  accepts  that  subsection  1(a)  is  engaged  in  the  present  case. However, he submits that s 5(1)(b) does not apply because the transfer of value did not occur by virtue of or because of the shareholding.

[114]   He does not dispute that income from the companies was deposited into the companies’ accounts and thence into Mr Musuku’s personal accounts.  Mr Thwaite points out that no method appears to characterise these deposits.  The amounts spent by Mr Musuku in 2006 on business supplies and expenses were large.26

[115]   The sums advanced to the companies were paid through Mr Musuku’s credit card, apparently for the purpose of gaining airpoints.   Mr Thwaite submits it is unimaginable Mr Musuku would have funded such a level of expenditure without any prospect of payment on an arm’s length basis particularly when these large sums were put on a credit card and defaults in payment would have lead to high penalty interest charges.  Mr Thwaite thus submits this evidence necessarily infers another legal connection must have existed between Mr Musuku and each company.   He posits that the alternative possible options include:

(a)      Mr Musuku was buying product and paying expenses as a director and was   entitled   to   reimbursement   for   those   sums   as   expenses. Mr Thwaite submits this is the most likely.

(b)Mr Musuku was buying product and paying expenses for the company as an agent with a right to reimbursement from the principal company, a relationship which Mr Thwaite accepts is less likely.

(c)      Mr  Musuku  and  the  companies  were  contractually  bound  by  an agreement under which Mr Musuku, as vendor, brought product and on-sold it to the company with Mr Musuku possibly paying certain expenses of the company’s operation.   Mr Thwaite frankly accepts

this option is the least likely.

26     $35,000, $152,756.24 and $1,099.90.

[116]   However, he submits that whatever the connection, the companies satisfied their payment obligations by frequent transfers or payments for Mr Musuku.  They were not paid to him because of his shareholding.   He submits the best analysis, consistent with arm’s length transactions, is that of a “running account” or a “current account”.  He thus submits that the relevant company was not paying Mr Musuku because he was  a shareholder.    It paid him because he was  a creditor and  the arrangement would have suited the companies because they had access to the long payment terms of a credit card.  Mr Thwaite accepts there is no evidence to support this option.

[117]   Alternatively, he submits that a conventional shareholder’s current account existed between each company and Mr Musuku in the form of advances by way of loans  to  him  in  the  context  of  frequent  debts  by  the  company  in  favour  of Mr Musuku.   Consistent with the loose arrangement around Mr Musuku paying company expenses, a company might make an excessive payment of an amount for Mr Musuku’s benefit.   At some point the creditors and debtors would need to be calculated and an adjusting payment made. Accordingly, a shareholder’s account, he submits,  existed  between  each  company  and  Mr  Musuku.    A  formal  written agreement is not essential.  Hence payments were not made to Mr Musuku by reason of his shareholding in terms of s CD5(1); instead the payments were made because an  arrangement  existed  between  Mr Musuku  and  the  companies  under  which Mr Musuku paid the companies’ expenses.

[118]   While accepting this arrangement may be “rather unorthodox”, Mr Thwaite submits it is, nevertheless, within the letter and spirit of both the general law and the tax law.

Analysis

[119]   I agree with the Authority, for the reasons given in its judgment, that there is

no merit in this part of Mr Musuku’s challenge.

[120]   First, the evidence discloses that Mr Musuku received amounts into his joint bank account from the companies.  These sums he retained and used for his private benefit.  Mr Musuku also received the benefit of amounts spent by the companies for his private benefit.  But for his shareholding the transfers of value would not have been made.

[121]   Furthermore, no reliable or credible evidence of loans or drawings exist.   I agree with Ms Herbert that the information provided with Mr Musuku’s NOPA (including the schedule of current accounts) appears to have been created in an attempt to retrospectively justify Mr Musuku’s current position, namely that the amounts were drawings and not dividend income.

[122]   In order to show that payments made by the companies were to reimburse Mr Musuku for expenses he had incurred on the companies’ behalf, and that the movement of funds between the companies and Mr Musuku were in the nature of operation  of  a  current  account,  Mr  Musuku  needs  to  establish  this  was  agreed between  him  and  the  companies.     Normally  this  would  be  recorded  by  a

contemporaneous journal entry in the companies’ accounts.   In Case Q627  Judge

Willy emphasised the importance of providing evidence of a transaction made via a current account.   While journal entries are not, in themselves, required they do provide evidence that such a transaction has occurred.

