FRANCE and COMMISSIONER OF TAXATION

[2010] AATA 858

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 858

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/4777

TAXATION APPEALS DIVISION		)
Re		ROY FRANCE

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal   Senior Member Bernard J McCabe

Date  2 November 2010

Place  Brisbane (heard in Toowoomba)

Decision   The Tribunal affirms the decision under review.

....................[Sgd]..........................

Senior Member

CATCHWORDS

TAXATION – income tax assessment and penalty decision – husband employed wife to assist with rental property – deduction claimed for wages and superannuation contribution – whether outgoings were of a domestic nature – whether a genuine employment relationship existed – penalty imposed – inclusion of claims for deductions occurred as a result of a want of reasonable care.

Income Tax Assessment Act 1997 (Cth), s 8-1

Income Tax Assessment Act 1936 (Cth), ss 82AAA, 82AAB, 82AAC

Taxation Administration Act 1953 (Cth), s 14ZZK

Frisch and Commissioner of Taxation 2008 ATC 10-031

REASONS FOR DECISION

2 November 2010   Senior Member Bernard J McCabe       

1.      Mr Roy France is the taxpayer. Mr France says he employed his wife to look after his investment properties. He wants to deduct the amount he paid in respect of her wages and a contribution to her superannuation against his assessable income for the year ending 30 June 2007.  The Commissioner refuses to accept that Mr France and his wife are involved in an employment relationship. The deductions were disallowed and a penalty was imposed at the rate of 25% on the shortfall on the basis that the taxpayer or his agent did not exercise reasonable care in preparing the tax return. The matter has now come before the Tribunal for reconsideration.

2.      In order to decide this case, I must first decide whether Mr and Mrs France were in an employment relationship with each other in the year of income. If they were, I would have to decide whether the amount paid in respect of wages is excessive. As it happens, that question does not arise because I conclude there was no employment relationship in the circumstances. It is therefore necessary for me to consider whether part of the penalty and the interest should be remitted.

The facts

3.      The following evidence is gleaned from the oral evidence and written statements of the taxpayer and his wife.

4.      Mr France worked long hours in a salaried position during the year of income in question. He said he regularly began work at 6am and returned home at 6pm, although he was able to come home for lunch on most days. Mrs France worked part-time as an office administrator for a local retailer.

5.      Mrs France ran the household and attended to many of the routine administrative tasks like collecting the mail and paying the bills. Mr France signed the cheques used to pay the bills, but the cheques were typically drawn by his wife and brought to his attention for signature. She kept the paperwork in a study in the home. She had a computer there and a filing system to make it easier when it came time to see the accountant and prepare a tax return.

6.      Mr France purchased an investment property in his name in 1996. The property was one of two units in a duplex. The property was sold in late 2007. Mr France said the property was rented more or less constantly during this period. An agent collected the rent and dealt with the tenants. Mr France told me that the agent handled most small maintenance issues and cleaning was the responsibility of the tenant under the terms of the rental agreement. The gardens were the responsibility of the body corporate. While some larger maintenance issues could only be addressed with his approval, Mr France was not called upon to deal with issues arising out of the property on a regular basis.

7.      Mr and Mrs France both agreed that they inspected the property every few months while the property was owned by Mr France. There was some correspondence and the occasional phone call from the agent that had to be dealt with; it was also necessary to pay insurance and deal with other issues arising out of the ownership of a rental property. Mrs France dealt with these matters at first instance, although she often brought them to the attention of her husband if a decision was required. I did not form the impression that the workload involved in dealing with those issues was onerous or regular. Mrs France agreed she spent perhaps an hour each week on average dealing with rental property issues. She agreed she did not regularly set aside any time to deal with those matters: she collected correspondence relating to the property along with the rest of their mail and she dealt with the property issues in the course of her work in running the household.

8.      Mr and Mrs France had an informal encounter with their tax agent, Mr O’Brien, at an ANZAC Day march in 2006. Mr O’Brien apparently told the taxpayer that he had learned of a recent decision of the Administrative Appeals Tribunal that suggested Mr France could obtain a legitimate tax advantage if Mrs France were to be employed to do all of the things she had been doing since 1996. Mr O’Brien suggested in his own statement that he thought the taxpayer might have been acting in breach of the law if he failed to employ and pay his wife. In any event, Mr France said he thought it was a good idea to employ his wife but nothing more was done about the suggestion until November 2006 when he and his wife had a further meeting with Mr O’Brien. Mr O’Brien apparently told Mr and Mrs France it was necessary to demonstrate that they had entered into a genuine employer/employee relationship, as opposed to a contractor/sub-contractor relationship. In his submissions before the Tribunal, Mr O’Brien’s reference to this advice was interesting. He said that he gave “advice on how to create an employer/employee relationship and what obligations would need to be imposed to achieve that”.

9.      Mr O’Brien filed an Australian Business Registration form on behalf of his client and registered him as a Pay As You Go employer. Mr O’Brien subsequently arranged for Mr France to pay an amount in respect of wages for the period from 1 July 2006 through 28 October 2006. That payment was made as a lump sum on 12 December 2006. It was described as “back pay” in the documentation prepared in connection with the payment: exhibit 1, p 105.

10.     The payment was calculated on the basis that the award rate for administrative work was $20.83 per hour. I have already noted the taxpayer and his wife accepted Mrs France worked on average for at least one hour per week – a total of about 18 hours - during the period in question. The relevant award required that a person could not be engaged for less than a two-hour block of time. The taxpayer concluded his wife should be paid for at least four hours of work each week, and he also paid her a cash bonus. In total, the taxpayer paid his wife $5,000 in respect of wages. Mr O’Brien arranged for withholding taxes to be paid on this basis. Lastly, Mr France elected to pay $70,000 into a super fund in his wife’s name.

