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Taxpayers J1 and J2 v Fiji Revenue and Customs Authority [2018] FJTT 1; ITA6.2016 (13 March 2018)


FIJI TAX TRIBUNAL

Decision

Section 83 Tax Administration Decree 2009

Title of Matter:
TAXPAYERS J1 and J2 (Applicant)
V
FIJI REVENUE AND CUSTOMS AUTHORITY (Respondent)
Section:
Section 83 (1) Tax Administration Decree 2009
Subject:
Application for Review of Reviewable Decision
Matter Number(s):
Income Tax Action No 6 of 2016
Appearances:
Taxpayer J1, for the Applicants
Mr O. Verebalavu, FRCA Legal Unit for the Respondent
Date of Hearing:
6 September 2017
Before:
Mr Andrew J See, Resident Magistrate
Date of Decision:
13 March 2018

KEYWORDS: Tax Administration Decree 2009; Amended Notice of Assessment; Calculation of further assessment; Calculation of Capital Gain; Section 14(1)(b) Income Tax Act 2015; Section 34(1)(a) Calculation of income from depreciable asset at time of disposal; Determination of Non-Resident for Tax Purposes; Definition of business income and carrying on business.


CASES CITED:

Chief Executive Officer, Fiji Revenue and Customs Authority v Narayan [2016] FJHC 1009; HBT5.2013 (4 November 2016)
Taxpayer from Lami v Fiji Revenue and Customs Authority [2013] FJTT 7; Action 8.2012 (13 May 2013)

Taxpayer R v Fiji Revenue and Customs Authority [2017] FJTT 1; ITA2.2016 (19 May 2017)
United States Businessman v Fiji Revenue & Customs Authority [2013] FJTT 8; Action 01 & 02.2009 (16 May 2013)


Background

  1. This is an application brought by husband and wife Taxpayers, who for the purposes of this decision, will be referred to as Taxpayers J1 and J2[1]. The application for review states:

This application is brought before this honourable Tax Tribunal Court for a review of FRCA objection decision dated December 6th 2016 for wholly disallowing the objection by (Taxpayer J2) dated 25th August 2016 and for partially disallowing the objection dated 29th August 2016 by (Taxpayers J1 and J2).


  1. At the outset and somewhat confusingly for the Tribunal, was the fact that both Taxpayers initially had been issued with Objection Decisions from the Authority, dated 6 December 2016[1]. For reasons that will become apparent later within this decision, as the property interests of the parties are joint ones, the implications of the analysis of the law has in some ways a common set of consequences. To that end and despite the unusual nature of the application, the Tribunal is content on this occasion to allow the Applicants to make this application in the manner and form in which they have done.[2] The request for a review of the Objection Decision, arises out of two objections raised by Taxpayer J2. These are contained within separate letters written to the Authority: -
  2. Having regard to the Objection Decision dated 6 December 2016, the Applicants ask that this Tribunal decide on three things: -

“

(i) Whether Taxpayer J2 a Fijian citizen is a tax resident of Fiji for tax purposes for 2015 and 2016;
(ii) Whether the sale of the Taxpayers principal place of residence is subject to capital gains tax ALONE and/or what other provisions of the Income Tax Act of 2015 should be applicable that the taxpayers shall be liable for.
(iii) Whether Taxpayer J2 and J1 are registered business entities in Fiji within the meaning of Section 17 of the Income Tax Act of 2015 that the CEO of FRCA based his assessment for tax payable on the sale of our Fiji principal place of residence.[3] “

Tax Payer J2’s Income Tax Assessment (2015)

  1. The first issue in dispute between the parties, relates to the Income Tax Assessment issued by the Authority to Taxpayer J2, on 29 July 2016[4]. In dispute, was the method used for calculating taxation on the total rental income received by Taxpayer J2, during the 2015 tax year. The Taxpayer claims that she should have been treated as a Fijian resident and therefore entitled to both the tax-free income component (up to $18,000), as well as paying taxation on the residual amount, at the rate of 18 percent.[5] Instead, Taxpayer J2 had been assessed by the Respondent as a ‘non-resident’ for taxation purposes. By letter dated 25 August 2016, Taxpayer J2 wrote to the Respondent Authority and stated:

From April 2007 and since 2010 I continued to lodge income tax returns as a Tax Resident of Fiji until FRCA decided to change my tax residency status when I notified the authority on June 2nd 2016 that I am selling my primary place of residence.

I can only be a tax resident of one country until I dispose my principal place of residence in Fiji that was leased out in August 2010 so I remain a tax resident of Fiji for taxation purpose.


  1. In response to that correspondence, the Objection Decision of the Authority[6] made clear, that the reason for wholly disallowing the objection was that the Taxpayer was not a Fiji resident, as she did not reside in the country under the first ordinary concept definition test, located at Section 2 of the Income Tax Act.

Is the Sale of the Property Subject Only to Capital Gains Tax?

  1. The second issue in dispute arises out of Taxpayer J2’s lodgement of a Capital Gains Tax Return in August 2016, prior to the disposal of land and a dwelling, located at CT14892 Lot 33 on DP 3786. In response to the lodgement of that return, the Authority wrote to the Taxpayers and advised that the sale of property was subject to income and social liability tax. The Taxpayers were advised that the nominal taxation based on the contract of sale, would be apportioned equally to them in the amount of $153,220.00. That is, a total of $306,440.00[7]. The Taxpayers challenge whether their property should have only been subject to capital gains tax. Within the objection to assessment dated 29 August 2016, the Taxpayers say that the house the subject of the assessment, was purchased and remains “a principal place of residence within the meaning of a residential home when it was first purchased and occupied by (the Taxpayers) until August 2010”. Within its Objection Decision dated 6 December 2016, the Authority advised Taxpayer J2, that insofar as the capital gains tax is concerned, as joint property owners, the nominal assignment for capital gains is apportioned equally to each of the taxpayers. More importantly, as Taxpayer J2 was at the relevant time a Fijian Citizen, she was advised that no such capital gain would be imposed by virtue of Section 67(1)(b) of the Income Tax Act 2015.

