CLARK and COMMISSIONER OF TAXATION

[2010] AATA 392

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 392

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/2014-15

TAXATION APPEALS DIVISION		)
Re		BRETT CLARK

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr A Sweidan, Senior Member

Date26 May 2010

PlacePerth

Decision The Tribunal affirms the reviewable objection decision under review.

..........(sgd) Mr A Sweidan..............

Senior Member

CATCHWORDS

- Income Tax – Personal Services Income – whether amounts were paid as salary and wages to an employee – whether exempt under “foreign service” provisions

Legislation

Income Tax Assessment Act 1936 s 23AG

Income Tax Assessment Act 1997 s 6-5(2); s 86-15

Cases

Lopez v Deputy Commissioner of Taxation (2004) FCA 756

REASONS FOR DECISION

26 May 2010 Mr A Sweidan, Senior Member    

Background

1           Applicant seeks review of a decision by respondent disallowing applicant’s objections to a Private Binding Ruling.

History

2           The applicant lodged an Application for a Private Ruling (“the Request”) dated 23 April 2008 with the respondent.  The Request raised the following issues:

3.1      Are the earnings under the taxpayer's contract of employment performed in a foreign country assessable in Australia under ss 6-5(2) of the Income Tax Assessment Act 1997 (“ITAA 1997") or can they be exempted under ss 23AG of the Income Tax Assessment Act 1936 (“ITAA 1936").

3.2 Does the time spent in Australia on rest and recreation form part of the contracted foreign service under ss 23AG(6) of ITAA 1936.

3The Request included the following details:

"Background Facts:

The taxpayer, Mr Brett Clark ('Brett'), is an Australian resident for tax purposes.

Brett is the sole shareholder and director of a private company, Boardline Pty Ltd ('Boardline').  Brett is also employed by Boardline on a salary and wage basis under a contract of employment dated 1^st July 2007.  All income, net of allowable deductions, from the provision of personal services by Brett is duly paid to Brett as salary and wages under this employment contract therefore no Personal Services Income ('PSI') attribution amounts are allocated to Brett.

Boardline is contracted to Tethyan Copper Company Pty Limited ('Tethyan'), an unrelated third party, to provide a key person to work in Pakistan as an advisor to the executive.  This agreement stipulates that Brett is to be that key person until Tethyan approves otherwise.

Initially Brett performed the functions of the Contracts Manager for Tethyan's Pakistan operations until a permanent employee was recruited.  This was followed by 20 days as rest and recreation leave.  This work cycle is replicated in the employment agreement between Boardline and Brett.

The large amount of rest and recreation days per month is in recognition of the volatility of the situation in Pakistan and the resulting potential stress from this situation.  Brett was in the country during the Bunghti killing in 2006, which sparked riots in major Pakistan cities and was caught up in the riots in May 2007 in which more than 45 people were killed.  Brett was in Islamabad when suicide bombings occurred in response to the Red Mosque siege and was in Lahore recently when the FIA building was blown up with over 30 people killed.  Coupled with this Brett is required to travel between the head office in Karachi and the mine site which causes additional exposure than would normally be expected.  As a result Brett was not prepared to go back to Pakistan unless adequate rest and recreation was built into the contract.

While in Pakistan Brett is required to work for greater than 40 hours per week (usually he works 10 to 12 hours a day, and often 14 hours per day) throughout the period, without weekend breaks.

The majority of the rest and recreation days allowed to Brett under the contract are taken in Australia.

Brett is not required to undertake any work for either Tethyan or Boardline while on rest periods in Australia or elsewhere.

Brett does not work for either Boardline or Tethyan or any other employer while back in Australia.

There is a tax system in Pakistan that taxes employment income and tax is paid on behalf of Brett in Pakistan on this employment income.

There is no tax treaty between Australia and Pakistan.

Brett is provided with accommodation while working in Pakistan.

Travel to and from Pakistan and travel within Pakistan is paid for by Tethyan."

4In response to a request from the respondent, the applicant provided

·An incomplete copy of an Employment Agreement dated 1 July 2007 between Boardline and the applicant ("the Employment Agreement").

·A copy of the Contractor Agreement dated 1 July 2007 between Tethyan and Boardline ("the Contractor Agreement").

·A copy of a document called "Addendum No.1 dated 12 April 2008 to Contract Agreement dated June 24, 2007 between Boardline Pty Ltd and Tethyan Copper Company Pty Ltd" ("Addendum").

