Motel owners win tax appeal

Press, 19 February 1987, Page 5

Motel owners win tax appeal

PA Wellington A family whose living expenses were so low that a tax inspector did not believe them has been described as truthful and honest by the Taxation Review Authority, Judge Barber.

A husband and wife running a motel in a North Island city put their .taxable income at a total of $12,156 for the five years from 1976 to 1980. The inspector who made a tax audit on the motel partnership was concerned that the couple seemed to be drawing too little from the business for their living expenses. The inspector estimated the couple’s living ex-

penses for the five years at a total of $27,000 and assessed them for tax on that basis.

The couple objected to the Taxation Review Authority and Judge Barber heard the case in Hamilton and Auckland in mid-1986.

The judgment says the wife, her father, and her husband built the motel and opened it in March, 1975.

“The husband and wife worked very hard indeed and the enterprise soon became very successful,” it says.

Food and accommodation were part of their pay, and following normal practice at the time they

added $520 a year to their taxable income as a “boarding allowance.”

A car owned by the motel was used almost entirely for business purposes, personal items could be bought wholesale when buying for the motel, and guests left behind cosmetics, shampoos and similar items. -

The wife said their main personal spending was on insurance, dental fees, incidentals and some clothing, although she made most of that.

They worked seven days a week and were available round the clock. The wife said they gave only token Christmas or

birthday presents. Though hei* husband enjoyed a drink he did not drink at the motel and they only occasionally offered a drink to a guest. Judge Barber says the wife produced a detailed analysis of the couple’s personal spending.

“I assessed the wife as an honest witness and that her evidence seemed to me to be very convincing indeed,” the Judge says.

The husband said that in the early years of running the motel the couple had gained cash by selling some furniture and chattels because the motel supplied furnished accommodation.

He had a few jugs of beer with friends at a club on Friday nights and played cards for small stakes, more often than not winning a few dollars. After about 1976, when his father had bought a share in a racehorse, he had occasionally placed a bet on the horse when it was likely to race well. On one occasion, he said, he had bet $3O to $4O and won about $lOOO. Travel and accommodation expenses for the husband and wife had been used to promote the motel during its first few years, and the husband said the occupancy rates shown for the motel were so high there was no way he and his wife could have been concealing income. The Judge says he re-

corded in his notes about the husband at the hearing: “He is not at all devious in his answers; in my view he is clearly a truthful witness.”

The tax inspector said he had assessed the couple’s living expenses by worldng out from their bank account that their expenses in 1975, when the couple both worked elsewhere for wages, had been $5055. He had then tried to make allowances for the change in lifestyle as a result of running the motel, and, based on his experience, had come up with an assessment of $4OOO. for 1976. But Judge Barber says the inspector could not produce detailed figures to support the assessment.

Assessments for the following four years had been based on the 1976 figures, adjusted for cost-of-living increases.

“At the time I in my notes that the inspector was clearly honest, but that he had a narrow-minded approach to this case and that he had been quite inflexible in his dealings with the objectors and their counsel,” Judge Barber says. He accepted the couple’s returns of income as the figures for tax, except for the $520 a year board allowance, which he ruled should be increased to $l5OO a year.