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High Court of New Zealand Decisions |
Last Updated: 27 August 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2018-404-000019
[2018] NZHC 2075 |
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UNDER THE
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Income Tax Acts 1994, 2004 and 2007 and the Tax Administration Act
1994
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IN THE MATTER OF
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an appeal against the decision of the Taxation Review Authority
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BETWEEN
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ETHNIK KRASNIQI
Appellant
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AND
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COMMISSIONER OF INLAND REVENUE
Respondent
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Hearing:
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7 and 8 June 2018; further submissions and schedules filed 28
June 2018
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Appearances:
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A A H Low and T M Kelly for the Appellant
R L Roff and L K Worthing for the Respondent
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Judgment:
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14 August 2018
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JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie On 14 August 2018 at 4.00pm
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:..............................
Solicitors/counsel:
Alexandra Low & Associates, Auckland Crown Law, Wellington
KRASNIQI v COMMISSIONER OF INLAND REVENUE [2018] NZHC 2075 [14 August 2018]
CONTENTS
Introduction
[1] The appellant, Ethnik Krasniqi, appeals aspects of a decision given by Judge AA Sinclair, sitting as the Taxation Review Authority (the Authority), on 30 November 2017.1 The respondent, the Commissioner of Inland Revenue (the Commissioner), cross-appeals aspects of the decision.
[2] Broadly, the appeals concern the correctness of default income tax assessments issued by the Commissioner to Mr Krasniqi for the 2005 to 2011 income years (the disputed period).
Factual background
[3] Mr Krasniqi was born in New Zealand. His business endeavours in this country have been met with mixed success. He was adjudicated bankrupt in 1993 following the failure of his family’s manufacturing business. He then became involved in property trading and land development. He relocated to Australia with his family in 2001, but he continued to spend a considerable amount of time thereafter in this country. During the disputed period, Mr Krasniqi worked as a consultant, notwithstanding that he was adjudicated bankrupt again in 2003. His work included advising on, as well as facilitating and negotiating, property deals and land development projects undertaken in New Zealand, principally by two of his childhood friends – Roy Brown and Murray Smith. He also looked after various business interests of his father, Mazhar Krasniqi.
[4] Many of the projects undertaken by Messrs Brown, Smith and Mazhar Krasniqi were conducted through trusts set up by them.
[5] During the disputed period, substantial deposits were made into Mr Krasniqi’s personal bank accounts, both in Australia and New Zealand, from the various trusts set up respectively by Messrs Brown, Smith and Mazhar Krasniqi. Substantial deposits were also made by the trusts into the bank accounts of various of Mr Krasniqi’s family members and the bank accounts of a further trust – the Krasniqi Discretionary Trust, which the Commissioner asserts Mr Krasniqi was involved in. There were also various eftpos card transactions, ATM withdrawals, foreign currency
1 Krasniqi v Commissioner of Inland Revenue [2017] NZTRA 8.
purchases and international money transfers by the trusts, which the Commissioner says resulted in monies being received directly or indirectly by Mr Krasniqi. There were other deposits into Mr Krasniqi’s personal bank accounts and the bank accounts held by the Krasniqi Discretionary Trust from unknown sources.
[6] The Commissioner started reviewing Mr Krasniqi’s tax affairs in October 2009, as a result of an investigation into the tax affairs of some of Mr Brown’s trusts. The Commissioner continued to gather and analyse information in relation to Mr Krasniqi’s tax affairs for almost four years before issuing default assessments against Mr Krasniqi in August 2013. Mr Krasniqi was then provided with a comprehensive schedule – referred to as “Schedule A” – setting out the Commissioner’s assessments for each tax year in the disputed period.2 The total income attributed to Mr Krasniqi over the disputed period was $7,806,780.67 and the total tax to pay was assessed at $2,930,367.55.
[7] Initially, Mr Krasniqi denied that he was a New Zealand tax resident liable to pay New Zealand income tax over the disputed period. In December 2013, he issued a notice of proposed adjustment and filed nil tax returns for each relevant tax year. He also stated that he wished to discharge the onus of proof resting on him, and he requested all of the Commissioner’s source documentation and a breakdown of the calculations set out in Schedule A.
[8] The Commissioner’s notice of response was issued on 14 February 2014. She rejected Mr Krasniqi’s notice of proposed adjustment and his assertion that he was not a New Zealand tax resident, liable to pay New Zealand income tax. She maintained the position she had taken in the default assessments.
[9] On 18 March 2014, the Commissioner responded to Mr Krasniqi’s request for a breakdown of the calculations set out in Schedule A. She compiled detailed spreadsheets itemising each transaction that made up the summary figures included in Schedule A. The breakdown and spreadsheets were made available to Mr Krasniqi. He was told in a covering letter that the amounts recorded in the spreadsheets were sourced directly from bank statements. The Commissioner recorded her assumption
that Mr Krasniqi would have access to his own bank account statements and records, and that he would be able to request copies of his family members’ bank account statements direct from them.
[10] Mr Krasniqi did not respond to this letter.
[11] After a series of aborted attempts to do so, a facilitated conference was arranged between the Commissioner’s officers and Mr Krasniqi’s advisors. The conference took place in late July 2014. Mr Krasniqi did not attend. In the course of the conference, the Commissioner agreed to provide Mr Krasniqi with copies of the bank statements she held for Mr Brown’s trusts which were said to have paid money to or for Mr Krasniqi, and the source documents relating to Mr Krasniqi’s passenger movements in and out of New Zealand (Mr Krasniqi was at this point denying that he was a tax resident in this country). Mr Krasniqi for his part, through his advisors, agreed to provide the Commissioner with documentation in relation to the alleged repayment of loans he said had been made by Mr Brown to members of his family. It was the expectation of both parties that this material would be exchanged by 10 October 2014.
[12] The Commissioner provided Mr Krasniqi with the documents she had agreed to provide between September and December 2014. Mr Krasniqi, however, failed to provide the documents he had promised in return. The Commissioner initially extended time to Mr Krasniqi to enable him to provide the promised material. He still failed to do so and the Commissioner ultimately issued him with formal notice requesting the promised information under s 17 of the Tax Administration Act 1994 (the Act). However, no documentation was provided by Mr Krasniqi in response to this formal notice.
[13] On 1 December 2014, a disclosure notice was issued by the Commissioner. This triggered the start of the strict timeframes set out in the disputes process detailed in the Act.3
[14] Mr Krasniqi sent his statement of position by email to the Commissioner on 30 January 2015. In it, Mr Krasniqi said as follows:
3 Tax Administration Act 1994, s 89H.
The Taxpayer reiterates that he wishes to discharge the onus of proof, and is reviewing the Commissioner’s source documents and breakdown of calculations. The Taxpayer had hoped to have all evidence to the Commissioner before today but will provide further evidence as it comes to hand and as quickly as possible. The Taxpayer is reviewing his records and making enquiries to obtain information in support of his position ...
Mr Krasniqi went on to indicate that the documentary evidence to be provided would include bank statements for various relevant entities, bank statements and loan documentation for various individuals, and oral evidence. Relevantly, Mr Krasniqi did not assert that he had been disadvantaged in preparing his statement of position because he did not have access to all of the material available to the Commissioner.
[15] On 3 February 2015, the Commissioner confirmed receipt of Mr Krasniqi’s statement of position. She rejected the assertions made in it on 9 February 2015 and, on 30 March 2015, issued her own statement of position. It included a full list of all the documentary evidence she relied on. The documentary evidence – running to 182 items – was cross-referenced to various assertions made in her statement of position.
[16] No request was then made by Mr Krasniqi for copies of any of the documents listed.
[17] On 11 June 2015, the dispute was referred to adjudication by the Disputes Review Unit. The referral letter also included a further list of all documentary evidence the Commissioner held. The same list was provided to Mr Krasniqi on 28 May 2015.
[18] Again, no request was made by Mr Krasniqi for any of the documents listed.
[19] On 17 July 2015, the Disputes Review Unit issued its adjudication report. It was in favour of the Commissioner and shortly thereafter statements were issued to Mr Krasniqi for the tax owing in accordance with the default assessments.
[20] On 16 September 2015, Mr Krasniqi filed a challenge with the Authority.
[21] Full discovery occurred in March 2016. Mr Krasniqi then received all of the Commissioner’s documentation.
Alterations in position
[22] As I have noted, Mr Krasniqi initially denied that he was a New Zealand tax resident and instead asserted that he was residing in Australia throughout the disputed period. He did not, however, return any income in that country over the disputed period either. When the dispute came before the Authority, Mr Krasniqi accepted that he was a New Zealand tax resident at all relevant times. He also accepted that he had received some fees for his consultancy work for some of the tax years falling within the disputed period, but he did not say how much he had received.
