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

MUSUKU v THE COMMISSIONER OF INLAND REVENUE [2016] NZHC 934 [10 May 2016]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2015-404-001947[2016] NZHC 934BETWEEN JAWAHAR BHASKAR MUSUKUAppellantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 3 February 2016Appearances: Gregory Thwaite for the AppellantLeia Herbert and Mark Bryant for the RespondentJudgment: 10 May 2016JUDGMENT OF MOORE JThis judgment was delivered by me on 10 May 2016 at 4:30 pmpursuant to Rule 11.5 of the High Court Rules.Registrar/ Deputy RegistrarDate:Contents ParagraphNumberIntroduction .............................................................................................................. [1]Background factsMr Musuku and his business interests ................................................................. [12]The investigation .................................................................................................. [13]Default assessment (May 2009) ........................................................................... [30]Dispute process .................................................................................................... [35]The hearing........................................................................................................... [55]Decision of the Authority ....................................................................................... [58]Grounds of appeal .................................................................................................. [64]Principles on appeal ............................................................................................... [65]Analysis ................................................................................................................... [68](a) Did the Commissioner fail to issue a proper assessment? ......................... [69](i) Was the assessment arbitrary?Appellant's submissions .................................................................... [70]Legal principles ................................................................................ [71]Analysis............................................................................................. [78](ii) Was the assessment made on a credible and reasonable basis? ........ [97](iii) Did the assessment properly take into account the known facts and law? ................................................................................. [102](b) Was the Commissioner's assessment incorrect? ..................................... [104](i) Dividend income – was the transfer of value by virtue ofMr Musuku's shareholdings in the companies? ............................. [108]Appellant's submission ................................................................... [112]Analysis........................................................................................... [119](ii) Employment income – was the transfer of value by virtue ofMr Musuku's employment with the companies?............................ [130]Analysis........................................................................................... [135](iii) Was the transfer of value income under ordinary concepts? .......... [141]Analysis........................................................................................... [150]Conclusion............................................................................................................. [156]Result ..................................................................................................................... [166]Costs ...................................................................................................................... [167]Introduction[1] Jawahar Bhaskar Musuku, the appellant, was the sole director and the sole or majority shareholder of three companies which operated pharmacies in which he worked as a pharmacist during the 2006 tax year.[2] In August 2006 a tax investigator employed by the Commissioner of InlandRevenue ("the Commissioner") commenced a review of Mr Musuku's tax affairsover a number of tax years. It would seem the decision to do so was sparked by a number of apparent irregularities in the taxpayer's affairs including the fact that hehad not filed any tax returns for six years, two of his companies had failed to submit any GST returns since incorporation, one of the companies had last filed a return of income for the 2003 tax year and the Musuku Family Trust ("the Trust") and one ofthe companies did not have IRD numbers and had never filed any returns.[3] The investigation itself was far from straightforward. It occupied some seven years. In the first three years the investigator made repeated requests for documents and information in the face of non-compliance. He engaged in extensive correspondence and numerous discussions with Mr Musuku and a procession of taxagents. Finally, in the face of what was effectively Mr Musuku's failure or refusal to co-operate, the Commissioner made a default assessment of his income for the 2006 tax year.[4] This step reflected the investigator's conclusion that Mr Musuku had treatedall the bank accounts, both business and personal, as though they were his own.1 He frequently transferred money between them. He made business deposits into his personal accounts and he mixed business and personal expenditure.[5] It was also apparent to the investigator that Mr Musuku had attempted to frustrate the timely and orderly progression of the investigation and, significantly, had still not filed an income tax return for the 2006 year.2 It was only after the Commissioner issued the default assessment that some response was excited from1 11 bank accounts were operated either exclusively or in part by Mr Musuku. These included trading accounts for the companies, credit card accounts and personal accounts.2 Mr Musuku's personal return of income for the 2006 year was not filed until September 2009.Mr Musuku. He filed a Notice of Proposed Adjustment ("NOPA") and his 2006income tax return.3[6] The resulting disputes phase was protracted. The conference stage concludedin August 2012. In 2013 Mr Musuku issued a response to the Commissioner's Statement of Position ("SOP") and in April 2013 the Commissioner issued the SOP Addendum.[7] The Commissioner made generous concessions during the conference stage and as further information was provided by Mr Musuku and/or his tax agents further concessions were made.[8] The Disputes Review Unit upheld the Commissioner's SOP in late July 2013and an amended assessment was issued. This was made on the basis the amounts deposited into various business and personal bank accounts to which Mr Musuku had access and which were spent on his behalf and to his private benefit or made available to him, were his assessable income as dividend income, employment income or income under ordinary concepts.[9] Mr Musuku then brought challenge proceedings before the Taxation ReviewAuthority ("the Authority").[10] In the Authority's reserved decision, delivered on 27 July 2015, Judge A A Sinclair determined she was not satisfied Mr Musuku had discharged theonus on him to prove on the balance of probabilities that the Commissioner'samended assessment (and/or default assessment) for the 2006 year was arbitrary andnot a genuine attempt to assess his taxable income, and/or the Commissioner'samended assessment was incorrect and, if so, by how much. Her Honour dismissed Mr Musuku's challenge and confirmed the Commissioner's assessment of his income tax for the 2006 year.3 On or about 25 September 2009 the tax inspector received a letter from Mr Musuku's then taxagent dated 24 September 2009 which constituted the NOPA and enclosed schedules and incomes of tax return for the disputed 2006 period. The letter also contained a response to an enquiry made three months earlier, including applications for the issue of IRD numbers for those entities which did not have them, and an income tax return for two of the companies and the Trust.[11] It is against that determination Mr Musuku now appeals.Background factsMr Musuku and his business interests[12] During the 2006 tax year Mr Musuku operated three retail pharmacies. He was the onsite pharmacist. While his efforts were divided between the businesses, his responsibilities included dispensing prescriptions, management, human relations (including hiring, PAYE and wages), operating the various bank accounts, etc. The relationship between Mr Musuku and the various relevant entities in the tax year ending 31 March 2006 is set out in the appendix attached to this judgment.4 The various entities were as follows:(a) Mission Bay Pharmacy Ltd ("MBP Ltd")This company was incorporated in 1996. Mr Musuku was its sole director and held 75 per cent of the issued shares. His wife held the balance. The company operated the Mission Bay Pharmacy on Tamaki Drive. Following a dispute with the landlord the company was evicted from the premises in May 2005 and was placed in liquidation in July 2006.(b) Mission Bay Pharmacy (2005) Ltd ("MBP (2005) Ltd")Following MBP Ltd's eviction, the pharmacy's business was relocateda short distance away in Patterson Avenue, Mission Bay. MBP (2005) Ltd operated the business from the new premises. The company was incorporated in June 2005 and Mr Musuku was its sole director and shareholder.4 The diagram shown in this appendix is a modification of the operational diagram prepared by the tax inspector, Mr Ward. It has been slightly amended to reflect the submissions of counsel before me.(c) Mission Bay Holdings (2005) Ltd ("Holdings Ltd")This company, which was incorporated in November 2005, purchased a pharmacy business in Remuera which traded as Wylie's Pharmacy.It commenced trading in early March 2006. Mr Musuku was its sole director and shareholder.(d) Mission Bay Holdings Ltd ("MBH Ltd")This company owned various rental properties. Mr Musuku and his wife were the directors. Each held 50 per cent of the shares. The company was incorporated in May 2004.(e) Musuku Family Trust ("the Trust")Mr Musuku and his wife were trustees of the Trust which was settled in either May 1997 or July 1998.5The investigation[13] In August 2006 Mr Ward, a tax investigator employed by the Commissioner,started to review Mr Musuku's tax affairs. At that time the Inland Revenue Department's ("IRD") records disclosed the following:(a) Mr Musuku had not filed an income tax return for six years. His last return was filed for the tax year ending 31 March 2000.(b) MBP (2005) Ltd and Holdings Ltd had failed to submit any GST returns since their incorporation in 2005.5 The uncertainty of the date of settlement arises for two reasons. First, some pages of a trust deed dated 12 May 1997 were provided in September 2009 by KPMG. The pages showed the settlors and trustees of the Trust to be Mr Musuku and his wife. However, the signatures were said to be witnessed by Sharmi Shah, Accountant of Auckland. Doubt arises because if the 1997 date is correct Sharmi Shah would have been a child. Another trust deed dated 10 July 1998 was obtained from the BNZ. The relevant pages showed a Mr Vallant as settler and Mr Musuku, his wife and Ravi Musuku, Mr Musuku's brother, as trustees.(c) MBP Ltd had failed to file any returns of income since the 2003 income tax year.(d) The Trust did not have an IRD number and had not filed any tax returns.