FUGLE v COMMISSIONER OF INLAND REVENUE [2016] NZHC 1997

FUGLE v COMMISSIONER OF INLAND REVENUE [2016] NZHC 1997 [25 August 2016]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2016-485-000170[2016] NZHC 1997UNDER the Income Tax Act 2004 and the TaxAdministration Act 1994IN THE MATTER OF an appeal from a decision of the TaxationReview Authority dated 16 February 2016BETWEEN LESLEY WILLIAM FUGLEAppellantAND COMMISSIONER OF INLANDREVENUERespondentHearing: 2 August 2016Counsel: M T Lennard for AppellantH Ebersohn and P M Higbee for RespondentJudgment: 25 August 2016RESERVED JUDGMENT OF CULL JContentsIntroduction ....................................................................................................................................... [1]Relevant facts..................................................................................................................................... [6]Decision of the Taxation Review Authority ................................................................................... [15]Admission of documents ................................................................................................................. [24]Principles on appeal ........................................................................................................................ [30]The Commissioner's position ......................................................................................................... [34]Mr Fugle's position ......................................................................................................................... [48]Discussion ......................................................................................................................................... [51]Was the credit to the current account a "payment"? ................................................................... [56]Has the financial arrangement matured? ..................................................................................... [68]Should the application by Mr Fugle to admit documents have been allowed? .......................... [75]Did the crediting to Mr Fugle's account take place in 2005 or prior and, if prior to 2005, whatsignificance, if any, should be attached to the date of crediting? ................................................ [90]Other matters .................................................................................................................................. [92]Result ................................................................................................................................................ [96]Introduction[1] Mr Fugle appeals a decision of the Taxation Review Authority (the Authority) dated 16 February 2016 regarding Mr Fugle's income tax assessment for the yearended 31 March 2005, in respect of an assignment of debt from Mr Fugle's companyBathos Properties Limited (Bathos) of $2,659,442.[2] The Authority found that there was a payment of the amount of the assigned debt between Mr Fugle by the crediting of the sum of $2,659,442 to Mr Fugle'scurrent account. The Authority held that the crediting of the sum to Mr Fugle'scurrent account was the last payment due under a deed of assignment from the Bank of New Zealand (BNZ). The financial arrangement had therefore matured,triggering a "Base Price Adjustment" under the Financial Arrangement Rules in subpart EH of the Income Tax Act 2004. The effect of the Authority's finding is that the amount credited to the appellant's current account is to be treated as income, less$90,000 paid by Mr Fugle for the assignment from the BNZ.[3] Mr Fugle appeals the Authority's decision on the following grounds:(a) the Authority erred in determining that the sum of $2,659,442, which was credited to Mr Fugle's current account with Bathos, was apayment, triggering a base price adjustment under the tax accrual rules in subpart EH of the Act;(b) the Authority erred in determining that the "payment" was made in2005, when the debt had been assigned to Mr Fugle in December 1995, following an agreement in December 1992;(c) as an alternative, if the amount had been a fresh transaction in the 2005 tax year, it was not income in Mr Fugle's hands;(d) the Authority erred in excluding two recently discovered documents as evidence at the Authority's hearing under s 138G Tax Administration Act 1994; and(e) the Authority erred in excluding the documents and the cross- examination on those documents from its consideration, when the Commissioner sought production of the documents and cross- examined on them.[4] Mr Fugle seeks an order allowing the appeal under s 26A of the Taxation Review Authority Act 1994 and a direction that the Commissioner re-assess Mr Fugle's income tax liability.[5] This case turns on the application of the accrual rules in Part EH of the Income Tax Act 1994 (the Act). The critical issue is whether the crediting to Mr Fugle's current account in the 2005 tax year is a "payment".Relevant facts[6] Mr Fugle has been a director of Bathos since 6 October 1987 and has been the sole director since 23 February 1996. Since October 2003, Mr Fugle was the sole shareholder.[7] Bathos, originally called Chas Pilcher (1986) Limited (Chas Pilcher), was a road construction entity that secured the contract to dredge the Clutha River downstream from the Clyde Dam. The company sustained large losses and was put into receivership by BNZ in September 1989.[8] As at 30 April 1992, Chas Pilcher was indebted to BNZ in the sum of $2,659,442.06 together with accruing interest. Mr Fugle was a guarantor of that debt. Litigation commenced between Mr Fugle and the BNZ regarding Mr Fugle'sguarantee.[9] On 31 December 1992, Mr Fugle settled the dispute with BNZ, by executing a Deed of Admission of Liability and Settlement (the Settlement Deed) between BNZ, the receivers, Bathos and Mr Fugle. The Settlement Deed provided that Mr Fugle would pay to BNZ $90,000 in return for an assignment of Bathos' debt toBNZ. The debt was $2,659,442.06 plus interest of $1,433,015. On payment of $90,000 to the BNZ, the receivers would then retire.[10] The receivers retired in February 1993. Mr Fugle paid the last portion of the monies due under the Settlement Deed on 12 February 1996. The BNZ then entered into a Deed of Assignment (the Assignment Deed) with Mr Fugle, by which the debt was assigned to him. The Assignment Deed recorded that the amount owing to the BNZ as at 11 December 1995 was $5,567,745.91. Bathos did not trade again until the 2005 tax year, when it commenced a property development project. When it ceased trading, Bathos accumulated tax losses that were carried forward.[11] On 1 April 2004, during the 2005 tax year, Bathos credited the amount of $2,659,442 to the current account of Mr Fugle with Bathos. This was the amount of indebtedness, without interest.