The Authority’s decision
[23] There were two primary issues for determination before the Authority:4
(a) Whether Mr Krasniqi should be permitted, under s 138G(2) of the Act, to raise what were referred to as “process issues” not raised in his statement of position; and
(b) Whether the amounts attributed by the Commissioner to Mr Krasniqi were assessable to him as income under “ordinary concepts”.
[24] Judge Sinclair noted that process issues were first raised in the opening submissions made for Mr Krasniqi.5
[25] The argument was in two parts – first, an assertion that there was an alternative basis of assessment which, it was said, should have been used by the Commissioner, and secondly, that the Commissioner was required in this case, involving attribution, to take additional steps to assist the taxpayer to obtain information he could not reasonably have been expected to have obtained himself.
[26] The Judge first discussed the alternative basis of assessment which Mr Krasniqi belatedly said should have been used by the Commissioner. This argument had not been advanced by Mr Krasniqi in his statement of position. Mr Krasniqi was contending either that the approach taken by the Commissioner was unclear or that the Commissioner had changed her initial basis of assessment – i.e. that
4 Krasniqi v Commissioner of Inland Revenue, above n 1, at [8].
5 At [9].
the amounts attributed to Mr Krasniqi were income under ordinary concepts. The Judge did not accept these arguments. She reached the following conclusion:
[21] ... In my view, it would have been apparent from an early stage, as to the way in which the Commissioner was approaching her assessment of [Mr Krasniqi’s] taxable income or with due diligence, it could have been determined. I consider that any issues which [Mr Krasniqi] wished to raise relating to the Commissioner’s basis of assessment could therefore have been included in his [statement of position].
The Judge went on to say that even if it was accepted that the basis of assessment issue did not arise until after the adjudication report was issued by the Disputes Review Unit, she did not consider that Mr Krasniqi could meet the requirements of s 138G(2)(b).6 She noted that the hearing before the Authority was a de novo hearing, and that any issue as to the basis for the Commissioner’s assessments could have been addressed at the hearing before her.7 As a result, she did not consider that Mr Krasniqi had suffered any manifest injustice.8 She concluded that the requirements of s 138G(2)(b) were not met, and she declined to allow Mr Krasniqi leave to raise the alternative basis of assessment issue.9
[27] Judge Sinclair then went on to deal with the second part of the submission, namely that, in cases involving attribution, the Commissioner must take additional steps to assist the taxpayer to obtain information the taxpayer cannot reasonably be expected to obtain, and which might assist the taxpayer to discharge the onus of proof resting on him or her. The Judge noted that Mr Krasniqi had Schedule A from the outset and the bank statements for Mr Brown’s trusts, which he received sometime later.10 She noted that Mr Krasniqi had these materials before he issued his statement of position. The Judge found that Mr Krasniqi knew that the Commissioner had copies of his personal bank statements and those of his family members.11 She concluded that it was reasonable for the Commissioner to have expected that Mr Krasniqi could source these bank statements for himself, as well as the bank statements for the Krasniqi Discretionary Trust.12 She considered that there was no evidence that
6 At [22].
7 At [22].
8 At [22].
9 At [23].
10 At [36].
11 At [36].
12 At [36].
Mr Krasniqi had suffered any prejudice, notwithstanding that there had been some delay by the Commissioner in providing some of the documents sought.13 Nor did she consider that there would be any manifest injustice to Mr Krasniqi if this issue was not able to be raised.14 She concluded that the requirements of s 138G(2) were not met and she dismissed Mr Krasniqi’s application under that subsection.15
[28] Judge Sinclair then turned to consider the income attributed to Mr Krasniqi. She noted that the onus was on him to establish, on the balance of probabilities, that the assessments were wrong, why they were wrong and by how much they were wrong.16 She discussed relevant tax law, including what is meant by income under “ordinary concepts”. She then went through the Commissioner’s assessments, taking into account evidence provided by Mr Krasniqi about the consultancy services which he had provided, primarily to Mr Brown’s trusts. She noted that Mr Krasniqi told her that, in return for the services he provided, Mr Brown’s entities paid his expenses, and that he also received fees in respect of some projects.17 She also noted that Mr Krasniqi did not dispute that a number of the deposits/international money transfers had been credited to him, that he accepted that he could not discharge the onus of proof in regard to these credits, and that he accordingly conceded that these amounts were properly assessed as income to him, and taxable accordingly.18
[29] The Judge went through each of the various payments in dispute, including sums received by Mr Krasniqi which he asserted were the repayment of loans made by his father to Mr Brown’s family trust, loans Mr Krasniqi said had been made to him by his father, and loans which Mr Krasniqi said had been made to him by Mr Brown. The Judge considered various bank account deposits into accounts, both in Australia and New Zealand, operated by Mr Krasniqi’s family members and the Krasniqi Discretionary Trust. The Judge considered payments made into the New Zealand bank account of Mr Krasniqi’s stepmother, international money transfers paid from Mr Brown’s trusts, overseas spending and ATM withdrawals from an entity known as AB Asset Management Limited, New Zealand ATM withdrawals, New Zealand
13 At [37].
14 At [38].
15 At [41].
16 At [42].
17 At [55].
18 At [56].
private spending, including a motor vehicle purchase, personal expenditure and cash withdrawals at a casino.
[30] Judge Sinclair was not satisfied that Mr Krasniqi had discharged the onus of proof which rested on him in relation to any of these transactions. She recorded that generally she did not find Mr Krasniqi to be a credible witness.19 She found his description of the various business activities in which he was involved to be vague and unconvincing. She noted that Mr Krasniqi held himself out as an experienced property consultant, who had also worked for other entities, providing services on substantial projects involving large sums of money.20 She acknowledged that any documents would have been held by others, but she had difficulty in accepting that Mr Krasniqi had retained no business records at all.21
[31] The Judge reduced Mr Krasniqi’s attributed income by excluding AUD
$519,351.45 deposited into Mr Krasniqi’s Australian bank account, AUD $66,300 deposited into the Krasniqi Discretionary Trust’s bank account, and NZ $10,020 and NZ $12,020, transferred to Phuket in December 2006 and July 2008.22 In all other respects, the Commissioner’s default assessments for the tax years within the disputed period were confirmed.23
Issues on appeal
[32] Judge Sinclair’s overall approach to the matter, including her findings as to what, as a matter of law, comprises income under ordinary concepts, was not challenged. Nor were many of her factual findings in relation to specific payments attributed as income to Mr Krasniqi.
[33] Mr Krasniqi raised two issues:
(a) whether the Authority erred in dismissing the application made by him under s 138G(2) of the Act to raise additional arguments not taken in his statement of position; and
19 At [72].
20 At [72].
21 At [72].
22 At [139].
23 At [140].
(b) whether the Authority erred in finding that:
(i) NZ $1,309,185.0424 paid into the Krasniqi Discretionary Trust’s bank accounts between 11 October 2005 and 25 June 2009;
(ii) NZ $105,000 paid by Whangaruru Farm Trust to Roverland for the purchase of a Range Rover on 16 September 2004;
(iii) NZ $100,025 (AUD $84,620) transferred from one of Mr Brown’s trusts to Mr Krasniqi’s brother, Flamur Krasniqi, on or about 3 October 2007;25 and
(iv) a total sum of NZ $253,479.45 deposited into Mr Krasniqi’s New Zealand bank account on 4 and 15 December 2010 and on 2 March 2011;
were correctly assessed by the Commissioner as income attributable to Mr Krasniqi under ordinary concepts.
[34] In her cross-appeal, the Commissioner argued that the Authority was wrong to amend her default assessments, and to reduce the same by taking out:
(a) AUD $519,351.45 deposited by Sun Marine Services into Mr Krasniqi’s Australian bank account on 20 December 2006;
(b) AUD $39,000 and AUD $27,300 (total AUD $66,300) deposited by Sun Marine Services into the Krasniqi Discretionary Trust’s bank account on 14 August 2007 and 19 December 2007; and
(c) the sums of NZ $10,020 and NZ $12,020 (total NZ $22,040) transferred by international money transfer to Yacht Solutions at Boat Lagoon, Phuket on 7 December 2006 and 9 July 2008.
The appeals
[35] The appeals are brought pursuant to s 26A of the Taxation Review Authorities Act 1994. They proceed by way of rehearing pursuant to r 20.18 of the High Court Rules. Counsel were agreed that the principles discussed by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar apply.26 Those principles have been summarised in the tax context as follows:27
- (a) the appellant bears the onus of satisfying the appeal court that it should differ from the decision under appeal;
(b) it is only if an appellate court considers that the appealed decision is wrong that it is justified in interfering with it;
(c) the appellate court has the responsibility of arriving at its own assessment on the merits of the case;
(d) no defence is required beyond the customary caution appropriate where the first instance fact finder had a particular advantage such as technical expertise or an opportunity to assist the credibility of the witnesses;
(e) the appellate Judge is entitled to use the reasons of the first instance decision-maker to assist him or her in reaching his or her own conclusions, but the weight the Judge places on them is a matter for the Court.