·A summary showing the positions held by the applicant in Pakistan and the periods that he spent in Australia and Pakistan.

·An explanation of why the duties changed over the period of the contracts.

5           Under the Employment Agreement, Boardline and the applicant purportedly agreed that Boardline would employ the applicant under the terms and conditions of that agreement.

6The Employment Agreement provided:

·The employment would be continuous for a period of 2 years commencing on 1 July 2007.

·The applicant would be based predominantly overseas.

·The employment roster consisted of 10 days rostered on followed by 2-5 weeks rostered off dependent on the political situations in the countries attended by the employee.

·Boardline was to pay the applicant $A20,000 per month with the base salary to be paid in monthly instalments on or about the 15^th of each month, half in advance and half in arrears.  Boardline was also to pay superannuation contributions if required by superannuation legislation.  If the applicant was to work in excess of 10 days per month, Boardline was to pay the applicant $A2,000 per day worked in excess of the 10 days in addition to the monthly base salary.

·The applicant was also entitled to annual leave of 20 days per year and sick leave of 10 days per year.

7The Contractor Agreement provided:

·Boardline was to provide the services of the applicant to Tethyan for 10 working days per month.  The average hours of work per day were to be 10 hours but were not to exceed 12 hours.

·Tethyan was to pay Boardline $A20,000 per month.

·The contract was to run until 30 September 2007.  If the agreement was to be renewed after that, it was to continue on a monthly basis and could be renewed up to three times and therefore the maximum expiry date was 31 December 2007.

·The agreement was on a non-exclusive basis, but Tethyan had first call on the applicant's availability for 50% of the working days within the month.  The parties were to negotiate on a monthly basis to forecast the reasonable planned travel requirements for the following months.

·The agreement did not prevent or restrict the applicant providing services the same or similar to the Services of any kind to any other person.

8The Contractor Agreement made no mention of rostered days off.

9       The Addendum purports to make the following changes to the original Contractor Agreement:

·There was no expiry date stipulated on the contract.  The expiry date would be 30 days after notice of termination was given.

·The contract was on an exclusive basis and that Tethyan had first call on the applicant's availability 100% of the working days within the month.

·The applicant was entitled to rostered leave for twenty days a month.

10     A summary of periods in which he was in Australia and in Pakistan was prepared by the applicant and stated:

"From July 16^th to August 6^th 2007 I was in Pakistan and filled in the various roles including Contracts Manager and Finance manager while the incumbent's (sic) was being recruited.  

From 26^th August to 8^th of September I was in Pakistan and filled in the role of Contracts manager while the incumbent was on annual leave.

During 8^th September to 22^nd of October I moved house and project managed the renovation of various major project within our principal residence.  I asked for some time off from Tethyan which they obliged.

From 22 October to 3^rd of November I was in Pakistan and continued to fill in various Contracts manager functions and assisted in overflow work from the Finance Manager and acted as the HSE manager and completed a double fatality investigation.

Out of contract from January 1^st 2008, have not been paid by Tethyan for any work performed in 2008 pending contract negotiation.

From December 26^th 2007 to 28^th January 2008 I was in Canada on Vacation with Family.

While I was in Canada I was contacted by CEO to see if I could fill in for Site Manager role and also run procurement and logistics in Karachi, while the position was being recruited.  I agreed and started work in Pakistan from the 4^th February to 23^rd February as Site and Karachi Manager.  From this point on my relationship changed to reporting to the CEO

This role continued from March 4^th to 21^st March 2008

And was repeated from 31 March to 18^th April 2008

And repeated from 12 May to the 29^th of May.

This is all verifiable by exit and entry dates in my passport either in Australia or Pakistan."

11     The respondent sent the applicant a Notice of Private Ruling ("the Ruling") on 21 October 2008.

12The Ruling stated that:

·The income derived by the applicant from working in Pakistan was assessable under ss 6-5(2) of the ITAA 1997

·The income derived by the applicant from working in Pakistan was not exempt from tax under s 23AG of ITAA 1936.

·The question of whether the time in Australia on rest and recreation (R&R) leave forms part of the contracted foreign service was not applicable.

·The income from working in Pakistan was considered to be the personal services income of the applicant.

·Boardline was not considered to be carrying on a personal services business in relation to the applicant’s personal services income.