[12] As the Authority recorded, the financial statements for the 2005 year recorded an opening balance in Mr Fugle's current account for that year of$2,659,442.1 The financial statements for Bathos showed drawings by Mr Fugle in the following amounts:(a) in the 2005 tax year, Mr Fugle drew down $452,754;(b) in the 2006 tax year, Mr Fugle drew down $1,064,364; and(c) in the 2007 tax year, Mr Fugle drew down $751,475.[13] The net amount drawn down by Mr Fugle over the three year period from 2005 to 2007 was $2,238,592. Between 2001 and 2010, Mr Fugle returned no income and paid no income tax. The funds drawn down were used in part to support Mr Fugle and his family and he and his partner claimed a number of tax credits in the 2005 to 2007 income years. No financial statements were prepared for Bathos from the early 1990s to 2010. Specifically, no financial statements were prepared since the 31 December 1992 Settlement Deed.[14] Inland Revenue commenced an audit in July 2009. The financial statements for Bathos for the 2005, 2006 and 2007 years were finalised on 17 June 2010 and1 Fugle v Commissioner of Inland Revenue [2016] NZTRA 2 at [12].provided to the Commissioner. These were Bathos' first financial statements since the assignment of the debt from BNZ to the appellant. In the financial statements, the assignment of debt was credited, as a net sum in Mr Fugle's current account.Decision of the Taxation Review Authority[15] The Authority records the parties' agreement that the payment by Mr Fugle of$90,000 to the BNZ to acquire Bathos' debt was a relevant financial arrangement for the purposes of the accrual rules in Part EH of the Act. "Financial arrangement" isdefined in s EH14 and it means any debt or debt instrument. It is applicable in this case.[16] Of importance, under the accrual rules, a "BPA" is a "calculation which it is necessary to undertake when a financial arrangement "matures" or is remitted sold, or otherwise transferred in the relevant income year." "Maturity" and"matures" are defined in s EH14 and the Authority sets those out as follows:maturity in relation to a financial arrangement, means the date on which the last payment contingent upon the financial arrangement is made, andmatures has a corresponding meaning:provided that where a financial arrangement has not matured and where the amount which has not been paid are material and the financial arrangement has been structured to void the application of s EH 4, the financial arrangement is deemed to have matured.[17] Thus, a financial arrangement matures when the last payment contingent on the financial arrangement is made. The Authority defined the issue in dispute aswhether an amount is paid where the amount is credited to a shareholder's currentaccount.[18] On that issue, the Authority found that the financial arrangement matured in 2005, when the assigned debt was credited to Mr Fugle's current account.[19] The Authority recorded that it was not an issue that the book entries recording the crediting of Mr Fugle's current account were not made until June 2010 when the financial statements for Bathos for the 2005 to 2007 years were prepared. However,the Authority found that once the funds were placed at the disposal of Mr Fugle so that he could draw down on those funds in 2005, there was a crediting.2[20] By reference to English and New Zealand authority and taking into account the statutory definition of the word "paid" under s OB1 of the Act, the Authority concluded that an amount is paid where the amount is credited to a shareholder'scurrent account.[21] In relation to the timing of the placing of the funds, the Authority was satisfied that the entry crediting the full amount of the debt to Mr Fugle's currentaccount accords with events in 2005 and the drawing down of funds by Mr Fugle in that year and the two subsequent years. The Authority found that nothing turned on the fact that the book entries recording the crediting were not made until June 2010.[22] In relation to the submission that Bathos did not have sufficient funds in 2005 to pay the entire indebtedness to Mr Fugle, the Authority did not consider that inorder for there to be a crediting to Mr Fugle's account, it was necessary for the fullamount of the funds to have been immediately payable to Mr Fugle. The Authorityrejected the submissions from Mr Fugle that even if there were some credit to thecurrent account of Mr Fugle, that did not amount to payment.[23] The Authority found that when the company commenced trading again in the 2005 tax year, Mr Fugle immediately commenced making draw-downs against thatpayment. Because this was the last payment due under the Assignment Deed, thefinancial arrangement matured and a base price adjustment was required in the 2005year.Admission of documents[24] On the day before the Authority's hearing, Mr Fugle's accountant, Mr Short,found two documents at his firm's office "amongst the old records". The documents were the Bathos account book for 1990-1991 and the account file for the year ended 31 March 1993 – to March 2003. Mr Lennard for Mr Fugle sought leave to produce2 At [76].the documents, after the accountant had referred to them in his evidence in chief, because part of his briefed evidence was incorrect. Although not referred to in theAuthority's decision, the Commissioner's counsel asked for their production and, while objecting to their admissibility, put them to Mr Fugle's accountant in cross- examination.[25] On the basis of those documents, Mr Fugle sought to argue that the credit to his account could not have been made in the 2005 year because it had already been made in the 1993 tax year as evidenced by reference to the 1998 entry. The Commissioner opposed the late production of the documents, contending that the issue that Mr Fugle wished to now raise was a new issue under s 138G of the Tax Administration Act.[26] Section 138G of the Tax Administration Act provides that the parties can only raise, in the challenge to the Commissioner's assessment, the issues that weredisclosed in the parties' statements of position. Section 138G(2) provides:138G Effect of disclosure notice(2) A hearing authority may, on application by a party to a challenge toa disputable decision, allow the applicant to raise in the challenge newpropositions of law, and new issues, if satisfied that—(a) the applicant could not, at the time of delivery of the applicant's statement of position, have, with due diligence, discerned those propositions of law or issues; and(b) having regard to the provisions of section 89A and the conduct of the parties, the hearing authority considers that the raising of those propositions of law or issues isnecessary to avoid manifest injustice to the Commissioner or the disputant.[27] Under s 138G(2), the Authority may allow the applicant to raise a new issue if satisfied that the applicant could not have discerned those propositions of law orissues at the time of delivery of the applicant's statement of position. The Authorityconcluded that Mr Fugle could have located the documents and discerned the issuewhich he wished to raise prior to the delivery of his statement of position. TheAuthority concluded that Mr Fugle's proposed argument was a new issue. Further,the Authority considered that the raising of the new issue was unnecessary to avoid manifest injustice to Mr Fugle, because of the view the Authority reached on the admission of the documents and the strength of the issues to be raised.