(e) Holdings Ltd did not have an IRD number and had never filed any tax returns.[14] In October 2006 Mr Ward sent a letter to Mr Musuku's then tax agent,Mr Reddy.6 The letter advised that various tax years were being investigated. These included the 2006 tax year. Mr Ward asked that certain specified documents be made available within a month.[15] Some days later Mr Ward received a telephone call from a Mr Martin Smith.He introduced himself as Mr Musuku's new tax agent. This change was to be thefirst of at least six in Mr Musuku's tax agent/advisors over the following seven years of the Commissioner's dealings with Mr Musuku.[16] The Authority's judgment provides a detailed description of Mr Ward'sinvestigation, his dealings with a procession of tax advisors and the various phases which the investigation included. Before the Authority, Mr Ward filed a lengthy and detailed brief of evidence which dealt with the primary issues before the Authority. To this were attached seven appendices which related to aspects of the investigation which were not central. His evidence, including the appendices, ran to over 100 pages. At the hearing he was cross-examined for half a day. However, a summary of the central events, which gives a flavour to the way the investigation and dispute process unfolded, follows.[17] What emerged from Mr Ward's evidence is that the material received fromMr Musuku and his agents was inadequate. It was often incomplete and drip-fed in response to repeated requests.6 Also copied to Mr Musuku.[18] For example on 30 June 2007, relatively early in the evolution of the enquiry,Mr Ward, on the Commissioner's behalf, issued a letter to Mr Musuku's then taxagent acknowledging receipt of the documentation which had been supplied but noting specific material which had not been supplied. He advised that if Mr Musuku had provided all items under his control the notice would have been complied with. He also stated that items which had not been supplied were, therefore, inferred to have been lost and gave notice that the Commissioner intended to proceed on the basis of the information then available.[19] The following day Mr Musuku's tax agent couriered eight cheque bookswhich he said Mr Musuku had located that day. Mr Ward asked the tax agent toconfirm that all documents under Mr Musuku's control had been provided. This wasconfirmed.[20] Another example is that in July 2007, four boxes were delivered to IRD'sTakapuna office. None had courier stickers on them. When the documentation was reviewed it was evident no documents had been provided in relation to Mr Musuku personally or the Trust, MBP Limited or MBH Ltd. Furthermore, although some documentation relating to MBP (2005) Ltd (the company which owned the Patterson Avenue pharmacy) was provided, what was received was deficient in that it included no invoices issued by the company, nor any documents relating to the subsidies the company had claimed from the Ministry of Health. Conversations Mr Ward hadwith Mr Musuku's advisors disclosed increasing levels of frustration on their part atMr Musuku's lack of willingness and readiness to comply.[21] The examples cited above represent only a modest fraction of the communications between Mr Ward, Mr Musuku and his tax agents and the unsatisfactory nature of Mr Musuku's responses. These are fully set out inMr Ward's evidence.[22] On 24 June 2008, following protracted attempts to set up a meeting, Mr Wardinterviewed Mr Musuku in the presence of his then tax agent, Mr Nair. Mr Ward'sevidence was that many of Mr Musuku's responses were inconsistent with theinformation and documentation then held by the Commissioner.[23] Following the interview Mr Ward sent Mr Nair a list of transactions from the bank accounts of Holdings Ltd which he required further details of. That letter also included various matters which had arisen in the interview. These included rental properties which Mr Musuku had failed to mention, the disparity between funds which he appeared to have taken for personal use and his reported shareholder salary, and the substantial volume of deposits to the joint bank account he held with his wife and others.[24] On 12 November 2008 Mr Ward visited Mr Nair's business premises wherehe met with Mr Nair and Mr Musuku. Further correspondence and requests for information were made.[25] Mr Ward examined a summary of cheques paid to Mr Musuku from MBP Ltd's account. The summary had been provided by Mr Nair. Some items which had previously been described as "accounts payable" were re-characterised as"personal expenses". Other cheques could not be characterised at all. Someappeared to be for purposes other than those stated.[26] Mr Ward told the Authority that during the course of his investigation he reviewed many thousands of documents in an attempt to identify the nature of the particular bank transactions.[27] In the absence of receiving satisfactory documentary material from Mr Musuku, Mr Ward was compelled to make numerous information requests to third parties including banks, insurance companies, legal advisors, customers and others.[28] Following the interview there was further correspondence and another changein Mr Musuku's tax agent. In November 2008 KPMG was instructed to act forMr Musuku following which there were discussions between that accounting firm and Mr Ward. This led to a meeting in February 2009 with Mr Ward, other IRD staff, Mr Musuku and KPMG personnel. With yet another change in tax agent, progress in the investigation continued to be slow. Much of the information soughtin earlier correspondence remained outstanding. Given the unsatisfactory progress Mr Ward advised KPMG that:" it was looking increasingly likely that disputes procedures would be commenced."That advice proved to be prophetic.[29] A few weeks later Mr Ward received advice that the accounting firm, KPMG, had been instructed by Mr Musuku. A meeting was arranged and, in February 2009, Mr Ward met with Mr Musuku and Ms Mar and Ms Roberts and amongst other requests, asked that his letter of 7 August 2008 to Mr Nair be replied to. On 12 May 2009 Ms Roberts, of KPMG, told Mr Ward that a response to his letter of 7 August 2008 would be sent on 18 May 2009. This time Mr Ward informed Ms Roberts it was looking increasingly like that dispute procedures would be commenced.Default assessment (May 2009)[30] On 29 May 2009 Mr Ward, on the Commissioner's behalf, issued a defaultassessment of Mr Musuku's disputed income for the 2006 year. This assessment wasbased on a taxable income of $591,080.74 with tax payable of $221,791.20.[31] A few days before the notice of assessment was formally issued Mr Ward sent Mr Musuku and KPMG a letter explaining how the assessment had been reached and enclosing his workings to illustrate the calculation. More particularly, Mr Ward explained the methodology he had adopted in calculating the default assessment. As Mr Ward explained in this evidence, a significant challenge he faced in assessing Mr Musuku's income was that Mr Musku appeared to treat all bank accounts as though they were his own. He frequently transferred money between them, made business deposits into personal accounts and mixed business and personal expenditure throughout the various accounts.[32] To arrive at a default assessment, Mr Ward first identified the nature of as many transactions as possible within the various accounts. Bank/credit card accounts containing sizeable numbers of business-related transactions were identified. He then categorised the transaction types into transfers, evident businessincome/expenses, evident personal income/expenses, items where there would be a personal and business component and items of an unknown nature.[33] Transfers between each of the accounts was excluded. Deposits which were clearly non-business related were also excluded. All expenditure from individual bank accounts which could be identified as being business-related was subtracted from the business income from those bank accounts. This was undertaken by reviewing many of thousands of documents supplied by Mr Musuku, conducting bank traces and obtaining third party documents. An annual adjustment was then made for each bank account to account for the opening and closing bank balances. The calculations treated every amount debited for bank fees and debit interest asbeing "business-related". A small proportion of motor vehicle expenses were treated as business-related where the vehicle was unknown. Several vehicles were ownedbetween Mr Musuku's household and MBP Ltd. The remaining amounts related to either Mr Musuku's expenditure, monies transferred to his interests or on his behalf or to unknown expenditure. This amount was the sum that had been withdrawn from the bank accounts but could not be shown to be expenditure of a business nature. Further expenditure of a business nature incurred from other accounts where no business income existed was subtracted from these amounts. This total, from each bank account, was aggregated to obtain an overall annual figure of monies"withdrawn" from business income for the tax year to be assessed as income to Mr Musuku.[34] On 26 May 2009 Mr Ward made a default assessment of Mr Musuku'sincome tax for the disputed period. The default assessment was based on a taxable income of $591,080.74 with tax payable of $221,791.20. On that date Mr Ward sent a letter to KPMG and Mr Musuku setting out how the amounts were calculated and enclosed his workings. On 29 May 2009 a notice of assessment was issued.Dispute process[35] Following the issuing of the default assessment there was further correspondence between Mr Ward and KPMG. About a month later, at KPMG'srequest, Mr Ward met with Mr Musuku and his advisors. The purpose of themeeting was for Mr Ward to explain his workings. It was agreed that KPMG should focus on responding to the default assessment and that for the time being the Commissioner would not issue any NOPAs relating to the earlier periods being investigated. Following the meeting there was further correspondence between the parties.[36] On 25 September 2009 Mr Musuku filed a NOPA with supporting documents. Also enclosed was his personal income tax return for the 2006 year. He reported a taxable income of $32,378. This amount was claimed to comprise of income of $19,000 in the form of shareholder/employer salary, $12,750 rental income and $628 interest (with RWT deducted).[37] Mr Ward analysed the underlying supporting documents. These included unsigned and undated financial statements for MBP (2005) Ltd for the nine month period to 31 March 2006 and various calculation sheets and spreadsheets. The financial statements had been prepared by an earlier tax agent and contained an express disclaimer to the effect that the accounts had been prepared based on information provided by Mr Musuku.