[36] I did raise with counsel whether or not the Austin, Nichols approach is appropriate when considering an appeal against a decision of the Authority declining to exercise the discretion conferred by s 138G(2) of the Act. Both counsel took the view that, in this case, the Authority did not get to the stage of exercising the residual discretion conferred by s 138G(2). Rather, it evaluated the evidence and concluded that the requirements set out in s 138G(2)(a) and (b) were not met. They submitted that the Austin, Nichols approach applies to an appeal against that threshold determination.
[37] I agree. Mr Krasniqi’s appeal in regard to this issue requires me to decide whether or not the Authority was correct when it found that the s 138G(2) threshold
26 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].
27 Russell v Commissioner of Inland Revenue [2010] NZHC 1707; (2010) 24 NZTC 24,463 (HC) at [69]; affirmed on appeal in Russell v Commissioner of Inland Revenue [2012] NZCA 128; leave to appeal declined in Russell v Commissioner of Inland Revenue [2012] NZSC 73.
criteria were not met. I accept counsels’ submissions that the principles in Austin, Nichols apply to this issue.
Analysis
Section 138G(2)
[38] In any hearing before the Authority, both the Commissioner and the disputant taxpayer are confined to the issues and propositions of law that they have disclosed in their respective statements of position.28 The Act encourages both parties to put “all cards on the table”,29 and seeks to prevent “trial by ambush”.30 There is a proviso – s 138G(2) allows a party in dispute with the Commissioner to apply to the Authority for leave to raise new issues not disclosed in that party’s statement of position. The subsection provides as follows:
138G Effect of disclosure notice
...
(2) A hearing authority may, on application by a party to a challenge to a disputable decision, allow the applicant to raise in the challenge new propositions of law, and new issues, if satisfied that—
(a) the applicant could not, at the time of delivery of the applicant’s statement of position, have, with due diligence, discerned those propositions of law or issues; and
(b) having regard to the provisions of section 89A and the conduct of the parties, the hearing authority considers that the raising of those propositions of law or issues is necessary to avoid manifest injustice to the Commissioner or the disputant.
...
28 Tax Administration Act, s 138G(1).
[39] The s 138G(2) criteria are strict.31 Unless they are made out, leave must be declined. If they are made out, the Authority has a discretion to allow the applicant to raise new issues.
[40] Section 89A, referred to in s 138G(2)(b), provides as follows:
89A Purpose of this Part
(1) The purpose of this Part is to establish procedures that will—
(a) improve the accuracy of disputable decisions made by the Commissioner under certain of the Inland Revenue Acts; and
(b) reduce the likelihood of disputes arising between the Commissioner and taxpayers by encouraging open and full communication—
(i) to the Commissioner, of all information necessary for making accurate disputable decisions; and
(ii) to the taxpayers, of the basis for disputable decisions to be made by the Commissioner; and
(c) promote the early identification of the basis for any dispute concerning a disputable decision; and
(d) promote the prompt and efficient resolution of any dispute concerning a disputable decision by requiring the issues and evidence to be considered by the Commissioner and a disputant before the disputant commences proceedings.
(2) This Part does not apply with respect to any tax returns or notices of assessments that are, or become, subject to objection proceedings under Part 8.
(3) Despite section 1(2), this Part applies to disputable decisions made by the Commissioner for tax years before the 1994–95 tax year.
Submissions
[41] Before the Authority, Mr Krasniqi submitted that he needed to be able to raise new grounds, in order to prevent a manifest injustice to him. The same argument was advanced before me. I asked Ms Low, appearing for Mr Krasniqi, what additional issues Mr Krasniqi belatedly seeks to raise. She advised that Mr Krasniqi wishes to assert that he was denied the opportunity to discharge the onus of proving the
31 Trustpower Ltd v Commissioner of Inland Revenue [2016] NZSC 91, [2017] 1 NZLR 155 at [15].
Commissioner’s assessments wrong, and further, that he was denied the opportunity to challenge “the arbitrariness” of the Commissioner’s assessments.
[42] Ms Low argued that Mr Krasniqi was denied these opportunities because the materials provided to him did not sufficiently inform him of the Commissioner’s basis for assessment, and because it was not clear to Mr Krasniqi until discovery was provided – some 12 months after his statement of position had been issued – that the Commissioner had documents that might have assisted him during the disputes process. She argued that in attribution cases, the Commissioner should be held to a higher standard and required to assist the disputing taxpayer to obtain all relevant information to avoid any unfairness.
[43] Ms Roff, for the Commissioner, did not accept that Mr Krasniqi could not have raised the issues he says he wanted to raise in his statement of position. Ms Roff argued that the Commissioner engaged with Mr Krasniqi throughout, that she provided him with all relevant documentation and that he was kept fully informed. It was submitted that Mr Krasniqi had everything he needed to challenge the Commissioner’s assessments from as early as March 2014, but that he only raised the so-called process issues in his opening submissions immediately prior to the hearing before the Authority. She asserted that Mr Krasniqi cannot show that the Authority was wrong when it found that the s 138G(2) threshold criteria were not made out.
(a) Process issues
[44] I have set out the relevant factual background above at [3] to [22]. As I there noted, the Commissioner issued her default assessments in August 2013. She then provided Mr Krasniqi with Schedule A setting out her default assessments. The schedule was a two-page, high level overview. While it was a high level overview, it did, however, make it clear that the Commissioner was attributing monies she considered had been received either directly or indirectly by Mr Krasniqi, or by his family members, or by the Krasniqi Discretionary Trust, as income to Mr Krasniqi, and asserting that it was taxable in his hands. It set out in summary how much credited to each account in each year was attributed to Mr Krasniqi. It summarised
international money transfers from Mr Brown’s entities to various named third parties and said to be for Mr Krasniqi’s benefit. It recorded overseas spending and ATM withdrawals, foreign currency purchases, New Zealand ATM withdrawals, and New Zealand private spending, again all on a year by year basis, and all said to be for Mr Krasniqi’s benefit. It totalled these sums and then assessed the tax on a year by year basis for each tax year falling within the disputed period.
[45] The Commissioner was requested to provide the source documentation and a breakdown of the summary calculations set out in Schedule A. She collated the information sought and compiled detailed spreadsheets itemising each transaction that made up the summary set out in Schedule A. This was done on an account by account basis. Full detail of each transaction was given where it was available. This breakdown was sent to Mr Krasniqi on 18 March 2014. The information provided to Mr Krasniqi contained all of the information available from the source documents. It was patently clear that the Commissioner had access to various bank account statements. This was also explained to Mr Krasniqi in a covering letter. The Commissioner made clear her expectation that Mr Krasniqi could obtain the bank statements himself.
[46] A taxpayer is entitled to know the ground or grounds on which he or she has been assessed,32 but in my judgment, it was clear from the materials provided by the Commissioner from the outset what amounts the Commissioner was attributing as income to Mr Krasniqi and the basis for the resulting assessment. Much of the money assessed had been received by Mr Krasniqi into his personal bank accounts – both in Australia and New Zealand. Clearly, Mr Krasniqi was in a position to obtain copies of his own bank accounts. The Commissioner was also seeking to attribute to Mr Krasniqi monies paid into the accounts of various members of Mr Krasniqi’s family, and into the accounts of the Krasniqi Discretionary Trust. Each family member was named. So was the trust. The account details were provided. The Commissioner was entitled to assume that Mr Krasniqi could obtain access to the relevant bank statements. The Commissioner expressly made her expectations in this regard known to Mr Krasniqi. There was nothing unreasonable in the Commissioner’s expectation. Mr Krasniqi did not protest or suggest that he could not source the relevant bank
32 Commissioner of Inland Revenue v Walker [1963] NZLR 339 (SC) at 359.
statements for himself. It was a situation where many of the relevant documents were or should have been within Mr Krasniqi’s control.33
[47] The Commissioner was at all relevant times prepared to attend a facilitated conference. There were difficulties organising a conference. When it was ultimately held in August 2014 – well before Mr Krasniqi filed his statement of position – he failed to attend in person and rather sent his legal advisor. One would have thought that had Mr Krasniqi had concerns about the basis on which the default assessments were issued against him, he would have attended the conference, taken the opportunity to make sure he understood the Commissioner’s position and responded where he disagreed with it.
