Commissioner of Taxation v Stone

[2004] HCATrans 219

[2004] HCATrans 219

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S432 of 2003

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

JOANNA STONE

Respondent

Application for special leave to appeal

GUMMOW J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 18 JUNE 2004, AT 10.45 AM

Copyright in the High Court of Australia

MR G.T. PAGONE, QC:   May it please the Court, I appear with MR S.H. STEWARD for the applicant.  (instructed by Australian Government Solicitor)

MR D.H. BLOOM, QC:   May it please the Court, I appear with my learned friend, MR J.H. MOMSEN, for the respondent.  (instructed by Blake Dawson Waldron)

GUMMOW J:   Yes, Mr Pagone.

MR PAGONE:   If the Court pleases, this is a matter involving the question about the assessability as income under ordinary concepts of receipts by an elite sportsperson which were received by her in the course of that activity.  May I take your Honours briefly to two pages in the appeal book ‑ ‑ ‑

GUMMOW J:   What would be the Commissioner’s attitude as to disturbance of costs below and as to the incidence of costs here if leave were granted in this test case?

MR PAGONE:   May I get instructions, your Honour?

GUMMOW J:   Yes.

MR PAGONE:   Your Honour, we would not oppose a disturbance of costs and we would be agreeable to pay the costs of the respondent.

GUMMOW J:   Reasonable costs.

MR PAGONE:   Yes.

KIRBY J:   .....expect the Commissioner to ever agree to anything that was unreasonable.

MR PAGONE:   Your Honour, reasonable costs.  I can only assume that my learned friends would only be charging reasonable costs, your Honour.

KIRBY J:   Mr Bloom’s eyebrows hit the ceiling.

GUMMOW J:   Yes, Mr Pagone.

MR PAGONE:   Your Honour, the two pages that I wanted to take the Court to are, first of all, what appears in the appeal book at page 81, where your Honours will see in a snapshot the nature of the income that Ms Stone had ‑ ‑ ‑

KIRBY J:   Yes, we know all that but the point against you is that this is a well run area of authority.  The test is stated as long ago as Sir Owen Dixon.  The principle is clear.  It is merely an application of the principle of the case.  It has gone to the Full Federal Court.  Tax cases normally finish there.  What is so special about this so-called test case?

MR PAGONE:   Your Honour, if what your Honour had said were accurate then there would be nothing that we could say, but if your Honour were to look at what the Full Court said about the question of principle then ‑ ‑ ‑

GUMMOW J:   What was the point on which they differed from Justice Hill – the actual focus of it?

MR PAGONE:   Your Honour, the focus of it is this.  Justice Hill seemed to regard the relevant question as being one of intention as determined by reference to objective factors, that is to say the purpose of the activities and whether, in fact, there had been a turning to account of Ms Stone’s abilities in a way that produced something regarded as income.  What the Full Court did was to say one must characterise the overall purpose of the activities and that in doing so the Full Court said, when you looked at the overall activities of Ms Stone, her overall concern was not that of deriving income, as we readily accept, her overall purpose was perhaps to undertake some broader objective.  Your Honour can see that very clearly in the appeal book, particularly at pages 66 and 67 but also ‑ ‑ ‑

KIRBY J:   Her primary income, if I can use that adjective, she was a police officer.  She was earning her day‑to‑day income as a police officer and I would warrant if you went out there on the street and said to ordinary Australians, “Is the money that a sportsperson gets as a prize income for the purposes of taxation” the ordinary Australian would say. “No, it is a prize”.  Now the question in this case is whether given her brochure, her promotion of herself, the regularity of the flow, it has taken on a different quality, but that is a matter of assessment for the Federal Court.

MR PAGONE:   Your Honour, I am not sure what would happen if one asked the ordinary Australian about elite sportspersons, but I suspect that there would be ‑ ‑ ‑

KIRBY J:   That is what Sir Owen Dixon set as the test – ordinary notions of the concept of income.

MR PAGONE:   That is not the same, your Honour, as asking the person in the street what they would regard as ‑ ‑ ‑

KIRBY J:   Well, tax lawyers may not think that, but as far as I am concerned that is what it – it is an ordinary act of the Parliament of Australia.  You go out there and ask people in the street, “What is this money, income or prize money?”  Australians are very sympathetic to sportspeople.  They would say it is a prize money.