[38] Mr Ward found a number of discrepancies in the financial information. He set these out in some detail in his evidence before the Authority. I shall mention anumber by way of illustration. For example, a document entitled, "Schedule of Current Accounts as at 31 March 2006" included a breakdown of Mr Musuku'scurrent account in the financial statements for MBP (2005) Ltd at that date. The account was ostensibly overdrawn by $148,785. It recorded cash deposits from Mr Musuku of $140,766 less cash drawings of $282,286 and interest charged on the overdrawn account of $7,265. No calculations or documentation were provided in support of these figures. Mr Ward observed that despite his extensive investigationshe was not aware of any of Mr Musuku's own funds being introduced intoMBP (2005) Ltd. Mr Ward also told the Authority that the treatment of monies used by or transferred to or used on behalf of Mr Musuku as though they were loans was incorrect. The financial statements had been prepared more than three years after the end of the disputed period. There was no evidence that Mr Musuku or the companies had treated any amounts as loans. Mr Musuku did not provide anycontemporaneous records of any loans being made by him or how they would be treated.[39] Mr Ward said that Mr Musuku's historic income tax returns showed insufficient levels of income to introduce the large cash deposits recorded. He told the Authority that a loan cannot be retrospectively created for accounting purposes and thus clothe transactions with a character they never had when they were made. He said that the outcome of such treatment was to suppress the real level of Mr Musuku's taxable income.[40] Mr Ward listed what he described as issues with Mr Musuku's NOPA. Thesewere:(a) Mr Musuku's tax position included rental income from a property hedid not own;(b) frequently his workings incorrectly characterised the nature of transactions;(c) the unsigned and undated financial records of MBP (2005) Ltdcontained amounts which Mr Musuku's accountant was unable toreconcile and contained unverifiable totals;(d) outward transfers of funds from bank accounts appeared to have been retrospectively treated as loans to Mr Musuku for accounting purposes;(e) transfers of funds from personal bank accounts to business accounts were treated as funds introduced to the businesses by Mr Musuku notwithstanding that the majority of funds in the personal bank accounts were deposits from the businesses;(f) despite the preparation of the unsigned and undated financial statements of MBP (2005) Ltd a $19,000 shareholder-employer salary was quantified and characterised separately on an unknown basis; and(g) Mr Musuku's reported income level for the disputed period was notcommensurate with the evident non-business expenditure sourced from the proceeds of the business operations.[41] On 18 November 2009 Mr Ward, on behalf of the Commissioner, issued aNotice of Response ("NOR") to Mr Musuku. The Commissioner's positionremained unchanged from the default assessment. Not long afterwards the 2006 income tax return for the Trust was received. However, the 2006 income tax return for MBH Ltd was not supplied until 26 June 2013 and even then included neither income nor expenses.[42] At about this time a dispute over fees erupted between KPMG and Mr Musuku which lead to another change of tax agents. In mid-January 2010 aletter from Mr Talekar, Mr Musuku's newly instructed agent, was received. Thiscorrespondence contained multiple annexures and was written in response to the NOR. Based on the analysis undertaken in this document, Mr Musuku claimed that his taxable income for 2006 should be reduced to $32,376.[43] In late May 2010 Mr Ward invited Mr Musuku and Mr Talekar to attend a conference. The following month Mr Talekar replied. He advised that Mr Musuku agreed to attend a conference but wished a facilitator be appointed. This was arranged. The conference took place in late September. This was followed by further correspondence, delays and the intervention of the 2010/2011 Christmas/New Year period.[44] In the meantime, Mr Ward reviewed bank records and examined specific transactions in an attempt to identify their nature. From this he prepared a further letter and spreadsheets and forwarded them to Mr Musuku and Mr Talekar. He requested specific information in respect of the 2006 year which would enable him to understand the transactions undertaken in that year. In particular he requesteddetails of funds recorded to have been introduced to MBP (2005) Ltd exceeding$140,000. The attached spreadsheets included details of bank statements and "pivottables" which summarised those transactions. Mr Ward also invited the addresseesto provide information on specific transactions the nature of which was obscure. Mr Musuku responded. In short, Mr Ward described the response as follows:"In general, I found [Mr Musuku's] letter to be of a similar theme to much ofthis other correspondence. That is, overtly stating a desire to work towards resolving disputes whilst failing to co-operate with requests for information.I observe that the letter was consistent with other correspondence in that [Mr Musuku] made factually incorrect statements and emphasised his degreeof honesty and tax compliance."[45] There followed another meeting which, in turn, generated further correspondence. Then yet another meeting took place in mid-2011 at which Mr Ward, on the Commissioner's behalf, made a number of generous concessions.These included:(a) treating all items of expenditure under $1,000 from bank accounts in company names as though they were business related expenditure by the relevant entity, notwithstanding the actual nature of the transactions or the lack of substantiating documentation;(b) treating all expenditure which had the appearance of being legal services as business-related (whether business or personal);(c) treating a deposit of $150,000 on 3 March 2006 as being from non- business income; and(d) apportioning payments to utility providers (where it was unknown whether the expenditure was business-related or not) on a 50/50 basis and 80 per cent of unknown telephone costs as business related.[46] On 14 August 2012 Mr Ward issued a Disclosure Notice to Mr Musuku regarding the 2006 tax year. The notice required him to issue a SOP within two months. This was followed by a telephone call which Mr Ward made to Mr Talekar in which Mr Talekar asked if the parties could meet. Mr Ward agreed.[47] On 12 October 2012 Mr Musuku's SOP was delivered. He claimed his 2006income tax return was correct. He claimed his tax position was the same as that contained in his response to NOR and his NOPA. However, while the tax position disclosed in the response to NOR differed by only $2 the methodology used to calculate Mr Musuku's tax liability was completely different.[48] On 6 November 2012 a compulsory enquiry was held under s 19 of the Tax Administration Act 1994 ("the TAA") with Mr Reddy. Mr Reddy had beenMr Musuku's tax agent when Mr Ward commenced his investigation more than sixyears earlier. In certain material respects Mr Reddy's responses were irreconcilablewith those Mr Musuku had given at his interview on 24 November 2008.[49] On 7 December 2012 the Commissioner issued her SOP. The Commissioner's tax position was amended from the default assessment as a result ofthe concessions made during the conference stage. The taxable income was reduced from $591,080.74 to $201,740.90.[50] At Mr Musuku's request, the Commissioner gave Mr Musuku two extensions of time for filing his response to the Commissioner's SOP. On 8 February 2013Mr Musuku's response to the Commissioner's SOP was received. This was in the form of a large volume of files, a request for further information, a request that once the response phase was completed, subsequent correspondence should be directed to Keith Turner of NSA Tax Ltd and recording that logistical issues relating to the running of the businesses were difficult. Mr Ward formed the view this correspondence, together with other delays and information requests, was a tactical device adopted by Mr Musuku to obstruct the orderly progress of the disputes procedure.[51] On 12 February 2013 Mr Musuku delivered a further folder of documentsentitled, "Response to Schedule B of the SOP."[52] This was by followed up by an email from Mr Musuku, stating that a Mr Kuperus was now authorised to act on his behalf. Mr Kuperus contacted Mr Ward and requested a further meeting but this request was ultimately declined.[53] On 5 April 2013 the Commissioner issued her SOP Addendum confirming that nothing within the additional information had changed the position set out in her original SOP.[54] On 31 July 2013 the Commissioner's dispute review unit issued itsadjudication report.The hearing[55] The hearing before Judge Sinclair occupied six days. Mr Musuku did not file any evidence or give evidence on his own account. He did not attend the hearing. Three witnesses were called on his behalf. None had been involved in the preparation of the NOPA or the 2006 income tax return. As such, none was able toidentify the provenance of the underlying information. Mr Musuku's witnesses wereas follows:(a) Mr Johnson was the accountant and business consultant who first started representing Mr Musuku in 2011 during the conference phase.He had been not been involved in the preparation of Mr Musuku's taxreturn, or the NOPA, instead deferring to Mr Talekar in respect of those matters. In response to questions about the adequacy of Mr Musuku's ledgers attached to his SOP, Mr Johnson conceded thatonly summary totals were ever provided, with no details of what was comprised within these totals. However, he was able to give evidence of arranging the meeting in mid-2011. He claimed that the Commissioner and her staff were not open minded, cancelled meetings at the eleventh hour and reneged on an agreement to have anindependent review of Mr Musuku's file undertaken by an accountant; an agreement which included an undertaking that no steps would be taken by the Commissioner until the review had been completed. Mr Johnson complained that the report following the review was notreleased until March 2013 despite it being completed in July the previous year. He later learned that the review did not include the 2006 year and it appeared the reviewer reported to a senior who was involved in the investigation, was not an accountant, and had not rigorously checked the calculations but seemed to have accepted Mr Ward's assessment at face value. Furthermore, Mr Johnsoncomplained that despite the agreement the Commissioner continued with formal objection procedures despite the report not having been released.(b) Mr Talekar was the tax agent who prepared Mr Musuku's response tothe NOR. He gave evidence he had undertaken the analysis set out in the response relying entirely on the spreadsheets which accompanied the NOPA. He was unable to assist the Tribunal on where the information contained in those spreadsheets had come from.Furthermore, Mr Talekar referred to what he described as, "An Income Analysis" for the 31 March 2006 tax year. This analysisrelied on the default assessment figure of $591,080.74. From this figure Mr Talekar deducted amounts totalling $558,704.74 arriving at a taxable income of $32,376. The analysis followed that which he undertook in preparing the response to the NOR. As the Authority observed, it was unclear from his evidence why Mr Talekar continued to use the default assessment figure when the amended assessment provided for assessable income of $201,740.90.