[28] The Authority also referred to r 8.31 of the District Court Rules, which requires leave to be granted for a document to be produced in evidence where it should have been discovered. Rule 8.31 provides:A document that should have been included in a party's affidavit ofdocuments may be produced in evidence at the hearing only with the consent of the other party or parties or the leave of the court.[29] The Authority refused leave because of the risk of prejudice to the Commissioner. In any event, the Authority was of the view that the documents were of no real significance to Mr Fugle's arguments and declined to admit the documents.Principles on appeal[30] The right to appeal a challenge decision of the Authority is found in s 26A of the Taxation Review Authority Act. It provides:26A Challenges appealed to High Court(1) Unless subsection (2) applies, the determination by an Authority of a challenge may be appealed to the High Court if—(a) The amount of tax involved in the appeal is $2000 or more; or(b) The amount of net loss involved in the appeal is $4000 or more.(2) The determination by an Authority of a challenge may not be appealed to the High Court if the determination was made by the Authority under a tax law that provides for the Authority's determination to be final.(3) This section applies only to challenges commenced under Part 8A of the Tax Administration Act 1994.[31] An appeal under this section is a general appeal and therefore the principles in Austin, Nichols & Co Inc v Stichting Lodestar apply.3 The principles for an appeal under s 26A were discussed by Wylie J in Russell v Commissioner of Inland Revenueand the following summary was made:4a) the appellant bears the onus of satisfying the appeal court that it should differ from the decision under appeal;b) it is only if the appellate court considers that the appealed decision is wrong that it is justified in interfering with it;c) the appeal court has the responsibility of arriving at its own assessment on the merits of the case;d) no deference is required beyond the customary caution appropriate where the first instance fact finder had a particular advantage such as technical expertise or an opportunity to assess the credibility of witnesses;e) the appellate Judge is entitled to use the reasons of the first instance decision-maker to assist him or her in reaching his or her own conclusions, but the weight the Judge places on them is a matter for the Court.[32] There are four issues for determination in this appeal:(a) Was the crediting to Mr Fugle's account a "payment" under theaccrual rules in the Income Tax Act?(b) Has the financial arrangement matured?(c) Should the application to admit documents have been allowed?(d) Did the crediting to Mr Fugle's account take place in 2005 or prior and, if prior to 2005, what significance, if any, should be attached to the date of crediting?3 Staithes Drive Development Ltd v Commissioner of Inland Revenue [2015] NZHC 2593, (2015) 27 NZTC 22-028, at [37]; Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 13, [2008] 2 NZLR 141.4 Russell v Commissioner of Inland Revenue (2010) 24 NZTC 24,463 (HC) at [69] (footnotes omitted).[33] There is no dispute between the parties on appeal that the payment by Mr Fugle of $90,000 to BNZ to acquire the Bathos debt was a relevant "financialarrangement" as defined in s EH14. The parties were also in agreement that ifBathos had "paid" Mr Fugle the $2,659,442 amount of the Bathos debt in the 2005 income year, that would be a final payment in relation to the financial arrangementand a BPA calculation would be required and the Commissioner's assessment wouldapply.The Commissioner's position[34] The Commissioner contends that in the 2005 income year, the last payment contingent upon the financial arrangement, namely the assignment by BNZ of the Bathos debt to Mr Fugle, was paid in the 2005 income year. The Commissioner says the payment was the crediting of Mr Fugle's current account in Bathos and upon thatoccurrence, the financial arrangement matured, and the base price adjustment was triggered.[35] The Commissioner submitted further that the Assignment Deed from the BNZ assigned a debt of $5,567,746. The Assignment Deed was dated December1995. The crediting of Mr Fugle's current account of $2,659,442 was the capital component, as the interest component of $2,908,304 become irrecoverable by the lapse of time in December 2001. Thus, the financial statements of Bathos for the 2005 income year were correctly drawn to include only the $2,649,442 as a credit tothe current account. The Commissioner submits that the crediting was the lastpayment contingent upon the financial arrangement and thus the financialarrangement had matured.[36] A base price adjustment is required when the financial arrangement matures or the remaining debt has been remitted. Remission includes the position wherepayments have become irrecoverable or unenforceable by actions through the lapseof time.5 The Commissioner submits that by 2005, the entire remaining debt hadeither matured or been remitted and a base price adjustment was required. The keyquestion, as the Commissioner framed it, is whether crediting is "payment"?5 Income Tax Act 1994, s EH4(1) and s EH4(8)(d).[37] The Commissioner says the concept of payment implies the payer placing that which constitutes payment at the disposal of the payee. The concept of payment by crediting a current account of a director or shareholder is payment, because the practical reality is that shareholders and directors control the entity and are able to draw down on funds credited in their current accounts at will.[38] The Commissioner relied on two authorities to support the submission that the crediting of Mr Fugle's current account amounted to payment,6 and a New Zealand authority to support the proposition that there is payment to the shareholder,7 even if the funds were not placed at the disposal of the shareholder, or with his or her agreement or assent. Payment of a dividend may occur by an agreement which acknowledges that the amount of the dividend is to be lent by the shareholder to the company and it is to be repaid to the shareholder in accordance with the terms of that agreement.8[39] The Commissioner accepted that from the time the Assignment Deed was entered into until the 2005 income year, Bathos did not trade, but in 2005, Bathos commenced a property development project. The Commissioner referred to the evidence that Mr Fugle could and did draw down funds at will from Bathos on the basis of the Assignment Deed. The Commissioner argues that this was done with the consent of Bathos, despite the fact that there were no resolutions dealing with the issue of drawings and no approval for any major transaction that would credit his current account. The reliance by Mr Fugle on his accountant, Mr Short, to make decisions relating to his tax affairs and to prepare the financial statements did not enable Mr Fugle to distance himself from the accounts.