MR PAGONE:   Your Honour, with respect, I am not sure that the ordinary people that I associate with would give the same answer because, with respect, what we would say is that a lot of the sportspeople would be regarded by the ordinary person in the street as, in fact, deriving something that is assessable as income and the example that Justice Hill gave during the course of his reasons were that of an unnamed swimmer.  Now, what we would say, your Honour, is that the ordinary Australian in respect of a whole range of people who appear before them on the media every day would take the view that the amounts that they receive, in part by prize money and in part by grants, because we must not ignore the issues specifically related to the grant, the medal incentive scheme ‑ ‑ ‑

KIRBY J:   There are grants, there is sponsorship and there are actual prizes.  They are the three categories, are they not?

MR PAGONE:   And appearance fees, your Honour.

KIRBY J:   Yes.

MR PAGONE:   But the two big things, I suppose, are the prizes and the grant that is made as a sum of money to her by the – or was made to her by the Olympic medal incentive program.

GUMMOW J:   At both levels in the Federal Court there seems to have been a notion that you solve the case by asking whether the taxpayer was carrying on a business? 

MR PAGONE:   That is right, your Honour, and the question that arises in that particular context is what does that mean in the context of a sportsperson?  His Honour Justice Hill regarded the question as being, well business in that context, bearing in mind the definition of “business” that appears in section 6 of the Act as including things like vocation and calling, does it necessarily mean that of a business that is necessarily directed to profit as such?

KIRBY J:   Is that introduced, that notion, because of the new Act or is that a red herring.

MR PAGONE:   No, that has always been there.  Well, I should not say always been there, it has been there for some time ‑ ‑ ‑

KIRBY J:   But is it in the Act that it has to be income in the course of a business or as a result of a business?  It sounds to me as though this is tax lore, which I am against.

MR PAGONE:   Your Honour, the primary provision is that it is income.

KIRBY J:   Exactly.  That is all.

MR PAGONE:   So the primary question is, is it income under ordinary concepts?  It will be income under ordinary concepts if it is income arising from a business, and then there is a definition of “business” and business is not narrowly defined, but includes a variety of things like a calling, a profession, a variety of activity that would not ordinarily be income.

An example that we have given your Honours, of course, is the case of G, where you had an evangelist preacher whose receipts were the donations made by the parishioners who doubtlessly were grateful that there was a person there who was preaching to them from time to time.  That was held to have been a business, now obviously not a business in the narrow sense, but a business in the relevant sense for tax purposes.

But, your Honours, can I come back to the question that I had been asked about the difference between the two decisions and may I take the Court to just three or four sentences, first of all at appeal book 63 in the judgment of the Full Court where their Honours say, paragraph 76:

It is necessary to consider whether Ms Stone undertook the Activities for the purpose of obtaining receipts of the nature described above in a way that demonstrates that obtaining the receipts was the object of the Activities.

So what their Honours posit is a test which is to say, “We must characterise the activities as a whole”.  They then repeat more or less that on page 66 where they say in paragraph 87, in the last two lines:

She sought sponsorship in order to further her aims as a sportswoman.  She did not perform the Activities in order to derive income from sponsorships.

On page 67 ‑ ‑ ‑

KIRBY J:   I thought that that promotional brochure where she says “What I can do for you if you sponsor me” was getting close to looking like raising income ‑ ‑ ‑

MR PAGONE:   And the relevant difference, your Honour, is that what their Honours in the Full Court did, we would say for the first time and contrary to authority and consequent principle, is to say that the character of receipts depends upon a characterisation of the ultimate purpose of a person in undertaking the activities as a whole.  His Honour below, we respectfully submit, approached it correctly by saying her ultimate objective may have been for wholly praiseworthy, personal objectives that have nothing to do with the derivation of income in the same way as an artist might paint because he or she regards it as a vocation or ‑ ‑ ‑

KIRBY J:   Or a barrister because the barrister loves coming up here and having a talk with us.

MR PAGONE:   Or judges taking judicial appointment, your Honour, or whatever, but those personal motivations have been held not to be the relevant discrimen to determine and so what his Honour did was to say, the relevant test is, has she turned to account her undoubted skills and derived income and his Honour then said, although admittedly in some respects that he said it was a borderline case, nonetheless, yes.  Now what we have there, your Honour, is a vastly different legal approach to the way the issue was considered.  At paragraph 92 on page 67, the same thing again, the last sentence of that paragraph 92:

She has not been engaged in a business activity to exploit her sporting prowess or to turn her talent to account in money.

And we would say that is plainly the wrong question.  It is not whether she was doing it to exploit.  The question is was she exploiting in a way that necessarily meant that the receipts were assessable as income.  Now his Honour below approached the matter, as I have said, in a very different way.  Your Honours can see that on page 18 of the appeal book.  First of all, he describes the relevant business in paragraph 63, the first sentence:

In the present case, the business, if there is a business, might be colloquially spoken of as the business of a professional athlete. 