(c) Mr Livingston was the chartered accountant engaged by Mr Musuku to arbitrate the quantum of fees in the dispute between Mr Musuku and KPMG. As part of that arbitration he reviewed the quality ofKPMG's services. Surprisingly, he confirmed he was not givingevidence in support of the tax position taken by Mr Musuku. The Authority observed it was quite apparent from his evidence that Mr Livingston did not have any particular knowledge of Mr Musuku'sbusiness activities or the relevant documentation. This limited role is, perhaps, reflected in Mr Livingston's evidence that the Commissionerhad prepared default assessments relating to MBP (2005) Ltd from incomplete records. However, as there was no default assessment of MBP (2005) Ltd Mr Livingston conceded he might have been wrong. He also conceded that KPMG did not prepare the accounts attached to the NOPA. It is not surprising the Authority determined that Mr Livingston, "Did not have any particular knowledge of[Mr Musuku's] business activities or the relevant documentation."[56] Four witnesses were called by the Commissioner, including Mr Ward.(a) Mr Porter gave evidence of the tenancy dispute involving MBP Ltd and its eviction from the premises on Tamaki Drive.(b) Ms Bell gave evidence of working as an assistant in the three pharmacies operated by Mr Musuku. In particular, she described how Mr Musuku was responsible for the operation of the pharmacies. She described how she maintained a record of her hours of employment and ordinarily met with Mr Musuku when he was calculating her wages. By reference to bank statements and cheque stubs she confirmed the specific payments made to her were in the nature of wage payments.(c) Mr Duggan was a senior analyst with the IRD with particular expertise in industrial benchmarking and, more particularly, examining gross profit percentages as an indicator of business performance used to determine whether a tax audit should be undertaken.[57] The common bundle which formed the documentary record before the Authority ran to several thousand pages. Extensive closing written submissions were filed by both parties.Decision of the Authority[58] In a detailed and careful judgment, Judge Sinclair set out the history of theCommissioner's investigation of Mr Musuku's tax affairs. Against that backgroundshe considered the preliminary threshold issue of whether the Commissioner, in making her assessment, had genuinely exercised her judgment in determining Mr Musuku's assessable income. After examining each of Mr Musuku's criticismsof the Commissioner in this regard her Honour determined that none had any merit.[59] In the course of doing so her Honour reviewed the exchange of correspondence between the Commissioner and Mr Musuku and/or his various tax agents. She concluded it was plain the Commissioner had considered the information which was provided by the taxpayer, observing that the Courts have long recognised the need for evidence beyond a taxpayer's bald assertions. Her Honourthus concluded it was entirely reasonable for the Commissioner, in light of the state of the evidence before her, to undertake her own analysis concluding there was no basis to support the claim that either of the Commissioner's assessment was arbitraryor demonstrably unfair. Her Honour concluded that the amended assessment andearlier default assessment were, in each case, an honest appraisal of the taxpayer'sposition at the time they were made and amounted to a genuine exercise of theCommissioner's judgment.[60] Her Honour then went on to consider the Commissioner's amendedassessment and whether Mr Musuku had discharged the onus on him to prove, on the balance of probabilities, that the amended assessment was wrong and, if so, by how much. In this context Judge Sinclair separately examined whether income from thecompanies was dividend income of an amount equal to Mr Musuku's privateexpenditure. Following a careful review of the evidence her Honour found herself in agreement with the Commissioner that there did not appear to be any reason for thecompanies to have made transfers of value other than because of Mr Musuku'sshareholdings.[61] Her Honour then examined whether, in the event that Mr Musuku'sexpenditure was not dividend income, it was employment income or income underordinary concepts. Again, her Honour carefully reviewed the evidence and agreed with the Commissioner that any salary paid to Mr Musuku was not commensurate with the work undertaken by him in the business. She found that in return, the companies either provided him with funds or spent money to his benefit without any arrangement for him to pay those amounts back. She thus concluded that to the extent the funds made available to Mr Musuku by the companies were not dividends they would be included in his income as either employment income or income under ordinary concepts.[62] Finally, her Honour examined the rent payments paid into Mr Musuku's and his wife's joint account. These payments were made on a weekly basis by tenants of various properties owned by the Trust. Judge Sinclair reviewed the evidence and the inferences available to be drawn from it, agreeing with the Commissioner that therent received had the quality of income in Mr Musuku's hands and was thus assessable as income under ordinary concepts.[63] She thus dismissed Mr Musuku's challenge and confirmed the Commissioner's income tax assessment for 2006.Grounds of appeal[64] On appeal, Mr Musuku claims the Authority erred in the following ways:(a) by finding the Commissioner's assessment represented an honestappraisal and genuine exercise of judgment as required by law, because sufficient evidence was available;(b) in finding that the Commissioner's assessment was correct;(c) in holding there was no sufficient evidence as to the amount by whichthe Commissioner's assessment was correct and Mr Musuku'sassessment was or could be correct.Principles on appeal[65] It is settled law that, in challenging the Commissioner's amended assessment,the onus of proof is on the appellant to establish that the assessment is wrong, and by how much.7 The standard of proof is the balance of probabilities.8[66] This reflects the well established principle that a taxpayer must be able to prove the tax position they claim is correct. The reason for this is obvious. The taxpayer has unique and in many instances exclusive knowledge of their tax affairs, as well as access to the relevant documentation.9 This being the case, it would be illogical for the burden to rest with the Commissioner.[67] This general appeal proceeds by way of re-hearing. The correct approach is that set out by the Supreme Court in Austin, Nichols & Co Inc v Stichting Lodestar.10The Court is required to undertake its own assessment of the merits of the case. It has been confirmed that the weight to be given to the findings of the lower court is amatter for the appellate court's assessment.11Analysis[68] I now turn to consider each of the grounds of appeal in the same order in which they are listed in the notice of appeal and as argued before me at the hearing.(a) Did the Commissioner fail to issue a proper assessment?[69] Under this heading Mr Musuku makes three claims. First, he claims the assessment is arbitrary. Secondly, he claims it was not made on a credible or reasonable basis and thirdly, he claims it did not fully apply the known facts and lawand, in particular, the businesses' duty to reimburse Mr Musuku. I shall deal witheach of these questions in turn.7 Tax Administration Act 1994, s 149A(2); Buckley & Young Ltd v Commissioner [1978] 2 NZLR 485 (CA) at 498, affirmed by the Court of Appeal in Beckham v Commissioner of Inland Revenue [2008] NZCA 301, (2008) 23 NZTC 22,066 at [39] and by the Supreme Court in Ben Nevis Forestry Ventures Limited v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [171].8 Tax Administration Act 1994, s 149A(1).9 Buckley & Young Ltd v Commissioner, above n 7 at 498.10 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR.11 K v B [2010] NZSC 112, [2011] 2 NZLR 1 at [31].(i) Was the assessment arbitrary?Appellant's submissions[70] Mr Thwaite, for Mr Musuku, submits that the Commissioner's assessmentdid not represent a honest appraisal or a genuine exercise of her judgment as required by law because there was sufficient evidence before the Authority of the following:(a) the initial assessment was greatly overstated and insupportable;(b) the conference phase was not conducted properly;(c) no independent review was obtained on the basis it was agreed;(d) the status and effect of the payments between Mr Musuku and any company were not properly assessed;(e) the response to information requests was inadequate;(f) negotiations were not conducted and brought to a reasonable conclusion;(g) the Commissioner's assumptions were arbitrary;(h) the Commissioner's enquiry was unnecessarily protracted; and(i) the Commissioner evinced a hostile attitude towards Mr Musuku.Legal principles[71] The parties are largely in agreement with the principles engaged in this appeal. Ms Herbert, for the Commissioner, accepts the Commissioner is required to make a genuine attempt to ascertain the assessable income of a taxpayer.12 The12 Commissioner of Inland Revenue v NZ Wool Board (1999) 19 NZTC 15,476 (CA) at 15,489.assessment must have a credible and reasonable basis. It must not be arbitrary. It must take into account the known facts and applicable law.13[72] However, I accept Ms Herbert's submission that this obligation cannot be elevated into a requirement that the Commissioner may not make an assessmentunless and until fully informed of the taxpayer's affairs. That would be anunrealistic expectation. The Commissioner is charged with the care and management of taxes and has a duty to collect over time the highest net revenue that is practicable within the law.14 . In exercising this duty, the Commissioner is heavily reliant on the co-operation of the taxpayer who not only possesses or has access to the relevant information but who would ordinarily be expected to be familiar with their income producing and tax assessable activities.[73] This principle was discussed by Baragwanath J in Duncan v Commissioner of Inland Revenue15 where his Honour stated the more unreasonable the position of the taxpayer in the maintenance and provision of records and other information, the greater must be the entitlement of the Commissioner to make assessments in broad or even rough terms. Similar observations are reflected in other Court of Appeal judgments such as Lowe v Commissioner of Inland Revenue and Commissioner of Inland Revenue v Canterbury Frozen Meat Co Limited16 where McKay J noted the duty on the Commissioner is to make an assessment based on the information available to them. It may not be arbitrary or chosen at random; but it may be an assessment which the Commissioner believes is not necessarily correct or even probably wrong to some extent so long as the Commissioner believes it to be the best which can be done until further information is obtained. As his Honour observed:"What is essential is that the figure must represent the honest judgment of the Commissioner as to what the correct figure, as best he can determine it inthe state of his knowledge at the time."13 Lowe v Commissioner of Inland Revenue [1981] 1 NZLR 326 (CA); Commissioner of Inland Revenue v Canterbury Frozen Meat Co Limited [1994] 2 NZLR 681 (CA) at 691; Commissioner of Inland Revenue v Dandelion Investments Limited (2001) 20 NZTC 17,293 (HC), 1, 297.14 Tax Administration Act 1994, s 6A.15 Duncan v Commissioner of Inland Revenue (2004) 21 NZTC 18,735 (HC) at [41]; quoted with approval in Clarke v Commissioner of Inland Revenue (2005) 22 NZTC 19165 (HC) at [32].16 Lowe v Commissioner of Inland Revenue, above n 13; Commissioner of Inland Revenue v Canterbury Frozen Meat Co Limited, above n 13 at 692.