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Duggan v. Commissioner of Inland Revenue.

73 ATC 6001

Cooke J

Supreme Court of New Zealand

Judgment date: Judgment handed down 1 December 1972.

Cooke J.: This is an objection relating to questions of fact and law referred directly to the Court by consent of the Commissioner and the objector under sec. 32 of the Land and Income Tax Act 1954.

At all material times the objector has carried on business in Wanganui as a wool and skin buyer. He buys wool from farmers, much of it in the form of oddments, and sells it to brokers or export firms. His tax returns for the years ended 31 March 1961 to 1968 inclusive presented a picture of an ailing business. The figures returned are set out in paragraph 2 of the case stated and show that, whereas profits were returned in 1961 and 1962 of £1777.19.10 and £731.7.8 respectively, a loss was returned in 1963 of £1307.2.8. A profit was returned in 1964 of £4406.13.8, but in each of the three succeeding years substantial losses were shown, that is to say £1650.8.7 in 1965, £1228. 12.1 in 1966 and £3160.7.6 in 1967, while in 1968 the profit returned was the sum of $26.00. Despite that picture the objector's assets increased substantially, and following an investigation in 1969 of his affairs by an inspector the Commissioner treated the accretion to his assets not satisfactorily accounted for in the Commissioner's opinion as representing undeclared assessable income. The assessments originally based on the objector's returns were altered accordingly. In respect of the first three years, 1961, 1962 and 1963, this involved increasing the amount after the expiration of four years from the end of the year in which the assessment was made. It is common ground that the Commissioner formed the opinion as to those years that the returns were fraudulent or wilfully misleading, thus making the increased assessments lawful in terms of sec. 24.

According to the inspector's calculations the discrepancy or amount of allegedly undeclared income in each of the relevant years was as set out in Exhibit B to the case stated, being for 1961 £1377 odd (I shall omit the shillings and pence), 1962 £321, 1963 £3635, 1964 £1031, 1965 £2671, 1966 £3041, 1967 $496.10c and 1968 $2391.60c - a total of over $27,000. For the objector the inspector's calculations are accepted as arithmetically correct, but it is said that the whole of the discrepancies represent winnings from betting on horses, and are not income. At one stage there was a contention that the discrepancies were partly accounted for by loans to the objector from his wife, who was also put forward as a successful bettor, but the evidence suggested that at least to a large extent monies transferred from the wife's Post Office Savings Bank account to the husband had originally been deposited in her account by the husband himself. At all events, at the end of the objector's case his counsel accepted that nothing turned on whether any of the alleged race winnings were those of husband or wife, and that the inspector had properly had regard to the state of the wife's Post Office Savings Bank account in calculating the net increase in the husband's assets. In the result the first issue in this case is accepted to be simply whether the discrepancies represented race winnings.

There is a second issue. The Commissioner says that even if the amounts in question are all race winnings they are taxable. This was not specifically advanced as a contention in the case stated, but Mr. Tizard for the objector in his opening recognised the possibility of a contention on these lines and said that he would not be embarrassed by it if it were raised, as all the evidence would be before the Court. Mr. Latham for the Commissioner did not wish to commit himself definitely to such a contention until the evidence had been heard. The objector gave evidence, as did other witnesses on his behalf. The Commissioner called no

73 ATC 6003

evidence. Mr. Latham then indicated that he would advance the contention. It was agreed that this was open to him, but that in the circumstances he should address first; and the argument took place accordingly.

Turning now to the first issue, that is to say race winnings or not, the effect of the relevant provisions of the Land and Income Tax Act and the Inland Revenue Department Amendment Act 1960 is that the burden of proof is on the objector. The Court has to redetermine all questions involved in the case, but to succeed the objector must affirmatively prove that the altered assessments are incorrect. Even as to whether the returns in the first three years were fraudulent or wilfully misleading the onus is on the objector to prove that they were not.
Commr. of I.R. v. Legarth (1969) N.Z.L.R. 137C.A. is authority for those points. I accept that the burden is the ordinary one applicable to civil cases: it is enough for an objector to establish his case on the balance of probabilities.

Having listened to and considered the evidence as a whole and the submissions of counsel, I am driven to the conclusion, notwithstanding the sustained argument of Mr. Tizard, that the objector has not discharged the onus. That he has placed bets regularly and systematically at both race and trotting meetings is undoubted, and I accept that he has had considerable success from time to time, but the evidence fell well short of persuading me that it is probable that he won $27,000 in those eight years. I do not propose to traverse now all the evidence, but some main aspects of it which I thought significant or unsatisfactory should be mentioned.