11.     Mrs France’s statement said she worked as a cleaner as well as an administrative assistant during the year in question. In her oral evidence, it became apparent that she did not do any cleaning work on the rental property. Significantly, nothing in her workload or work pattern changed after she and her husband supposedly entered into a master-servant relationship. Life continued much as before.

12.     The terms of Mrs France’s engagement were not recorded in a written contract of employment. I accept that is not formally required in order to establish the existence of an employment relationship, but it can be of some assistance.

13.     I am satisfied from the evidence of the taxpayer and his wife that Mrs France did perform some work of an administrative nature in connection with her husband’s rental property. That work was undoubtedly valuable to him in that it needed to be done and it saved him from doing it himself. I also accept she completed an average of one hour of work each week. But I am also satisfied from the evidence of Mr and Mrs France that Mrs France was undertaking the same work in the same way during 2006-2007 that she had been doing since the property was acquired in 1996. The only thing that had changed was that the taxpayer and his wife decided to formalise the arrangement and start paying Mrs France.  I am satisfied from the evidence of Mr France in particular that he thought it was appropriate to employ his wife because it would enable the couple to take advantage of a taxation benefit that they understood was legitimately available to them.

The law

14.     Section 8-1 of the Income Tax Assessment Act 1997 (ITAA97) relevantly permits a taxpayer to deduct outgoings (including salary and wages) that are incurred in gaining or producing assessable income. The section adds (at s 8-1(2)) that a loss or outgoing may not be deducted if it is of a private or domestic nature. Section 82AAC of the Income Tax Assessment Act 1936 (ITAA36) relevantly permits a taxpayer to claim a deduction in respect of contributions to a superannuation fund in respect of an “eligible employee”. An “eligible employee” is a person who is an employee of the taxpayer. It follows I must consider whether Mrs France was engaged under a contract of employment with the taxpayer in order to resolve a key issue in this case.

15.     The expressions “employer”, “employee” and “contract of employment” have their ordinary meaning for the purposes of this dispute.

16.     I am not satisfied the taxpayer and his wife can be said to have entered into a contract of any sort. Every student of contract law is drilled on the requirements of a valid contract. One of them is evidence of an intention to create legal relations. It is trite law that not every agreement entered into between two individuals is necessarily enforceable as a contract. Arrangements between spouses are often entered into on the basis that they will not give rise to formal legal consequences. That is not to say that spouses can never contract with each other, of course. But the relationship must be examined carefully in each case so as to ensure that a breach of an agreement is not visited with consequences that were not actually intended.

17.     I do not think the evidence establishes that the taxpayer intended that he and his wife should enter into a legally enforceable relationship. I accept he intended that the relationship should have one legal consequence – he saw it as a means of accessing an entitlement to a taxation benefit – but that is not the same thing. It was clear from the evidence and from Mr O’Brien’s submissions that the taxpayer was merely repackaging an existing domestic relationship so it took on some of the appearance of a employment relationship. Most of the repackaging was done by Mr O’Brien himself.

18.     One does not transform an existing relationship simply by calling it by a different name, or even adopting some of the forms of a different relationship. Language and form is merely an indicator of the nature of the relationship. Language and form will not be decisive if they do not accurately reflect the character of the relationship. One must look to the totality of the relationship when characterising it. In this case, the relationship between the parties continued to be what it had always been: a spousal relationship in which one of the spouses attended to the management of the family’s affairs.

19.     That is not to say that the taxpayer and his wife were acting dishonestly. They were doing and saying what their tax agent told them to say in the honest belief that doing so would entitle them to a tax benefit that they had been told was legitimately available to them. But I am not persuaded they really understood themselves to be in a genuine employment relationship, with all that such a relationship implies.

20.     In those circumstances, I am satisfied that the outgoings in respect of salary and wages were not deductible. Those outgoings were of a private or domestic nature. It also follows that the superannuation contributions were not deductible.

Penalties

21.     I have already concluded that the taxpayer and his wife were not acting dishonestly. They simply got the wrong advice.

22. The Commissioner says a penalty assessed at the rate of 25% of the shortfall is appropriate in this case under Division 284 of Schedule One to the Taxation Administration Act 1953 (Cth). The rate should be set at 25% because of a want of reasonable care on the part of Mr France’s tax agent, the Commissioner says.

23.     I agree there was a want of care in this case. Mr O’Brien referred me to the Tribunal’s decision in Frisch and Commissioner of Taxation 2008 ATC 10-031 which he said was the basis of his advice to Mr France. The case is only generally relevant and I do not think it can be used to justify the specific advice given to Mr France. It follows I am satisfied the penalty was properly imposed. I was not referred to any evidence that would suggest the imposition of the penalty would be harsh in the circumstances, although it became apparent during the course of Mr France’s evidence that he had recently been ill. Even so, I was not provided with evidence that would justify me remitting the penalty. I was not provided with any evidence that would justify remitting the shortfall interest charge either.

Conclusion

24.     The objection decision is affirmed.

25.     I would add that I have not referred to additional submissions that were filed by the taxpayer’s representative without leave after the hearing had concluded. While the Tribunal could reopen the hearing to consider the additional evidence, I am not satisfied it is appropriate to do so. The taxpayer had ample opportunity to present a case and be heard. The obligation to act fairly has been satisfied. The obligation to deal with the matter quickly and efficiently would be compromised if I were to examine the late material and necessarily provide the Commissioner with the opportunity to respond.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed: ...................[Sgd]........................................................
  Patrick MacDonald

Date of Hearing  4 October 2010
Date of Decision  2 November 2010

Advocate for the Applicant        Mr D O’Brien, David O’Brien Accountants

Advocate for the Respondent   Ms J Kot, ATO Legal Services Branch