[74] In the same case Richardson J noted that there must be a genuine attempt to ascertain the taxable income of a taxpayer even if carried out cursorily or perfunctorily.17[75] Furthermore, it has been held that an assessment remains valid even where the Commissioner believes that further enquiries will be required in order to arrive at the correct taxable position.18[76] In support of his submission that the Commissioner failed to issue a proper assessment, Mr Thwaite points out the Commissioner had three attempts at calculating the income. The first was the May 2009 default assessment which assessed Mr Musuku's income at $591,080.74. The second was the internalreassessment in May 2011 which reduced this figure to $250,417.21 and finally the current, amended assessment of $201,740.90 issued on 7 December 2012.[77] He submits the assessment was arbitrary because ss 6 and 6A of the TAA requires fairness, impartiality and lawfulness as part of the integrity of the tax system. He submits these provisions were contravened because the assessment was not peer reviewed, not well articulated and not reviewed by an accountant, as was agreed. Furthermore, he submits the Commissioner breached an undertaking to suspend taking further steps until the independent review had been completed and the report furnished. In support of that claim Mr Thwaite relies upon email correspondence in 2011 in which an IRD staff member advised Mr Johnson that the request for an independent review of the file by a qualified accountant had been agreed to and that until this review had taken place it was not possible to have "ameaningful discussion as the Inland Revenue attendee would not have the requiredinformation". Mr Thwaite complains that no proper review, as promised, wasundertaken. He says, as a consequence, good progress ceased. The enquiry by the Commissioner was not objective and in particular an internal check was not provided to Mr Musuku before the adjudication procedure continued.17 At 690.18 Commissioner of Inland Revenue v Dandelion Investments Limited, above n 13.Analysis[78] I do not accept the Commissioner's assessments were arbitrary or demonstrably unfair. First, to the extent that criticisms are made of the Commissioner's process and, in particular, allegations of unfairness,unreasonableness, bias and delay are advanced, it is well settled that the focus of a de novo hearing before the Authority is in determining the correctness of the Commissioner's assessment rather than attacking the process. This is because thenature of the hearing will necessarily cure any breaches of natural justice, unfairness and procedural defects.19[79] As Salmond J said in Dandelion Investments Limited v Commissioner of Inland Revenue:20"That means that the Taxation Review Authority can hear the taxpayer'scase without examining in detail the process which led to theCommissioner's assessment. In reaching its own decision as to the appropriate assessment to be made the Authority can cure any defects thatmight have existed in the Commissioner's assessment. A challenge toprocess is effected, therefore, not by attacking the method by which the Commissioner reached his decision, but by calling the evidence necessary to enable the Taxation Review Authority to make the correct decision.It is unnecessary for the Taxation Review Authority to allow in a hearingbefore it a 'lengthy inquisition into the alleged behaviour of theCommissioner and his staff in arriving at a particular assessment'. Thecorrectness of the assessment can be determined on the evidence called before the Authority. It is also unnecessary for the Taxation Review Authority to hear evidence as to whether the conduct of the Commissioner'sstaff led the Commissioner to arrive at his assessment taking into account impermissible matters and failing to have regard to relevant matters. Once again, the evidence relevant to the assessment can be called before theTaxation Review Authority."[80] This principle was discussed by the majority of the Supreme Court inTannadyce Investments Limited v Commissioner of Inland Revenue, which held that whatever the claimed ground of error, illegality or invalidity a hearing Authority is19 Case 12/2015 [2015] NZTRA 12, (2015) 27 NZTC 3-0111 at [78] and [79].20 Dandelion Investments Limited v Commissioner of Inland Revenue [1997] 2 NZLR 96 (HC) applied in Case 16/2014 [2014] NZTRA 16, (2014) 26 NZTC 2-026 and Case 2/2014 [2014] NZTRA 02, (2014) 26 NZTC 2-012.empowered to adjudicate upon it.21 The majority held that the hearing Authority candetermine whether the Commissioner's assessment is correct and, if not, what thecorrect assessment ought to be.If there is no assessment at all the Authority has the power to cancel.[81] It follows I reject the submission that the assessment did not represent anhonest appraisal or genuine exercise of the Commissioner's judgement by reason offlaws in the process or through breaches of natural justice.[82] Neither do I accept the other criticisms which include claims that theCommissioner's assumptions were arbitrary, that the enquiry was unnecessarilyprotracted and the status and effect of the payments between Mr Musuku and his companies were not properly assessed.[83] On the evidence, it is apparent the Commissioner went to considerable lengths to ascertain Mr Musuku's correct tax position and exhibited commendablepatience in the face of a wide range of frustrations and difficulties in completing the enquiry in a timely way. I am satisfied her assessments amounted to an honest appraisal and a genuine exercise of her judgement. My reasons follow.[84] First, at the time the initial default assessment was made on 26 May 2009 no tax return had been filed. Two and a half years earlier, on 9 October 2006, the Commissioner announced to Mr Musuku that his taxation affairs were being investigated and required him to make certain documentation available. As the factual background set out above reveals, throughout the investigation which followed and the subsequent dispute processes, the Commissioner was repeatedly required to follow up previous requests made to Mr Musuku and his procession of tax agents. He was asked to provide documents and was explicitly warned, on multiple occasions, that if the documentation was not provided the Commissioner would be obliged to undertake her task on the basis of the limited information available. There are numerous instances of serial requests made by Mr Ward to Mr Musuku and his agents including the Commissioner's letter to Mr Musuku's then21 Tannadyce Investments Limited v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR 153 at [55].new tax advisor of 30 July 2007 advising that the items requested had not been supplied and the Commissioner would thus infer that the documents were lost and the Commissioner intended to proceed on the basis on the information then available.[85] Furthermore, at no time did the Commissioner receive any records of sales made by Mr Musuku's companies nor did the Commissioner receive, as she repeatedly requested, copies of bank deposit slips or other records showing the amounts banked. Literally thousands of documents were reviewed by Mr Ward in order to identify the nature of particular bank transactions.[86] Notably, before the default assessment was issued, Mr Ward wrote to Mr Musuku on 26 June 2009 enclosing his workings. He explained how the default assessment was calculated. He enclosed copies of his workings. Nearly 100 pages of detailed analysis was provided in relation to each of the accounts to assist Mr Musuku and his agents in understanding how the Commissioner had come to her decision.[87] Then in September 2009 Mr Musuku filed his NOPA and his 2006 income tax return. These were plainly inadequate. As noted earlier in this judgment, Mr Ward listed the many shortcomings.[88] The Commissioner then issued a NOR to Mr Musuku on 18 November 2009. Further correspondence followed including a response from Mr Musuku's then taxagent. This was carefully reviewed by the Commissioner.[89] The Commissioner made generous concessions during the non-statutory conference stage as discussed earlier which operated to Mr Musuku's considerabletax advantage.[90] Furthermore, the analysis compiled by KPMG in Mr Musuku's NOPA, whichis relied upon by him, was based on information supplied by an earlier tax agent and Mr Musuku himself. No detailed ledger was provided to support the financial statements.[91] There were two sets of worksheets for MBP (2005) Ltd. One was a general ledger for MBP (2005) Ltd for the nine months from 1 July 2005 to 31 March 2006. This was emailed to Mr Musuku on 11 May 2012. The other worksheets were emailed to the Commissioner by Mr Musuku's tax agent. The same set ofinformation appears in the NOPA prepared by KPMG but the workings behind the figures were not made available. There were also inconsistencies between those documents and the transactions which appeared in the bank statements.[92] Additionally various issues of credibility and reliability arose in relation to Mr Musuku and how he maintained his business records. This was detailed in Mr Ward's evidence. Mr Ward found discrepancies between the reported PAYE andthe amounts paid to employees as evidenced from bank statements and other source documents. During the year in question MBP Ltd and MBP (2005) Ltd submitted employer monthly schedules in respect of staff employed in the pharmacy businesses. An analysis of these schedules indicated that nine staff received payments of salary or wages from the businesses during the 2006 tax year. One member of staff, Ms Bell, gave evidence before the Authority. From that evidence it was apparent that MBP (2005) Ltd had failed to record payments made to more senior staff to whom she reported.[93] Against this background of incomplete information, contradictory statements and unreliable or incorrect, if not misleading, documentation the Commissioner was bound to make an assessment on the information then available to her. This was not an arbitrary exercise. The evidence reveals it was not random.[94] Additionally, it emerged in evidence that the salary or wages paid to those staff were either understated or completely omitted in the employer monthly schedules filed.[95] As Judge Sinclair observed, the Courts have long recognised the need forevidence beyond a taxpayer's mere assertions.22 I agree with Judge Sinclair that it was entirely reasonable for the Commissioner to undertake her own analysis. There22 Case E69 (1982) 5 NZTC 59,378 (TRA); J23 (1987) 9 NZTC 1,129 (TRA); Case F42 (1983) 6 NZTC 59,773 (TRA); Case L40 (1989) 11 NZTC 1,249 (TRA).is simply no basis to suggest that either of the Commissioner's assessments wasarbitrary or demonstrably unfair. Indeed, the evidence reveals the very opposite is the case.[96] As was Judge Sinclair, I am easily satisfied the Commissioner's amendedassessment and earlier default assessment were, in each case, an honest appraisal of Mr Musuku's tax position at the time they were made and a genuine exercise of the Commissioner's judgement.(ii) Was the assessment made on a credible and reasonable basis?