The plaintiff himself in testifying gave me the impression of a man on guard, and in some respects unclear in what he said, to an extent which in itself would have been enough to cause one at least to hesitate before accepting his testimony. I do not say that I would have rejected him out of hand as a trustworthy witness - merely that I would not be content to act on his evidence without corroboration. There was no solid corroborative evidence. A number of his friends and his wife dwelt in general terms on his constant success, skill or luck as an investor, and the large sums that he was understood to have won; but not surprisingly they could say very little specific. The documentation that he produced, although extensive, was incomplete and largely equivocal. It consisted inter alia of a list of so-called highlights of his betting for certain periods, namely the 1962-63 season, two meetings in April and May 1964, and seven meetings in 1965. These lists were all apparently originally prepared for the benefit of his accountants, and they were lists purporting to record outstanding successes only. There was also an exercise book in which later, after the tax investigation had commenced, he compiled a list of meetings, races, bets and returns over the period from 23 March 1963 to 28 August 1965. Some of the highlights did not appear in the book; conversely some of the entries in the book did not appear in the highlights. According to the book he won $44,200 odd over this period, and he said in evidence that this should be augmented by $4,000 alleged to have been won on a double at Woodville. He also produced numerous race books covering the meetings listed in the exercise book. The race books were copiously annotated. His practice was evidently to note what each horse in each race was paying both for a win and a place shortly after the totalisator opened. These race books purported to contain indications of which horses he supported and the dividends received; but, confronted with a sample, one of his witnesses, who claimed familiarity with his methods, was unable to say how many horses in a particular race the notations indicated the objector to have supported. The objector said that he had attended meetings not mentioned in the highlights or in the exercise book, but that his wins and losses at such meetings would balance out. He said that even after the tax investigation he had not kept race books for all meetings he had attended, although he claimed to have continued betting with much the same sort of results and to be making about $12,000 each year from it. Race books for the calendar year 1970 were also produced and were said to show that in that year he had won over $14,000; yet even they, he said, were not a complete collection for the year. The biggest loss they showed him as

73 ATC 6004

experiencing for any one day was no more than $14 odd. He maintained that, although he knew at the time of the investigation that the department was querying his records and particularly the absence of records of losing bets, it was practically impossible to put all transactions down and ``it seemed like a lot of work''. Nevertheless, as already indicated, the books that he did produce both for the years which are in question in these proceedings and for subsequent years were full of detailed notes; and his witnesses were agreed that he was a most methodical man. Indeed they stressed this characteristic. I find the absence of records of betting at meetings which were not notably successful - and he said that there were such days - puzzling in the case of such a methodical man.

As for his business accounts relating to the wool and skin buying business, they were not audited, but the firm of chartered accountants who completed them on the basis of the information supplied by him showed that in a number of years additional capital had been introduced into the business from what was described as race horse winnings. The years in question were 1963, when a sum of £3160.16.6 was said to have been introduced in this way; 1964, the sum being £741.18.0; 1965, the sum being £3682.4.6; 1966, when the sum shown as introduced under this head was £6219.3.6; and 1968, $1000. But the evidence of his accountant, Mr. Brandon, revealed that in part these entries in the accounts stemmed simply from the fact that known expenditure was found by the accountants to exceed the moneys known by them to be available in the business, and they accordingly asked their client to supply details of some further source of funds for insertion in the balance sheets. They did not verify this source, as they were not undertaking an audit. Moreover it emerged in cross-examination that some of this alleged new capital represented only pro forma journal entries recording notional payments in and notional drawings out by the objector. For instance in the year 1966 the balance sheet showed £6219.3.6 as introduced from race horse winnings. Of this it turned out that £1706.18.9 was balanced by payments to sundry creditors, while the remaining £4512.4.9 represented notional credit and debit entries in the books, there being no real record of any such money going into the business or being spent in the business. The Court cannot have confidence in accounts prepared on such a basis.

Again, the cash which the objector claimed to have won from races, as opposed to certain racing club or Totalisator Agency Board cheques, does not appear to have found its way into his bank account. He claimed to have spent some of the racing cash in buying wool, but in the absence of satisfactory records I do not consider it possible to find, even on the balance of probabilities and even in the most approximate terms, how much racing cash was used in this way.

In sum, all that one can say is that it is possible that there were considerable betting earnings. That is not enough.

Mr. Tizard understandably laid emphasis on the fact that no evidence was called for the Commissioner, nor was the Commissioner able to point to any specific source other than betting from which the surplus money might have come. There was evidence that the firms to which the objector sells wool do not buy for cash, and this was not really challenged. It is true that the objector at one stage carried on a dagcrushing business as a side line and that a byproduct of that was manure, some of which he could have sold for cash to the citizens of Wanganui. But I accept that it is not credible that over eight years $27,000 would be wholly or substantially accounted for in that way. Still, the Commissioner is not bound to point to a specific alternative source. To the question whether it is more probable that the whole or substantially the whole of the $27,000 was earnings from betting than that there was some other undisclosed business income, I find myself unable to give an affirmative answer. In view of the pattern of the annual discrepancies, including the size of a number of them and the fairly long period over which they occurred, I think that the objector's failure to discharge the onus applies even on the question whether the returns in the first three years were fraudulent or wilfully misleading. I cannot find it more probable than not that he did not know of the omissions. It is somewhat repugnant to have to decide such a question

73 ATC 6005

on the footing that the onus is on the taxpayer, but such is the statute law.