[40] In the Commissioner's view, Mr Fugle acted in a manner consistent with the company accounts, by taking amounts in terms of the assigned debt, as and when he required. Thus, Mr Fugle has obtained a benefit from those funds in Bathos without attracting the tax that would apply to dividends or monetary remuneration. Because6 Garforth (Inspector of Taxes) v Newsmith Stainless Ltd [1979] 2 All ER 78 (Ch D); The Commissioners of Inland Revenue v Doncaster (1924) 8 TC 623 (KB).7 Case Z4 (2009) 24 NZTC 14,051 (TRA) and Commissioner of Inland Revenue v Albany Food Warehouse Ltd (2009) 24 NZTC 23,532 (HC).8 Case Z4, above n 7, at [56], citing Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 (HCA).the funds under the Assignment Deed were available in 2005 for Mr Fugle to draw down on, the Commissioner says the amount outstanding under the Assignment Deed was credited.[41] The basis of the Commissioner's objection to the inclusion of those documents in evidence was that the documents were neither discovered nor in the common bundle and were produced after Mr Fugle had given evidence. Further, Mr Fugle's argument that the credit could not have been made in 2005, because it had already been made in 1993 and/or 1998, was not included in Mr Fugle'sstatement of position or pleaded.[42] Relying on the purpose of s 138G of the Tax Administration Act that it would operate as a sanction where either party fails to disclose matters as required, and the cases in which the courts have applied the operation of s 138G, the Commissionersupported the Authority's decision to exclude the documents.[43] The Commissioner also referred to the High Court Rule9 equivalent to the District Court r 8.31,10 which provides that a document that should have beenincluded in an affidavit of documents (or common bundle) may be produced inevidence at the hearing only with the consent of the other party or the leave of theCourt. The rule provides that the Court may refuse leave if it is satisfied that theproduction of the document might cause an injustice.[44] The Commissioner reinforced the Authority's view that the Commissionerwould be prejudiced and, thereby an injustice would occur, because the Commissioner did not have the opportunity to investigate the documents nor cross- examine the staff member who prepared the accounts, who would have been employed in the period 1993 to 1998 approximately. Nor was there an opportunity for the Commissioner to cross-examine Mr Fugle on the documents. Because there was no adequate explanation of the failure to discover the documents and given the merits of the application, the Commissioner submitted there was no prejudice to Mr9 High Court Rule 9.6.10 Regulation 4 Taxation Review Authority's Regulations 1998 applies the District Court Rules tothe Taxation Review Authority.Fugle and the decision to exclude the documents was reasonable and open to the Authority.[45] In any event, the Commissioner submits that the documents do not reflect the underlying legal (or economic) position in either 1993 or 1998 and do not assistMr Fugle's claim. It was submitted that the documents purport to show a credit of$2,659,442 in the 1993 tax year when the Assignment Deed was not entered intountil December 1995. Mr Short, the accountant acknowledged under cross-examination that in that sense, the credit was merely anticipatory.[46] During argument, Mr Ebersohn for the Commissioner referred to the 2005 Bathos financial statements, to demonstrate that the BNZ debt liability was not credited to Mr Fugle's shareholder current accountant before the 2005 tax year.11[47] In answer to Mr Fugle's argument that the crediting in the 2005 income year was just a financial recording in the 2011 year, because the financial accounts were done five years later, the Commissioner submitted that the test is more substance based. He submitted that once the funds were placed at the disposal of Mr Fugle, for him to draw on, the amount would be credited to his current account, irrespective of whether the book entry was made. The Commissioner relied on Albany Food Warehouse, where the dividend was held to be paid by the crediting of the shareholders' current accounts, when the funds were agreed to be used for the company's purposes in the immediate future.12Mr Fugle's position[48] Mr Fugle's position can be summarised as follows:(a) Nothing happened in the 2005 income year.(b) The crediting of Mr Fugle's current accounts in the financial statements for that year is just a recording, completed in 2011, when11 The shareholder current accounts for the year ended 31 March 2005 show the balance at the beginning of the year to Mr Fugle at $2,659,441 compared to the 2004 year which has a nil entry.12 Commissioner of Inland Revenue v Albany Food Warehouse Ltd, above n 7, at [14].the 2005 statements were prepared. The "crediting" took place in the 1990s when Mr Fugle acquired the BNZ debt.(c) The crediting did not amount to payment but recorded the position asit had been from the time Mr Fugle acquired the BNZ debt in the mid-1990s. Bathos owed him the capital amount of the indebtednesswhich was assigned.(d) Mr Fugle drew down funds against the credit balance in his current account, because Bathos began trading again and there were some funds available.(e) There has been no final "payment" in relation to the financialarrangement in the 2005 tax year or previously.(f) The crediting of Mr Fugle's current account in the 2005 tax year is fundamentally different from the crediting which happens on some action of the company, for example, the decision to pay a dividend, when that action of the company creates the income and the crediting implements it.[49] In relation to the issue of admissibility of the new documents, Mr Fugle submits that the Authority was wrong to conclude there was a new issue raised. The documents did not raise a new "issue", but were evidence supporting Mr Fugle'sposition that his current account was credited in the 1990s not in 2005 and even ifthis was wrongly or prematurely done, it reflected events that occurred well before2005.[50] Secondly, the Commissioner cross-examined Mr Short, the accountant, on those documents and they were therefore, in evidence. Thirdly, the documents were probative to show the debt was credited to Mr Fugle in the 1993 tax year and that amount was carried through in the 1998 tax year.Discussion[51] In this appeal, the relevant law is contained in the Act and the Tax Administration Act 1994. The accrual rules, or the "financial arrangement rules"govern the income tax treatment of financial arrangements. The purpose of ss EH A(i) – EH 59 of the Act is to ensure that all returns on financial arrangements are brought to tax on a progressive basis over the term of the financial arrangements concerned.13 The term "financial arrangement" is broadly defined and includesvirtually any arrangement where there is a deferral of the passing of consideration.14The rules therefore bring to tax increases or decreases in the value of financialarrangements.