[97] Mr Thwaite submits that in respect of Mr Musuku's personal account for the nine months ending 31 March 2006 the Commissioner's calculation showed a running balance of payments involving business payments into the accounts and business expenses being paid out of those accounts. He submits that such a balance is consistent with a current account.[98] He further submits that if a payment is treated as a dividend then on theCommissioner's theory it should retain that character. He says that the Commissioner's theory appears to be that Mr Musuku was not entitled toreimbursement for expenditure incurred by a company and that no payment that is deemed to be a dividend can be offset against expenditure.[99] He submits the defect in the Commissioner's theory is that, in the practicalcalculations, the nature of the deposits change as expenditure amounts. He submits that an adjustment is needed in relation to the nature of the deposits which is consistent with an open account but inconsistent with income vested in the hands of the appellant.[100] The difficulty with this submission, as recognised by the Authority, is the absence of any evidence of the existence of such an arrangement between Mr Musuku and the companies particularly where he also contends the amounts aredrawings made under his shareholder's current account. I shall deal with this issue more fully later in this judgment when considering Mr Thwaite's submission in thecontext of his criticisms of the Authority's decision that the payments to Mr Musukuwere either shareholder dividends or income earned as an employee or under ordinary concepts.[101] However, I agree with the Authority there was no obligation on the Commissioner to consider various possible contractual and other arrangements between Mr Musuku and the companies in the absence of any evidence that such arrangements existed.(iii) Did the assessment properly take into account the known facts and law?[102] This is Mr Thwaite's final submission under this general heading.Mr Thwaite submits the Commissioner did not properly recognise the general principle that a shareholder has no obligation to spend personal funds for product for a company or for expenses of the company. He submits Mr Musuku personally funded a high level of expenditure for the benefit of his companies. He thus submits as follows:"Therefore, another legal connection must exist between [Mr Musuku] andeach company. If that connection obliges a company to reimburse [Mr Musuku], then payments by the company are not made solely because[Mr Musuku] is a shareholder of the company."[103] This submission fails for the same reason. I agree with the Authority for the reasons given The Commissioner had no obligation to consider other possible contractual arrangements in the absence of any evidence they existed. In my view this submission calls for speculation. No evidence exists to support these claims and, as earlier noted, the alternatives are inconsistent with Mr Musuku's claim thatthe amounts are drawings.(b) Was the Commissioner's assessment incorrect?[104] Mr Thwaite, consistent with his submission before the Authority, argues that any transfer of value between the companies and Mr Musuku was not by virtue of his shareholding in the companies, nor was it employment income or income under ordinary concepts. He submits that the payments to Mr Musuku were made pursuant to an obligation to reimburse a director or were reimbursements to Mr Musuku as anagent of the companies, or was a "running account". He submits Mr Musuku wasnot being paid as a shareholder. Alternatively, if he was being paid as a shareholder, a current account existed between each company and Mr Musuku as advances by way of loan to him in the context of indebtedness.[105] Further, he submits there was no employee income as the relationship was that of a debtor/creditor or the payments did not show regularity and periodicity and had no connection to his effort.[106] Finally, under this heading, he submits there was no other income as the relationship was that of a debtor/creditor or Mr Musuku declared salary, rental income and interest; other payments were part of a current account which embraced the personal payment of business expenses.[107] I shall deal with each of these submissions in turn.(i) Dividend income – was the transfer of value by virtue of Mr Musuku'sshareholdings in the companies?[108] Section CD1 of the Income Tax Act 2004 ("the ITA") provides that adividend derived by a person is income of that person. A dividend includes a transfer of value from a company to a person caused by their shareholding in that company.23 A transfer of value occurs where a company provides money or monies worth to a person.24[109] Section CD4(3) provides that a transfer of value does not occur to the extentthat the money's worth provided by a company is the only provision of services.However, under s CD4(4) there is a transfer of value if the provision of services by a company is the benefit of a company's expenditure and the company is a closelyheld company.[110] Dividends under tax law do not have to reflect the character of dividends as generally understood. For example, there is nothing in the ITA which requires dividends to be paid out of company profits or that dividends must be minuted or23 Income Tax Act 2004, ss CD3(1)(a) and CD5.24 Section CD4(1)(a).officially declared. Where companies incur expenditure for the benefit of a shareholder, or where a shareholder treats company funds as their own, there may be a deemed dividend to that shareholder.25[111] The numerous authorities which comment on this principle make it plain that a dividend for the purposes of the ITA does not have to correspond to a payment that is a dividend under the general law. The breadth of the definition is such that there is no requirement that dividends must be paid from profits.Appellant's submission[112] Mr Thwaite submits the relevant provision engaged in the present case is s CD5 of the ITA which provides as follows:"CD 5 When is a transfer caused by a shareholding relationship?General test(1) A transfer of value from a company to a person (recipient) is caused by a shareholding in the company if—(a) the recipient at any relevant time—(i) holds shares in the company; or(ii) is associated with a shareholder; or(iii) is the trustee of a trust, and a beneficiary of the trust is either a shareholder or the spouse, civil union partner or de facto partner of a shareholder; and(b) the company makes the transfer because of that shareholding of the relevant shareholder.Indication that test met(2) One indication that a transfer is caused by a shareholding is if the terms of the arrangement that results in the transfer are different from the terms on which the company would enter into a similar arrangement if no shareholding were involved."25 McIlraith v Commissioner of Inland Revenue [2007] 23 NZTC 21,456 (HC); Alexander v Commissioner of Inland Revenue (1996) 17 NZTC 12,543 (HC); Alexander v Commissioner of Inland Revenue (1998) 18 NZTC 13,921 (CA); Case J58 (1987) NZTC 1,327 (TRA); Case Q6(1993) 15 NZTC 5,047 (TRA) at 5,050.[113] Mr Thwaite accepts that subsection 1(a) is engaged in the present case. However, he submits that s 5(1)(b) does not apply because the transfer of value did not occur by virtue of or because of the shareholding.[114] He does not dispute that income from the companies was deposited into thecompanies' accounts and thence into Mr Musuku's personal accounts. Mr Thwaitepoints out that no method appears to characterise these deposits. The amounts spent by Mr Musuku in 2006 on business supplies and expenses were large.26[115] The sums advanced to the companies were paid through Mr Musuku's creditcard, apparently for the purpose of gaining airpoints. Mr Thwaite submits it is unimaginable Mr Musuku would have funded such a level of expenditure without any prospect of payment on an arm's length basis particularly when these large sumswere put on a credit card and defaults in payment would have lead to high penalty interest charges. Mr Thwaite thus submits this evidence necessarily infers another legal connection must have existed between Mr Musuku and each company. He posits that the alternative possible options include:(a) Mr Musuku was buying product and paying expenses as a director and was entitled to reimbursement for those sums as expenses. Mr Thwaite submits this is the most likely.(b) Mr Musuku was buying product and paying expenses for the company as an agent with a right to reimbursement from the principal company, a relationship which Mr Thwaite accepts is less likely.(c) Mr Musuku and the companies were contractually bound by an agreement under which Mr Musuku, as vendor, brought product and on-sold it to the company with Mr Musuku possibly paying certainexpenses of the company's operation. Mr Thwaite frankly acceptsthis option is the least likely.26 $35,000, $152,756.24 and $1,099.90.[116] However, he submits that whatever the connection, the companies satisfied their payment obligations by frequent transfers or payments for Mr Musuku. They were not paid to him because of his shareholding. He submits the best analysis,consistent with arm's length transactions, is that of a "running account" or a "current account". He thus submits that the relevant company was not paying Mr Musuku because he was a shareholder. It paid him because he was a creditor and the arrangement would have suited the companies because they had access to the long payment terms of a credit card. Mr Thwaite accepts there is no evidence to support this option.[117] Alternatively, he submits that a conventional shareholder's current accountexisted between each company and Mr Musuku in the form of advances by way of loans to him in the context of frequent debts by the company in favour of Mr Musuku. Consistent with the loose arrangement around Mr Musuku paying company expenses, a company might make an excessive payment of an amount forMr Musuku's benefit. At some point the creditors and debtors would need to be calculated and an adjusting payment made. Accordingly, a shareholder's account, hesubmits, existed between each company and Mr Musuku. A formal written agreement is not essential. Hence payments were not made to Mr Musuku by reason of his shareholding in terms of s CD5(1); instead the payments were made because an arrangement existed between Mr Musuku and the companies under which Mr Musuku paid the companies' expenses.[118] While accepting this arrangement may be "rather unorthodox", Mr Thwaitesubmits it is, nevertheless, within the letter and spirit of both the general law and the tax law.Analysis[119] I agree with the Authority, for the reasons given in its judgment, that there isno merit in this part of Mr Musuku's challenge.[120] First, the evidence discloses that Mr Musuku received amounts into his joint bank account from the companies. These sums he retained and used for his private benefit. Mr Musuku also received the benefit of amounts spent by the companies for his private benefit. But for his shareholding the transfers of value would not have been made.[121] Furthermore, no reliable or credible evidence of loans or drawings exist. I agree with Ms Herbert that the information provided with Mr Musuku's NOPA(including the schedule of current accounts) appears to have been created in anattempt to retrospectively justify Mr Musuku's current position, namely that theamounts were drawings and not dividend income.