[48] As agreed at the facilitated conference, between September and December 2014, the Commissioner provided Mr Krasniqi with all bank statements for Mr Brown’s trusts relevant to the default assessments, as well as the passenger movement source documents. Mr Krasniqi did not then complain, suggest that he could not understand the default assessments, or assert that he needed more information. Rather, he failed to provide the documents he had agreed to provide.
[49] The disclosure notice – triggering the statutory timeframes – was not issued until 1 December 2014. Mr Krasniqi issued his statement of position on 30 January 2015. There was nothing in the statement of position suggesting that Mr Krasniqi was hindered in its preparation because he did not have all relevant documents. Indeed, the contrary applies – Mr Krasniqi said that he was reviewing the documentation provided by the Commissioner.
[50] When the Commissioner issued her statement of position, she included a full list of the documents she relied upon. Mr Krasniqi did not then request copies of any of the documents listed, or suggest that any of them took him by surprise or that he was prejudiced by their earlier non-disclosure.
[51] Similarly, on 11 June 2015, when the dispute was referred to the Disputes Review Unit, the referral letter included a list of all of the documentary evidence the Commissioner held. The referral letter and list had been provided to Mr Krasniqi on
33 See Duncan v Commissioner of Inland Revenue (2004) 21 NZTC 18,735 (HC) at [181].
28 May 2015. Again, he did not request any of the documents listed or protest their earlier non-disclosure.
[52] I agree with the Authority that the Commissioner made her position clear at an early stage, and well before Mr Krasniqi was required to file his statement of position. Further, in my judgment, Mr Krasniqi had everything he needed, or was in a position to obtain everything he needed, to challenge the Commissioner’s assessment, from December 2014 at the latest. Mr Krasniqi should have been readily able to discern the propositions of law, and/or the issues he belatedly seeks to raise, at the time he filed his statement of position. The matters he says he has been denied the opportunity to raise were or should have been obvious from the outset. It is noteworthy that even at this late stage, I was not referred to any particular document Mr Krasniqi received after he filed his statement of position which could have altered the stance he then took. Nor did counsel explain how Mr Krasniqi’s ability to present the proposed arguments noted above at [41] was affected by what it is belatedly said were the Commissioner’s failings.
[53] I am not persuaded that the Authority was wrong when it found that the criteria detailed in s 138G(2) were not made out. The Authority was right to conclude that it was not necessary to allow Mr Krasniqi the opportunity to raise matters not raised in his statement of position, to avoid manifest injustice to him. This aspect of the appeal is dismissed.
(b) A higher standard of disclosure in attribution cases?
[54] Nor do I consider that the Commissioner should be held to a “higher standard” and required to assist disputants in attribution cases to obtain information to discharge the onus of proof resting on them.
[55] The Commissioner properly accepts that she has an obligation to conduct an honest appraisal of a taxpayer’s tax affairs, and to genuinely exercise her judgement when issuing default assessments. She also fairly acknowledged that, in doing so, she is not entitled to act arbitrarily, or to disregard the law or facts known to her.34 It is
not, however, unusual for the Commissioner to have to rely on limited information when attempting to reconstruct a taxpayer’s affairs, and even if the information held is incomplete, the Commissioner can still assess so long as she can make a genuine assessment.35 She must do the best she can based on the information in her possession.
[56] There is nothing to suggest that the Commissioner has breached any of these obligations. She based her default assessments on the information she had – that is information that was in her possession at the time the assessments were made. The Commissioner does not have to seek information not in her possession, but perhaps available had she sought it.36 The legislation requires the Commissioner to exercise judgement, but it does not set a high threshold as to the material on which any judgement is required to be based.37 The taxpayer is best placed to know how he or she has conducted his or her business affairs, and the more unreasonable the position of the taxpayer in not maintaining or providing records, the greater the entitlement of the Commissioner to make assessments in broad terms.38
[57] Once the Commissioner issued her default assessments, the onus passed under the Act to Mr Krasniqi to establish on the balance of probabilities that the assessments were wrong, why they were wrong and by how much they were wrong.39
[58] There is no authority that I am aware of, or which counsel could refer me to, which suggests that, in attribution cases, the Commissioner is required to assist disputants to obtain information to discharge the onus of proof which the Act places on them. Any assertion that such duty exists ignores two things – first, the taxpayer is being assessed in respect of payments he or she has received and which it is reasonable to assume he or she must be aware of, and secondly, the statutory onus of proof.
[59] In any event, in this case, the Commissioner did provide copies of relevant documents to Mr Krasniqi. He failed to provide anything in return to assist her in making the default assessments. The Commissioner had no alternative but to proceed
36 At [51].
37 At [49].
39 Tax Administration Act, s 149A.
on the basis of the information she had in her possession at the time. It has not been established that the information was incomplete; even if it was, that cannot taint or invalidate the assessments made. It was not for the Commissioner to prove the correctness of the assessments honestly and properly made or to make additional enquiries to assist Mr Krasniqi to discharge the onus which passed to him. Rather, it was for Mr Krasniqi to present any evidence he wished to rely on to the Authority to support his assertions and to show what the correct assessments should be. The reality is that he failed to do so.40
[60] For the sake of completeness, I also record that I agree with the Authority that the focus of the hearing before it was to determine whether or not the Commissioner’s assessments were correct. The Authority is a commission of inquiry which gives it broad evidential powers.41 It was a de novo hearing, which necessarily cured any earlier breaches of natural justice, unfairness or procedural defects, even assuming that there were such breaches of defects (and that has not been established).42
[61] Again, this ground of appeal must fail. Mr Krasniqi has failed to persuade me that the Authority erred in its approach to this issue. I agree with the Authority’s conclusion that Mr Krasniqi had not met the s 138G(2) threshold criteria.
Income under ordinary concepts
[62] As the Authority noted,43 the Commissioner was contending that the unexplained deposits and funds paid or applied to Mr Krasniqi’s behalf were income to him under ordinary concepts.
[63] Relevantly, s CA 1(2) of the Income Tax Act 2007 provides as follows:
40 When asked why he had not called his wife as a witness, Mr Krasniqi answered “I’m not sure why I need to”. He went on to say “I think all my family could add value, but as I said yesterday, I’m not going to drag them into this”. With respect to his brother, Flamur Krasniqi, he said “I don’t think – if I called him, I don’t think he would come. I wouldn’t call him anyway, he’d have to be subpoenaed”.
41 Taxation Review Authorities Act 1994, s 15.
43 Krasniqi v Commissioner of Inland Revenue, above n 1, at [47].
(2) An amount is also income of a person if it is their income under ordinary concepts.
[64] As the Authority acknowledged, income under ordinary concepts is not defined in the Income Tax Act.44 The Authority nevertheless set out various principles which are well established and which are derived from the relevant case law. It summed up those principles as follows:45
... A long history of case law has considered the terms and the following are well established principles:
47.1 Income is something which ‘comes in’ (as opposed to a saving in expenditure).46
47.2 Income must be either payment in money or money’s worth.47
47.3 Whether a payment is income is to be determined with reference to the quality of the payment in the hands of the payee (as opposed to the payer).48
47.4 Major factors in determining whether payments are income under ordinary concepts include:
47.4.1 Whether the payments are recurring, regular and/or periodic;49 and
47.4.2 Whether the recipient relies on the payments to meet living expenses.50
Income under ordinary concepts is a flow of money or money’s worth arising from the ownership of property or capital, or from labour, or from a combination of those things. In A Taxpayer v Commissioner of Inland Revenue51 Richardson J described income as:
Thus income is perceived as a gain derived from property which leaves the property intact – a fruit of the tree as distinct from the tree itself, a crop as distinct from the land. Again,
44 At [49].
45 At [49]-[51].
46 Tennant v Smith [1892] UKHL 1; [1892] AC 150 (HL); Commissioner of Inland Revenue v Parson (No 2) [1968] NZLR 574 (CA); Federal Commissioner of Taxation v Cooke and Sherden [1980] FCA 37; (1980) 29 ALR 202 (FCA).
47 Commissioner of Inland Revenue v Parson (No 2), above n 46.
48 Reid v Commissioner of Inland Revenue [1986] 1 NZLR 129, (1985) 7 NZTC 5,176 (CA). See also Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514 (HCA) and G v Commissioner of Inland Revenue [1961] NZLR 994 (SC).
49 Reid v Commissioner of Inland Revenue, above n 48; A Taxpayer v Commissioner of Inland Revenue [1997] NZCA 135; (1997) 18 NZTC 13,350 (CA); Neame v Commissioner of Inland Revenue [1988] NZHC 628; (1988) 10 NZTC 5,288 (HC); Federal Commissioner of Taxation v Dixon [1952] HCA 65; (1952) 86 CLR 540 (HCA).