[52] A financial arrangement is defined in s EH14 as:financial arrangement means(a) any debt or debt instrument, and(b) any arrangement (whether or not such arrangement includes anarrangement that is a debt or debt instrument, or an excepted financial arrangement) whereby a person obtains money inconsideration for a promise by any person to provide money to anyperson at some future time or times, or upon the occurrence or non- occurrence of some future event or events (including the giving of, or failure to give, notice), and(c) any arrangement which is of a substantially similar nature (including, without restricting the generality of the preceding provisions of this subparagraph, sell-back and buy-back arrangements, debt defeasances, and assignments of income),but does not include any excepted financial arrangement that is not part of afinancial arrangement:(emphasis added)[53] When a financial arrangement comes to an end, either through remission or maturity, s EH4 provides that a base price adjustment calculation will be undertaken, when the financial arrangement matures or is remitted, sold or otherwise transferred in the relevant income year.13 Susan Glazebrook and others The New Zealand Accrual Regime – A Practical Guide (2nd ed, CCH, Auckland, 1999).14 At 3.[54] The formula for the base price adjustment includes, in the case of a holder,the sum of the amount of all consideration "that has been paid" or will becomepayable to the relevant person in relation to the financial arrangement.15[55] There is no dispute between the parties that the relevant financial arrangement is Mr Fugle paying $90,000 to the BNZ to acquire the Bathos debt. Mr Fugle also accepts that if, in the 2005 income year, Bathos had actually paid Mr Fugle the amount of the Bathos debt, then that would be a final payment in relation to the financial arrangement under the accrual rules and a base price adjustment calculation would be required to produce the tax result sought by the Commissioner and upheld by the Authority. Thus, in this case, a base price adjustment would include all consideration from the arrangement less the cost ofacquiring the arrangement and less all income or losses already returned in earlieryears. The first issue is whether the credit to the current account was a payment.Was the credit to the current account a "payment"?[56] Mr Fugle entered into the Settlement Deed with the BNZ on 31 December 1992, agreeing to pay $90,000 in return for an assignment of Bathos' debt to BNZ.Mr Fugle paid the last portion of the monies due under the Settlement Debt on 12 February 1996. BNZ agreed to assign the debt to Mr Fugle and as at 11 December 1995, the amount owing to the BNZ was $5,567,745.91.[57] Bathos did not trade until the 2005 tax year. Following an Inland Revenue audit, financial statements for Bathos were completed for the 2005, 2006 and 2007 years on 17 June 2010. There had been no financial statements or accounts prepared for Bathos since the 31 December 1992 Settlement Deed. The financial statements for the 2005 year recorded an opening balance in Mr Fugle's current account of $2,659,441. This was the debt of $5,567,745 to the BNZ approximately ten years before, less the interest that had become irrecoverable. In the statement of financial performance, the income of Bathos was shown as a total of $2,643,486, being proceeds from section sales and contracting revenue. The statements also showed that Mr Fugle drew down $452,754 and in the statement of financial position,15 Section EH4(1)a(i)(A).showed the net assets of Bathos as $541,138. In contrast, for the 2004 year, there were no entries reflecting the fact that Bathos was not trading.[58] It is evident that although Mr Fugle acquired the debt from Bathos when it was assigned in the 1996 tax year, he did not take any drawings for ten years, because Bathos was dormant. It was only in 2005, when Bathos recommenced trading, that it was able to start paying the debt Mr Fugle had acquired from the BNZ. Even when Bathos commenced trading in 2005, the full amount of the debt could not be drawn down. The drawings of $452,754 in the 2005 year by Mr Fugle was the amount the company could sustain in the 2005 tax year.[59] In Garforth (Inspector of Taxes) v Newsmith Stainless Ltd16 sums credited to the director's accounts had been placed unreservedly at the disposal of the directorsand the Court held there had been a "payment" of those sums to them. Walton J said:17If money is placed by one person unreservedly at the disposal of any otherperson, that I think, must be equivalent to payment Where a director chooses to leave his money seems to be a matter entirely of his own choice. If, of course, it is not a matter of his own choice – if, for some reason, the money was not placed unreservedly at his disposal – then I think that different considerations would arise.[60] In his judgment, Walton J derives support for his view of when payment occurred from the judgment of Rowlatt J in The Commissioners of Inland Revenue v Doncaster.18 In Doncaster, the company passed a resolution authorising the directors to distribute a fund among the ordinary shareholders as a funded debt payable at the option of the directors in cash or in fully paid preference shares. Subsequently, the directors resolved to pay the fund in cash and to credit the amount to which each shareholder (director) was entitled, to his loan account. The directors'loan accounts were used for crediting their fees, dividends and interest and they withdrew varying amounts from the accounts from time to time. Rowlatt J found16 Garforth (Inspector of Taxes) v Newsmith Stainless Ltd, above n 6.17 At 414-415.18 The Commissioners of Inland Revenue v Doncaster, above n 6.that once the sums were credited, they were at the disposal of the shareholders, who could draw upon the account. As he termed it:19It was simply putting it to the credit of what is equivalent to a banking account. Those loans were money in the hands of the company belonging to the shareholder as an individual.[61] In both cases, money was available to meet the demand of the balances credited to the director's respective accounts. In Garforth, the two director shareholders were each paid a sum of money in respect of their bonuses and the balances remaining were credited to their current accounts. Had the directors demanded payment of those sums, the company was able to pay, and would have paid, those sums to them. Walton J held that the crediting of the directors' accounts was a payment of those sums to the directors, because the director could choose to either be paid or leave his money in the account. Relevantly, Walton J drew a distinction where the money was not available. He said:20 if it is not a matter of the director's choice and for some reason the moneywas not placed unreservedly at the director's disposal, then differentconsiderations would arise.