[122] In order to show that payments made by the companies were to reimburse Mr Musuku for expenses he had incurred on the companies' behalf, and that themovement of funds between the companies and Mr Musuku were in the nature of operation of a current account, Mr Musuku needs to establish this was agreed between him and the companies. Normally this would be recorded by acontemporaneous journal entry in the companies' accounts. In Case Q627 Judge Willy emphasised the importance of providing evidence of a transaction made via a current account. While journal entries are not, in themselves, required they do provide evidence that such a transaction has occurred.[123] It is not in dispute that the companies were properly constituted or that during the relevant period Mr Musuku was a significant shareholder in them all. Transfers of value were made from the companies to Mr Musuku. Mr Talekar confirmed thatprivate expenditure was paid from the companies' business accounts. The companies' income was deposited into a variety of business and personal accounts in the names of the companies, Mr Musuku, and his wife. The amounts were not kept separate from other funds and were transferred between the various bank accounts on a frequent and ongoing basis.[124] Additionally, Mr Musuku had access to and controlled the companies' bankaccounts. At interview he advised he signed most of the cheques for the joint27 Case Q6 (1993) 15 NZTC 5,047 (TRA) at 5,050.personal account he operated with his wife and that only he had access to internetbanking for that account and the companies' accounts.28[125] It is noteworthy that Mrs Musuku also appears to have benefited from the income derived from the companies although not a shareholder of either MBP (2005) Ltd or Holdings Ltd. However, s CD5(1)(a)(ii) of the ITA provides that a transfer of value from a company to a taxpayer is caused by a shareholding in a company if that taxpayer is associated with a shareholder. Plainly Mrs Musuku is associated with Mr Musuku through the operation of that section.[126] Mr Musuku provided no reliable evidence he borrowed money from the companies and that interest was charged. Any evidence provided by him was created three years after the end of the disputed period and only after the default assessment had been issued.[127] For the reasons already discussed, I agree with the Authority that the financial statements provided by Mr Musuku are neither reliable nor credible. Significantly, Mr Musuku has never provided calculations or supporting documents for the funds which he says he deposited and withdrew (recorded in the schedule of current accounts for MBP (2005) Ltd). It follows these amounts cannot be verified. Furthermore, Mr Ward gave evidence that despite the extensive and detailed natureof his investigation he was not aware of any of Mr Musuku's own funds beingintroduced into that company.[128] It follows there is no reliable evidence from Mr Musuku or any other source that there was any reason for the companies to have made transfers of value otherthan by reason of Mr Musuku's shareholding. And, while I accept it is not necessary for a formal written statement or other documentary evidence to be produced to support the use and operation of a current account, the preponderance of evidence in this case points the other way, i.e. the transfers of value were by reason of Mr Musuku's shareholding.28 This assertion was modified when the Commissioner raised the issue of PAYE. Mr Musuku then claimed that his tax advisor (Mr Reddy) had access to these accounts although Mr Reddy, on interview, contradicted this.[129] It follows I agree with the Authority that Mr Musuku can be taken to have derived as dividend income an amount equal to the private expenditure.29(ii) Employment income – was the transfer of value by virtue of Mr Musuku'semployment with the companies?[130] Additionally, Mr Thwaite submits that the payments were not employment income. He points out Mr Musuku declared income of $19,000 from the pharmacy business which was part of nearly $60,000 identified in the 2006 Statement of Financial Performance financial records for MBP (2005) Ltd as wages and salary. While accepting the income attributed to Mr Musuku is modest, Mr Thwaite points out that the 2006 year was a difficult and challenging one. Mr Musuku had to shut down one business, engage in a protracted legal dispute with the landlord of MBP Ltd, open another business (MBP (2005) Ltd), acquire customers and then buy a third business (MBH (2005) Ltd). He submits that a prudent owner could properly decide to draw a small salary in those circumstances. Furthermore, while actingunder the advice of KPMG and others, Mr Musuku declared income from real estate.He accepts he did not own the property identified but Mr Thwaite submits there isevidence of rental income entering his accounts. Interest was also returned.[131] Mr Thwaite challenges the Commissioner's reliance on Mr Musuku'slifestyle noting that the Commissioner did not identify what the unusual or expensive elements of the lifestyle were, how much that lifestyle cost or what portion of the cost was absorbed by the Trust as owner of the home. He submits that any sum, other than the declared income, was received by Mr Musuku as part of acreditor/debtor relationship or as part of a shareholder's current account. Inparticular he points out that a key element of income is regularity and periodicity. He thus points to the random nature of the payments made to Mr Musuku and the absence of any connection between effort and payment. For these reasons he submits the payments do not constitute income.29 Although the Commissioner has not assessed Mrs Musuku for any dividend income it would not be unreasonable to expect she might have spent money which was in the bank accounts to which she had access for her own purposes. However, the present proceedings represent Mr Musuku'schallenge to the assessment and he did not identify which, if any, amounts of expenditure were made Mrs Musuku rather than himself.[132] Section CE 1(1)(a), (b) and (g) of the ITA provides that certain amounts derived by a taxpayer in connection with their employment or service are income of that taxpayer."CE 1 Amounts derived in connection with employmentIncome(1) The following amounts derived by a person in connection with their employment or service are income of the person:(a) salary or wages or an allowance, bonus, extra pay, or gratuity:(b) expenditure on account of an employee that is expenditure on account of the person:(g) any other benefit in money."[133] Salary or wages is defined in s OB 1 of the ITA. "Expenditure on account of an employee" is defined in s CE 5 of the ITA. According to that definition,expenditure on account of an employee is where an employer pays for expenditure that an employee has incurred.[134] I agree with Ms Herbert that s CE 1(1)(g) of the ITA casts a wide net toinclude in a person's employment income a cash amount derived that has aconnection with their employment or service, even though that amount may fall outside the specific categories listed in CE 1.Analysis[135] On or about 24 September 2009 Mr Musuku, in his NOPA and his late income tax return, recorded a shareholder employee salary of $19,000. It is thus not in dispute he derived income during the relevant tax year. The question is how much?[136] Mr Musuku provided the companies with his services as a pharmacist. At interview he said he had been a pharmacist for 24 years and in retail pharmacies since 1996. He said he worked 60 hours per week. This evidence is supported byMs Bell who was employed by the companies during the relevant period. She confirmed Mr Musuku carried out the role of pharmacist and managed the pharmacies during the period of her employment.[137] In his interview of 24 June 2008 Mr Musuku discussed his work responsibilities as follows:"Ward Now, talking about your work. On a day-to-day basis eh what do you do?Masuku Mostly dispensing."[138] In relation to his responsibilities at Holdings Ltd (Wylie's Pharmacy in Remuera) Mr Musuku explained that he dispensed prescriptions and was responsible for the rostering of staff; looking up debtors and creditors; supervising staff; and providing customer services, but added 80 per cent of his time was spent in the dispensary. He said he spent 10 to 15 per cent of his time in Mission Bay (MBP (2005) Ltd) and the rest in Remuera.[139] Of significance is the income protection insurance which Mr Musuku took out for the period between November 2002 and December 2007. This provided him with income security cover in the event of illness or disability for a weekly benefit of $2,500. This is the equivalent to $130,000 per annum. Mr Thwaite submits that no significance should be attached to this level of cover for the purposes of assessingMr Musuku's income in the 2006 tax year. This is because of the business disruptions discussed earlier. However, the Commissioner's second assessment assessed Mr Musuku's total income at $201,740.90. The net amount, when adjustedfor tax, is $132,037.24, a figure which is remarkably comparable to the level of annual income which Mr Musuku had insurance cover for. I am of the view that thisevidence provides independent support for the Commissioner's assessment.[140] I also agree with the Authority that the salary of $19,000 paid to Mr Musuku is not commensurate with the work undertaken by him in the businesses. In return the companies either provided him with funds or spent money to his benefit without any arrangement for him to pay these amounts back. Again, I find myself agreeingwith the Authority. To the extent that the funds the companies made available to Mr Musuku were not dividends they would be his income as employment income.(iii) Was the transfer of value income under ordinary concepts?[141] On the question of what amounts to income, s CA 1(1) and (2) of the ITA provides as follows:"Amounts specifically identified(1) An amount is income of a person if it is their income under a provision in this Part.Ordinary meaning(2) An amount is also income of a person if it is their income under ordinary concepts."[142] Mr Thwaite submits that if a creditor/debtor relationship is shown to exist on the balance of probabilities then the cashflow was part of a current account. He submits that by definition cashflow cannot then constitute other income. In support of this submission he points out that Mr Musuku did receive a salary, did receive rental income and did receive interest. These sums have been declared. Again, Mr Thwaite repeats his earlier submission that in respect of the other sums identified as coming from the business, the payments were made to his accounts either as part of an overall creditor/debtor relationship or as part of a current account. He thus submits that no funds are unaccounted for and no income can be considered asincome under the ordinary concept of income relying on the principle that "income tax is not a tax on everything which comes in".30[143] Furthermore, Mr Thwaite submits that the payments were made on a random basis, often by members of Mr Musuku's family. He thus submits there is nonecessary connection between any effort on the part of Mr Musuku and the payment to his account or for his benefit. Thus the payments do not constitute income.30 A Taxpayer v Commissioner of Inland Revenue (1997) 18 NZTC 13,350 (CA) at 13,355.