13     Since the Ruling, the applicant has acknowledged that the payments made by Tethyan to Boardline were, at the direction of Boardline, paid directly into the applicant's bank account as Boardline did not operate a bank account.

14It is further not in dispute that:

14.1     Boardline issued invoices to Tethyan for “consulting fees” at the rate of $2000 per day for February, March and April 2008 in April and May 2008.

14.2     Boardline itself did not pay the applicant any amounts wether as salary or wages or otherwise.

14.3     Boardline did not pay the applicant during his period of leave

14.4     Boardline did not pay any superannuation or workers compensation insurance on behalf of the applicant.

Issues

15 The issue in this matter is whether the payments received by the applicant from Tethyan Copper Company Pty Ltd ("Tethyan") are exempt from Australian income tax under s 23AG of the ITAA1936.

Tribunal’s Findings

16The Tribunal finds that on the facts before it and for the reasons set out below the payments are not exempt because:

·The Personal Services Income ("PSI") provisions of ITAA1997 apply to attribute the contract income to the applicant and as such s 23AG of ITAA1936 has no application

·Alternatively if the PSI provisions do not apply, the applicant was not engaged in foreign service at any relevant time for a continuous period of not less than 91 days, so that the exemption continued in s 23AG does not apply.

PSI Provisions

17 Before s23AG can be considered, it is necessary to consider the PSI provisions.

18     The applicant does not dispute that the amounts paid to the applicant under the Contractor Agreement are personal services income of the applicant as the income is mainly a reward for the applicant's personal efforts or skills.

19     The applicant also does not dispute that Boardline is a personal services entity and that Boardline was not conducting a personal services business.

20     Consequently the PSI provisions attribute the personal services income to the applicant under s 86-15 of ITAA1997.

21 It is clear that s 23AG of ITAA1936 cannot apply to income attributed to a person under the PSI provisions – see Lopez v Deputy Commissioner of Taxation (2004) FCA 756

22     SS 86-15(4) provides that the PSI provisions do not apply to the extent that the personal services entity pays the relevant amount to the person as an employee as salary or wages within a prescribed period.

23     There is no evidence to show that any relevant amount was paid by Boardline to the applicant as salary or wages as an employee at any relevant time.

24     The evidence shows that Boardline issued invoices to Tethyan with instructions to pay the contract payments directly into the bank account of the applicant and that this was done.

25     Although the applicant and Boardline purportedly entered into an Employment Agreement, in the Tribunal’s opinion it is clear that in practice that agreement was ignored or bypassed and the total contract payments were simply paid directly to the applicant by Tethyan.

26     It is also clear that the applicant considered himself to be an employee of Tethyan rather than Boardline, notwithstanding the provisions of his purported Employment Agreement with Boardline.

27     The Tribunal notes in this regard that the applicant says the following in his witness statement:

“The intent of the contractual arrangement is that I was considered as an employee of Tethyan Copper Company, I fulfilled roles within the Tethyan organisation as other permanent (12 or 24 month employee’s (sic), no other employee had a contract of more than 24 months) employees within the Tethyan Copper Company.

As with other employee’s (sic) and as part of my exclusive arrangement with Tethyan, I spent a minimum number of days in Pakistan and the balance of the month was treated as R&R to reflect the conditions of service in Pakistan.”

28     The Tribunal also notes that Boardline ignored the usual employer responsibilities to:

·Deduct tax

·Pay superannuation

·Provide worker's compensation cover

and further that it appears that because Boardline did not have a bank account it did not make any provision to pay holiday pay or sick pay as was required under the Employment Agreement.

29     If the applicant considered himself to be an employee of Boardline, he took no steps to ensure that his rights as an employee were looked after by Boardline.  In fact, as the applicant was also the sole director of Boardline, he was responsible for Boardline ignoring the purported Employment Agreement.

30     As noted above the Tribunal finds that the contract payments due to Boardline by Tethyan were simply paid directly to the applicant so that the conditions of ss 86-15(4) of ITAA 1997 were not met because the payments in question were not made to him as salary or wages paid by Boardline.

S 23AG ITAA1936

31 Alternatively, if, contrary to the Tribunal’s finding the amounts that were paid directly to the applicant by Tethyan were payments of salary or wages from Boardline to the applicant, ss 86-15(4) of ITAA1997 applies . In that event there is no amount of income attributed to the applicant under the PSI provisions but the Tribunal finds that s 23AG of ITAA 1936 does not apply to exempt the income as the applicant has failed to discharge the onus which rests on him to prove he was engaged in foreign service for any continuous period of not less than 91 days during the relevant period.