[62] In Doncaster, the cash funds were available, to enable the directors to distribute a fund among the ordinary shareholders, payable at the discretion of the directors. The loan accounts, in which sums were credited, were at the disposal of the directors' shareholders, who could draw upon the accounts when they chose. In both cases, therefore, the crediting of those accounts were held to be payments, because the sums were available to be drawn down subject to the decisions of the directors.[63] In Commissioner of Inland Revenue v Albany Food Warehouse,21 the company declared a fully imputed dividend. The directors passed a resolution that the dividend was to be credited to the relevant shareholders' current accounts, with payment being conditional on the shareholders agreeing to subordinate their claims to the company's creditors generally and to be made, as and when finance permitted. The shareholders passed a resolution agreeing to those terms on the same day.19 At 631.20 At 78.21 Commissioner of Inland Revenue v Albany Food Warehouse Ltd, above n 7.Clifford J held that the dividend was "paid". The effect of the directors' resolution and the shareholders' respective resolutions, agreeing to the subordination terms, was that funds that were previously available to the directors were placed outside the directors' control, as a result of their resolution, and became debts due and owing to the shareholders.[64] In this case, there was no company dividend, but an assignment of debt to Mr Fugle, who could not draw down on that debt, until Bathos recommenced trading. In reaching his decision in Albany Food Warehouse Ltd Clifford J adoptedthe Authority's comments in relation to two further cases, which distinguished the difference between the methods of paying a dividend and book entries in companyaccounts without the shareholders' assent. These cases have particular relevance tothis proceeding:22[56] Brookton Co-operative Society Limited v FC of T 81 ATC 4346; (1981) 11 ATR 880, a decision of the High Court of Australia, also supports the stance of [Albany – the respondent]. Mason J in his judgment said, at p 889:Payment of a dividend may occur in a variety of ways not involving payment in cash or by bill of exchange, as, for example, by an agreed set-off, account stated or an agreement which acknowledges that the amount of the dividend is to be lent by the shareholder to the company and it is to be repaid to the shareholder in accordance with the terms of that agreement. It is, however, well settled that the making of a mere entry in the books of a company without the assent of the shareholder does not establish a payment to the shareholder. Manzi v Smith (1985) 49 ALJR 376 at 377; 7 ALR 685 at 687-688.(emphasis the Authority's)[65] Clifford J also accepted the distinction drawn by the Authority between amere entry in the books of a company without a shareholders' assent and ashareholders' agreement to defer payment of an actual dividend:23[57] In the present case there is not a mere entry in the books of the [respondent] without the assent of the shareholders. The credit to the current account was clearly made with the assent of the shareholders and that assent was given together with an agreement, which was contained in ashareholders' resolution, that the repayment of the loan to the disputant,which was created and acknowledged by the act of crediting, would be made22 At [51]; Case Z4, above n 7, at [56].23 At [51].as finance permitted and that the loan would be subordinated to certain other liabilities of the company.[66] I accept Mr Lennard's submission that a dividend or salary credit is an allocation of income or retained earnings to the shareholder, which then becomes payable to him or her and was not previously payable. It is the dividend or the salary that is the payment; the crediting to a current account is simply the means of effecting that payment. Further, the payment by credit to a shareholders' currentaccount will amount to payment if, and only if, the crediting is done with the shareholders' assent, as Mason J said in Brookton Co-operative Society Ltd.24[67] In this case, an existing liability to Mr Fugle was recognised by an entry to his credit in his shareholder's account, 10 years after the debt was assigned. There was no payment or cash sums made available to Mr Fugle at that time. Nor was there a decision to make a payment from Bathos to Mr Fugle in the 2005 tax year. The entry in the current account of Mr Fugle in 2005 did not establish a payment to him. I am unable therefore to accept the submission from the Commissioner that there was a payment to Mr Fugle by the crediting of his current account in 2005.Has the financial arrangement matured?[68] Under the accrual rules, the base price adjustment is triggered, when a financial arrangement comes to an end (either through remission or maturity) or aperson's involvement with an arrangement comes to an end (through selling or otherwise transferring the arrangement).[69] The base price adjustment compares everything received and everything paid by a person, with what has previously been returned and deducted by that person. The formula in s EH 4 which governs this exercise may require an adjustment to theperson's tax to ensure that the correct tax has been paid.[70] Section EH 4(1) defines the base price adjustment calculation:2524 Brookton Co-operative Society Ltd v Federal Commissioner of Taxation, above n 8, set out at[64] above.25 Income Tax Act 1994.(1) Subject to subs (2), where in relation to any person, financial arrangement matures or is remitted (other than by way of being written off as a bad debt) sold, or otherwise transferred by the person in any income year, the amount of the base price adjustment in relation to that income year, that person, and that financial arrangement shall be an amount calculated in accordance with the following formula:a - (b + c)where ais,(i) in the case of a holder, the sum of(A) the amount of all consideration that has been paid, and all further consideration that has or will becomepayable, to the person, and(B) any amounts that have been remitted by the personand that are not included in subsubparagraph (A),(ii) in the case of an issuer, the sum of(A) the amount of all consideration that has been paid, and all further consideration that has or will becomepayable, by the person, and(B) the amount paid by the person associated with theissuer if the issuer is the debtor of a debt to which section EH 7 appliesin relation to the financial arrangement, andbis, the acquisition price of the financial arrangement in relation to the person,[71] The Commissioner assessed Mr Fugle on the basis that a base price adjustment was required as the financial arrangement had matured, as defined in s EH14.