Should the Proceeds from Sale be Regarded as Business Income for the Purposes of Section 17 of the Act?

  1. The third issue, that was agitated within the application for review, is an objection to any income taxation at all arising from the proceeds of sale. in relation as to whether the Taxpayers property was also amenable to income and related tax, the Authority stated:

CT 14892 Lot 33 on Deposited Plan No 3786 (building) is a depreciable asset and the excess consideration over the written down value upon its disposal is included as gross income under Section 34(1)(a), 14(1)(a), 17(1)(c)(iii) and 17(4) of the ITA 2015.


  1. It is useful just to look at the definition of what constitutes ‘gross income’ for the purposes of the Income Tax Act 2015. Section 14 (1) of the Act provides the following definition:

(1) Subject to this Act, the gross income of a person for a tax year is the total of the following—

(a) employment income, business income, and property income derived by the person during the year;
(b) income according to ordinary concepts, other than income referred to in paragraph (a), dd by the pehe person during the year;
(c) unexplainedunidentified deposits during the year in anin any bank account if thesit can be sourced to the pthe person; and
(d) income that a section of this Act includes in the gross income of the person for the year.


  1. The Authority seems to hold the view that the proceeds from the sale of the property is business income for the purposes of Section 14(1)(a) of the Act[8]. Section 17 of the Act, sets out what is included in the business income of a person conducting a business and provides: -

(1) (a) the gross proceeds from the conduct of the business, including the consideration for the disposal of trading stock and the gross fees from the provision of services;

(b) the gross revenue from the investment of the capital of the business, including dividends, interest, royalties and rents;

(c) the net gain from—


(d) any other income according to ordinary concepts from the conduct of a business;

(e) any other income that a section of this Act deems to be business incom>


(2) For thor the purposes of subsection (1)(c)(i) and (ii), and subject to subsection (3), the net gain arising from the conduct of a venture or concern in the nature of a trade, commerce, agriculture or manufacture, or in carrying on or carrying out of a profit-making undertaking or scheme is the amount by which the gross proceeds derived by the person from the venture, concern, undertaking or scheme exceed the expenditures or losses incurred in conducting the venture, concern, undertaking or scheme.

(3) An expenditure or loss is taken into account in computing the net gain under subsection (2) only if the expenditure or loss is allowed as a deduction under this Act (ignoring section 22(1)(c)).

(4) Subject to this Act, the net gain arising on disposal of an asset to which subsection (1)(c)(iii) applies is the consideration for the disposal reduced by the cost of the asset at the time of disposal.

  1. Whilst it is noted that the Taxpayers wish to question whether they are registered business entities in Fiji within the meaning of Section 17 of the Income Tax Act of 2015, that is not the statutory test. At issue, is whether or not the Taxpayers have disposed of a depreciable asset held on revenue account and are the proceeds amenable to income taxation.

The Evolving Nature of the Taxpayers Case

  1. Since the commencement of this review application, the Tribunal had encouraged the parties to engage in ongoing dialogue, in a bid to attempt to ‘close the gap’ between the issues in dispute. There has been some degree of progress made in this regard. Within the Final Written Submissions of the Taxpayers, what is being sought is as follows:
    1. On the matter of Income Tax for 2015 once the court hands down its ruling ON TAX RESIDENCY STATUS for (Taxpayer J2) than FRCS shall either uphold the original assessment or uphold the amended assessment for 2015 Income tax return.
    2. On the matter of Income Tax for 2016 once the court hands down its ruling for taxes payable i.e. CGT(section 65 ITA 2015) and Income Tax (section 34 ITA 2015) on the disposal of a capital asset being the sale of Fiji principal place of residence than the tax payer (J2) shall file an amended Income Tax Return for 2016 and seek refund of income tax taken from an of amount of $306,440.00 as alleged taxes owed by (Taxpayer J2) to FRCS that the authority on September 8th 2017 took by garnishee order issued to BSP bank.[9]
    3. On the matter of Vat dispute that was brought before this court on March 21st 2017 ..... once FRCS issues an “objection decision” under section 16 of the TAD of 2009 as directed/ordered by the Judge on November 9th 2017 mention of case 06/2016; the taxpayer shall return the Vat dispute to the appropriate court against the parties FRCS and DIL as suggested by the Honourable Judge.

What Needs to be Determined by the Tribunal?

  1. What remains from a process that has run the course of twelve months, is for the determination of the following issues:-
    • (i) What is the tax residency status of Taxpayer J2;
    • (ii) What was the applicable taxations that should apply as a result of the disposal of the former place of residence of the Taxpayers; and
    • (iii) And subject to (ii) above, whether the Taxpayers have been able to claim all expenses, when offsetting against the value of income derived through the sale of CT14892 Lot 33 on DP 3786.

