Here are some suggested entries you might make in a Statement of position (SOP) - IR773 form for this type of dispute. These are a guide only and if your circumstances are similar to the scenario, you will need to provide specific evidence to support your view.
Scenario
You run a retail business. The business has two motor vehicles and eight employees. Your tax returns are all filed on time. We have investigated your business and identified what we consider to be unexplained cash deposits into your personal bank account.
We sent you a Notice of proposed adjustment (NOPA) proposing that all the 'unexplained amounts' deposited to your personal bank account be treated as business income. You issued a Notice of response (NOR) disputing our NOPA.
You attended a facilitated conference with us. We were not satisfied with the evidence you provided. We still considered the unexplained cash deposited to your personal bank account to be business income, so we issued a Disclosure notice and SOP.
Generally, you have 2 months to file your SOP from the date we issued the Disclosure notice.
Suggested entries in the SOP
What facts support your view?
Give an outline of the facts and circumstances that support your view. Include any important facts you think we’re missing. If you think the amounts in dispute have changed, give the updated amounts.
You could use the facts you listed in your NOR as a starting point. However, the facts may have been further clarified in the facilitated conference so it is important to update them. For example, if our SOP stated that you have not provided evidence of where the cash deposits came from, you could explain the evidence about these cash deposits that you have obtained since the facilitated conference.
The relevant facts might include:
- Your explanation of where the cash deposits came from. For example, 'The cash deposits were loans from my parents'.
- The circumstances that led you to borrow money. For example, you might say that you sold goods to a client who did not pay you and the business was suffering from a cash flow shortage. And so this was the reason that you borrowed money from your parents.
- The reason why you deposited the money you borrowed from your parents into your personal bank account. For example, 'I thought it would be easier to keep track of it that way'.
What questions need to be answered to resolve this dispute?
Describe the questions or issues that you think our Disputes Review Unit, the Taxation Review Authority or the High Court would need to consider before this dispute could be resolved. In tax disputes these are usually questions of how a tax law or principle applies to the facts of the dispute. For example, you might say 'the question is whether the cash deposits are my business income'.
It is important to list all the questions or issues that you think are relevant even if you have done so previously because you won’t be able to add any more issues later unless we agree. A judge may allow issues not finalised in your SOP to be raised in court but this is in very limited circumstances.
Why do you think your view is correct?
Explain why you think your view is correct. You'll need to provide details of the law you are relying on to support your view. If you can’t do this, then you’ll need to provide enough detail so we can identify any relevant legislative provisions for you. You’ll also need to explain how the law applies to the facts.
It is important to list all the legal arguments or propositions of law that you think are relevant even if you have done so previously because you won’t be able to add any more propositions of law later unless we agree. A judge may allow propositions of law not finalised in your SOP to be raised in court but this is in very limited circumstances.
You can find examples to help you answer this question and information about tax laws by searching our website. You can also refer to publications, court cases and legal principles that support your arguments. For example, if you search our website (search term: 'unexplained deposits') you will find a case that says you need to explain where the cash deposits came from and what they were for.
Some or all of the law may have already been included in our SOP. If so, you can say something like 'I am relying on the law set out in Inland Revenue’s SOP with the addition of …' Then you might also say:
I searched the IR website and found Case TRA 26/11 [2014] NZTRA 09. The judge said that if there was proof that an amount was from a non-taxable source then it was not business income. As far as I can tell, a loan is not a taxable source. I borrowed the cash from my parents. The cash deposits are loans that I have to repay. The cash deposits are not income that was earned by my business.
The attached letter from my parents shows the date, amount, term, interest rate and expected repayment for each of the loans. The letter from my parents and the copies of my parents’ bank statements indicate the nature of the transaction and where the money came from. The cash loans are not unexplained deposits, and therefore they are not business income.
List the evidence you’re relying on
In tax disputes you have the responsibility to prove the assessment or our decision or proposed change is wrong. List the evidence you’re relying on. You don’t need to give the name of any witnesses who may later give evidence for you in the Taxation Review Authority or High Court. Attach copies of documents you haven’t already provided to us. Evidence that might be helpful includes:
- The letter from your parents setting out the details of each loan (ie date, amount, term, interest rate, repayments).
- Your parents’ bank statements.
- Proof of the client not paying you that created the cashflow shortage which led to you borrowing money from your parents. For example, documents to and from a debt collecting firm.