[72] Although entitled to payments from the full amount of the debt from the 1996 income tax year, Mr Fugle could not take drawings until 2005 and the two following years, 2006 and 2007. As at 2007 and at the date of hearing, $690,000 remained unpaid. By 31 March 2007, as a result of Mr Fugle drawing funds out of Bathos, the current account balance was $690,000. This meant a net total of drawings byMr Fugle of $2,238,593, which the Commissioner contends is a significant amount received by Mr Fugle under the financial arrangement, for which he has not returned any income and has not indicated what the correct assessment would be.[73] In the event the Court was persuaded that there can be no payment, where the full cash amount was not available, the Commissioner relied on Case Z4,26 the first instance decision in Commissioner of Inland Revenue v Albany Food Warehouse Ltd,27 where Judge Barber noted that even if there were insufficient funds to draw down the current accounts, there was still "payment", as Albany could have arranged funds through the bank.28 In the same way, the Commissioner submits that Mr Fugle could have drawn funds from related entities. The Commissioner referred toGarforth, where the Court observed that even if the company went into liquidation, the prior crediting would be payment.29 The Commissioner submits that Mr Fugle could write off the remaining $690,000 as a bad debt under either s EH6(1) or s DJ1(a)(ii) of the Tax Administration Act, to avoid paying tax on amounts not drawn down, and claim a deduction for the bad debt. Thus, the full cash amount does nothave to be produced in order for there to be "payment".[74] I am unable to accept the Commissioner's submission, and the cases referred to, do not assist the Commissioner. A dividend was declared, with funds being made available to the directors in Case Z4, and in Garforth, money was placed unreservedly at the disposal of the directors. I have drawn a distinction between those cases and the facts in this case, because here, there was no sum of money to constitute a payment, but rather an assignment of debt. There has been no final payment under the financial arrangement and the base price adjustment has not yet been triggered and it is premature to tax the full credit sum for the 2005 tax year, as no taxable event occurred in the 2005 year.Should the application by Mr Fugle to admit documents have been allowed?[75] The two documents in issue were found the day before the hearing in Mr Fugle's accountant's office among old records. They had not been introduced26 Case Z4, above n 7.27 Commissioner of Inland Revenue v Albany Food Warehouse Ltd, above n 7.28 Case Z4 at [89].29 Garforth (Inspector of Taxes) v Newsmith Stainless Ltd, above n 6, at 78.into the firm's computer system and had not been discovered, prior to Mr Fugle'sstatement of position in his challenge of the Commissioner's assessment, or in hisbrief of evidence.[76] The first of the documents was a Warwick account book which had thenotation "Chas Pilcher (1986)" with two pages, showing the accounts for the yearended 31 March 1992 and entries for the year ended 31 March 1998 to March 2003.In the entry for March 1998, under the heading "Retained earnings" totalling$2,719,442, Mr Fugle's current account is shown as having a credit of $2,659,442and a stamp notation marked "posted".[77] The second document was a codafile in the name of Chas Pilcher (1986) Ltd.This contained an accounting file index, a summary of indebtedness owing as at 30April 1992, a copy of the 1992 settlement deed, BNZ bank statements for ChasPilcher 1986 Ltd, a trial balance and a copy of the shareholders' current accountstatement for the year ended 31 March 1993, showing a closing balance forMr Fugle's current account as $2,659,442.[78] Mr Lennard sought to produce these documents to the Authority, prior to thehearing. There were two reasons advanced for his application. The first is thatMr Short had prepared a brief, which did not include reference to the two sets ofdocuments and Mr Lennard wished to correct his statement, by producing thedocuments and leading Mr Short's evidence on them. The second reason is that thenotations for the 1993 tax year and the credit in the current account of Mr Fugle inthe 1998 tax year, was relevant. It showed that the credit to Mr Fugle's account in2005, upon which the Commissioner relied to make his assessment for that tax year,had already been made in the 1998 tax year, on the basis of these handwritten entries.I note that in the accounts for the year ended 31 March 1993, Mr Fugle's currentaccount is credited with $2,659,442 with the following description:(being entry to record assignment of Bank of New Zealand debts as of30 April 1992 to L W Fugle on 8 December 1992 as per deed of Admissionof Liability and potential debt compromise on working papers file.)[79] The Authority relied on s 138G(2) of the Tax Administration Act, to refuse to admit the documents. Essentially, it ruled30 that this was a new issue; the documentscould have been located before; and there was no manifest injustice to Mr Fugle.Leave was refused under r 8.31 of the District Court Rules to admit the documents,because of the risk of prejudice to the Commissioner.[80] I have reached the view that the Authority was in error in refusing to admit the documents under s 138G(2), or alternatively granting leave under r 8.31 of theDistrict Court Rules.[81] The production of the two documents did not raise a new issue for Mr Fugle.The documents supported Mr Fugle's position that nothing happened in 2005, exceptthat Bathos recommenced trading. The effect of the book entries, recast in 2010,with effect for the 2005 year, was to document the pre-existing historical events.The documents themselves show that the sum of $2,659,442 was credited toMr Fugle's current account in the 1993 tax year and was carried through in the 1998tax year. Bathos had no cash to enable it to pay out the debt in 1993, 1996, 1998 or2005 in full. The entries for 1993 and 1998 demonstrate a recording of theassignment of the BNZ debts as at April 1992, as agreed in the Settlement Deed andfollowing the Assignment Deed in 1996, the entry was made in 1998.[82] These documents corroborated the evidence of Mr Fugle that there was nopayment in 2005. The crediting was effected by an account entry in the 2005 taxyear. There was no receipt of payment but a drawing down from the only source ofincome from Bathos's business, being the generation of cash through the businesscommencing trading.