SUPREME COURT OF NEW ZEALAND
GLAUSIUSS v INLAND REVENUE COMMISSIONER (NZ)
Wilson, J
23 March, 6 April 1970 - Christchurch
Wilson, J Case stated by the Board of Review pursuant to s 30 of the Inland Revenue Department Amendment Act 1960.
The appellant taxpayer was reassessed by the respondent to income tax and social security charge or social security income tax in respect of income derived by him for the years ending 31 March 1956, 1957, 1958, 1959, 1960 and 1961 following an investigation of his affairs. In the absence of any reliable accounts kept by the appellant his assessable income was estimated by the Commissioner on an assets accretion statement prepared by the Inspector who investigated the appellant's affairs. The appellant objected to certain of the re-assessments on the grounds that: "(a) No account has been taken of the fact that he had in his possession sums of cash in New Zealand and foreign currencies at the commencement of the period covered by the assets statement and during the succeeding years; and (b) that in any event the incomes shown on the assets statement for some years are so inconsistent with the income shown for other years that the statement of income does not correctly show the incomes derived by the taxpayer in each year."
The respondent disallowed these objections whereupon the appellant required, in terms of s 30(2) of the Land and Income Tax Act 1954, that they be heard and determined by a Board of Review, and a case was stated by the Commissioner accordingly on 24 June 1964. The objections were heard by a Board on 18 and 19 May 1965. In its decision, delivered on 17 September 1965, the Board upheld the Commissioner's amended assessments, subject to certain amendments which are not material to this appeal. The appellant having duly given notice of appeal from this determination the Board, on 9 June 1969, stated a case for the determination by this Court of the following questions which were formulated by counsel for the appellant and received by the Board on 21 March 1969: "(a) Whether the findings of the Board are inconsistent with the evidence and contradictory of it; and (b) Whether the Board misdirected itself as to the principles of and incidental to the accretion of assets method in determining that the respondent's amended assessments of income were (except for the amendments directed to be made in respect of the years ended 31 March 1956, 1957, 1958 and 1960) correctly made."
Before entering into a discussion of the substance of this appeal I think that I should make some observations as to the form of the case stated. I begin by pointing out that under s 28 of the Inland Revenue Department Amendment Act 1960 the Board's determination is subject to appeal on any question of law, but is final and conclusive as to any question of fact and that under s 30 the Board is required "to state and sign a case setting forth the facts and the questions of law arising for the determination of the Supreme Court". The facts stated in this case consist simply of a brief history of the proceedings and references to a transcript of the evidence given before the Board with the exhibits received by it in evidence, and to the copy of the Board's written determination with specific reference to the page thereof on which it set forth its answer to the question posed by the case stated by the Commissioner, namely, whether the Commissioner acted correctly in making the amended assessments and, if not, in what respect they, and which of them, should be amended.
Counsel for the appellant accepted responsibility for the form of the case. In my opinion it does not comply with the requirements of s 30 of the Inland Revenue Department Amendment Act 1960. Even where the grounds of appeal include a contention that a finding of fact is not supportable on the evidence the case should specify the finding complained of. It should not be necessary for the Court to await counsel's address to be informed of the challenged finding or to search the Board's reasons for its determination in order to ascertain the Board's finding in that regard. In the instant case the actual finding of the Board was, in fact, the subject of argument. Moreover, the principle of law applied by the Board, and which (as the appellant contended) amounted to a misdirection, was not defined by the case and had to be ascertained by the Court from a perusal of the Board's reasons. In short, the case failed to inform the Court of those necessary matters. Had it not been that the Board's determination was delivered nearly five years ago, I should have sent the case back to the Board for amendment in these respects under s 32 of the Inland Revenue Department Amendment Act 1960. Neither counsel asked for this course to be followed so, in view of the delay which had already occurred, I completed the hearing of the appeal, interpreting as best I could the Board's reasons for its determination in order to ascertain precisely what facts it had found to be proved and the principle of law which it applied.