50 G v Commissioner of Inland Revenue, above n 48; Reid v Commissioner of Inland Revenue, above n 48, at 5,183.
51 A Taxpayer v Commissioner of Inland Revenue, above n 49.
income is a flow of money or money’s worth, a series of periodic receipts arising from the ownership of property or capital, or from labour, or a combination, eg rent, interest and dividends, salary and other personal exertion receipts, annuities and business receipts ...
Therefore, income, under ordinary concepts, includes payments from business and other profit making activities, and also from performing services as a self-employed person.52 It also includes periodic payments. In Reid v Commissioner of Inland Revenue,53 Richardson J said:54
... The major determinant in many cases is the periodic nature of a payment (FC of T v Dixon [1952] HCA 65; (1952) 86 CLR 540; and Asher v London Film Productions [1944] 1 ALL ER 77). If it has that quality of regularity or recurrence then the payments become part of the receipts upon which the recipient may depend for his living expenses, just as in the case of a salary or wage earner, annuitant or welfare beneficiary. But that in itself is not enough and consideration must be given to the relationship between payer and payee and to the purpose of the payment, in order to determine the quality of the payment in the hands of the payee.55
[65] The Authority went on to deal with income credited into accounts held by members of Mr Krasniqi’s family or paid to third parties. It said as follows:
[52] As previously mentioned, some of the disputed amounts were not received directly by the disputant but were paid into bank accounts held in the names of members of the disputant’s family, paid to third parties, or used to pay expenses. It is not in dispute that amounts can be income derived by a person in spite of him or her not being the immediate recipient of the money or money’s worth, if the income has been dealt with on the person’s behalf or in his or her interest. The relevant subsection of s BD 3 of the [Income Tax Act] 200756 provides:
BD 3 Allocation of income to particular income years
...
Income credited in account
(4) Despite subsection (3), income that has not previously been derived by a person is treated as being derived when it is credited in their account or, in some other way, dealt with in their interest or on their behalf.
53 Reid v Commissioner of Inland Revenue, above n 48.
54 At 5,183.
56 Section EB 9(1) of the Income Tax Act 1994 and s BD 3 of the Income Tax Act 2004.
[53] In Dunn v Commissioner of Inland Revenue57 the then Supreme Court said of an earlier equivalent to s BD 3(4):
... [the section] is concerned with when a person is deemed to derive income. What the section is aimed at, I think, is the kind of situation where income which in the ordinary course would reach the taxpayer’s hands is in some way diverted to other uses of benefit to him. The section postulates that income has not actually been paid to or received by him, nor already become due or receivable. Hence he could say that he has not derived it. So a rule is laid down that he shall be deemed to have derived it when it has been dealt with in his interest or on his behalf in any of various ways, some which are specified. All the ways specified involve diversion of income which would otherwise have flowed to the taxpayer.
...
Another helpful statement is that of Fergusson J. in Perrott v Commissioner of Taxation [1922] NSWStRp 81; (1922) 23 S.R. (N.S.W.) 118,124 –
“What that clause contemplates is that the case where the taxpayer, though he has not received the money itself, has had the benefit of it, or of something which is substantially equivalent to it. If he is given credit for the amount, for example, in his bank account, he is in the same position as if he had actually been paid the cash and had deposited it in the bank. So with a re-investment, or accumulation, or any of the other dealings mentioned in the section. A contract to pay money in the future stands on a very difficult footing. He does not receive it now; he has no right to receive it now: and he may never receive it at all.”
Those passages support the view that, broadly speaking, sec 92 is intended to deal with persons whose activities or assets yield income but who do not receive and perhaps do not even control that income, although it is applied for their benefit.
...
In Commissioner of Inland Revenue v Farmers Trading Co Ltd58 Richardson J said in relation to a predecessor of the section that the section:
... does not in its terms provide a test for determining when a profit accrues on trading. It is directed to the form in which income is derived. It deems income to be derived by a taxpayer where, even if it does not reach him, it is dealt with in his interest or on his behalf.
[66] Neither party took issue with these paragraphs from the Authority’s decision, and I gratefully adopt them.
57 Dunn v Commissioner of Inland Revenue [1975] 1 NZLR 465, (1974) 1 NZTC 61,245 (SC) at 469.
58 Commissioner of Inland Revenue v Farmers’ Trading Co Ltd [1982] NZCA 47; [1982] 1 NZLR 449 (CA) at 457. That case considered s 92 of the Land and Income Tax Act 1954, which was replaced by s EB 1(1) of the Income Tax Act 1994 (the wording of the two is almost identical).
[67] Ms Low argued that the Commissioner was essentially relying on unexplained deposits and asserting that they were not out of the ordinary for Mr Krasniqi. The majority of deposits relied on by the Commissioner were either paid to Mr Krasniqi, to his wife or to an entity owned or controlled by him. It was argued that the Authority had to consider the character of each deposit and undertake a factual enquiry, balancing the evidence given by the Commissioner and the evidence given by Mr Krasniqi. It was argued that the Authority did not properly do so in relation to some of the deposits the subject of the default assessments, and it was suggested that the Commissioner’s assessment of some of the deposits was arbitrary.
[68] The Commissioner, for her part, did not dispute that a factual enquiry was necessary. She, however, pointed to the statutory onus and argued that there was more than sufficient evidence to show that the deposits the subject of Mr Krasniqi’s appeal should be attributed to him as income under ordinary concepts. She noted that:
(a) The amounts came in directly to Mr Krasniqi via his personal bank account, via bank accounts which he controlled, or via payments to third parties at his direction and for his benefit.
(b) The deposits were either in the form of money or monies worth.
(c) Mr Krasniqi received the amounts as remuneration for his services in respect of the various consultancy services he was providing to Mr Brown’s trusts and others.
(d) The deposits were recurrent and regular.
(e) Mr Krasniqi relied on the deposits to meet his day to day living expenses. He did not declare any income in Australia. His wife did not work and she had no income.
(f) Mr Krasniqi was unable to give satisfactory answers as to what money (if not the amounts in dispute) he was using to meet his and his family’s living expenses.
The Commissioner emphasised Judge Sinclair’s findings as to Mr Krasniqi’s credibility, summarised at [30] above.
[69] As I have already noted, when the Commissioner issued her default assessments, the onus passed to Mr Krasniqi to establish on the balance of probabilities that the assessments were wrong, why they were wrong and by how much they were wrong.
[70] The reason why the onus passes to the disputant in tax challenges is clear. It was succinctly put by the Court of Appeal in Buckley & Young Ltd v Commissioner of Inland Revenue:59
... The Commissioner could not sensibly be expected to bear the onus of proof of matters which originate with the taxpayer and which usually are peculiarly within his knowledge and power. Thus, there are sound if not compelling practical reasons why the legislation requires him to provide satisfactory evidence to support his calculation of his assessable income. If he fails or is unable to provide sufficient evidence to discharge that onus, his objection to the Commissioner's assessment will fail.
For a tax challenge to succeed, the disputant has to demonstrate with “reasonable clarity” what the correct assessments should be.60 As the Authority noted, the facts in any particular case will determine what evidence will be required to discharge the disputant’s onus of proof.61 In most cases, it will be necessary for the disputant taxpayer to produce corroborative evidence, such as contemporaneous documents, statements, records and the like, in support of the disputant’s necessarily ex post facto explanations.62
59 Buckley & Young Ltd v Commissioner of Inland Revenue [1978] NZCA 22; [1978] 2 NZLR 485 (CA) at 498. See also Russell v Commissioner of Inland Revenue [2012] NZCA 128 at [70].
60 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [171].
61 Krasniqi v Commissioner of Inland Revenue, above n 1, at [46].
62 Case J23 v Commissioner of Inland Revenue [1986] NZTRA 13, (1987) 9 NZTC 1,129; Case E69 v Commissioner of Inland Revenue (1982) 5 NZTC 59,378 (TRA); Case L40 v Commissioner of Inland Revenue [1989] NZTRA 3; (1989) 11 NZTC 1,249 (TRA); Case L25 v Commissioner of Inland Revenue
[71] Against this background, I turn to look at the various payments challenged by Mr Krasniqi and by the Commissioner.
(a) Deposits paid into the Krasniqi Discretionary Trust
[72] The Commissioner assessed various deposits totalling NZ $1,309,185.04 into the Krasniqi Discretionary Trust’s bank accounts as income to Mr Krasniqi, whether the deposits came directly from one of the trusts operated by Mr Brown or others, or whether they were from other sources, unknown or otherwise. The Commissioner took this stance because she considered, on the basis of the information available to her, that Mr Krasniqi was a primary beneficiary of the trust and that he frequently resorted to the trust fund for his personal expenditure.