32     The evidence shows that the applicant worked in Pakistan during the following periods:

16 July 2007 to 6 August 2007
26 August 2007 to 8 August 2007
22 October 2007 to 3 November 2007
26 November 2007 to 8 December 2007
4 February 2008 to 23 February 2008
4 March 2008 to 21 March 2008
31 March 2008 to 18 April 2008
12 May 2008 to 29 May 2008
16June 2008 to 26 July 2008

33 As each of these periods of foreign service is less than 91 days, the income received by the applicant is not exempt under s 23AG unless ss 23AG(6) ITAA 1936 applies.

34 SS 23AG(6) provides that a period during which a person is engaged in foreign service includes any period that he is absent on “recreation leave”.

35 SS 23AG(6A) provides that 2 or more periods in which a person has been engaged in foreign service are taken together to constitute a continuous period of foreign service until:

(a).the end of the last of the 2 or more periods; or

(b).a time (if any), since the start of the first of the 2 or more periods, when the person's total period of absence exceeds ¹/₆ of the person's total period of foreign service

36 The Tribunal finds that the times in between periods in Pakistan were not periods when the applicant was on recreation leave. The applicant asserts that these periods were R & R leave or rostered days off and has contended that they are recreation leave for the purposes of ss 23AG(6). The Tribunal rejects this assertion for the reasons set out below.

37     The Tribunal notes that clause 7.1 of the Employment Agreement provides that the applicant was to be rostered on for 10 days and have 2-5 weeks rostered off dependent on the political situations attended by the employee. The Contractor Agreement provided that the applicant was the “key personnel” and that he would work for 10 days per month for which Tethyan would pay Boardline $20,000 i.e. $2000 per day as invoiced by Boardline.  The Contractor Agreement covered the period from 1 July 2007 to 31 December 2007.

38     Clause 7.1 of the Contractor Agreement provided that, subject to the remainder of the agreement, the agreement does not prevent or restrict the Contractor and the key personnel providing services the same or similar to the services of any kind to any other person.

39     Clause 7.4 of the Contractor Agreement provided that the agreement was on a non-exclusive basis but the company had first call on the “Key Personnel's” availability for 50% of the working days within a month.

40     Clause 5 of the Addendum is contradictory.  It says that the contract is on an exclusive basis but it then says that the company has “first call” on the “Key Personnel's” availability 100% of the working days within a month.  This would indicate that the applicant is able to work for someone else when not required by Tethyan and on days that are not working days.

41     Clause 7 of the Addendum provides that the “key personnel” is entitled to “rostered leave” of 20 days per month.

42     The evidence shows that the applicant was paid $20,000 per month up to 31 December 2007 ie. $2000 per day for 10 days per month being the number of days for which he was contracted to work for Tethyan. Thereafter he was paid $2,000 per day for the days that he worked in Pakistan.  It is clear that at all the relevant times the applicant was paid only for his days in Pakistan and he was not paid for the so-called “rostered leave” days.

43     In the Tribunal’s view the applicant was not on recreation leave during the periods that he was “rostered off” and not in Pakistan.  It was simply the case that he was not working and he was not being paid.

44     The applicant refers to Miscellaneous Taxation Ruling MT 2048 to support his contention that the rostered time off was recreation leave.  That Ruling considered the meaning of "recreation leave" in relation to fringe benefits tax on remote area holiday transport.  It states that the concession will apply to transport provided while an employee is on recreation leave, such as rostered days off, only if those rostered days are "working days" for the purposes of paragraph 143(1)(h).  In the Tribunal’s view the Ruling is not relevant but in any event the time off granted to the applicant were clearly not working days and should not be treated as recreation leave.

45     The applicant also contends that ATO Interpretive Services ID 2010/3 supports his claim that the rostered days off are recreation leave.  He quotes from the ATO ID "in general terms 'recreation leave' may be described as a kind of paid leave of absence from work granted to employees for the purposes of rest, enjoyment and reinvigoration.”  However the Tribunal finds that the periods off that the applicant had were not periods of paid leave and therefore do not fall into the description of recreation leave.

