Davies and Commissioner of Taxation

[2009] AATA 297

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 297

ADMINISTRATIVE APPEALS TRIBUNAL      )

)     No   2008/4316
  No   2008/4320

TAXATION APPEALS DIVISION		)
Re		GRAHAM DAVIES SYBIL DAVIES

Applicants

And COMMISSIONER OF TAXATION 

Respondent

REASONS FOR DECISION

Tribunal   Mr A Sweidan, Senior Member 

Date of Decision       25 February 2009   

Date of Written Reasons             20 March 2009

Place           Perth

Decision

1.    At the conclusion of the hearing of this application on 25 February 2009, the terms of the decision intended to be made and the reasons for that decision were stated orally by the Tribunal.

2.    The applicants and the respondent have requested the Tribunal to furnish a statement in writing of the Tribunal’s reasons for its decision.

3.    The oral reasons for decision have been transcribed by Auscript Australasia Pty ltd.

4.    A copy of the edited reasons for decision is attached and is forwarded to the applicants and to the respondent as the reasons for the Tribunal’s decision. 

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

Senior Member  

CATCHWORDS

Income Tax – capital gains tax – small business retirement exemption – whether conditions met – whether applicants were employees – whether eligible termination payment made – decisions under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 – subdivision 152-D

Income Tax Assessment Act 1936 s 27A(1)

CASES

Dietrich v Dare (1980) 30 ALR 407

REASONS FOR DECISION

20 March 2009 Mr A Sweidan, Senior Member

Background

Relevant Facts and Applicants’ Contentions 

1.      The applicants have sought review of objection decisions relating to assessments that denied them the small business retirement exemption (see below).

2.      The applicants are husband and wife and their circumstances are the same.

3.      They were both beneficiaries of family trusts (the trusts) which owned adjoining farming properties.

4.      The trustee of the trusts sold the properties in March 2004 and both trusts made capital gains which were distributed to the applicants.

5.      An Agreed Statement of Facts tendered at the hearing reads as follows:

1.Mr and Mrs Davies worked on the farms owned by the trusts. Duties include:

·sheep husbandry

·wool production, shearing etc

·sheep & lamb breeding

·sewing growing and harvesting of crops

·general farm development and fencing

2.Mr and Mrs Davies ceased work on the sale of the farms.

3.Mr and Mrs Davies were and still are directors of the nominee company that is trustee for the trust.

4.The trusts still received investment income after sale of the farms.

5.Mr and Mrs Davies did not have a written contract of employment.

6.Mr and Mrs Davies did not receive a regular wage. They drew money from the business account for living expenses.

7.Mr and Mrs Davies expected to receive the rewards for their work from the eventual sale and capital gain made on the property. The value of the farm was increased by the work done by Mr and Mrs Davies over the years thus increasing the capital gain.      

6.      It is common cause that the trustee of the trusts did not at any relevant time:

6.1      pay any salary or wages to the applicants

6.2make any PAYG income tax or superannuation payments for the applicants

6.3    take out any workers compensation insurance for the applicants. 

7.      In April 2005 the applicants signed elections to apply the small business retirement exemption provisions of subdivision 152-D of the Income Tax Assessment Act 1997 (the Act) to the capital gains from the sale of the land. It appears that this was done in their personal capacities as there is no indication that the elections were signed in any other capacity.  

8.      Applicants contend that there was an implied contract of employment between the trustee of the trusts and themselves. Mr Davies gave evidence to the effect that it was “understood” among the family that he and Mrs Davies were employed with the expectation that they would get a reward at some future date. Under cross- examination he said that what was discussed was who would do what work as between himself and Mrs Davies. There was no other evidence as to any terms of their so-called employment.           

Relevant Legislation        

9.      The small business retirement exemption provisions are found in subdivision 152-D of the Act. The provisions have changed since the sale of the farms but at the relevant time, for the applicants to be entitled to the exemption the following conditions needed to be satisfied: 

·the trusts must have satisfied the basic conditions for relief in section 152-10

·the trust must have chosen to disregard the capital gain [subsection 152-305(2)]

·the trust must have made eligible termination payments to the applicants [section 152-325]        

Tribunal’s Findings

10.     It is accepted by the Commissioner and the Tribunal finds that the trusts satisfied the basic conditions for relief in section 152-10 of the Act.

11.     However, with regard to the remaining conditions there is no evidence to show that the trustee of the trusts ever chose to disregard the capital gains. While the applicants personally signed elections to apply the small business retirement exemption to the capital gains from the sale of the land, the capital gain was made by the trustee of the trusts. It was the trustee that was required to make the election.

12.     There is also no evidence that the trustee of the trusts paid any eligible termination payments to the applicants. The capital gains were distributed to the applicants as beneficiaries of the trusts by way of resolutions of the trustee.

13.     Furthermore, there is no evidence to show that the applicants were ever in fact employees of the trustee. While it is clear that the applicants worked on the farms there is nothing by way of evidence before the Tribunal which supports their contention that an employment contract arose by implication. There is nothing to say what the terms and conditions of their alleged employment were other than a vague statement that they would be remunerated at some future time.  In Dietrich v Dare (1980) 30 ALR 407 the High Court had to consider whether a “trialling” agreement was a contract. The disabled plaintiff was employed on a trial basis by the defendant at $2 per hour. He was injured and the question arose whether he was an employee or an independent contractor for workers’ compensation purposes. The majority of the High Court held that there was no intention to create a contract of employment or an independent contractor relationship. The Tribunal finds here that there was no intention to create a contract of employment and that no such contract was in fact created.

14.     The Butterworths Australian Legal Dictionary defines ‘employment’ as follows:

A relationship in which parties agree that one party will perform work for another in exchange for remuneration, subject to terms and conditions contained in the contract of employment, and in industrial awards, agreements or legislation…

15.     An eligible termination payment (ETP) is defined by statute as follows:

An ETP is relation to a person means (subject to certain exceptions) any payment made in respect of the person in consequence of the termination of any employment of the person (paragraph (a) of the ETP definition in subsection 27A(1) of the Income Tax Assessment Act 1936 (the ITAA 1936)). ‘Employment includes the holding of an office (subsection 27A(1) of the ITAA 1936).

16.     Absent a contract of employment of which as noted above there is no evidence, there was no employment and therefore no termination of employment and hence no ETP.

17.     In the Tribunal’s view no contract of employment is to be implied merely from the fact that one person performs work for or provides services to another. Modern commercial life abounds with arrangements for the performance of work or services for others by persons who are not employees.

18.     In this case the only factor on which applicants can rely is that they “worked on the farms owned by the trusts”. In the Tribunal’s view this falls far short of establishing an implied contract of employment.

19.     It is clear that the applicants were and remain directors of the trustee company. No termination payment was paid to them in this capacity.

20.     The Tribunal accordingly finds that the applicants have failed to discharge the onus which rests on them to show that they are entitled to the exemption and that, for the reasons stated above, the required conditions for the exemption have not been met.  

Decision

21.     The Tribunal affirms the decisions under review.  

I certify that the 21 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member. 

Signed: ...(sgd) T Freeman.......
  Associate

Date/s of Hearing  25 February 2009
Date of Decision  25 February 2009
Date of Written Reasons  20 March 2009
Representative for the Applicants’            Self represented
Representative for the Respondent          Mr F  Maloney
                  ATO Legal Services Branch