[123]   It is not in dispute that the companies were properly constituted or that during the relevant period Mr Musuku was a significant shareholder in them all.  Transfers of value were made from the companies to Mr Musuku.  Mr Talekar confirmed that private  expenditure  was  paid  from  the  companies’  business  accounts.     The companies’ income was deposited into a variety of business and personal accounts in the names of the companies, Mr Musuku, and his wife.  The amounts were not kept separate from other funds and were transferred between the various bank accounts on a frequent and ongoing basis.

[124]   Additionally, Mr Musuku had access to and controlled the companies’ bank

accounts.   At interview he advised he signed most of the cheques for the joint

27     Case Q6 (1993) 15 NZTC 5,047 (TRA) at 5,050.

personal account he operated with his wife and that only he had access to internet

banking for that account and the companies’ accounts.28

[125]   It is noteworthy that Mrs Musuku also appears to have benefited from the income   derived   from   the   companies   although   not   a   shareholder   of   either MBP (2005) Ltd or Holdings Ltd.  However, s CD5(1)(a)(ii) of the ITA provides that a transfer of value from a company to a taxpayer is caused by a shareholding in a company if that taxpayer is associated with a shareholder.  Plainly Mrs Musuku is associated with Mr Musuku through the operation of that section.

[126]   Mr Musuku provided no reliable evidence he  borrowed  money from  the companies and that interest was charged. Any evidence provided by him was created three years after the end of the disputed period and only after the default assessment had been issued.

[127]   For the reasons already discussed, I agree with the Authority that the financial statements provided by Mr Musuku are neither reliable nor credible.  Significantly, Mr Musuku has never provided calculations or supporting documents for the funds which  he  says  he deposited  and  withdrew  (recorded  in  the  schedule  of current accounts for MBP (2005) Ltd).   It follows these amounts cannot be verified. Furthermore, Mr Ward gave evidence that despite the extensive and detailed nature of his investigation he was not aware of any of Mr Musuku’s own funds being introduced into that company.

[128]   It follows there is no reliable evidence from Mr Musuku or any other source that there was any reason for the companies to have made transfers of value other than by reason of Mr Musuku’s shareholding. And, while I accept it is not necessary for a formal written statement or other documentary evidence to be produced to support the use and operation of a current account, the preponderance of evidence in this  case  points  the  other  way,  i.e.  the  transfers  of  value  were  by  reason  of

Mr Musuku’s shareholding.

28     This assertion was modified when the Commissioner raised the issue of PAYE.  Mr Musuku then claimed that his tax advisor (Mr Reddy) had access to these accounts although Mr Reddy, on interview, contradicted this.

[129]   It follows I agree with the Authority that Mr Musuku can be taken to have derived as dividend income an amount equal to the private expenditure.29

(ii)      Employment income – was the transfer of value by virtue of Mr Musuku’s

employment with the companies?

[130]   Additionally, Mr Thwaite submits that the payments were not employment income.  He points out Mr Musuku declared income of $19,000 from the pharmacy business  which  was  part of nearly $60,000  identified  in  the 2006  Statement  of Financial Performance financial records for MBP (2005) Ltd as wages and salary. While accepting the income attributed to Mr Musuku is modest, Mr Thwaite points out that the 2006 year was a difficult and challenging one.  Mr Musuku had to shut down  one  business,  engage  in  a  protracted  legal  dispute  with  the  landlord  of MBP Ltd, open another business (MBP (2005) Ltd), acquire customers and then buy a third business (MBH (2005) Ltd).  He submits that a prudent owner could properly decide to draw a small salary in those circumstances.   Furthermore, while acting under the advice of KPMG and others, Mr Musuku declared income from real estate. He accepts he did not own the property identified but Mr Thwaite submits there is evidence of rental income entering his accounts.  Interest was also returned.