46     The applicant further contends that paragraph 11(b) of Taxation Ruling 96/15 states that rostered days off are recreation leave.  The Tribunal is of the view that this contention is not correct as clearly emerges when the paragraph is read as a whole.  Paragraph 11(b) states:

"(b)     Weekends, public holidays, etc.

A period of foreign service is taken to include weekends, public holidays, rostered days off, ‘compulsory lay off/over days’, ‘grounded days’ and flexidays (which are not ‘available days’ spent in Australia), and days off in lieu of such, provided:

(i) such breaks are authorised by the terms and conditions of the foreign service employment or engagement; and

(ii) where such breaks are used by the person to visit or return to Australia they must not be excessive by comparison with the scheduled period of foreign service or, if the period of foreign service is ongoing, by comparison with the income year.  As a guide, the Commissioner considers that where such breaks are used to visit or return to Australia, they will be excessive where the total of such breaks are more than one-sixth of the period of scheduled foreign service or, if the period of foreign service is ongoing, more than one sixth of the income year.  Therefore, where the total of temporary absences is excessive in terms of this paragraph, each temporary absence will be taken to break the foreign service period, subject to section 23AG(6A) to (6E).

Rostered days off, compulsory lay off/over days, grounded days and flexidays are not considered to be recreation leave for the purposes of section 23AG(6).  That is because such absences are not recreation days that are granted as a result of leave that has accrued while a person is actively engaged in foreign service.

Available days spent in Australia are not considered to be a period of foreign service. Where an employee spends available days in Australia, this period is considered to be a break in foreign service, unless subsections 23AG(6A) to (6E) apply.  That is because such time is not recreation leave for the purposes of subsection  23AG(6), nor does it come within any of the temporary absences set out in paragraph 11 of this Ruling.  If available days are spent in a foreign country, it is considered that those days will form part of the foreign service period.

47     The applicant further also contends that he worked in a “cyclical arrangement”, broadly described as 10 days on and 20 days off.  The Tribunal finds that this was not the case.  The applicant claims that his contract ceased on 31 December 2007 and he went on holidays with his family and then recommenced under a new arrangement in February 2008.

48The Tribunal notes that the applicant's work/break periods were:

Start Date	End Date	Days worked
16/07/2007	06/08/02007	22 days
Break of 19 days
Start Date	End Date	Days worked
26/08/2007	08/09/2007	14 days
Break of 43 days
22/10/2007	03/11/2007	13 days
Break of 22 days
26/11/2007	08/12/2007	13 days
Break of 23 days Out of contract from 1 January 2008
04/02/2008	23/02/2008	20 days
Break of 9 days
04/03/2008	21/03/2008	18 days
Break of 9 days
31/03/2008	18/04/2008	19 days
Break 23 days
12/05/2008	29/05/2008	18 days
Break 17 days
16/6//08	26/6/08	11 days

49     Accordingly in the view of the Tribunal the taxpayer did not work on a cycle. A cycle is where work and break periods are repeated over and over. This is not the case here.

50     The applicant also claims that he was on “annual leave” for the period 14 to 21 October 2007.  There is no evidence of this. 

51     In the original application (page 26 of T-documents), the applicant stated "During 8^th September to 22^nd of October 2007 I moved house and project managed the renovation of various major projects within our principal residence.  I asked for some time off from Tethyan which they obliged."

52     No mention of “annual leave” was made in the applicant's objection or his Statement of Facts, Issues and Contentions or in any evidence presented to the Tribunal.

53     The first time that ”annual leave” was raised was when the applicant's representatives were making oral submissions to the Tribunal. 

54     In the Tribunal’s opinion there was a cessation of foreign service for the period that the applicant carried out his home renovations.

55     Finally the Tribunal notes that the applicant has conceded that he was out of contract at the end of December 2007 and that he went to Canada with his family in January 2008 terminating his foreign service which was only re-commenced on 4 February 2008.

Decision

56The Tribunal affirms the reviewable objection decision under review.

I certify that the 56 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member

Signed: ..........(sgd) Ms L Huynh..............................................
  Associate

Date/s of Hearing  26 March 2010
Date of Final Submissions  16 April 2010
Date of Decision  26 May 2010
Representatives for the Applicant             Mr T Underhill and Mr P Hills
  William Buck (WA) Pty Ltd
Representative for the Respondent          Mr F Maloney
  ATO Legal Services Branch