Whether Taxpayer J2 is a Tax Resident of Fiji

  1. The first thing that needs to be made clear, is that the relevant legislation in force for assessing obligations for the 2015 Income Tax Year, are located within the Income Tax Act (Cap 201). Section 7 of that Act, draws the distinction between an individual and non-resident for the purposes of providing two distinct taxation schedules. Relevantly, the definition of “resident” for the purposes of Section 2 of the former Act is as follows:

“resident” means

(a) — a person, other than a company, who resides in Fiji, and includes a

Person –


(i) whose domicile is in Fiji, unless the Commissioner is satisfied that his permanent place of abode is outside Fiji;
(ii) who has actually been in Fiji, [continuously] or intermittently, during more than one half of the income year, unless the Commissioner is satisfied that his usual place of abode is outside Fiji and that he does not intend to

take up residence in Fiji;


  1. The Respondent Authority contends that the Commissioner assessed the Taxpayer’s immigration records and determined that she had not been residing in Fiji for more than one half of the income year. The Taxpayer J2 does not dispute that allegation. It is also the case, that the Taxpayers’ residential property had been leased out and they were residing overseas. The Respondent was therefore of the view that the Taxpayers place of residence, was other than Fiji. The argument on behalf of the Taxpayer J2, is simply one that is founded on her citizenship status at the relevant time. Unfortunately, that is not the criteria for determination. A person whose taxable income is assessed for the purposes of the Income Tax Act is either deemed as resident or non-resident. The outcome of that classification, informs the Authority as to the way in which the assessable income is to be calculated. The assessment undertaken by the Authority in the case of the 2015 Income Tax Year is appropriate on that basis. Taxpayer J2, was a non-resident, whose permanent place of abode was Australia. Taxpayer J2’s domicile cannot be in Fiji, when the former family home was now rented out and there was no evidence whatsoever of any intention by the Taxpayers of returning to it. That determination, disposes of the first issue that was raised by the Taxpayer in her correspondence dated 25 August 2016.

Implications of the Disposal of land and a dwelling on CT14892 Lot 33 on DP 3786

  1. The second issue in dispute, concerns the manner by which the Authority has treated the sale of the jointly owned property of the Taxpayers for tax purposes. The starting point for that analysis, is the Objection Decision issued to Taxpayer J2 on 6 December 2016 and the law applicable at that time; that is, the Income Tax Act 2015. The Objection Decision, has two aspects to it. The first, is the manner by which the sale of the property attracts capital gains tax, insofar as the land itself is a “Fiji asset” for the purposes of Section 2 and Part 3 of the Act. The second aspect, is what takes place in relation to the proceeds from the structural improvements on the real property and what aspect of any gain arising from disposal is amenable to taxation.

The Attraction and Calculation of the Capital Gain

  1. The imposition of a capital gains tax, arises out of Section 65 of the Act, that reads:

(1) Subject to this Act, a tax to be known as "Capital Gains Tax" is imposed at the rate prescribed by Regulations made under this Act on a person who has made a capital gain, other than an exempt capital gain, on the disposal of a capital asset.

(2) The Capital Gains Tax payable by a person on the disposal of a capital asset is computed by applying the rate prescribed by Regulations made under this Act to the amount of the capital gain arising on the disposal.

(3) If the person who has made a capital gain is a non-resident person, subsection (1) applies only if the capital asset is a Fiji asset.

  1. The first question to ask, has Taxpayer J2 made a capital gain, other than an exempt capital gain on the disposal of a capital asset?

What is the disposal of the Capital Asset?

  1. The case of the Respondent is that the sale of the real property is a Fiji asset and therefore a capital asset for the purposes of Section 2 of the Act. There, the definition of the term ‘capital asset’, is provided to mean:

(a) real property, a structural improvement to real property, an interest in real property or an interest in a structural improvement to real property, and includes the following—

(i) a lease of real property;

(ii) a lease of a structural improvement to real property; or

(iii) an exploration, prospecting, development, or similar right relating to real property;

(iv) information relating to a right referred to in sub-paragraph (iii);

(b) a vessel of over a 100 tonnage;

(c) a yacht;

(d) a membership interest in a company, security, or other financial asset;

(e) an intangible asset;

(f) an interest in a partnership or trust;

(g) an airplane, helicopter or other aircraft;

(h) an option, right or other interest in an asset referred to in the foregoing paragraphs,


but does not include an asset that is trading stock, a depreciable asset or a business intangible.


  1. The Authority is satisfied that the real property is captured by the definition of capital asset on the basis that it is also a Fiji Asset, being real property located in Fiji[10]. What is less clear, is how the dwelling should be treated. Returning to the definition of capital asset, the expression given at paragraph (a), relating to a structural improvement to real property, would include, “any building, road, driveway, car park, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, (or) retaining wall”[11]. Yet ts nots not the end of the matter, as the definition of a capital asset specifically excludes, a ‘depreciable asset’.

Is the Dwelling a Depreciable Asset?

  1. The definition of depreciable asset is also located at Section 2 of the Act, where it states:

"depreciable asset" means any tangible personal property or structural improvement to real property that

(a) has a useful life exceeding one year;

(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and

(c) is used wholly or partly to derive income included in gross income;

  1. In this case, the building would be regarded as structural improvement to the real property. It has a useful life exceeding one year. By the Taxpayers own admissions, it is likely to lose value as a result of normal wear and tear and has been used to derive income by the Taxpayers. To that end, the structural improvement to the land (the building) would be excluded from the calculation of any gain to the capital asset. The capital asset can only therefore relate to the real property that is CT14892 Lot 33 on DP 3786.

The Calculation of the Capital Gain

  1. The formula for the calculation of the capital gain made by a person on the disposal of a capital asset is defined at Section 66(1) of the Act to be “the consideration for the disposal reduced by the cost of the asset at the time of the disposal”. The agreed valuation for the consideration for the disposal of the real property was set at $600,000.00. The cost of the asset at the time of the disposal can be calculated, based on the prescriptions set out within Section 85 of the Act. Relevantly Sections 85(1) and (2) of the Act provide as follows: -

85.—(1)Subject to this Act, this section establishes the cost of an asset for the purposes of the Act.

