The Taxation Review Authority (TRA) has dismissed a taxpayer’s challenge and confirmed the Commissioner’s assessments relating to PAYE obligations and income tax and GST liabilities.

The background

Between 1972 and 1994, the taxpayer was a sole trader trading as XYZ. After that, he operated various companies under the trading name XYZ. In April 2003, he returned to trading as a sole trader under the name of XYZ and continued to trade on this basis until December 2003. The taxpayer’s de facto partner, Ms Black, operated her own company, HCW Ltd, in the same industry as the taxpayer. The taxpayer became involved in a different business venture referred to as SDL. He reached an agreement with Ms Black whereby XYZ would be operated under the umbrella of HCW Ltd. In late December 2011, Ms Black left New Zealand without notice. The taxpayer claimed he took over the business, and, as he did not want to return to the industry, he sold XYZ and HCW Ltd businesses in May 2012 to ABJ Ltd.

The Commissioner commenced an investigation into the tax affairs of the taxpayer following a query from a former employee of XYZ with regard to the payment of PAYE. The Commissioner assessed the taxpayer for PAYE, GST and income tax in respect of business activities the taxpayer undertook between April 2003 and November 2011. In particular, the Commissioner alleged that the taxpayer carried on business in a regulated industry under the trading name XYZ. The Commissioner also alleged that in the same period, the taxpayer was involved in a business importing and on-selling motor vehicles (the motor vehicle trading business). The taxpayer challenged the assessments and maintained that he was not involved in any business activities of the nature alleged in any of the tax periods under dispute.

The issues

The issues were as follows:

(1) Whether the taxpayer had PAYE obligations for staff employed by XYZ.

(2) Whether the taxpayer carried on business trading as XYZ giving rise to an income tax and GST liability.

(3) Whether the taxpayer carried on a motor vehicle trading business giving rise to an income tax and GST liability.

(4) Whether the Commissioner erred in opening the time bar and assessing the taxpayer for income tax and GST for particular periods.

(5) Whether the taxpayer failed to return all of his employment income in the 2010 tax year.

Taxation Review Authority’s decision

The TRA dismissed the taxpayer’s challenge and confirmed the Commissioner’s assessments. The TRA found as follows:

  1. The taxpayer continued to carry on business in his personal capacity under the trading name of XYZ in the tax periods in dispute. During that time, the taxpayer held a licence in his personal name trading as XYZ. He was aware of the structure of the licensing regime and used his licence to apply for and renew the certificates of individuals described as employees of XYZ. Wages were paid to employees of XYZ from the bank accounts which were in the taxpayer’s name and/or under his control. Invoices issued to customers of XYZ contained a direction to pay to one of these accounts and also included the taxpayer’s GST number.
  2. In the tax years in dispute, the taxpayer continued to hold himself out to third parties as the owner/operator of XYZ. The taxpayer was listed as the vendor and the employer of the employees of XYZ/HCW in the agreement for sale and purchase of those businesses to ABJ Ltd in May 2012.

PAYE obligations

  1. The taxpayer was liable for PAYE and student loan repayments deducted from the salary and wages of employees of XYZ in the disputed tax periods as assessed by the Commissioner.
  2. The taxpayer failed to prove that he sold or otherwise transferred the business of XYZ to HCW Ltd. On the evidence, in the disputed tax years, the taxpayer continued to operate as a sole trader under the name of XYZ. The taxpayer continued to apply as employer for certificates of approval for the employees of XYZ, and in other instances he also held himself out as employer in relation to the XYZ business. In all the circumstances, the taxpayer was the employer of the staff of XYZ in the disputed tax periods. As employer, the taxpayer deducted PAYE and student loan repayments from the wages of his employees which he then failed to return to the Commissioner.

Income tax and GST liabilities

  1. The taxpayer was liable for the income tax and GST relating to the business of XYZ in the disputed tax periods as assessed by the Commissioner.
  2. Amounts earned from the business of XYZ were deposited into the bank accounts held in the name of and/or controlled by the taxpayer. These amounts were income derived from a business under s CB 1 of the Income Tax Act 2007 (ITA) and as such were income of the taxpayer under s CA 1(1). Alternatively, if not business income, the amounts deposited into the bank accounts were income of the taxpayer under ordinary concepts pursuant to s CA 1(2).
  3. During the tax periods in dispute, the taxpayer was registered for GST and was making GST returns in relation to commercial rent. As such, he was required to account for GST on any taxable activity he conducted during this period. The taxpayer carried on the XYZ business and the invoices continued to be issued using his GST number until at least March 2011. The taxpayer was required to account to the Commissioner for GST charged on the supplies made by XYZ in the furtherance of a taxable activity during the tax periods in dispute.

Income tax and GST: motor vehicle trading business

  1. The taxpayer carried on the business of importing and on-selling motor vehicles during the 2004 to 2011 tax years. On this basis, he was required to account to the Commissioner for tax earned on the income made from this business. As the taxpayer was already registered for GST, he was also required to account for GST on supplies made as part of this taxable activity.
  2. Applying the factors in Grieve v C of IR (1984) 6 NZTC 61,682 (CA), the importing and on sale of the vehicles by the taxpayer was in the nature of a business activity having particular regard to the frequency and volume of the transactions. The taxpayer carried on these activities over a lengthy period between 2004 and 2011. The importing and on sale activities were carried on by the taxpayer in an organised and coherent way and with the purpose of achieving a profit.

Opening the time bar

  1. The exceptions under s 108(2)(a) and/or (b) of the Tax Administration Act 1994 to the time bar applied in respect of the 2004 income tax return and the Commissioner was able to amend the assessment to increase the amount of income tax to be paid to include income earned from XYZ and the motor vehicle trading business.
  2. In the 2004 tax year, the taxpayer did not disclose income earned from either XYZ or the motor vehicle trading business in his 2004 income tax return and on this basis, the return did not reflect the taxpayer’s true tax position and was misleading. The taxpayer was an experienced businessman who was well aware of his tax obligations. On the evidence, his failure to include this income in the return was deliberate. Accordingly, the exception under s 108(2)(a) applied.
  3. The exception under s 108(2)(b) also applied. On the basis of factual findings, it was evident that the taxpayer did not mention income earned from the operation of XYZ and his motor vehicle trading business in his tax return filed for the year ending 31 March 2004 as he was required to do.
  4. Section 108A of the Tax Administration Act sets out the time bar for amending GST assessments. The exception under s 108A(3) applied and the Commissioner was entitled to open the time bar for the GST periods from September 2003 to March 2005 and September 2008 to March 2009.
  5. The Commissioner had reasonable grounds to consider on the basis of the investigation undertaken that the taxpayer had knowingly or fraudulently failed to disclose to the Commissioner all of the material facts necessary for determining the amount of GST payable for the relevant GST periods in respect of the taxable activities of XYZ and the motor vehicle trading business.

Employment income in 2010 tax year

  1. The taxpayer’s employment income returned for 2010 was substantially less than the employment income returned by the taxpayer in previous years. In her assessment of the taxpayer’s income, the Commissioner increased the taxpayer’s employment income from HCW Ltd for the year ended 31 March 2010. The taxpayer failed to provide any explanation for the discrepancy between his returned income and the records obtained by the Commissioner from HCW Ltd setting out the amount which was paid to him. In the absence of any credible explanation for the discrepancy, the Commissioner’s assessment for the 2010 income year was confirmed.