This objector of course is far from the first who has failed to discharge the onus of proving betting winnings. While such cases as
Barrett v. Commr. of I.R. (1957) N.Z.L.R. 1098 and
N. v. Commr. of I.R. (1958) N.Z.L.R. 122 were basically decisions on their own facts, I think my approach is in accordance with that adopted in those cases. It has been said that an objector must show, not only that the Commissioner's assessment is wrong, but if so by how much: see for instance the assets accretion cases of
Babington v. I.R. Commr. (1957) N.Z.L.R. 861, 869;
Lancaster v. I.R. Commr. (1969) 1 A.T.R. 109, 110; and
Glaussius v. I.R. Commr. (1970) 1 A.T.R. 588, 594. Applied in a broad and commonsense way, that seems to me, with respect, to be right. In any event I would not depart from that current of authority. The objector here has gone nowhere near to showing by how much the assessments are wrong, if wrong at all.

In case it should be any consolation to the objector for his defeat in that way on the onus of proof, I would add that had I accepted his story of race winnings to the full I would have been prepared to hold that it would still not have availed him (except perhaps as to the years outside the four year period). In
Commissioner of Taxes v. McFarlane (1952) N.Z.L.R. 349 the majority of the Court of Appeal, while upholding a Magistrate's decision that a jockey's betting winnings were accessable, left open the question whether a similar view might be tenable in the case of a person not otherwise associated with the racing business. Stanton J. said at the foot of p. 376 and top of p. 377 -

An analysis of the cases cited in Gunn's Commonwealth Income Tax Law and Practice, 3rd Ed., shows that, where a systematic bettor was regarded as making an income, he was a horse-owner, trainer, bookmaker, or otherwise associated with racing, though not every taxpayer in that position was so treated. It is difficult on any logical ground to justify the distinction between systematic betting by a mere punter with no racing background and similar betting by a person associated with racing activities, and it may be that, although it has been accepted and acted on in several cases, this question will have to be considered if and when it arises.

Adams J. dealt with the matter at somewhat greater length at p. 382-383. I will not read all that he said; I think it sufficient to read a short extract from p. 383 -

Where income is in fact derived from betting activities which are engaged in, not with the motive of making casual gains or merely for sport or amusement, but with the motive of making an income, it is difficult to see on what principle such income can be differentiated from any other form of income.

He went on to indicate that he was reserving his opinion on that question.

On the facts in this case I think that if one did accept in toto the objector's evidence of betting winnings it would be difficult to avoid the conclusion that his dominant motive was making an income. Certainly I would not accept that he had proved otherwise, if regard be had to various matters claimed in evidence by him or his witnesses, such as the regularity of his betting, the adoption of a system, frequent attendances at weekday as opposed to weekend meetings (he said he had increasing ``sporting'' commitments on the weekend in recent years), the large extent to which he and his family were allegedly dependent on the proceeds for their living, the assertion that his wool business was generally unsuccessful over the relevant years, and his claim to have mixed up the proceeds of bets with other monies used in the wool business. It is clear too that his racing friends regarded him as no ordinary punter. I would therefore agree with the submission for the Commissioner that, if the evidence of the objector about remarkably consistent betting success were substantially accepted, this would be an exceptional case in which betting winnings would be taxable and betting losses should they occur would be deductible. I would be inclined to base this on the wide opening words of sec. 88(1) of the Land and Income Tax Act 1954 and the no less wide words of sec. 88(1) (g), read together with the definition of assessable

73 ATC 6006

income in sec. 2. These provisions ensure that the other paragraphs of sec. 88(1), expressly bringing within the ambit of assessable income various kinds of receipts, do not in any way limit the meaning of the term. It would appear that ``income'', which is undefined in the Act, is used in the ordinary and natural sense. In that connection it is of interest that in
Graham v. Green (1925) 2 K.B. 37 at p. 42 Rowlatt J., dealing with a man who derived substantially his entire livelihood from betting, said -

All I can say is that in my judgment the income which this gentleman succeeded in making is not profits or gains, and that the appeal must be allowed...

In that case Rowlatt J. held that, not being profits or gains in his opinion, the sums in question were not taxable. He was concerned with a United Kingdom statute in which the expression ``profits or gains'' appeared. I am not concerned to explore the question whether the decision in Graham v. Green is or is not consistent with the decision of the Court of Appeal in Commissioner of Taxes v. McFarlane, for the latter decision is clearly binding upon me. I do think, however, that it is not without significance that as accurate a speaker as Rowlatt J. found it natural to describe the amounts which the appellant in Graham v. Green had received from betting as income.

As an alternative to that approach it may be that sec. 88(1)(a) of the New Zealand Act would apply, in that there may be room in a case such as this, if the objector's evidence of continual successes is accepted, for classifying his betting activities as a business; but on the view previously expressed on the first issue in this case I need not discuss the second issue further.

For those reasons the objection must be disallowed and the assessments confirmed.

The Commissioner is entitled to costs. By agreement between counsel the amount is fixed at $250.


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