The tax affairs of James Smith are being investigated by the tax authority. The tax inspector believes that Mr Smith has understated his income in the tax year as being $40,700. Mr Smith has been asked to give full details of his assets and liabilities at the beginning and end of the tax year and a summary of personal expenditure during the year, which he believes to be about $36,500. Details of his assets and liabilities (at original cost) appear below: 

Beginning of year End of year 

House purchased 10 years ago $95,000 $95,000 

Furniture and fittings 35,000 39,000 

Government bonds 4,000 4,000 

Shares 15,600 18,600 

Bank account 1,400 2,600 

Cars 6,700 16,800 

Mortgage 21,000 20,000 

Overdraft 300 400

Required:

a. Deduce Mr Smith’s income in the year, based on information given.

b. What action do you think the tax department should take?