(2) Subject to this section, the cost of an asset of a person, other than an intangible asset, is the sum of the following amounts—


(a) the total consideration given by the person for the asset, including the fair market value of any consideration in kind determined at the time the asset is acquired and, if the asset is constructed, produced or developed, the cost of construction, production or development;

(b) any incidental expenditure incurred by the person in acquiring or disposing of the asset;

(c) any expenditure incurred by the person to install, alter, renew, reconstruct or improve the asset.


  1. There does not appear to be any dispute between the parties, that the fair market value of the consideration in kind determined at the time the real property was acquired was $45,000.00. It is also understood that despite the Amended Submissions of the Appellants dated 17 March 2017, that it is now accepted that the land consideration on sale should be assessed at $600,000.00.

Table 1 – Method for Calculating Total Capital Gains Tax


Capital Gains Tax Particulars
Amount
Land Consideration on Sale [12]
$600,000.00
Cost of Land
($45,000.00)
Real Estate Commission and
Legal Costs
($61,100.00)


Calculated Capital Gain:
$524,450.00
Taxation Calculated
$ 52,445.00
50% Nominal Calculation for Taxpayers J1 and J2
$ 26,222.50

  1. Without more, both taxpayers should have been required to pay capital gains tax in the amount of $26,222.50.

Is Taxpayer J2 Exempt from Paying the Capital Gains Tax?

  1. Section 67(1) of the Act sets out the circumstances where capital gains are exempt capital gains as follows: -

67.—(1) The following capital gains are exempt capital gains—


(a) a capital gain made by a resident individual or Fiji citizen that does not exceed FJD$16,000;

(b) a capital gain made by a resident individual or a Fiji Citizen on disposal of either the individual’s first residential property or principal place of residence;

(c) a capital gain made by a person on the disposal of shares listed on the South Pacific Stock Exchange;

(d) a capital gain made on disposal of an asset that is used solely to derive exempt income; (e) any gain made by a person on the disposal of an interest in a company within paragraph (c) of the definition “company” in section 2;

(f) a capital gain made by a resident individual or a Fiji Citizen on disposal of his or her interest in a family home, provided however that the disposal of the interest is by way of transfer to an existing joint tenant or tenant in common;

(g) a capital gain made by a resident person from the sale of shares where a private company goes through re-organisation, restructure or amalgamation for the purposes of listing or as part of a listing process on the South Pacific Stock Exchange, provided that— (i) the private company is listed on the South Pacific Stock Exchange within 24 months from the date of commencement of re-organisation, restructure or amalgamation; and (ii) where the private company is not listed with the South Pacific Stock Exchange in accordance with sub-paragraph (i), the gain from the re-organisation, restructure or amalgamation of the private company shall be taxable under this Act;

(h) a capital gain made by the trustee or beneficiary of a deceased estate on the disposal of an asset forming part of the estate that, if the gain had been made by the deceased on a disposal of the asset immediately before death, the gain would be an exempt capital gain to the deceased under this subsection, but only when the asset is disposed of by the trustee or beneficiary within 2 years after the death of the deceased or within such further time as the CEO allows.


  1. In further Supplementary Responses provided by the Respondent, it is said that Taxpayer J2 is entitled to have her share of the capital gain exempt from taxation, by virtue of Section 67(1)(b) of the Act, as the Taxpayer was a Fijian citizen, disposing of her first residential property. The Taxpayers in their additional response, have stated, that the property was both the first residential property and the Taxpayer’s principal place of residence. To reach a conclusion in this regard, one needs to consider the meaning of the definitions of those terms as located within Section 67(4) of the Act.

Definitions of First Residential Property and Principal Place of Residence

  1. Section 67(4) of the Income Tax Act 2015 sets out the definition of first residential property and place of residence.

For the purposes of— (a) subsection (1)(b)—


(i) “first residential property” means the first residential property that a resident individual or Fiji citizen has acquired, and who has sole ownership or co-owns the same with his or her spouse and includes a spouse living in a de facto relationship as defined in the Family Law Act 2003; and

(ii) “principal place of residence” means the place of residence where the individual lives;
  1. There is no dispute that at the relevant time, Taxpayer J2 was a Fijian citizen. There appears no dispute, that this was her first residential property. Those two pre-conditions are sufficient to trigger the exemption that is available at Section 67(1)(b) of the Act. For the sake of completeness in any event, the Tribunal does not accept that the former home of the Taxpayer at the relevant time, was also her principal place of residence at the time of its disposal. As mentioned earlier, the immigration records do not support that fact and more tellingly, the property was being rented out by the Taxpayer, as she had been living overseas. At the time of disposal, the property was not the Taxpayer’s principal place of residence. In any event, for the reasons articulated, Taxpayer J2 would be exempt from paying any capital gains tax on the disposal of her share of the real property.

Is the Income Arising out of the Disposal of the Dwelling Subject to Income Tax?

  1. Within the objection made by Taxpayer J2 in her letter dated 29 August 2016, it is stated:

... the home was never purchased as a business entity in May 2001 as declared by FRCA in their decision of 26 August 2016 and remains a principal place of residence within the meaning of a residential home when it was first purchased and occupied by us until August 2010.