[131]   Mr  Thwaite  challenges  the  Commissioner’s  reliance  on  Mr  Musuku’s lifestyle noting that the Commissioner did not identify what the unusual or expensive elements of the lifestyle were, how much that lifestyle cost or what portion of the cost was absorbed by the Trust as owner of the home.   He submits that any sum, other than the declared income, was received by Mr Musuku as part of a creditor/debtor  relationship  or  as  part  of  a  shareholder’s  current  account.    In particular he points out that a key element of income is regularity and periodicity. He thus points to the random nature of the payments made to Mr Musuku and the absence  of  any  connection  between  effort  and  payment.    For  these  reasons  he

submits the payments do not constitute income.

29     Although the Commissioner has not assessed Mrs Musuku for any dividend income it would not be unreasonable to expect she might have spent money which was in the bank accounts to which she had access for her own purposes.  However, the present proceedings represent Mr Musuku’s challenge to the assessment and he did not identify which, if any, amounts of expenditure were made Mrs Musuku rather than himself.

[132]   Section CE 1(1)(a), (b) and (g) of the ITA provides that certain amounts derived by a taxpayer in connection with their employment or service are income of that taxpayer.

“CE 1 Amounts derived in connection with employment

Income

(1)      The following amounts derived by a person in connection with their employment or service are income of the person:

(a)      salary  or  wages  or  an  allowance,  bonus,  extra  pay,  or gratuity:

(b)      expenditure on account of an employee that is expenditure on account of the person:

…

(g)      any other benefit in money.”

[133]   Salary or wages is defined in s OB 1 of the ITA.  “Expenditure on account of an employee” is defined in s CE 5 of the ITA.  According to that definition, expenditure on account of an employee is where an employer pays for expenditure that an employee has incurred.

[134]   I agree with Ms Herbert that s CE 1(1)(g) of the ITA casts a wide net to include  in  a  person’s  employment  income  a  cash  amount  derived  that  has  a connection with their employment or service, even though that amount may fall outside the specific categories listed in CE 1.

Analysis

[135]   On or about 24 September 2009 Mr Musuku, in his NOPA and his late income tax return, recorded a shareholder employee salary of $19,000.  It is thus not in dispute he derived income during the relevant tax year.   The question is how much?

[136]   Mr Musuku provided the companies with his services as a pharmacist.  At interview he said he had been a pharmacist for 24 years and in retail pharmacies since 1996.  He said he worked 60 hours per week.  This evidence is supported by

Ms Bell who was employed by the companies during the relevant period.   She confirmed  Mr  Musuku  carried  out  the  role  of  pharmacist  and  managed  the pharmacies during the period of her employment.

[137]   In   his   interview  of  24  June  2008   Mr  Musuku   discussed   his   work responsibilities as follows:

“Ward            Now, talking about your work.   On a day-to-day basis eh what do you do?

Masuku         Mostly dispensing.”

[138]  In relation to his responsibilities at Holdings Ltd (Wylie’s Pharmacy in Remuera) Mr Musuku explained that he dispensed prescriptions and was responsible for the rostering of staff; looking up debtors and creditors; supervising staff; and providing customer services, but added 80 per cent of his time was spent in the dispensary.    He  said  he  spent  10  to  15  per  cent  of  his  time  in  Mission  Bay (MBP (2005) Ltd) and the rest in Remuera.

[139]   Of significance is the income protection insurance which Mr Musuku took out for the period between November 2002 and December 2007.  This provided him with income security cover in the event of illness or disability for a weekly benefit of

$2,500.  This is the equivalent to $130,000 per annum.  Mr Thwaite submits that no significance should be attached to this level of cover for the purposes of assessing Mr  Musuku’s  income  in  the  2006  tax  year.    This  is  because  of  the  business disruptions discussed earlier.   However, the Commissioner’s second assessment assessed Mr Musuku’s total income at $201,740.90.  The net amount, when adjusted for tax, is $132,037.24, a figure which is remarkably comparable to the level of annual income which Mr Musuku had insurance cover for.  I am of the view that this evidence provides independent support for the Commissioner’s assessment.