[83] I accept the submission from Mr Lennard that in this regard, there is asimilarity between this case and Krukziener v Commissioner of Inland Revenuewhere Courtney J accepted that a distribution and repayment effected by journalentry had no effect on the true nature of the payment.31 She said:3230 See [26]–[29] above for a full description of the ruling.31 Krukziener v Commissioner of Inland Revenue HC Auckland CIV-2010-404-000728,17 September 2010.32 At [54].How a distribution is made, whether by payment of cash or allocating income through a journal entry is not significant; it is the fact of distribution that is the issue. Nor do I see the circularity of the payments as significant. Self-evidently, a proprietor whose only source of income is his business can only repay current account debts from income or profit distributed by that business.[84] The accounting entry for 2005, as I have already found, did not in my viewconstitute a payment and reference to the earlier handwritten accounts, should havebeen available to the Authority, to properly consider Mr Fugle's position.[85] Although the documents may well have been able to be located before, theywere not at the disposal of Mr Fugle. They were documents in his accountant'soffice, among old records. Clearly, if Mr Short had undertaken a thorough search ofhis office, they may have come to light. But the effect of the Authority's ruling is todisadvantage Mr Fugle for his accountant's oversight.[86] Further, the Authority correctly allowed Mr Short to correct and amend hisbrief of evidence in light of the newly discovered documents. The Commissionerthen took the opportunity to require production and cross-examined on them.Having heard the evidence in relation to the documents, including the cross-examination, it behoved the Authority to deal with the evidence in its capacity as aCommission of Inquiry under s 15 of the Taxation Review Authorities Act 1994.Section 15(1) provides that:15 An Authority to be a Commission of Inquiry(1) Every Authority shall, within the scope of the Authority's jurisdiction, be deemed to be a Commission of Inquiry under the Commissions of Inquiry Act 1908, and, subject to this Act and any regulations made under this Act, all the provisions of that Act, except sections 11 and 12 (which relate to costs), shall apply accordingly.[87] Although the Authority is presided over by a District Court Judge, theevidence that the Authority may receive, may be any statement, document,information or matter that may assist it to deal effectively with the subject of theinquiry, whether or not it would be admissible in a court of law.3333 Commissions of Inquiry Act 1908, s 4B(1): "The Commission may receive as evidence any statement, document, information, or matter that in its opinion may assist it to deal effectively with the subject of the inquiry, whether or not it would be admissible in a Court of law."[88] The Authority is correct that s 138G of the Tax Administration Act 1994 prevents persons raising new matters that were not raised in their statement of position prior to a hearing. Here, however, documents which were not in the controlof Mr Fugle were supportive of his position and in the interests of fairness, shouldhave been admitted, for a full consideration of Mr Fugle's challenge to theCommissioner's assessment.[89] In relation to the Authority's reason for refusing leave under r 8.31 of the District Court Rules, I have some difficulty in understanding the risk of prejudice tothe Commissioner, when the documents were produced to the Commissioner andcross-examination was undertaken on them. Any risk of prejudice to theCommissioner could have been addressed by an adjournment of the hearing to allowthe Commissioner to either produce further evidence or make additionalsubmissions. As a Commission of Inquiry, the Authority should receive evidencewhich will assist it to deal effectively with the subject of the inquiry, whether or notit would be admissible in a court of law or would be the subject of leave in a DistrictCourt.Did the crediting to Mr Fugle's account take place in 2005 or prior and, if prior to 2005, what significance, if any, should be attached to the date of crediting?[90] The entry in Mr Fugle's current account in the year 2005 showed it wascredited with the sum of $2,659,442. However, for the reasons already addressedabove, I do not accept that the crediting was a payment. I have found also that if theundisclosed documents had been admitted by the Authority, they demonstrate thatthe amount of the assigned debt had been owing to Mr Fugle for a decade, since hemade the last portion of the $90,000 payment to the BNZ in the 1996 tax year.[91] The fact that the credit of $2,659,442 to Mr Fugle's account was effected by aretrospective entry in the 2005 tax year's financial statements does not reflect thereality that Mr Fugle began to draw down a portion of the sum owing to him, fromthe cash or profit made available by Bathos in that year. The only significance to beattached to the date of crediting is that Bathos recommenced trading and was in aposition to enable Mr Fugle to draw down part of the debt owing to him.Other matters[92] During the course of argument, the Commissioner raised a number of otherissues. They included a reference to the receipt of benefits under the accrual rules,namely that the movements of benefits have to be taken to tax and Mr Fugle hasreceived significant amounts under the financial arrangement but he has not returnedany income. There is no reference to benefits within the accrual rules under the Act.I have found that the base price adjustment has not been triggered because there hasnot been a final payment of principal and no tax is payable in 2005 in respect of thisagreed financial arrangement. Further, there has been no interest received byMr Fugle. If he was in receipt of payments of interest, they would have beenbrought to tax under the accrual rules.[93] The Commissioner also submitted that Mr Fugle had an obligation to saywhy the Commissioner was wrong and by how much.34 For the reasons given, Ihave upheld Mr Fugle's objections, which do specify why the Commissioner'sassessment was wrong.[94] Lastly, Mr Ebersohn invited the Court to adopt a "spreading method" if theCourt decided that there was no payment by crediting and a base price adjustment was not triggered in the 2005 income year.[95] This matter has proceeded by way of appeal from the Authority's finding andMr Fugle has been successful. I am not satisfied that the alternative spreading method in s EH1(2)–(7) is applicable here, where the payments to Mr Fugle have been three respective payments of principal. It is now open to the Commissioner toreassess Mr Fugle's income tax liability, in light of this Court's decision.Result[96] The appeal is allowed.34 Relying on Ben Nevis Forestry Ventures v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.[97] I was not addressed on the issue of costs. Counsel may wish to confer andreach agreement on costs. In the absence of agreement, counsel may file memorandaon behalf of Mr Fugle within 20 working days, and on behalf of the Commissionerin reply within 15 working days, with a right of reply to Mr Fugle within 10 furtherworking days.Cull JSolicitors/Counsel:Dewhirst Law, Whanganui for appellantCrown Law, Wellington for respondent