That is necessary in order to give context to the approach that his Honour, and we would respectfully say the Court, needed to undertake.  On page 20, in paragraph 69, particularly in the middle of that paragraph, his Honour says - this is at line 44:

The question whether the athlete is carrying on a business will not be resolved in these cases by considering the activity he or she engages in, but rather by a consideration of the motive or purpose for doing so.  That motive may often, however, be gleaned from the activities which the athlete undertakes.  It must also be said that the mere fact that the athlete wins prizes of a large amount can likewise not be determinative of the issue.  The size of a prize alone does not mean that it is income.

And over the page, at 21, particularly paragraph 73:

The question however, is whether Ms Stone turned her undoubted talent to the pursuit of money in the way that one would expect a professional athlete would. 

Now, your Honours, just in those passages one sees a startling difference between the two approaches.  His Honour talks about motive or purpose, but plainly he is not talking about an inquiry into the subjective purpose of a taxpayer.  What his Honour is talking about is that of characterisation, characterising the activity that is productive of the income, and is certainly not considering the overall activity being entered into, as it were, as a job lot.  On the contrary, his Honour says on page 21, paragraph 72, second sentence:

I have no doubt that Ms Stone engaged in the sport of javelin throwing from an early age because of her enthusiasm for the sport and because of her desire to excel in it and to win medals, particularly in the Commonwealth Games and the Olympic Games.

KIRBY J:   But this is the irony, you see, that on one hand the Commonwealth through its Sports Institute gives out money to help young sporting people find themselves and when they find themselves and begin winning prizes and becoming people of great celebration in the country, in walks the Commissioner in the other arm of the Commonwealth and says, “Well, we want all your money” or “We want your money as income, we are going to tax you on it”.  It may be relevant but it seems to be inconsistent.

MR PAGONE:   Your Honour, the inconsistency, if there be any, is more starkly shown in respect of pensions and welfare payments where the Commonwealth happily gives a pension or a welfare payment and the whole range of benefits, including Austudy to encourage individuals to become, not elite sportspeople, but great scientists and lawyers and all sorts of endeavours and, at the same time as giving the money, takes it back, or part of it back, in the tax system.

KIRBY J:   You say it is just the application of a neutral principle to all citizens, all people in the country.

MR PAGONE:   Correct, your Honour.  Now, your Honour, that explains the basic part of the case with which we are concerned. 

GUMMOW J:   We will hear from Mr Bloom.  Thank you, Mr Pagone.

MR BLOOM:   Your Honours, it is our respectful submission, as your Honours know, that this is not an appropriate case for special leave.  Firstly, even if there were some fundamental principle involved, which we say there is not, the matters referred to by Lord Griffiths in Ketteman have no less relevance, in our respectful submission, in this context than they did in that case.

GUMMOW J:   Given the way tax law works with these general concepts and given the quite significant social phenomenon in recent years of professionalisation of sports and the exploitation of fame by commercialisation in various ways, why is this not something that has to be looked at, given the division of opinion in the Federal Court?

MR BLOOM:   Well, we will come to the division of opinion, your Honour, because effectively, we say, that there was an inherent inconsistency in the trial judge’s judgment which was recognised by the Full Court and that both, the trial judge and the Full Court were simply looking at the proper conclusion from the facts before them to be drawn as to whether there was a business or not.

KIRBY J:   Well, on that score, I would add to Justice Gummow’s list the brochure which your client put out telling sponsors this is what I can do for you.  That is getting very close to a business.

MR BLOOM:   Your Honour makes it seem like it was something ‑ ‑ ‑

KIRBY J:   I am not being critical, I am just saying that that is the ‑ ‑ ‑

MR BLOOM:   Your Honour is being flattering in calling it (a) a brochure, and (b) suggesting that it contains something very unhelpful ‑ ‑ ‑

KIRBY J:   Unhelpful to your case and not unusual, I would have thought, amongst sporting people.

MR BLOOM:   But it was neither, your Honour, it was a document prepared in the most amateurish form by the respondent’s mother on the home computer sent to the local businesses in Queensland and under the heading “What I can do for you as a sponsor” appeared “I can wear your logo on my uniform”.  That was the extent of it, your Honour. 

KIRBY J:   Yes, but that is, as it were, going out to all and sundry saying give me money, I can do this for you, I can do it, and that is sort of the notion of, I think, income generation.