[140]   I also agree with the Authority that the salary of $19,000 paid to Mr Musuku is not commensurate with the work undertaken by him in the businesses.  In return the companies either provided him with funds or spent money to his benefit without any arrangement for him to pay these amounts back.  Again, I find myself agreeing

with the Authority.   To the extent that the funds the companies made available to

Mr Musuku were not dividends they would be his income as employment income.

(iii)     Was the transfer of value income under ordinary concepts?

[141]   On the question of what amounts to income, s CA 1(1) and (2) of the ITA

provides as follows:

“Amounts specifically identified

(1)      An  amount  is  income  of  a  person  if it  is their  income  under  a provision in this Part.

Ordinary meaning

(2)      An amount is also income of a person if it is their income under ordinary concepts.”

[142]   Mr Thwaite submits that if a creditor/debtor relationship is shown to exist on the balance of probabilities then the cashflow was part of a current account.   He submits that by definition cashflow cannot then constitute other income.  In support of this submission he points out that Mr Musuku did receive a salary, did receive rental income and did receive interest.   These sums have been declared.   Again, Mr Thwaite repeats his earlier submission that in respect of the other sums identified as coming from the business, the payments were made to his accounts either as part of an overall creditor/debtor relationship or as part of a current account.   He thus submits that no funds are unaccounted for and no income can be considered as income under the ordinary concept of income relying on the principle that “income

tax is not a tax on everything which comes in”.30

[143]   Furthermore, Mr Thwaite submits that the payments were made on a random basis, often by members of Mr Musuku’s family.   He thus submits there is no necessary connection between any effort on the part of Mr Musuku and the payment

to his account or for his benefit. Thus the payments do not constitute income.

30     A Taxpayer v Commissioner of Inland Revenue (1997) 18 NZTC 13,350 (CA) at 13,355.

[144]   Section CA 1(2) of the ITA is a residual or catch-all provision which includes income under ordinary concepts as income of a person if it is not otherwise included by some specific section of the ITA.

[145]   “Income” was described by Richardson J as follows:31

“Thus income is perceived as a gain derived from property which leaves the property in tact – a fruit off the tree as distinct from the tree itself, a crop as distinct from the land. Again, income is a flow of money or monies worth, a series of periodic receipts arising from the ownership of property or capital, or from labour, or a combination, e.g. rent, interest and dividends, salary and other personal exertion receipts, annuities and business receipts.   And the source  of  the  transaction which  produces  the  dollar  may  be  relevant  in determining assessability as well as being relevant geographically in international tax matters.”32

[146]   The ITA does not define the phrase “under ordinary concepts”.   This is a

phrase which has been left for the Courts to develop.

[147]   The primary determinant in many cases will be the periodic nature of a payment and, accordingly, whether they are part of the funds on which the recipient may depend for living expenses.33   In considering the relationship between the payer and payee and the purpose of payments, Richardson J stated:34

“The sums in question were regular periodical payments made to the appellant to defray his expenses while attending teachers’ college full-time as a teacher trainee.  They were paid to him for that purpose and were the whole or part of the receipts upon which he depended for that purpose. They were not gifts.  They were contractual payments to which the appellant was entitled so long as he performed his part of the bargain.   They were emoluments received in respect of and in return for his performance of the obligations of the studentship he had undertaken.  It is implicit in s 61(37) that at least some scholarship and bursary payments constitute income according to ordinary concepts, otherwise it would be unnecessary to exempt such income.”

[148]   Mr  Thwaite’s  submission  in  relation  to  this  issue  reflects  his  primary

submission.   He accepts Mr Musuku received a salary, rental income and interest income.  Those sums have been declared.  In respect of the other sums identified as

31     A Taxpayer v Commissioner of Inland Revenue above n 30.

32     See too Tennant v Smith (1892) AC 150 (HL) at 164; Commissioner of Inland Revenue v Grover

[1987] 2 NZLR 736 (CA) at 742.

33     Reid v Commissioner of Inland Revenue [1986] 1 NZLR 129 (CA) at 136 (citing Scott v

Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219.

34     Reid v Commissioner of Inland Revenue above n 33 at 136.

coming from the business Mr Thwaite repeats his submission that the payment was made to his accounts as part of an overall creditor/debtor relationship; or was part of a current account.  Payment was made for his benefit from the company account as part of a shareholder’s current account.