  1. It is understood that since 2010, the taxpayers having been living abroad and for the past several years, obtaining rental income from their former principal place of residence. The Authority relies on Section 17(1)(c)(iii) of the Act and claims that the disposal of an asset, held on revenue account by a person in carrying on a business, are included as business income. The issue for Taxpayers J1 and J2, is whether or not they have been carrying on a business. Neither party have addressed this issue within their submissions in any detail. The question as to what constitutes the ‘carrying on of a business’, has been one, that has been well canvassed at different points in time. For example, in United States Businessman v Fiji Revenue & Customs Authority[13] this Tribunal stated:

In Tar N #160;and in relatees that ultimately deal with the dispositiosition of property, the Trl haslconcluded that the governiverning principles that shape this question are set out within the decision in Califo Copp Copper Syndicate v Harris, where Lord Justice Clerk formulated the test:

where the owner of r of an ordinary investment chooses to realise it, and obtains a greater price for it than (s)he origy acquiacquired it at, the enhanced price is not profit in the sof ...assessable to income tax. But it is e is equally 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..."

.....That is the first question that needs to be considered, was the act done by the taxpayer realised through the carrying on or carrying out of a business?................


In Hope v Bathurst City Council, the High Court of Australia observed that the expression "http://www.paclii.org/cgi-bin/sinodisp/fj/cases/FJTT/2013/8.html?stem=&synonyms=&query="carrying on a business" - disp0 carryina bu a business http://www.paclii.org/cgi-bin/sinodisp/fj/cases/FJTT/2013/8.html?stem=&synonyms=&query="carrying on a business" - disp2", implies the repetition of acts and activities which possess something of a permanent character. In Ferguson v Federal Commissioner of Taxation, a Full Court of the Federal Court of Alia wf the view, that that therethere are many elemto b to be dered when when looking at this question. These include, the nature o activities, particularly wrly whether they have the purpose of profit making; repetition and regularity of activities, or even the commencement of carrying on a business ef="htt="http://www.paclii.org/cgi-bin/sinodisp/fj/cases/FJTT/2013/8.htem=&yynonqms=&query=/#disp3" title="tle="\">http://www.paclii.org/cgi-bin/sinodisp/fj/cases/FJTT/2013/8.html?stem=&synonyms=&query="carrying on a business" - disp3 and wh ther there is an organization of activities in a businesslike manner.

Further the courtcourt held that "the fact that concurrentlh the activities in question, the taxpayer ayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business."[10]

As the High Court of Australia determined in MartFederamderamissioner oner of Taxation, whether a person is carrying out a busine simply a question of the rthe right conclusion to draw from the whole of the evidence.


  1. Whilst rental income may be regarded as property income for the purposes of Section 18(1)(a) of the Act, the question needs to be asked, is the holding of the property on a revenue account by the Taxpayers prior to its disposal, in the circumstances of this case, the carrying on of a business?[14] Within the Objection Decision dated 6 December 2016, the Respondent Authority has stated that the house itself is a ‘depreciable asset’ for the purposes of Section 2 of the Act[15]. The definition of a depreciable asset, is given to mean:

any tangible personal property or structural improvement to real property that


(a) has a useful life exceeding one year;

(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and

(c) is used wholly or partly to derive income included in gross income;


  1. What the Authority relies upon is that the disposal of the depreciable asset renders the net proceeds business income for the purposes of Section 17(I)(c)(iii) of the Act. Yet for that to be the case, the Taxpayers need to be ‘carrying on a business’. The definition of business at Section 2 of the Act provides: -

“business” includes—

(a) trade, commerce, agriculture, manufacture, profession, or vocation, but does not include employment;

(b) a venture or concern in the nature of a trade, commerce, agriculture, or manufacture; or

(c) a profit-making undertaking or scheme not covered by paragraphs (a) or (b);


  1. This is the sale of the first residential property of Taxpayer J2. In effect, the Taxpayer has migrated to Australia and now taken up its citizenship. It is difficult to characterise the renting out of this property in this way. The property was not acquired as part of a profit-making undertaking or scheme. It was the first residential property of the Taxpayer. In Taxpayer R v Fiji Revenue and Customs Authority [16] some of the indicia for considering comparable questions under the former tax laws are set out. Whilst the Authority has failed to earmark, how the Taxpayer’s rental property comes to be a ‘business’ for the purposes of Section 2, it would seem that the only way it could, is if the disposal of the property that was leased by the Taxpayers, could somehow be characterised as a profit-making undertaking or scheme not covered by paragraphs (a)&#1i>;or (b)of thof the definition of business. For othe, had the property been sold within 12 mon2 months of the Taxpayers relocating abroad, the building would have been treated as a capital asset and could have been assessed for capital gain on that basis. In that situation Taxpayer J2 would have enjoyed the exemption provision on the basis of her then Fijian Citizenship and not been required to pay any capital gains tax whatsoever.[17] Yet in the case where the Taxpayers had not resided in the property for some time and leased the property for the purposes of generating income, is likely to have given rise to a different category of case and one that the legislature sought to cover by its income tax law. The Tribunal is more inclined to the view that the proceeds from the disposal of the depreciable asset are for the purposes of Section 14(1)(b) of the Act, income according to ordinary concepts, other than income referred to in paragraph Section 14(1)(a), derived by the Taxpayers during the year. The incomeot business income for the purposes of Sect Section 17 of the Act. Thhority was incorrect in claiming that the the taxation came about by virtue of Section 17(1)(c)(iii) of the Act.

Implications of Being A Depreciable Asset

  1. The case of the Authority is that as a consequence of the property not being the principal place of residence of the Taxpayers, coupled with the fact that the property was leased, together with the benefits of being able to claim the allowable deductions for depreciable assets, renders the proceeds from the disposal of the depreciable asset, as being income. Reliant on Section 17(1)(c)(iii) of the Act, the Authority had thereafter calculated the formula for valuing the net gain of the asset, as being that set out within Section 17(4) of the Act, being the consideration for the disposal reduced by the cost of the asset at the time of disposal. That is the same formula that is used in the case of Section 18 (1)(b) of the Act, where the net gain from the disposal of an asset that was acquired for the purpose of disposal at a profit, is included as property income. The difference being of course, that there is no allegation being made, that the property was acquired for the purpose of disposal at profit. To calculate how then to deal with the ultimate calculation, what needs to be relied upon by the Authority, is the formula for the disposal of depreciable assets at Section 34(1)(a) of the Act, that states:

if the consideration for the disposal of the asset exceeds the written down value of the asset at the time of disposal, the amount of the excess is income included in the gross income of the person for that year.