[73] The Authority did allow two deductions – one of AUD $39,000 and the other of AUD $27,300 – both deposited by Sun Marine Services into the Krasniqi Discretionary Trust’s bank account on 4 August 2007 and 19 December 2007 respectively. These deductions are challenged by the Commissioner in her cross- appeal and I deal with them below.
[74] The Commissioner obtained information about the Krasniqi Discretionary Trust from the Australian Tax Office. The trust was initially settled by Mr Krasniqi’s father, Mazhar Krasniqi, and Mr Krasniqi’s brother, Flamur Krasniqi, was initially a trustee. In this capacity, he bought and sold a properly on behalf of the trust. Flamur Krasniqi was adjudicated bankrupt in Australia and he did not disclose the trusteeship in his statement of affairs. When he was questioned about this, he said that he was no longer a trustee of the trust and, in a report prepared by his controlling trustees in his bankruptcy, it was noted that Flamur Krasniqi resigned as a trustee of the Krasniqi Discretionary Trust in June 2007. The controlling trustee also reported that the trust deed named Mr Krasniqi as the primary beneficiary of the trust and that his siblings were secondary beneficiaries.
[1989] NZTRA 10, (1989) NZTC 1,163; Case Q32 v Commissioner of Inland Revenue (1993) 15
NZTC 5,150 (TRA).
[75] Mr Krasniqi initially maintained in his brief of evidence that he did not have any direct personal involvement in the trust. He said that he was not a beneficiary of the trust and that he had no access to its bank accounts. In the course of his examination-in-chief, he admitted that he had been a beneficiary but said that that was no longer the case. He was, however, unable to say when he was removed as a beneficiary. He denied knowing who the then trustee(s) of the trust was (or were). He admitted arranging for payments to be made into the trust from another trust – the DIF Trust – of which he was a trustee. He endeavoured to explain why these deposits were made, but he produced no documentary evidence or independent witnesses to corroborate his contentions.
[76] Information obtained from the Australian Tax Office showed that at least two bank accounts in the name of the Krasniqi Discretionary Trust were in operation during the disputed period. One was opened in 2005 and the other in 2007. Mr Krasniqi had a level of authority over at least one of the bank accounts. He was described in the material from the Australian Tax Office as being an “ordering customer”. When pressed on this issue at the hearing, Mr Krasniqi admitted that he still held signing authority over a bank account operated by the trust. Judge Sinclair concluded, on a careful reading of the bank authority form, that Mr Krasniqi was named as an additional person, but that he had limited authority only.63 This finding was not challenged before me.
[77] Over the disputed period, various amounts were transferred from Mr Brown’s trusts (or entities associated with him) to the Krasniqi Discretionary Trust. The Commissioner attributed those sums as income to Mr Krasniqi, on the basis that they were remuneration for consultancy services provided by him. Mr Krasniqi accepted that one minor payment – NZ $3,525 – was indeed remuneration for his services. Mr Krasniqi said that the payments were made to repay loans made to Mr Brown by Mazhar Krasniqi. He produced no evidence to support this contention. If this was a proper explanation for the payments, or if there was another explanation, it should have been given by Mr Krasniqi and he should have produced corroborating material to back up his version of events. He did not do so.
63 Krasniqi v Commissioner of Inland Revenue, above n 1, at [101].
[78] Ms Low criticised the Commissioner for focusing on payments into the Krasniqi Discretionary Trust’s accounts, and not on withdrawals made from those accounts.
[79] To address this criticism, the Commissioner further reviewed the trust’s bank statements and Mr Krasniqi’s bank statements. That review highlighted a number of things, many of which cast considerable doubt on Mr Krasniqi’s explanation:
(a) A number of withdrawals were made from the Krasniqi Discretionary Trust’s accounts at places where there were also transactions conducted on Mr Krasniqi’s personal bank account on the same day. By way of example, there were withdrawals made at the Sky City Casino from both Mr Krasniqi’s personal account and the bank accounts of the trust on the same days.
(b) The records also showed that Mr Krasniqi was checking the balances, both of his personal account and of the Krasniqi Discretionary Trust’s bank accounts, on occasion, in the same places and on the same days.
(c) There were several occasions where Mr Krasniqi’s personal bank account was used at casinos where withdrawals were made at the same place and on the same day from the Krasniqi Discretionary Trust’s bank accounts.
(d) There was something of a crossflow between amounts coming out of the trust’s bank accounts and amounts being paid into Mr Krasniqi’s personal bank account. For example, on 5 March 2007, NZ $310,000 was paid by Mr Krasniqi from his personal account into the trust’s bank accounts. There was a further transfer of NZ $2,500 from Mr Krasniqi’s account into the trust’s accounts on 13 March 2007. There was then a series of transfers from the trust’s accounts to Mr Krasniqi’s account – including a payment of NZ $40,000 on 2 May 2007, a further payment of NZ $9,000 on 28 November 2007, a transfer
of NZ $80,000 on 10 April 2008, and a transfer of NZ $3,000 on 2 February 2009.
Without further explanation from Mr Krasniqi, and corroborating evidence to support any explanation, it is reasonable to infer from these various transactions that Mr Krasniqi was the likely user of both accounts, and that he was using funds from the trust’s accounts for his personal expenditure.
[80] The onus was on Mr Krasniqi to explain the payments into the trust’s accounts and his use of the trust fund. He did not do so. He did not provide any supporting documentation or evidence from family members. He did not produce the trust deed or any variation to the deed supporting his assertion that he was no longer a beneficiary of the trust. He did not produce the trust’s bank accounts or financial statements. He did not call the trustee(s) or his father, if indeed it was his father’s trust. Put bluntly, Mr Krasniqi failed to demonstrate, with reasonable clarity, what the correct assessments should have been. He failed to discharge the onus of proof on him.
[81] Mr Krasniqi has not persuaded me that the Authority was wrong to attribute the monies paid into the Krasniqi Discretionary Trust’s bank accounts between 11 October 2005 and 25 June 2009 as income assessable in his hands. This aspect of the appeal is dismissed.
[82] One issue did, however, arise in the course of submissions on this issue which needs to be addressed.
[83] The Commissioner accepted that there may well have been a relationship between transfers from the trust’s bank accounts into Mr Krasniqi’s personal account. She acknowledged that a further review of the amount assessed was appropriate, to ensure that no deposits were assessed twice – once when the deposit was paid in the trust’s bank accounts and again when it went into Mr Krasniqi’s bank account.
[84] I asked counsel to further consider this issue and I received a joint memorandum in relation to it. I am advised that amounts likely to have been double- counted total AUD $132,000 and are as follows:
- (a) 2 May 2007 – AUD $40,000 was withdrawn from the Krasniqi Discretionary Trust’s accounts. On the same date, AUD $40,000 was deposited into Mr Krasniqi’s Australian account;
(b) 28 November 2007 – AUD $9,000 was withdrawn from the Krasniqi Discretionary Trust’s accounts. On the same date, AUD $9,000 was deposited into Mr Krasniqi’s Australian account;
(c) 10 April 2008 – AUD $80,000 was withdrawn from the Krasniqi Discretionary Trust’s accounts. On the same date, AUD $80,000 was deposited into Mr Krasniqi’s Australian account; and
(d) 2 February 2009 – AUD $3,000 was withdrawn from the Krasniqi Discretionary Trust’s accounts. On the same date, AUD $3,000 was deposited into Mr Krasniqi’s Australian account.
[85] It seems likely that these amounts have been double-counted in the default assessments. I direct the Commissioner to prepare amended assessments to ensure that Mr Krasniqi is assessed only once in respect of each of the above amounts.
(b) Payment by Whangaruru Farm Trust to Roverland
[86] On 16 September 2004, the Whangaruru Farm Trust paid NZ $105,000 to Roverland for the purchase of a Range Rover motor vehicle. This sum was deemed to be income to Mr Krasniqi in the 2005 income tax year.
[87] It was not in dispute that the Whangaruru Farm Trust was one of the trusts established and operated by Mr Brown.
[88] Mr Krasniqi denied that the Range Rover was his vehicle. He said it belonged to Mr Brown. However:
(a) there was no record of Mr Brown owning such a vehicle at the relevant time; and
(b) in an interview which Mr Brown gave under oath pursuant to s 19 of the Act, he stated that he owned and drove, at different times, a Prado, a Lamborghini, and other vehicles which he said he got in “as trades” and which were owned by his trusts, including, at one stage, a Range Rover. He said that he did drive these traded vehicles on occasion and that others had access to them, including Mr Krasniqi.