By this unnecessarily laborious process (which no doubt contributed to the hearing of the appeal taking more than twice its estimated time) I ascertained that the finding of fact challenged by the appellant was that he had not proved that he had in his possession sums of cash in New Zealand and foreign currencies at the commencement of the period covered by the assets statement and during the succeeding years. The significance of this finding was that the Commissioner, in reassessing the appellant, had relied upon a calculation of his assessable income for the relevant years based on what is known as an assets accretion statement. This is a statement of the ascertained assets of the taxpayer at the commencement and at the end of each fiscal year under review (valued at cost) and his sundry debtors, from which is deducted all known liabilities of a capital nature, sundry creditors existing at the end of the year and all moneys received by the taxpayer during the year from non-assessable sources. To the difference is added all known expenditure by the taxpayer for purposes other than the acquisition of the assets already taken into account, including living expenses. The final result should show the money which the taxpayer had received during the year from assessable sources. The foregoing is not intended to be an exhaustive description or precise definition of an assets accretion statement and its purpose and justification, but it is sufficient for my present purposes. For the fiscal year ended 31 March 1961(the last year under review) the assets accretion showed as assets, for the first time, cash and currency totalling £3590. The appellant claimed that this represented the balance of cash and valuables which he was able to bring out of Hungary in the years 1938 and 1939 and he deposed that early in April 1957 he had a hoard of £4600 in bank notes in his home which he showed to his brother-in-law, Mr Atlas, (who claimed to have assisted in bringing the funds into New Zealand) and a friend, Mr Thompson, both of whom corroborated the appellant in this respect.
It is clear from the Board's written determination that it rejected the appellant's evidence that the source of the cash and currency owned by him as at 31 March 1961 was money and valuables which he had brought from Hungary. In his submissions to the Board, however, the appellant's advocate argued that, alternatively, it represented what was left of the sum of £4600 which he had in early April 1957 which might have been accumulated from profits made before that time and that that sum should have been brought into account at that stage. This submission was rejected by the Board because "it overlooks the fact that the appellant's case, in so far as his first ground of objection was concerned, was based upon the proposition that the only source of the moneys which came into his hands, otherwise than was disclosed in his returns of income or was allowed subsequent to investigation by the respondent, was the cash fund claimed to have been held from 1939 onward." Mr Penlington submitted that this was a misdirection and that is a matter which I shall consider later. At the moment, however, I am concerned to ascertain the basis of the first ground of appeal.
Mr Penlington could not, of course, contest the rejection of the evidence offered to show the Hungarian source of the hoard disclosed in the 1961 year, but he contended that the Board had made a finding of fact with reference to the cash fund claimed to have been in the appellant's possession in early April 1957 which was inconsistent with and contradictory of its finding that the fund brought into account in 1961 had not been proved to have existed at an earlier date. The finding upon which he relied was in these terms: "Those witnesses [Atlas and Thompson] said that, in the year 1957 when the appellant was about to leave on a visit to Japan, he separately produced to them from a drawer at his home a box containing what appeared to be a substantial sum of money in notes, the amount whereof was stated by the appellant to be £4500. The appellant was said also to have mentioned to these two witnesses a sum of £100 which was kept in a drawer in a desk, also at his home. One of the witnesses saw the larger sum of money for only a few seconds and neither of them counted it. We do not doubt that, at the time referred to, the appellant was possessed of a substantial sum of money which, so far as the evidence shows, he proposed to leave in his home during his absence overseas." The finding relied upon is that contained in the last sentence.
Contrary to the view taken by the Board and supported in argument by Mr Williamson I do not think that the appellant was restricted by the form of his objection to reliance wholly on his contention that the hoard disclosed in 1961 was part of funds derived from Hungary. The source of the funds was not referred to in the objection, nor was its existence thereby limited to any particular time other than "at the commencement of the period covered by the assets statement and during the succeeding years". These words, although more apt to refer to a continuous period from the commencement of the period covered by the assets statement through the succeeding years, are capable of being construed as referring to each of the years within those limits. I do not think that the form of an objection should be so strictly construed as to exclude any construction which it can fairly bear, even if another construction is preferable.
Nor do I think that, as a matter of law, the Board was entitled to disregard proof of the existence of a sum of money owned by the appellant at any time during the period covered by the statement upon which the Commissioner based his amended assessments, if the fund had not been brought into account in the statement and therefore tended to show that the statement and the amended assessments were erroneous to an ascertainable extent. If the Board had found as a fact that in early April the appellant had £x in a secret hoard it should have then considered when it had been proved to have been acquired and whether it had been proved to have been non-assessable when acquired. It should also have considered whether the sum of £3590 taken into account in the 1961 year, or any ascertainable part of it, was derived from the fund of £x.