What Are the Costs of the Asset at the Time of Disposal?

  1. Based on a sales price achieved of $1,121,000.00 and an agreed land valuation of $600,000.00, the Authority has relied on the structural improvement (building) amount of $521,000.00, as the consideration at disposal. The Taxpayer J2 had already identified within the Depreciation Schedule as at 31 December 2015,[18] that the depreciable asset had a written down value as $240,835.00. This was the starting point from which the Respondent’s analysis took place. It was this aspect of the dispute between the parties that perhaps generated the most activity and dialogue. The Taxpayers J, sought additional time and assistance from both the Tribunal and Authority to ensure that valuations obtained for the purposes of calculating the net gain were fair and informed by all relevant facts and factors. Much discussion and revision of the depreciable value of the asset, focused upon works undertaken on the building over time. Unfortunately for the Taxpayers, whilst they have had many opportunities to provide detailed information to the Authority in relation to expenditure incurred, they have not been able to satisfy the evidentiary requirements consistent with the onus of proof that they have.
  2. The Authority has made specific mention of these discussions and the analysis and status of costs claimed by the Taxpayers, are set out within Tab 19 of the Respondents Bundle of Documents. There are strong policy grounds for ensuring an expenses verification process is at play, that ensures transparency and equal treatment. As the Taxpayer has correctly pointed out, Section 85 (11) of the Income Tax Act 2015 provides a further independent review mechanism, where expenses are claimed, but not substantiated. In A Taxpayer from Lami v Fiji Revenue and Customs Authority,[19] this Tribunal dealt with the way in which the former legislation characterised capital and revenue expenses to assist in that task. Section 85(2) of the present Act provides clarity in relation to the incidental expenditure that is incurred for the acquisition or disposal of an asset, as well as the recognition that there will be revenue expenses allowed for costs associated with the installation, alteration, renewal, reconstruction or improvement to the asset. The responsibility for claiming the costs of the depreciable assets in accordance with Section 21 of the Act, is that of the Taxpayers. The Taxpayer’s Financial Statements relied upon as at 31 December 2015, are the starting point by which the Authority has made its assessment. In the case where the Taxpayer J2 cannot produce any record of expenditure, she is quite entitled to ask that the Solicitor General appoint an independent assessor in order to undertake an assessment of the amounts sought to be included as expenditure. In this regard, Section 85(11) of the Act provides:

If— (a) a person seeks to include an amount of expenditure in the cost of a capital asset, including expenditure incurred in carrying out improvements to a capital asset;


(b) the person is unable to produce any record of the expenditure; and

(c) the CEO, after carrying out such investigation as he or she considers appropriate, has decided not to allow the inclusion of any such expenditure in the cost of the capital asset,


the person may apply to the Solicitor-General to appoint an independent assessor to provide an assessment of the amounts sought to be included as expenditure in the cost of the capital asset, including any expenditure incurred in carrying out improvements to the capital asset.


  1. The Tribunal is not aware of any approach being made for this to take place and having regard to the time that has lapsed since sale, considers there is no certainty in any event, that such an evaluation could now be made accurately, having regard to the improvements claimed to have been made at that time.[20] Be that as it may, the Taxpayers are of course free to make that application, should they so desire. For the moment though, the dispute is confined to the positions set out within Folio 19 of the Respondents Bundle of Documents, where the resolutions between the Taxpayers and the Respondent following a meeting held on 27 July 2017, are set out.

Legal Costs

  1. In relation to the legal costs claimed. The Taxpayers say that this cost arises out of the legal fees incurred at the time of acquisition in 2001. The Tribunal accepts that this is a cost that would have been allowed for, had it been substantiated and is prepared to allow 50% of this cost to be claimed by Taxpayer J2.

Unreceipted Expenses

  1. There is a claim of $68,559.00 being sought by the Taxpayers for unreceipted expenses. This claim is vague, although the Taxpayers have identified that some of this is attributable to the cost of retaining walls and electronic gates, that were installed at the property. There is a lack of specificity in relation to what makes up these costs. It should be noted here, that in a Directions Order issued to the parties on 1 June 2017, the Applicants were asked to provide:

Better identification and substantiation of costs claimed in relation to physical and depreciable assets:

(a) Building improvements’; and
(b) Repair and maintenance for the period 2001 to 2016.
  1. In response to those Directions, the Taxpayers filed further documents on 18 July 2017[21]. It should be noted that following the filing of additional materials, at a report back in this matter on 20 July 2017, Counsel for the Authority Mr Verebalavu advised that some additional expenses had been allowed by the Respondent. In relation to these residual unreceipted expenses claims, the Tribunal is not in a position based on the materials provided, to recognise these expenses. The Taxpayers are free should they wish, to seek any appraisal of the same, in accordance with Section 85(11) of the Act.