[149]   He  thus  submits  no  funds  are  unaccounted  for  and  no  amount  can  be considered as income under the ordinary concept of income.35     The payments to Mr Musuku  were  made  on  a  random  basis  often  by  members  of  his  family. Mr Thwaite  submits  there  is  no  necessary  connection  between  any  effort  by Mr Musuku and the payments made to his account.  He thus submits the payments do not constitute income.

Analysis

[150]   I am satisfied that if the income was not dividend income or income received as an employee it was income under ordinary concepts.  My reasons follow.

[151]   Mr Musuku was either the sole or joint director of the companies.  He was also the sole and majority shareholder.  He was the company employee and accepts he  received  employment  income.    It  follows  there  is  an  element  of  reciprocity between the amounts the companies either spent on Mr Musuku’s behalf or which Mr Musuku spent himself.  I agree with Ms Herbert this supports the conclusion that these amounts have the quality of income in Mr Musuku’s hands as opposed to being capital amounts or otherwise not assessable.

[152]   Mr Musuku depended on this income to meet his and his family’s living expenses.  The amount for which he has been assessed does not include alternative sources such as any income received by Mrs Musuku.  The spreadsheets prepared by Mr Ward are extensive.   In meticulous detail they set out the various items of personal expenditure.  They disclose a regular flow of money to Mr Musuku which I find has the quality of income in his hands.  Certainly, Mr Musuku has not pointed to

any alternative sources for the funds such as gifts, loans, capital or otherwise.

35     A Taxpayer v Commissioner of Inland Revenue, above n 30 at 13,355, 13,360.

[153]   The  pharmacy  businesses  operated  by Mr  Musuku  derived  income  on  a regular basis.  That income was paid into a variety of personal and business accounts which Mr Musuku controlled and had access to.

[154]   What limited explanations for alternative sources of revenue proffered in evidence were demonstrably incorrect.  For example, Mr Johnson said he turned his mind specifically to the question of how Mr Musuku could have survived when his net taxable income was apparently so modest.  Mr Johnson said that he discovered Mr Musuku had sold an interest in a property in Mt Eden and had funds available of approximately $500,000 for living, mortgage and/or business expenses.   He concluded this must have been the source of funds Mr Musuku used to meet his living expenses.  However, the difficulty with that proposition, as Mr Johnson was bound to accept in cross-examination, is that the property in question had been sold three years earlier in 2003 and the proceeds were used to clear loans.  Furthermore, as  was  accepted  in  cross-examination  by  both  Mr  Talekar  and  Mr  Johnson, Mr Musuku either benefited from or spent income derived from the companies on non-business purposes.

[155]   Additionally,  Mr Musuku  accepted that  rent  was  deposited into  his  joint personal bank account on a weekly basis by the tenants of various properties.  The Authority inferred that as he was a trustee and beneficiary of the Trust, he had arranged  with  the tenants  to  pay the rent  directly into  that  account.   That  is  a perfectly logical inference and one which was plainly open to the Authority on the evidence.  The rental payments “came in” to Mr Musuku on a regular basis and were amounts  on  which  he  was  able  to  depend  to  meet  his  and  his  family’s  living expenses.   Again, in my view, this supports the Authority’s decision that the rent received has the quality of income in Mr Musuku’s hands and is assessable to him as income under ordinary concepts.

Conclusion

[156]   On this appeal Mr Musuku is required to prove on the balance of probabilities that not only is the assessment incorrect but also by how much.

[157]   Mr Musuku did not give evidence at the hearing before Judge Sinclair.  The witnesses called in support of his case had, at best, only a limited and rudimentary knowledge and understanding of Mr Musuku’s business activities.  None had any in- depth knowledge or understanding of his unorthodox business activities including the  way in  which  he  operated  the  businesses,  the  companies’ accounts  and  his personal accounts.   Significantly, none of the witnesses called on his behalf was involved  in  the  preparation  of  the  NOPA  or  the  income  tax  return  on  which Mr Musuku relies.