Mr Penlington submitted that that portion of the Board's finding which I have quoted should be construed as a finding that it had been proved that, in early April 1957, the appellant owned a secret hoard of banknotes to the value of at least £4500 and that the Board should have drawn the inference that it was in existence, as a matter of probability, at 31 March 1957 and the further finding that it was depleted in the manner deposed to by the appellant over the following years until it was reduced to £3590 at 31 March 1961. I am unable to construe the Board's finding in this way. Read in its context I think that, although the Board was prepared to accept that the appellant possessed a substantial amount of money in notes in early April 1957, it was careful to avoid any finding as to its amount. It is apparent that the Board did not place reliance on the evidence of either the appellant or his brother-in-law and that it regarded Thompson's evidence as to the amount of the hoard as too tenuous to constitute proof. The onus was on the appellant not only to prove that the assets statement (and consequently the amended assessment) was wrong, but also to prove by how much it was wrong. This he failed to do. Furthermore, the presence of an unascertained sum of money in April 1957 does not necessarily prove that the cash sum of £3590 brought into account in the 1961 fiscal year was not assessable income derived during that year because the link offered by the appellant in the form of uncorroborated evidence as to how £4600 was reduced to £3590 was not accepted by the Board. For these reasons (although not for those given by the Board) it was entitled to ignore proof of the existence, in April 1957, of a "substantial" sum of cash in the possession of the appellant, and, accordingly, its finding that the appellant had failed to prove that "any money or assets possessed by the appellant subsequent to that time [1939] (other than, possibly, money expended upon furnishings) had their source in such cash fund" (ie a cash fund possessed by him at or about 1939) was not inconsistent with its finding that the 1957 fund of unascertained value existed, or contradictory thereof.
The appellant's first ground of appeal therefore fails and question (a) of the case is answered "No".
With regard to question (b) in the case Mr Penlington submitted that it was a principle of law that when a taxpayer's assessment is amended as the result of the application of the assets accretion method of ascertaining his assessable income over a number of years, the total amount of the excess income so calculated should be spread over the years included in the assets statement where this is necessary in order to produce a result conforming to the pattern of the assessable income returned by the taxpayer, and, as the Commissioner had failed to do so in this case, the Board misdirected itself by not directing it to be done. It is therefore necessary to examine the basis upon which the use of the assets accretion method (which has no express statutory authority) has received recognition and approval by the Court in this Dominion.
The first reported case in which its use was considered was Babington v Commissioner of Taxes (NZ), [1957] NZLR 861, at p 865; 6 AITR 428, at pp 432-3, in which Turner, J, said: "In making his original assessment of the amount upon which tax ought to be levied, and in making such alterations thereto as he later thought necessary, the respondent was not, in my opinion, limited to any particular method of assessment, and, provided that he proceeded bona fide to assess the amount upon which, in his judgment, tax ought to be levied, I think that his assessment must stand, save only in so far as the appellant establishes his objection that the amount is excessive. Trautwein's Case [Trautwein v Federal Commissioner of Taxation (1936), 56 CLR 63] cited by the appellant, appears to be an authority completely supporting this statement of what I conceive to be the law. It may well be that the use of the 'assets method', in the absence of objection, may result in only a crude approximation to the true amount of the assessable income: but though crude, this may approach accuracy much more closely than the returns provided by a defaulting taxpayer. Thus, Sir John Latham, CJ, in Trautwein's Case says: 'In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valued privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books'."
Since this decision the right of the Commissioner to adopt the assets accretion method of assessing a taxpayer's income has not been in doubt, although in Hall v Inland Revenue Commissioner (NZ), [1965] NZLR 184, at pp 188, 189, I held that the method is not sufficiently accurate in respect of any particular year to afford proof beyond reasonable doubt that a taxpayer's return of income for that year is wilfully false, on a prosecution under s 228(1)(b) of the Land and Income Tax Act 1954. That decision is, of course, not applicable to a taxpayer's appeal against disallowance of his objection to assessment, where the onus of proof is on the taxpayer.
The correctness of the result achieved by the assets accretion method in individual cases has been challenged on at least two occasions and this has resulted in observations as to its limitations. Thus in Phillips v Inland Revenue Commissioner (NZ), [1959] NZLR 1357; 8 AITR 21, Shorland, J, held that where the statement prepared by the Commissioner refers to an asset of the taxpayer, the existence of which is denied on oath by the taxpayer, the onus is on the Commissioner to prove its existence as the property of the taxpayer and that the Commissioner having assessed the taxpayer on the basis of the figures shown by an assets accretion statement, is not entitled to depart from those figures in any particular year merely because the result gives a lower income than that returned by the taxpayer. The learned judge said ([1959] NZLR, at p 1358; 8 AITR, at p 22): "It is inherent in the 'assets method' of deducing income that whereas it shows the income earned over the period to which it is applied, it cannot for certain and with absolute accuracy demonstrate the precise time when such income was earned. If the application of the 'assets method' shows a lower figure than that which was in fact earned in a particular year, then it would presumably do so because it attributed part of the income in fact earned in that year to some other year; or, in other words, because it included an overstatement of the true income for some other year."
