Taxpayer P v Fiji Revenue & Customs Authority [2013] FJTT 6; Income Tax Appeal 01.2012 (7 March 2013)

IN THE STATUTORY TRIBUNAL, FIJI ISLANDS
SITTING AS THE TAX TRIBUNAL

Income Tax Appeal No 1 of 2012

BETWEEN:

TAXPAYER P
Applicant

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Mr R Singh, Kholi and Singh Lawyers for the Applicant
Ms R Malani, FRCA Legal Unit for the Respondent

Dates of Hearing: Tuesday 5 February 2013
Date of Judgment: Thursday 7 March 2013

JUDGMENT

INCOME TAX ACT (CAP 201) – Section 11; Carrying out or carrying on business; Disposition of Property; Objective Purpose Test of Acquisition; Section 44 Income Tax Act (Cap 201)- Obligation to submit taxation return.

Background

1. This an application for review against the decision of the Respondent Authority dated 7 November 2011, in which the Respondent disallowed the Taxpayer's objection to its Amended Assessment Number 1, dated 10 February 2011.
   
2. There are two aspects to the application. The first deals with whether or not the sale proceeds from a one off acquisition and disposition of a residential property, would constitute "ïncome" for the purposes of the Income Tax Act (Cap201).
   
3. The second issue, is whether or not the failure by the Taxpayer to lodge a tax return in the relevant financial year period, would give rise to a penalty for the purposes of Section 46(2)(b) of the Tax Administration Decree 2009.
   
4. The application is heard in accordance with the relevant provisions of the 2nd thed the Mrates Ctes Court (Amen) Decree <11.

Relevant Facts

The parties did not prepare an Agreed Statement of Facts before the Tribunal, though in many respects the factual issues are not that controversial.

6. According to the submissions of the Applicant[1], the property in question was purchased by the Taxpayer in conjunction with two other family members on or around 26 June 2003. The purchase price, was $150,000.00.
   
7. The submissions relevantly provide:-
   
   • The property was bought for the sole reason to accommodate the family member's ailing mother, so as to allow her access to better medical facilities in Suva, as compared to Labasa.
     
   • The mother passed away on 1 September 2003.
     
   • That on 11 May 2004, the Taxpayer together with the other interest holders in the property, sold it for the sum of $260,000.00, on the basis that they no longer required the property for the desired purpose.
     

Commencing Point for Analysis

8. Counsel for the Taxpayer in his submissions, understandably directs the Tribunal to consider the relevant limb of Section 11(a) of the Act.
   
9. In various decisions of this Tribunal, the point has been made quite clear however, that the starting point for any analysis of the definition of what is to constitute "total income", is the commencement of Section 11 and the wide definition that it provides.[2]
   
10. For the purposes of Section 11, the governing principles that shape this question are set out within the decision in Californian Copper Syndicate v Harris[3], where Lord Justice Clerk formulated the test:
    

where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than (s)he originally acquired it at, the enhanced price is not profit in the sense of ...assessable to e tax. But it is equally wely well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done what is truly the carrying on or carrying out of a business..."

11. That is the first test in my mind, was the taxpayer engaged in the carrying on or carrying out of a business?
    
12. The Taxpayer himself gave evidence in this regard.
    
13. He told the Tribunal, that the property was acquired to enable the mother to reside in Suva, while she required hospital trearment. After it was purchased by the two brothers and father, they embarked on a program of renovation, including works undertaken on the roof, ceiling, lighting and plumbing.
    
14. It was the evidence of the Taxpayer that during this time and prior to the house being occupied in or around November 2003, his mother passed away and thereafter the father and brothers took the decision to sell the home.
    
15. The most supportive documentary evidence provided by Counsel and admitted as evidence in proceedings[4], related to a decision by the Taxpayer and his family members to pay down the housing loan that was acquired to facilitate the purchase, on the basis that "the passing away of (the) mother necessitated a rethink and reorganisation of (their) lives".
    
16. While the other medical related correspondence is suggestive of the Taxpayer's mother having required medical, it is not particularly influential or supportive as to the state of her health around the relevant time.
    
17. In any event, I am satisfied that at the relevant time, the property was purchased for the purpose as indicated by the Taxpayer. Any profit derived from its sale, was to my mind fortuitous and certainly not relating to the carrying on or carrying out of a business.
    