[144] Section CA 1(2) of the ITA is a residual or catch-all provision which includes income under ordinary concepts as income of a person if it is not otherwise included by some specific section of the ITA.[145] "Income" was described by Richardson J as follows:31"Thus income is perceived as a gain derived from property which leaves the property in tact – a fruit off the tree as distinct from the tree itself, a crop as distinct from the land. Again, income is a flow of money or monies worth, a series of periodic receipts arising from the ownership of property or capital, or from labour, or a combination, e.g. rent, interest and dividends, salary and other personal exertion receipts, annuities and business receipts. And the source of the transaction which produces the dollar may be relevant in determining assessability as well as being relevant geographically ininternational tax matters."32[146] The ITA does not define the phrase "under ordinary concepts". This is aphrase which has been left for the Courts to develop.[147] The primary determinant in many cases will be the periodic nature of a payment and, accordingly, whether they are part of the funds on which the recipient may depend for living expenses.33 In considering the relationship between the payer and payee and the purpose of payments, Richardson J stated:34"The sums in question were regular periodical payments made to the appellant to defray his expenses while attending teachers' college full-time as a teacher trainee. They were paid to him for that purpose and were the whole or part of the receipts upon which he depended for that purpose. They were not gifts. They were contractual payments to which the appellant was entitled so long as he performed his part of the bargain. They were emoluments received in respect of and in return for his performance of the obligations of the studentship he had undertaken. It is implicit in s 61(37) that at least some scholarship and bursary payments constitute income according to ordinary concepts, otherwise it would be unnecessary to exempt such income."[148] Mr Thwaite's submission in relation to this issue reflects his primarysubmission. He accepts Mr Musuku received a salary, rental income and interest income. Those sums have been declared. In respect of the other sums identified as31 A Taxpayer v Commissioner of Inland Revenue above n 30.32 See too Tennant v Smith (1892) AC 150 (HL) at 164; Commissioner of Inland Revenue v Grover[1987] 2 NZLR 736 (CA) at 742.33 Reid v Commissioner of Inland Revenue [1986] 1 NZLR 129 (CA) at 136 (citing Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219.34 Reid v Commissioner of Inland Revenue above n 33 at 136.coming from the business Mr Thwaite repeats his submission that the payment was made to his accounts as part of an overall creditor/debtor relationship; or was part of a current account. Payment was made for his benefit from the company account aspart of a shareholder's current account.[149] He thus submits no funds are unaccounted for and no amount can be considered as income under the ordinary concept of income.35 The payments to Mr Musuku were made on a random basis often by members of his family. Mr Thwaite submits there is no necessary connection between any effort by Mr Musuku and the payments made to his account. He thus submits the payments do not constitute income.Analysis[150] I am satisfied that if the income was not dividend income or income received as an employee it was income under ordinary concepts. My reasons follow.[151] Mr Musuku was either the sole or joint director of the companies. He was also the sole and majority shareholder. He was the company employee and accepts he received employment income. It follows there is an element of reciprocitybetween the amounts the companies either spent on Mr Musuku's behalf or whichMr Musuku spent himself. I agree with Ms Herbert this supports the conclusion thatthese amounts have the quality of income in Mr Musuku's hands as opposed to being capital amounts or otherwise not assessable.[152] Mr Musuku depended on this income to meet his and his family's livingexpenses. The amount for which he has been assessed does not include alternative sources such as any income received by Mrs Musuku. The spreadsheets prepared by Mr Ward are extensive. In meticulous detail they set out the various items of personal expenditure. They disclose a regular flow of money to Mr Musuku which I find has the quality of income in his hands. Certainly, Mr Musuku has not pointed to any alternative sources for the funds such as gifts, loans, capital or otherwise.35 A Taxpayer v Commissioner of Inland Revenue, above n 30 at 13,355, 13,360.[153] The pharmacy businesses operated by Mr Musuku derived income on a regular basis. That income was paid into a variety of personal and business accounts which Mr Musuku controlled and had access to.[154] What limited explanations for alternative sources of revenue proffered in evidence were demonstrably incorrect. For example, Mr Johnson said he turned his mind specifically to the question of how Mr Musuku could have survived when his net taxable income was apparently so modest. Mr Johnson said that he discovered Mr Musuku had sold an interest in a property in Mt Eden and had funds available of approximately $500,000 for living, mortgage and/or business expenses. He concluded this must have been the source of funds Mr Musuku used to meet his living expenses. However, the difficulty with that proposition, as Mr Johnson was bound to accept in cross-examination, is that the property in question had been sold three years earlier in 2003 and the proceeds were used to clear loans. Furthermore, as was accepted in cross-examination by both Mr Talekar and Mr Johnson, Mr Musuku either benefited from or spent income derived from the companies on non-business purposes.[155] Additionally, Mr Musuku accepted that rent was deposited into his joint personal bank account on a weekly basis by the tenants of various properties. The Authority inferred that as he was a trustee and beneficiary of the Trust, he had arranged with the tenants to pay the rent directly into that account. That is a perfectly logical inference and one which was plainly open to the Authority on theevidence. The rental payments "came in" to Mr Musuku on a regular basis and wereamounts on which he was able to depend to meet his and his family's living expenses. Again, in my view, this supports the Authority's decision that the rent received has the quality of income in Mr Musuku's hands and is assessable to him asincome under ordinary concepts.Conclusion[156] On this appeal Mr Musuku is required to prove on the balance of probabilities that not only is the assessment incorrect but also by how much.[157] Mr Musuku did not give evidence at the hearing before Judge Sinclair. The witnesses called in support of his case had, at best, only a limited and rudimentaryknowledge and understanding of Mr Musuku's business activities. None had any in- depth knowledge or understanding of his unorthodox business activities including the way in which he operated the businesses, the companies' accounts and hispersonal accounts. Significantly, none of the witnesses called on his behalf was involved in the preparation of the NOPA or the income tax return on which Mr Musuku relies.[158] On this appeal Mr Thwaite has earnestly and, at times, courageously, urged me to draw factual inferences which he submits, to varying extents, are available on the evidence. However, the difficulty he faces is that Mr Ward was involved in this investigation since its inception in October 2006. He remained directly involved in the investigation up to and including the dispute process.[159] Mr Ward's examination and analysis of the operation of the numerous bankaccounts operated by Mr Musuku was not only detailed and extensive but was openly disclosed to Mr Musuku and his various tax agents with his workings. Regularly Mr Ward extended invitations to discuss the detail and/or providealternative explanations in support of Mr Musuku's claim that the assessments werewrong.[160] Furthermore, generous concessions which operated in favour of Mr Musuku, were made by the Commissioner which resulted in an amended assessment whichsubstantially reduced the quantum of Mr Musuku's assessable income.[161] For these reasons and the other reasons set out more fully in this judgment, I am not satisfied Mr Musuku has discharged his onus in proving on the balance of probabilities:(a) the Commissioner's amended assessment (and/or default assessment)for the tax year ending 31 March 2006 was arbitrary and not a genuineattempt to assess Mr Musuku's taxable income; and/or that(b) the Commissioner's amended assessment is incorrect and, if so, byhow much.[162] It follows that I am satisfied that the Authority was correct when it found theCommissioner's amended assessment (and earlier default assessment) were a genuine attempt to ascertain the taxable income of Mr Musuku at the particular time and were not arbitrary and/or made in disregard of the law or facts then known to the Commissioner.[163] I also uphold the Authority's conclusion that the companies spent amounts onMr Musuku's behalf and for his private benefit or made amounts available to himwhich he has retained or used for his private benefit. It follows I agree with the Authority that Mr Musuku can be taken to have derived as dividend income an amount equal to the private expenditure.[164] To the extent that such expenditure is not dividend income I agree with the Authority that it is either employment income or income under ordinary concepts.[165] Finally, I agree with the Authority that the rent payments made into the joint account of Mr Musuku and his wife are income to Mr Musuku under ordinary concepts.Result[166] The appeal is dismissed and the Authority's decision is upheld.Costs[167] I understand that the parties are agreed that costs should be awarded on a category 3 basis in accordance with the joint memorandum of counsel dated 17 September 2015 and as ordered by Woodhouse J on 18 September 2015.[168] Accordingly, costs are awarded in favour of the Commissioner on that basis with disbursements as fixed by the Registrar.Moore JSolicitors:Mr Thwaite, AucklandMs Herbert and Mr Bryant, WellingtonJawahar Bhaskar Musuku – Related Entities (Tax year ended 31 March 2006)Settlor/TrusteeSettlor/TrusteeSwarnaMusuku("SM")JawaharBhaskarMusuku("JBM")MBP (2005) LtdMission Bay Pharmacy (2005) LtdInc: 8 June 2005Director: JBMShareholding: JBM(100%)Patterson AvenueHoldings LtdMission Bay Holdings (2005) Ltd(Previously RemueraLife Time PharmacyLtd. Name changedin November 2005 toWylie's Pharmacy)Inc: 10 November2005 (in liquidationfrom 18 July 2014)Director: JBMRemuera RoadMBH LTDMission Bay Holdings Ltd(Owned certainrental properties)Inc: 7 May 2004Director: JBM &SMShareholding: JBM(50%); SM (50%)MBP LtdMission Bay Pharmacy LtdInc: 2 October 1996(in liquidation from10 July 2006)Director: JBMShareholding: JBM(75%); SM (25%)Tamaki Drive"the Trust"Musuku Family Trust12 May 1997 TrustDeedSettlors: JBM & SMTrustees: JBM & SM10 July 1998 TrustDeedSettlors: Michael PVallantTrustees: JBM & SM& Ravi Musuku100% 100% 50% 50% 75% 25%Spouse