The other reported case on this topic is Fenson v Inland Revenue Commissioner (NZ) (1961), 8 AITR 257. In that case Richmond, J, having made certain adjustments to the taxpayer's living expenses as estimated by the Commissioner and having disallowed certain items included by him amongst the taxpayer's assets said, at p 262: "To bring about a more realistic result, bearing in mind that the 'increase of assets' basis is likely to result in errors in individual years, the foregoing deficiencies and excesses should be redistributed in the following way and the assessments for the years in question amended accordingly": he then proceeded to allocate the sums involved unequally among the relevant years.
In the Australian case referred to by Turner, J, in Babington's Case, supra, namely, Trautwein v Federal Commissioner of Taxation (1936), 56 CLR 63, the Commissioner had no means of ascertaining in which of the seven years under review assessable income which was represented by a very substantial asset at the end of the period had been earned and had therefore spread it equally over the seven years. On objection by the taxpayer the High Court held, however, that this course had been adopted by the Commissioner in a bona fide attempt to ascertain the taxpayer's real assessable income and that the onus was on the taxpayer of showing that the assessment should be reduced by some figure. See 56 CLR, at p 111, per Dixon and Evatt, JJ. The learned judges concluded, at pp 111-2: "In respect of no one of the seven years can it be correctly said that the taxpayer has shown that the amount allocated thereto from his aggregate gains of the seven years exceeds that which was derived therein. It is not enough for him to prove that in one or more out of the seven this must be so without identifying which it is. He does not show that he has been prejudiced by any departure from legal standards and he does not show that the facts assumed in any particular year are not true of that year."
From these decisions the following principles may be extracted:-
(1) The assets accretion method is one which the Commissioner is entitled to apply in estimating the assessable income of a taxpayer for the purpose of assessing him to tax.
(2) Provided the Commissioner employs this method bona fide for this purpose his assessment must stand save only in so far as the taxpayer establishes that the amount is excessive ( Babington's Case and Trautwein's Case).
(3) It is not sufficient for the taxpayer to establish that the assessable income for any particular year, ascertained by this method, is not correct. He must also show by how much it is wrong ( Babington's Case. See also Commissioner of Taxes (NZ) v McCoard, [1952] NZLR 263; 5 AITR 323 ).
(4) The Commissioner may properly spread the value of an asset representing income derived by the taxpayer during the period covered by the assets accretion statement equally over each of those years if there is no satisfactory evidence to show the year or years in which it was in fact derived. If he does so the onus is on the taxpayer to prove in what year or years it was derived ( Trautwein's Case).
(5) Spreading should be adopted in such a way as to produce a "realistic" result (Fenson's Case). (By "realistic" I understand Richmond, J, to mean "in accordance with the proved facts". In this sense I think that it merely states, in another way, the principle that the taxpayer is entitled to have assessments amended to the extent that he succeeds in proving them to be incorrect. If the reference to the necessity for achieving a "realistic result" was intended to bear a wider meaning than this I respectfully dissent from the proposition.)
In accordance with the principles so enunciated, I think that in the instant case the Board of Review was required to amend the assessments objected to by spreading the sum of £3590 first brought into account in the 1961 fiscal year only so far as that sum or any specific part or parts thereof was or were proved to have been derived in any other year. I do not think that it applied any different principle of law. It held as a fact that this sum was not part of any fund of Hungarian origin. No other evidence was tendered to prove its origin in any other way, but it was sought to establish that it could not have wholly been derived in the year 1961 and was probably derived in earlier years, particularly those in which the income ascertained by the assets accretion method was less than that returned by the appellant, by stressing the great fluctuations of income resulting from the application of that method. The Board rejected this argument because the appellant's own returns showed some considerable degree of fluctuation in his income. There was ample evidence to justify this conclusion. In particular, the ascertained sales made by the appellant for the years ended 31 March 1958, 1959, 1960 and 1961 showed fluctuations comparable with those in the assessable income for those years as shown on the assets accretion statement. The fact that in some years the appellant returned a higher income than that shown in the statement does not necessarily lead to the inference that the statement was incorrect for those years. It is pertinent to point out that the extract which I have quoted from the judgment in Phillips' Case, supra, refers to income "in fact earned", not income "claimed to be earned" by the appellant.
In any event, however, the appellant failed to prove that any specific sum forming part of the sum of £3590 was derived in any year before 1961 and his appeal from the Commissioner's disallowance of his objection in this regard was rightly rejected by the Board on this ground also. The answer to question (b) posed in the case is, accordingly, "No".
The appellant will pay the costs of this appeal which I fix at $150 and disbursements.
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