[89] Before the Authority, the Commissioner submitted that it was likely that Mr Krasniqi was the principal user of the Range Rover. It was noted that he spent a great deal of time in this country and that he would have required transport when he was here. It was noted that, in his evidence, Mr Krasniqi admitted driving the Range Rover, albeit “not very often”, and that he said that it was not his car.
[90] Mr Krasniqi’s evidence was not accepted by the Judge, and she held that he had failed to discharge the onus on him to show that the transaction was not for his sole benefit. It was noted that Mr Krasniqi did not produce any supporting evidence, and that it could reasonably have been expected that Mr Krasniqi would have been able to produce some evidence as to the vehicle or vehicles he used in New Zealand at the relevant times, along with some supporting evidence to show that the Range Rover was Mr Brown’s company car, and that it was not utilised by Mr Krasniqi as his private vehicle. It was noted that those who knew his daily movements could have been called to give evidence. In the absence of such corroborative evidence, the Judge refused to accept Mr Krasniqi’s explanation. She concluded that the $105,000 had been correctly assessed as income to Mr Krasniqi.
[91] Before me, Ms Low argued that Mr Krasniqi’s evidence was corroborated by the sworn evidence of Mr Brown, given in the course of his s 19 interview.
[92] I do not consider that Mr Brown’s interview evidence does corroborate Mr Krasniqi’s evidence. The $105,000 payment was made by Mr Brown’s trust – the Whangaruru Farm Trust – to Roverland to purchase the Range Rover. The vehicles Mr Brown was talking about in his interview were vehicles which he, or one or other of his trusts, acquired as part payment in property deals. Mr Brown was not specifically asked about the Roverland transaction.
[93] If Mr Krasniqi wished to call Mr Brown to corroborate his explanation, it was open to him to do so. He failed to do so.
[94] I cannot see any error in Judge Sinclair’s approach, and again Mr Krasniqi has failed to satisfy me that she erred in this regard. The Authority was correct to find that Mr Krasniqi failed to discharge the statutory onus and it did not make any error in this regard.
(c) Payment to Flamur Krasniqi
[95] Mr Krasniqi appeals the fact that the sum of NZ $100,025 was assessed as income. The sum was transferred from the WBR Trust – one of Mr Brown’s trusts – to his brother, Flamur Krasniqi. The transfer occurred on or about 3 October 2007.
[96] It was common ground that Flamur Krasniqi also worked for Mr Brown, and that he received money transfers from various of Mr Brown’s trusts from time to time. Before the Authority, the Commissioner accepted that it was possible that the transfer of the $100,025 could have been made to Flamur Krasniqi for his benefit. She, however, noted that the amount was not itemised in Flamur Krasniqi’s bank statement, but that other transfers made by Mr Brown’s personal assistant, a Ms Cannon, were itemised. It was argued that the fact that the transfer was not itemised made it more likely that it occurred on instructions from Mr Krasniqi, and that the amount was dealt with in Mr Krasniqi’s interests or on his behalf.
[97] The Authority favoured the Commissioner’s view. Judge Sinclair noted that Mr Krasniqi did not call his brother as a witness.64 On the evidence before her, the Judge was not satisfied that the amount assessed was not income to Mr Krasniqi.65
[98] This issue is finely balanced. I note that the information obtained from the Australian Tax Office is to the effect that this payment was made to a bank account with the National Australian Bank in Brisbane. Flamur Krasniqi’s account with the Commonwealth Bank of Australia, unsurprisingly, does not record receipt of the transfer. There is no information I am aware of showing who held or who controlled
64 Krasniqi v Commissioner of Inland Revenue, above n 1, at [117].
65 At [117].
the National Australian Bank account. In the circumstances, I fall back on the onus of proof. Mr Krasniqi could have called Mr Brown, his administrative assistant Ms Cannon, who made the payment, or his brother, Flamur Krasniqi. If the payment was made to Flamur Krasniqi or for his benefit, then they would readily have been able to say so. Mr Krasniqi did not call any of these persons as a witness. Again, he failed to discharge the onus that was on him. Again, I am not persuaded by Mr Krasniqi that the Authority’s decision was wrong. This aspect of the appeal must also fail.
(d) Amounts paid into Mr Krasniqi’s New Zealand bank account in December 2009 and March 2011
[99] The Commissioner assessed as income to Mr Krasniqi deposits made into his New Zealand bank account of NZ $85,479.45 on 4 December 2009, NZ $33,000 on 15 December 2010 and NZ $135,000 on 2 March 2011.
[100] It was Mr Krasniqi’s evidence that, because of his frequent visits to New Zealand, he decided to buy a house for his family in Remuera, Auckland. He said that he borrowed about $1,250,000 from his solicitor’s nominee company and purchased a house in the name of his solicitor’s trust company in or about November 2009. He told the Authority that a reduction in the price was agreed as there was an issue with regard to cladding, and that $85,479.45 was deposited by direct credit into his bank account on 4 December 2009 to enable him to fix the problem. He said that there was a further payment of $33,000 into his account by the solicitors on 15 December 2010. Mr Krasniqi said that this amount was additional funding to finalise the repairs to the house. He said that there was a further deposit of $135,000 paid into his account on 2 March 2011. Mr Krasniqi said that this was the deposit received on the sale of the property. Mr Krasniqi said that his family did not enjoy living in New Zealand, that Mr Brown’s financial situation was deteriorating at the time and that the property was sold in February 2011. He said that the balance of the settlement proceeds – following the repayment of the mortgage advance, namely $395,000 – were deposited by cheque into his account on 11 March 2011.
[101] The Commissioner assessed the sums as income to Mr Krasniqi. It was argued for Mr Krasniqi that these were non-taxable capital receipts.
[102] The Authority noted that Mr Krasniqi was involved in property sales and development.66 It was not satisfied on the evidence that the Remuera property was his private home.67 It noted that no utility accounts or other evidence relating to Mr Krasniqi’s occupation of the property were produced, and observed that Mr Krasniqi had consistently maintained that he did not have a permanent place of residence in New Zealand over the disputed period.68 It was noted that, in his statement of position, Mr Krasniqi specifically stated that he did not have a house available to him in New Zealand.69 The Authority recorded that other than a ledger statement relating to the purchase, and a settlement statement relating to the subsequent sale, no other documents were produced.70 It observed that Mr Krasniqi could have called either his wife or his solicitor to prove his ownership/occupation of the property, but that he did not do so.71 The Authority was not persuaded that the amounts had been incorrectly assessed as income to Mr Krasniqi.72
[103] I share the Authority’s reservations.
[104] Clearly, if Mr Krasniqi was residing in the home, then monies received for its repair and from its sale would have been non-taxable capital receipts. However, Mr Krasniqi failed to produce any corroborating evidence to support his claim that the house was his private home. He did not, for example, provide any utility bills in his name. He did not put forward any other evidence, for example, that his children went to school in the local area. To the contrary, he maintained up until his written brief that he did not have a permanent place of abode in New Zealand, and that his and his family’s home was in Australia. In his statement of position, he denied that he had a permanent place of abode in New Zealand, no doubt because at that point he was denying that he was a New Zealand tax resident. It was only at the hearing that Mr Krasniqi did a turn around, and claimed to have bought the Remuera house to use as a family home because, according to him, he was spending considerable amounts of time working in New Zealand looking after his family’s financial investments.
66 Krasniqi v Commissioner of Inland Revenue, above n 1, at [80].
67 At [80].
68 At [80].
69 At [80].
70 At [81].
71 At [81].
72 At [81].
[105] I agree with Ms Roff’s submission that Mr Krasniqi’s evidence was conflicting, unconvincing and totally self-serving.
[106] If Mr Krasniqi bought the property for his personal use, and funded the purchase through a loan from his solicitor’s nominee company, the Authority should have been given documentation evidencing the purchase, and showing that the property was held in Mr Krasniqi’s name or on trust for him.
[107] The trust account ledger produced from the solicitors did not include the payment of $33,000 or the payment of $135,000. The bank narrations were unhelpful. If Mr Krasniqi’s version of events was correct, one would have expected that all relevant transactions would have gone through the solicitor’s trust account. Mr Krasniqi could not explain the absence of two of the three entries. It is also significant that the Commissioner made a request under s 17 of the Act to Mr Krasniqi’s solicitors. She did not receive any further relevant documents as a result of that request. Mr Krasniqi tried to suggest that the solicitors did not retain copies of relevant documents. That explanation is simply not credible. Solicitors have a professional and regulatory obligation to retain client records.
[108] If the house in Remuera was indeed Mr Krasniqi’s private home, which he personally bought using his solicitor’s services, he could reasonably have been expected to provide convincing evidence of that, rather than just relying on a single page printout from the trust account ledger, which did not display all of the transactions which he said were related to the house.