[158]   On this appeal Mr Thwaite has earnestly and, at times, courageously, urged me to draw factual inferences which he submits, to varying extents, are available on the evidence.  However, the difficulty he faces is that Mr Ward was involved in this investigation since its inception in October 2006.  He remained directly involved in the investigation up to and including the dispute process.

[159]   Mr Ward’s examination and analysis of the operation of the numerous bank accounts operated by Mr Musuku was not only detailed  and extensive but was openly disclosed to Mr Musuku and his various tax agents with his workings. Regularly Mr Ward extended invitations to discuss the detail and/or provide alternative explanations in support of Mr Musuku’s claim that the assessments were wrong.

[160]   Furthermore, generous concessions which operated in favour of Mr Musuku, were made by the Commissioner which resulted in an amended assessment which substantially reduced the quantum of Mr Musuku’s assessable income.

[161]   For these reasons and the other reasons set out more fully in this judgment, I am not satisfied Mr Musuku has discharged his onus in proving on the balance of probabilities:

(a)      the Commissioner’s amended assessment (and/or default assessment) for the tax year ending 31 March 2006 was arbitrary and not a genuine attempt to assess Mr Musuku’s taxable income; and/or that

(b)      the Commissioner’s amended assessment is incorrect and, if so, by

how much.

[162]   It follows that I am satisfied that the Authority was correct when it found the Commissioner’s  amended  assessment  (and  earlier  default  assessment)  were  a genuine attempt to ascertain the taxable income of Mr Musuku at the particular time and were not arbitrary and/or made in disregard of the law or facts then known to the Commissioner.

[163]   I also uphold the Authority’s conclusion that the companies spent amounts on Mr Musuku’s behalf and for his private benefit or made amounts available to him which he has retained or used for his private benefit.   It follows I agree with the Authority that Mr Musuku can be taken to have derived as dividend income an amount equal to the private expenditure.

[164]   To the extent that such expenditure is not dividend income I agree with the

Authority that it is either employment income or income under ordinary concepts.

[165]   Finally, I agree with the Authority that the rent payments made into the joint account of Mr Musuku and his wife are income to Mr Musuku under ordinary concepts.

Result

[166]   The appeal is dismissed and the Authority’s decision is upheld.

Costs

[167]   I understand that the parties are agreed that costs should be awarded on a category  3  basis  in  accordance  with  the  joint  memorandum  of  counsel  dated

17 September 2015 and as ordered by Woodhouse J on 18 September 2015.

[168]   Accordingly, costs are awarded in favour of the Commissioner on that basis

with disbursements as fixed by the Registrar.

Moore J

Solicitors:
Mr Thwaite, Auckland
Ms Herbert and Mr Bryant, Wellington

Jawahar Bhaskar Musuku – Related Entities (Tax year ended 31 March 2006)

Jawahar Bhaskar Musuku (“JBM”)

Spouse

Swarna Musuku (“SM”)

Settlor/Trustee

100%  100%  50%               50%  75%  25%

Settlor/Trustee

MBP (2005) Ltd

Mission Bay Pharmacy (2005) Ltd

Inc: 8 June 2005

Director: JBM Shareholding: JBM (100%)

Patterson Avenue

Holdings Ltd

Mission Bay Holdings (2005) Ltd

(Previously Remuera Life Time Pharmacy Ltd. Name changed in November 2005 to Wylie’s Pharmacy)

Inc: 10 November

2005 (in liquidation from 18 July 2014) Director: JBM

Remuera Road

MBH LTD

Mission Bay Holdings Ltd (Owned certain rental properties)

Inc: 7 May 2004

Director: JBM & SM

Shareholding: JBM (50%); SM (50%)

MBP Ltd

Mission Bay

Pharmacy Ltd

Inc: 2 October 1996 (in liquidation from

10 July 2006) Director: JBM Shareholding: JBM (75%); SM (25%)

Tamaki Drive

“the Trust”

Musuku Family

Trust

12 May 1997 Trust

Deed Settlors:  JBM & SM Trustees:  JBM & SM

10 July 1998 Trust

Deed Settlors:  Michael P Vallant

Trustees:  JBM & SM

& Ravi Musuku