18. I accept that I could go further and explore the clarifying examples that make up Section 11(a) of the Act. To do so though on this occasion would appear somewhat pointless. The activity has been characterised as one that is not arising out of the carrying out or carrying on of a business. It is therefore not a transaction in itself in the nature of trade or business.[5]
    
19. I accept the submissions of Mr Singh, that the case law that is Commissioner of Inland Revenue v National Distributors Ltd[6] thereafter directs the inquiry as to the purpose of the taxpayer. Though in situations where the transaction is only a one off transaction and not one that is in the nature of trade or business, yields such efforts of little point.
    

Should the Taxpayer Have Lodged A Return and Was This Omission A False and Misleading Statement for the Purposes of Section 46 of the Tax Administration Decree?

20. As mentioned earlier, the Taxpayer has also objected to the decision by the Respondent to impose a penalty against him for providing a false or misleading statement for the purposes of Section 46 of the Tax Administration Decree 2009.
    
21. The requirement to submit a taxation return comes about by virtue of the combined effect of Section 3 of the Tax Administration Decree 2009 and Section 44 of the Income Tax Act (Cap 201).
    
22. Section 3 of the Decree, requires that where a tax law requires, that the Taxpayer must lodge a return in the approved form.
    
23. Section 44 of the Income Tax Act (Cap 201) imposes the requirement to deliver a return, in such cases where the Taxpayer is liable to pay income tax.
    
24. Though, it needs to be understood that the Section provides exemptions in the case of
    

any person whose only source of income is from emoluments as defined in section 79 and who is not liable to have any deductions of tax made and who has not had such deductions as aforesaid lawfully made from such emoluments in accordance with any regulation made under the provisions of section 81 and

any person whose only liability has been for deduction of [basic tax]2

unless required to do so by notice or demand sent to him by the Commissioner.

25. Unfortunately the definition of "basic tax" as referred to in Section 2 of the Act and previously provided at Section 6, has been repealed by virtue of the Income Tax (Amendment) Decree 1992.[7] Why Section 44 appears not to have been modified accordingly is hard to understand and unfortunately, no submissions bother dealing with this point.
    
26. What appears to have been substituted in the place of the proviso that was Section 44 at that time, was an amendment to Section 7 of the Act, that deals with the Normal Taxation requirements.
    
27. At the present time, Section 7 includes the following words:
    

Provided that no resident individual whose total income is below $8,840 shall be subject to assessment under the principal Act as from 1st July 1992.

28. My impression of all of this, is that there is no requirement for taxpayers earning less than the amount of $8,840 to submit a taxation return.
    
29. The Taxpayer freely admits to having not submitted a tax return in the years 1998, 1999, 2000, 2001 to 2004. I accept he was acting on a well held belief that there was no legal obligation to submit a return in cases where he had earned no income. I would concur with that understanding. There is nothing within the submissions of the Respondent to lead me to any other conclusion.[8]
    
30. In any event, given that the Respondent has been found to have incorrectly assessed the proceeds of sale as income, renders the imposition of a penalty in the circumstances of Section 46 of the Decree, even more erroneous. The imposition of a penalty for the reasons apparently given by the Respondent, would appear somewhat oppressive had they been validated. The fact is though, that they have not. The proceeds are not income and the taxpayer was not liable to pay income tax.
    

Conclusions

31. For the reasons now flagged, I find that the Taxpayer should succeed in his review application. The Respondent must refund to the Taxpayer the amount so claimed, including the penalty amount charged.
    
32. The Respondent is to pay the Applicant's costs of this appeal to be agreed or failing agreement, to be the subject of further application to the Tribunal.
    

DECISION

(i) The Application for review is upheld.

(ii) The parties are to confer in relation to costs, failing agreement, the Applicant is free to apply.

Mr Andrew J See
Resident Magistrate

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^[1] As filed on 19 February 2013

^[2] See for example Taxpayer A v Fiji Revenue & Customs Authority [2012]FJTT 3; A Property Management and Investment Company v Fiji Revenue & Customs Authority [2013] FJTT 3; Taxpayer S v Fiji Revenue & Customs Authority [2012] FJTT18.

^[3] (1904) 5 T.C. 159

^[4] See Exhibit A 2

^[5] Note the exclusionary provision that forms part of Section 11(a) of the Act.

^[6] (1989) NZTC 6346

^[7] See Decree 30 of 1992.

^[8] See final submissions of the Respondent dated 1 March 2013.