MR BLOOM:   Well, your Honour, there is no contest that the sponsorship moneys are income.  That was accepted before his Honour Justice Hill.  There was just no issue about that and that is because when you get sponsorship moneys you are performing a service.  The case run by the Commissioner in the Full Court was really this, that there is some sort of general principle, which he was unable to articulate, that says that where an athlete or sportsperson derives money, that money is income, notwithstanding that it is not the product of services or employment or a business.

KIRBY J:   But once you get into the league of, as it were, attracting the money through sponsorship and attendances, it is beginning to look as though this is your little business.

MR BLOOM:   Well, your Honour, the evidence shows that of this particular person, she is primarily a policewoman, and it shows that ‑ ‑ ‑

KIRBY J:   Yes, but her police income was $57,000 a year whereas this income was in the ‑ ‑ ‑

MR BLOOM:   Your Honour is deciding it against me in using that tone - this income, but this receipt ‑ ‑ ‑

KIRBY J:   For the purpose of the argument.  I have not decided against you at all.

MR BLOOM:   Your Honour, to take a snapshot of the one year in which she won the one big prize in a competition incidentally which she had to enter in order to get Olympic selection, and the evidence also shows that she entered many such competitions where there was no prize money or where she just did not know whether there was prize money, but in this one year, it leaves out of account that she and her family from when she was a little girl, paid considerable sums of money to get her to Little Athletics, to buy her javelins, to buy javelin boots all of which wear out, and for which the Commissioner incidentally says you are not entitled to any deduction.  He says all of this is income, but all of those things are not deductible then he ‑ ‑ ‑

GUMMOW J:   Well, that is another case, maybe.

MR BLOOM:   Maybe, but this is a question of whether special leave should be granted.

KIRBY J:   Mr Pagone looks horrified at that allegation.

MR BLOOM:   Your Honour, the reality though is to take a snapshot of the one year in which she won the big prize, and to say that that is the only year over a period of time in which she has engaged in athletics and incurred considerable expenditure.  The other thing is, the evidence showed there was no system, no organisation, she did not keep records of what she spent, she did not know whether particular prize money was offered in any competitions, or often in many competitions, in which she entered.

KIRBY J:   She was very proper in revealing this income though to the Commissioner ‑ ‑ ‑

MR BLOOM:   Certainly.

KIRBY J:   And asserting that it was not – I use the word “income” ‑ ‑ ‑

MR BLOOM:   Revealing these amounts, yes, your Honour.  I know what your Honour says.

KIRBY J:   Using these amounts and asserting that they were not income for the Act.

MR BLOOM:   But, your Honour, we come back to Ketteman and what Lord Griffiths said - your Honours should have a copy of it - at page 220E:

But justice cannot always be measured in terms of money and in my view a judge is entitled to weigh in the balance the strain the litigation imposes on litigants, particularly if they are personal litigants ‑ ‑ ‑

GUMMOW J:  What has Ketteman to do with this case?

MR BLOOM:   Well, it is relevant to your Honours discretion, with respect.  This is a personal litigant rather than a business corporation and ‑ ‑ ‑

GUMMOW J:   Discretion as to what?

MR BLOOM:   To grant special leave, your Honour.

GUMMOW J:   Well, we have indicated terms would be imposed.

MR BLOOM:   Yes, your Honour, but, your Honour, how can, in the context of the letter which the Australian Taxation Office wrote refusing test‑case funding when the taxpayer had lost at first instance and the taxpayer was seeking to appeal and seeking funds from the ATO to do so - your Honours that letter is at page 95 of the application book.  The Commissioner writes back and says, line 35:

The Panel discussed the requirement for test case applications to serve the public interest in the clarification of law, and for test case issues to seek to clarify the law for a significant amount of taxpayers.  With respect to the issues raised in your application, the Panel were of the opinion that funding was not appropriate because:

·The case would not result in clarification of taxation law principles;

·The outcome in this case turns largely on the particular facts of the case;

·A decision on appeal would not provide a precedent.

Now, your Honours, by that response the Commissioner effectively nailed his colours to the mast.  He did so in a letter which he must have known would have an effect on the decision to appeal.

GUMMOW J:   Is this some sort of estoppel argument now, is it?

MR BLOOM:   Well, it is something which is relevant.

KIRBY J:   He has now got wiser counsel, his counsel says there is an important matter of principle, it does not depend on the particular facts and it is an extremely important matter of tax law and anyway we will pay the costs.

GUMMOW J:   And not try and disturb the order you got in the Full Court.

MR BLOOM:   Well, he now says that, he has not said that until today.

GUMMOW J:   I know.  We know these things, Mr Bloom.

MR BLOOM:   But, your Honour, I am acting for a personal litigant not a corporation.

GUMMOW J:   We understand that.