Cyclone Rating Upgrade

  1. The Taxpayers are seeking to have recognised the costs of upgrading the dwelling for cyclone rating, in the amount of $127,991.00. Yet there is no substantiation of the costs provided. The proceedings on 6 September 2017, were adjourned so as to allow the Taxpayers to source an Engineers Cost Report, to substantiate the cyclone rating upgrade costs being claimed. No such report was forthcoming. Again, should the Taxpayers wish to do so, they are entitled to have evaluated any costs expended on structural improvements that cannot be substantiated, by making an application for assessment in accordance with Section 85 of the Act. Given the amount of the claim, there is simply insufficient information before the Tribunal in which any objective assessment could be made. It is nonetheless noted that the Taxpayers stated in the Response to Closing Submissions[22],

The applicant made every effort to obtain a report but the engineer certifying this building upgrade does not provide such and ALL persons referred to by the engineer to provide such could NOT produce one either. What we gather is that people in Fiji are scared of FRCS and anything to do with the FRCS no-one wants to provide such documentation for fear of being pursued by the authority for tax breaches. Tax accountants that were supposed to provide advice were colluding also with FRCS to defraud the taxpayer....


42. It is worth noting, that comments of this nature are peppered throughout the submissions and various communications forwarded to the Tribunal by the Taxpayers. Some of those communications are concerning, particularly those that directly relate to these or previous proceedings of this Tribunal.[23] They provide no assistance to the task before the Tribunal whatsoever and are not going to be accepted as a legitimate reason why an alternative form of verification could not have been provided. It is noted that in support of this lack of documentary evidence, the Taxpayers rely on the decision of His Honour Alfred J, in Chief Executive Officer, Fiji Revenue and Customs Authority v Narayan[24] where the Taxpayers assert that “expenses submitted to the Tax Tribunal were allowed without the provision of receipts to back it up”. It is perhaps important to cite the relevant extract of his Honour’s decision, where he states:
... I accept that the oral evidence was all that the Tribunal had to go on in reaching his conclusion. I accept that Narayan’s evidence was not of the best quality. But reading the Record in cold print cannot given me or any other appellate forum, the opportunity or the advantage that the Tribunal possessed in gathering from the evidence before him, material on which to base his estimation of the expenses. The Tribunal makes this crystal clear at para 50 of the judgment when he says “given the nature of the faming business that the Taxpayer was seeking to pursue, I am satisfied based on his oral evidence, that some of these expenses would have been reasonably incurred as wholly and exclusively laid out or expended for the purpose of the business.” In my view there can then be no gainsaying that the Tribunal was right to athe expenses as properly claimed and allowallowable business expenses.
43. This same Tribunal does not find any parallel arguments in the case of the Taxpayers. It would have been very easy for the Taxpayers to have provided house and land drawings and photographic evidence in support of their claims, no such effort was made. It would also have been quite easy for any persons involved in those building works, to have been subpoenaed to give evidence before the Tribunal. There was simply no evidence at all. It is here where the Tribunal cannot make a finding based on the material that has been provided. For example, within the Amended Submissions for the Appellants filed on 17 March 2017, it is stated that:


..non receipted expenses of $100,000.00 between 2004 and 2016 spend (sic) on upgrading home to cyclone rating, repair and upgrade sewer line and build solid brick wall fence around the pool.[25]


44. The amount now being claimed for ‘cyclone rating’ the property, appears to have escalated in costs from this initial amount of $100,000.00, to $127,991.00. In doing so, the Taxpayers have provided no rationale for the escalation whatsoever. The way in which such figures have been determined, is not only confusing, but would appear on occasions contradictory[26]. The Tribunal cannot make any assessment based on the information provided. The claim is rejected.


Valuation of Dwelling

  1. Within the Taxpayers Submissions in Response filed on 6 March 2018, it states:

As submitted in earlier documents buildings do not appreciate in value and hence the tax laws allow depreciation. We have submitted valuations and ALL costs expended on the building since it was purchased and believe after the sale the amounts allocated by the valuer to the building component tallies with money spent on the property and there was no gain on the building component.


  1. Within the Respondents Supplementary Closing Submissions[27] the calculations for arriving at the assessable income for Taxpayer J2 are set out.[28] Insofar as the non-land consideration on sale is concerned, the amount is derived by deducting from the sales price, the land consideration at the time of sale. After that point, the Authority has relied upon the Taxpayer’s own calculations up and until the time of sale, to determine what additional costs and depreciations[29] could apply. The written down value of the depreciable asset has been relied upon, with additional income expenses being allowed for receipted expenses in the amount of $74,346.00. As Taxpayer J2 was eligible for a total capital gains taxation exemption, her 50% share of the commission and sales costs that were identified as $61,100.00 were also allowed as a deductible expense. Within the depreciation schedules provided, it is noted that an Accumulated Depreciation for $26,689.00 had been allowed. An amount of $16,129 appears to have also been calculated for depreciation of furniture and equipment.

Table 2 - Position of the Parties in Relation to Costs and Expenses Being Claimed by Taxpayer


Item
Amount
Dispute
View of Tribunal
Legal Cost Purchase
$860.00 -Parshotam Lawyers
Respondent has rejected on basis that no documentation.
Allowed - 50% of this cost should be allowed as expense for Taxpayer J2.
Unreceipted Expenses
$68,559.00 -including costs of retaining walls and electronic gates
No documentation
Not accepted. Insufficient evidence before Tribunal. Application can be made for independent assessment in accordance with Section 85 of the Act.
Cyclone Rating Upgrade
$127,991.00
No details of any expenses documented.
As above.
Depreciation allowed by FRCA between 2010-2015
$24,652.00 based on 2005 IT Return dwelling value.
No independent documentary evidence to authenticate transaction.
Not allowed. Depreciation has taken place and is reflected in written down values in Financial Statement 31 December 2015.