[109] Once again, Mr Krasniqi has failed to persuade me that the Authority was wrong in the conclusions it reached. Once again, he has failed to discharge the onus which was on him. This aspect of the appeal is also dismissed.
The Commissioner’s cross-appeal
(e) Payment by Sun Marine Services into Mr Krasniqi’s Australian bank account
[110] On 20 December 2006, Sun Marine Services paid AUD $519,351.45 into Mr Krasniqi’s Australian bank account.
[111] The Commissioner’s investigator gave evidence that Sun Marine Services was a boat-yacht sales business operating in that part of Australia in which Mr Krasniqi and his family lived. Mr Krasniqi told the Authority that his father had sold a boat and advanced him the proceeds of sale, so that he and his wife could buy a house in Australia.
[112] The Authority noted that the deposit did not come from any trust or other entity owned by Mr Brown, Mr Smith or Mazhar Krasniqi. It also noted that the payment was a substantial one-off payment. It was prepared to infer that it represented the proceeds of sale of a boat. Judge Sinclair expressed the view that there was no logical basis for assessing the amount as income under ordinary concepts.73
[113] Before me, the Commissioner argued that the Authority’s conclusion was wrong and that the Authority erred in finding that Mr Krasniqi had discharged the onus of proof in relation to this amount. It was said that the Authority’s conclusion was inconsistent with its credibility findings – summarised at [30] above. Further, the Commissioner did not accept that it was a one-off payment, noting that two further deposits from Sun Marine Services were paid into the Krasniqi Discretionary Trust’s accounts on 14 August 2007 and 19 December 2007. It was argued that it was artificial for the Authority to isolate one payment from a large number of regular deposits which flowed to Mr Krasniqi from various sources throughout the disputed period, and that an overall consideration of the circumstances of the case was necessary to appreciate the nature and character of the payment.
[114] I am not persuaded by the Commissioner’s arguments. In my view, the following are relevant:
(a) The payment was not from Mr Brown, Mr Smith or Mr Krasniqi’s father. It was from an unrelated third-party entity.
(b) At the time it was made, it was a one-off payment of a large sum.
73 Krasniqi v Commissioner of Inland Revenue, above n 1, at [91].
(c) There is nothing to suggest that Mr Krasniqi was undertaking any consultancy services for Sun Marine Services, or that he derived any other remuneration or income from that entity.
(d) The Commissioner’s investigator – Ms Banwell – in cross-examination confirmed that the amount came from a boat sales yard. This evidence was consistent with Mr Krasniqi’s evidence.
(e) A person would not ordinarily be taxed on the sale of a boat.
(f) The other payments from Sun Marine Services were not to Mr Krasniqi personally, but rather to the Krasniqi Discretionary Trust. There was only one payment from Sun Marine Services direct to Mr Krasniqi.
[115] I am not persuaded that the Authority’s decision was wrong. There is nothing on the face of the payment to suggest that it was income according to ordinary concepts. It seems more likely that the payment resulted from the sale of a capital item – likely a boat. This aspect of the Commissioner’s cross-appeal is dismissed.
(f) Sums paid by Sun Marine Services to the Krasniqi Discretionary Trust
[116] There were two deposits from Sun Marine Services into the Krasniqi Discretionary Trust’s bank accounts – the first of AUD $39,000 on 14 August 2007, and the second of AUD $27,300 on 19 December 2007.
[117] It was Mr Krasniqi’s evidence that the two deposits into the trust’s bank accounts came from the sale of his father’s boat.
[118] The Authority dealt with these amounts relatively briefly. Judge Sinclair simply said that, on the evidence before the Authority, she was prepared to allow these deposits to be deducted, and she directed the Commissioner to amend her assessments accordingly.74
74 At [106]-[107].
[119] The Commissioner argued before me that there is something of an illogicality in the payments. The payment to Mr Krasniqi’s personal account was made in December 2006. The payment of AUD $39,000 on 14 August 2007 into the trust’s bank accounts was some eight months later; the payment of AUD $27,300 into the trust’s bank accounts on 19 December 2007 was almost a year later. It was noted that there was no explanation offered as to why one of the payments went into Mr Krasniqi’s personal bank account, and the other two payments were paid into the Krasniqi Discretionary Trust’s bank accounts, nor as to why payments from the sale of Mazhar Krasniqi’s boat would be made in part to Mr Krasniqi and in part to the trust.
[120] Again, I am not persuaded that the Authority’s decision was wrong in this regard, and for much the same reasons as I have set out in relation to the rather larger payment from Sun Marine Services to Mr Krasniqi personally. I agree with the Authority that there is nothing to suggest that the two payments were income to Mr Krasniqi according to ordinary concepts. The Commissioner’s cross-appeal in this regard is dismissed.
(g) International money transfers to Yacht Solutions
[121] On 7 December 2006, there was an international money transfer from the Brown Family Trust in the sum of NZ $10,020 to Yacht Solutions at Boat Lagoon in Phuket. On 9 July 2008, there was another international money transfer, in the sum of NZ $12,020, paid to Yacht Solutions in Phuket from the North Family Trust – another Brown entity.
[122] Mr Krasniqi said that he did not know anything about these payments.
[123] The Authority observed that the payments were not made to anyone in Australia, and it concluded that there was no sufficient basis for their inclusion in the default assessments.75 It directed that they be removed from the assessments.76
75 At [116].
76 At [116].
[124] The Commissioner submitted that the Authority was wrong to accept Mr Krasniqi’s blanket denial, and that the Authority’s decision as to why it excluded the payments from the default assessments is unsatisfactory, because no explanation was given for the finding.
[125] I do not accept the Commissioner’s arguments. The Authority implicitly considered that the payments were not income under ordinary concepts paid to Mr Krasniqi. In my view, it was correct to do so. There is nothing to connect the payments with Mr Krasniqi. He did not live in Phuket. There were no passenger movements produced showing that he travelled to Phuket, and there was no reference to Mr Krasniqi in the relevant international money transfers schedule prepared in relation to these transactions. The payments were some 18 months apart. This aspect of the Commissioner’s cross-appeal is also dismissed.
Conclusion - Summary
[126] For the sake of convenience, I summarise my findings:
(a) Mr Krasniqi’s appeal in relation to s 138G(2) of the Act is dismissed;
(b) Mr Krasniqi’s appeal in respect of the sum of NZ $1,309,185.04 paid into the Krasniqi Discretionary Trust’s bank accounts between 11 October 2005 and 25 June 2009 is dismissed;
(c) Mr Krasniqi’s appeal in respect of the sum of NZ $105,000 paid by Whangaruru Farm Trust to Roverland for the purchase of a Range Rover on 16 September 2004 is dismissed;
(d) Mr Krasniqi’s appeal in relation to the NZ $100,025 transferred from one of Mr Brown’s trust to Mr Krasniqi’s brother, Flamur Krasniqi, on or about 3 October 2007 is dismissed;
(e) Mr Krasniqi’s appeal in relation to the sum of NZ $253,479.45 deposited into Mr Krasniqi’s New Zealand bank account on 4 and 15 December 2010 and on 2 March 2011 is dismissed;
(f) The Commissioner’s cross-appeal in relation to the sum of AUD
$519,351.45 deposited by Sun Marine Services into Mr Krasniqi’s Australian bank account on 20 December 2006 is dismissed;
(g) The Commissioner’s cross-appeal in relation to the sum of AUD
$39,000 and AUD $27,300 – total AUD $66,300 – deposited by Sun Marine Services into the Krasniqi Discretionary Trust’s bank accounts on 14 August 2007 and 19 December 2007 is dismissed; and
(h) The Commissioner’s cross-appeal in respect of the sums of NZ $10,020 and NZ $12,020 transferred by international money transfer to Yacht Solutions at Boat Lagoon, Phuket on 7 December 2006 and 9 July 2008 is dismissed.
[127] The Commissioner is directed to prepare amended assessments to allow for those payments which have been assessed twice as noted in [82]-[85] above.
Costs
[128] Both the appeal and the cross-appeal have been dismissed. It is my preliminary view that costs should lie where they fall.
[129] If counsel do not agree with this view, then I direct as follows:
(a) within 10 working days of the date of this judgment, the Commissioner is to file a memorandum seeking any costs and/or disbursements she wishes to claim;
(b) within a further 10 working days, Mr Krasniqi is to file any memorandum responding to the Commissioner’s memorandum and seeking any costs and/or disbursements that he wishes to claim; and
(c) the Commissioner is to file a memorandum in reply to any application Mr Krasniqi may make for costs and disbursements within a further 10 working days.
I will then deal with the issue of costs on the papers, unless I require the assistance of counsel.
Wylie J
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