MR BLOOM:   The strain of litigation exists and the Commissioner raised a false hope by sending out this letter, that if she was successful in the Full Court ‑ ‑ ‑

KIRBY J:   We are discharging a constitutional and statutory function.  We cannot be affected by that letter, it seems to me, unless you assert that it is some sort of a commitment that cannot be resiled from and you point out that it is inconsistent with the great importance now being urged upon us, and I understand that argument.

MR BLOOM:   It is a volte-face.  He now comes along and says to your Honours this is a matter of enormous – the exact opposite to everyone of those, and this is a letter which he sends out publicly saying I have ‑ ‑ ‑

KIRBY J:   But he puts his money where that point is and says this is a test case, as it was said to be earlier - I think that Justice Hill used that word, or certainly the Full Court.  It is raising a general issue.  As Justice Gummow said there has been a sea change over sporting in Australia.  It does appear to present some general questions and it is not without interest and we have two able and experienced counsel in the case and the costs are covered ‑ ‑ ‑

MR BLOOM:   Two out of four is not bad, your Honour.  I will not ask your Honour which two. 

KIRBY J:   I should say four then.

MR BLOOM:   I thank your Honour on behalf of my junior anyway.  Your Honour, interest is something I find it difficult to deal with.  If your Honours are interested in it and that is the basis for the grant of special leave, then there is not a lot I can say.  However, what the judgments below illustrate is this.  Justice Hill said this is a borderline case and not without some doubt.

GUMMOW J:   It seems to me there is a public interest in sorting out these questions that have arisen in view of this changed social ‑ ‑ ‑

MR BLOOM:   Well, your Honour, may I just add one other thought for your Honours and that is the possibility of limiting the grant of special leave.  According to the submissions filed on behalf of the applicant, the principle seems to depend upon the judgment of the various judges who comprised this Court in Dixon’s Case.

GUMMOW J:   Yes, that is 50 years ago.

MR BLOOM:   Yes, and that would ‑ ‑ ‑

GUMMOW J:   It is not about sportsmen either. 

MR BLOOM:   Well, it is not, your Honour.

GUMMOW J:   It is about people serving their country in the armed forces.

MR BLOOM:   Under an inducement from a patriotic employer that the wages would be made up, and yet the basis of that would cover grants, it seems ill-appropriate to prize money, and for that reason, we would ask that if special leave were to be granted, that it be limited to the grants about which my learned friend said they are like pensions, they are like the sorts of things that come from the government and you nonetheless tax them, but prize money is in an altogether different category, in our respectful submission. 

KIRBY J:   What is the actual language of the limited grant that you would be urging on us?

MR BLOOM:   Limited to the question of whether the grants from ‑ ‑ ‑

GUMMOW J:   I think if you come here and you want a limited grant, Mr Bloom, you have two counsel, you write it down first.

MR BLOOM:   Well, your Honour, there are only two grants.  There was a grant from the Queensland Government and there was a grant from the Olympic Committee.  They are the only two grants.  They are easily identified.

KIRBY J:   I think if we are going to bring it up, I mean it is all rolled up in a relatively small compass of facts – it is a question of grants and prize money.

GUMMOW J:   Now, is there anything else you want to say?

MR BLOOM:   No, your Honour.

GUMMOW J:   What is this point, Mr Pagone, that causes you such distress about deductions?

MR PAGONE:   Your Honour, it is actually conceded that she was entitled to deductions.  It appears in the appeal book that she was.

KIRBY J:   I think the suggestion is javelins at the age of seven – did not have any income in that year, presumably.

MR PAGONE:   Your Honours, if Ms Stone was engaged in a business, she would be entitled to deductions, whether or not she had sufficient income to match the deductions, and that is part of the reason why the case is important because there will be people out there, or there may be people out there who will be regarded as being involved in a business activity,

relevantly, and will get deductions though the income is not sufficient to match the deductions.

GUMMOW J:   That is why these cases can be a double‑edged sword for your client.

MR PAGONE:   Absolutely, your Honour, and your Honour can rest assured that he is mindful of that.

GUMMOW J:   Mr Pagone, I will read this to you for your response.  Special leave granted upon terms that in any event the Commissioner will not seek to disturb the costs order in favour of the taxpayer made by the Full Court of the Federal Court and will pay the costs of the taxpayer of the appeal to this Court, including the costs of senior and junior counsel and that the draft notice of appeal will be revised accordingly.

MR PAGONE:   Content, your Honour.

GUMMOW J:   As indicated then, there will be a grant of special leave in application No 4.  Thank you, gentlemen.

AT 11.14 AM THE MATTER WAS CONCLUDED