  1. The Taxpayers have sought to revisit the entire basis upon which the initial valuation and depreciation of the asset has been calculated, however how such a departure now can be practically entertained is difficult to understand[30]. Insofar as the relevant positions of the parties are concerned, these are set out within Folios 18 and 19 of the Respondent’s Bundle of Documents. Table 2 above, provides a summary position of the relevant claims and their status consistent with the findings made by the Tribunal. Arising out of the above, the Tribunal is inclined to the view that outside of the 2001 legal costs that should be allowed, the rationale adopted by the Authority in the calculation of the assessable income, is fair and appropriate in the circumstances. Attachment 2 to the Amended Assessment No 2 sets out the basis from which the calculations for assessing taxation have been arrived. These shall be modified to allow for the small adjustment based on the legal costs associated at acquisition. Based on the above, Taxpayer J2, is liable for taxation in the 2016 Income Year, as set out within Table 3, calculated in the amount of $16,440.90. The Assessment notice should be adjusted on that basis.

Pending VAT Objection Decision

  1. One final issue that warrants comment is in relation to a dispute between the parties pertaining to Value Added Taxation. Whilst the Taxpayers have sought at various times to agitate the merits of their arguments before this Tribunal, as has been said repeatedly, this is not an issue before the Tribunal. Having said that, the Taxpayers rightly point out that on 9 November 2017, the Tribunal had directed the Authority to respond and if necessary, issue any relevant Objection Decision to Taxpayer J2, in order that she could pursue any matters that arise. The Authority undertook to address that issue and must now ensure that this takes place urgently, if it has not done so already.

Table 3 - Income Tax Calculations -Taxpayer J2

Income Tax Particulars
Amount
Notes
Non-Land Consideration on Sale
$521,000.00
Non-Land Written Down Value
($250,835.00)
From 2015 Financial Statement
Additional Expenses/Costs Allowed
($71,441.00)
($2,905.00)
($430.00)

Receipted Expenses
2016 Expenses
Legal Expenses 2001
Gross Income Calculation
$164, 409.00
50% = Taxpayer J2 share
$ 82,204.50
Non-Resident Tax Calculation
($10,000 +20% in excess over $50K) [31]

Total Tax Liability
$16,440.90

Decision

  1. It is the decision of this Tribunal that: -
    • (i) Taxpayer J2 is a non-resident for tax purposes, for the Income Year 2015.
    • (ii) That Taxpayer J2 was not required to pay capital gains taxation upon the sale of real property CT14892 Lot 33 on DP 3786, on the basis that she was a Fijian citizen and exempt from such liability, by Section 67 (1)(b) of the Act.
    • (iii) Taxpayer J2 is liable for taxation on the disposal of a depreciable asset, in accordance with Sections 14(1)(b) and 34(1)(a) of the Act, to be calculated based upon the consideration for the disposal of the depreciable asset (building) situated on the real property CT14892 Lot 33 on DP 3786, reduced by the cost of the asset at the time of disposal.
    • (iv) Notice of Amended Assessment No 2 issued on 12 September 2017, is to be revoked and a further Amended Assessment issued, consistent with the terms of this decision.

Mr Andrew J See

Resident Magistrate

[1] The Application of itself is quite a novel one, insofar as it is made by two discrete taxpayers, ostensibly in relation to the one Objection Decision.
[1] As it transpired, Taxpayer J’s Objection Decision was revoked 2 days later.
[2] This in part is also in recognition of the fact that the Applicants are not legally represented and have a long history of attempting to resolve matters before this Tribunal.
[3] See Application for Review filed on 19 December 2016.
[4] See Folio 1 of Respondent’s Bundle of Documents.
[5] That is from 20% for non-residents to 18% for residents.
[6] See Folio 3 of the Respondents Bundle.
[7] See Folio 4 of the Respondents Bundle.

[8] Yet nowhere within any of their material is this properly articulated.

[9] It is understood, that
[10] See the definition of Fiji Asset at Section 2.
[11] See definition of Structural Improvement within Section 2.
[12] Based on Valuation Report that was accepted by both parties.
[13] [2013] FJTT 8; Action 01 & 02.2009 (16 May 2013)
[14] It does not appear to be property income for the purposes of Section 18(1)(b) of the Act.
[15] The house would be regarded as a structural improvement to real property.
[16] [2017] FJTT 1; ITA2.2016 (19 May 2017)
[17] That outcome would be somewhat comparable to that previously available under Section 7(1)(b) of the Capital Gains Decree 2011, where a capital gain made by a resident individual or a Fiji Citizen on disposal of the individual's principal place of residence is exempt from taxation, provided the residence has been the individual's principal place of residence during the whole of the period in which the individual owned the residence;
[18] See Folio 8 in the Respondent’s Bundle of Documents.

[19] [2013] FJTT 7; Action 8.2012 (13 May 2013)

[20] That is, the disposal of the property most likely will bring with it, further modifications that would also be relevant to any further assessment.
[21] See ‘Documents filed Pursuant to directions orders of the Tax Tribunal Court on May 31st 2017’.
[22] Received 6 March 2018.
[23] See in particular, the email communication from Taxpayer J2 dated February 27, 2018 at 8.34am.

[24] [2016] FJHC 1009; HBT5.2013 (4 November 2016)

[25] See Item 3 of Page 8 of that Submission.
[26] For example, most recently the claim for the Cyclone Upgrading has been
[27] Dated 27 February 2018.
[28] See Attachment A and the Notice of Amended Assessment No 2 dated 12 September 2017.
[29] Note that there is no depreciation available in the year of disposition of the asset in accordance with Section 34(1) of the Act.
[30] There are no alternative depreciation schedules that have been provided. Nor has there been any analysis provided as to the implications on the previous income tax returns that have been submitted by Taxpayer J2, since the time in which the property was first leased.
[31] Note that there is no Social Responsibility Tax payable based on this income amount, in accordance with the Schedule to the Income Tax (Rates of Tax and Levies) Regulations 2016

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