Graham Fayle and Commissioner of Taxation
[2012] AATA 439
•12 July 2012
[2012] AATA 439
Division TAXATION APPEALS DIVISION File Number(s)
2012/0357-0359
Re
Graham Fayle
APPLICANT
And
Commissioner of Taxation
RESPONDENT
Decision
Tribunal Deputy President PE Hack SC
Date 12 July 2012 Place Brisbane The application is dismissed pursuant to s 42B of the Administrative Appeals Tribunal Act 1975 (Cth).
............................[Sgd]...................................
Deputy President PE Hack SC
Catchwords
PRACTICE AND PROCEDURE – objection to amended tax assessments – refusal to make a personal services income determination – whether applicant relitigating an issue determined in earlier proceedings – opportunity to demonstrate that amended assessments were excessive in earlier proceedings – proceedings are frivolous and vexatious – application dismissed.
Legislation
Administrative Appeals Tribunal Act 1975 (Cth) s33
Income Tax Assessment Act 1997 (Cth) ss 84-5, 87-15, 87-60, 87-65Cases
Comcare v Grimes [1994] FCA 1054; (1994) 50 FCR 60
Henderson v Henderson (1843) 3 Hare 100 [67 E.R. 313]
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Re Quinn and Australian Postal Corporation (1992) 15 AAR 519
Singh v Secretary, Department of Employment and Workplace Relations [2006] FCA 1381; (2006) 43 AAR 469REASONS FOR DECISION
Deputy President PE Hack SC
12 July 2012
Background
The applicant, Mr Graham Fayle, is a horticulturalist. At all material times he was a member and a director of Bimbajong Farming Pty Ltd (Bimbajong). Bimbajong was, during all of the period relevant to these proceedings, controlled by Mr Fayle and his family. Mr Fayle was also a director of Queensland Paulownia Forests Limited (Paulownia).
In March 2001 Bimbajong contracted to provide consultancy services to Paulownia. Mr Fayle was the consultant. An hourly rate of $50 was agreed. In the income years ending 30 June 2003, 2004 and 2005 Mr Fayle’s consultancy work for Paulownia earned Bimbajong considerable sums. Those sums were returned as income of Bimbajong; they were not disclosed in Mr Fayle’s tax returns for those years.
The respondent, the Commissioner of Taxation, took the view that the sums paid to Bimbajong by Paulownia ought to have been included in Mr Fayle’s assessable income because they were, so the Commissioner concluded, “personal services income” of Mr Fayle. The Commissioner made amended assessments. Mr Fayle objected to those amended assessments but the objections were disallowed. The matter ended up in the Tribunal in proceedings in which Mr Fayle sought a review of the Commissioner’s objection decisions i.e. decisions disallowing Mr Fayle’s objections to the Commissioner’s amended assessments for the 2003, 2004 and 2005 income tax years. Mr Fayle’s accountant, Mr David O’Brien, commenced those proceedings on Mr Fayle’s behalf in July 2008.
On 24 June 2009 Mr O’Brien lodged with the Commissioner a request that the Commissioner make a “personal services business determination” pursuant to s 87-60 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). The Commissioner declined to make such a determination by letter of 23 July 2009.
The proceedings were heard in the Tribunal on 17 November 2009. On 25 November 2009 the Tribunal, constituted by Senior Member McCabe, remitted the objection decision to the Commissioner for reconsideration pursuant to s 42D of the Administrative Appeals Tribunal Act 1975 (Cth)[1]. Senior Member McCabe concluded that Mr Fayle ought to have included personal services income in his assessable income but remitted the matter to the Commissioner to consider whether there were other deductions available to Mr Fayle pursuant to s 86-20 of the ITAA 1997.
[1] See The Taxpayer & Commissioner of Taxation [2009] AATA 906.
The matter eventually returned to the Tribunal in May 2011. On this occasion the Senior Member concluded that the expenses claimed were deductible to the extent of concessions made by the Commissioner but otherwise rejected Mr Fayle’s claims for deductions[2].
[2] See The Taxpayer & Commissioner of Taxation [2011] AATA 359.
Mr Fayle renewed his application for a personal services income determination in June 2010. The application was refused by the Commissioner by letter dated 13 October 2010. Then on 22 December 2010 Mr Fayle lodged an objection to the Commissioner’s decision.
Mr Fayle’s objection was disallowed by letter dated 22 November 2011. These proceedings, by which Mr Fayle seeks a review of the Commissioner’s decision to refuse to make a personal services income determination, were commenced on 26 January 2012.
The matter is now before me because the Commissioner contends that Mr Fayle seeks to relitigate an issue that has already been determined against him in the earlier proceedings. The Commissioner contends that the Tribunal’s power under s 33(1) of the Administrative Appeals Tribunal Act1975 (Cth) can and should be used to dismiss the proceedings summarily without the need for a hearing.
The legislative framework
To understand the argument it is necessary to examine more closely the provisions of Part 2-42 of the ITAA 1997 dealing with personal services income.
By virtue of s 84-5 of the ITAA 1997 income which is mainly a reward for an individual’s personal efforts or skills is the personal services income of the individual. The individual’s assessable income includes an amount of ordinary income or statutory income of a “personal services entity” that is the individual’s personal services income[3]. But that rule does not apply if that amount is income from the personal services entity conducting a “personal services business”[4]. A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals[5].
[3] See s 86-15(1), ITAA 1997.
[4] See s 86-15(3), ITAA 1997.
[5] See s 86-15(2), ITAA 1997.
The tests for a personal services business are set out in s 87-15 of the ITAA 1997 in these terms:
87‑15What is a personal services business?
(1)An individual or *personal services entity conducts a personal services business if:
(a)for an individual—a *personal services business determination is in force relating to the individual’s *personal services income; or
(b)for a personal services entity—a personal services business determination is in force relating to an individual whose personal services income is included in the entity’s *ordinary income or *statutory income; or
(c)in any case—the individual or entity meets at least one of the 4 *personal services business tests in the income year for which the question whether the individual or entity is conducting a personal services business is in issue.
Note 1: For personal services business determinations, see Subdivision 87‑B.
Note 2: Under subsection (3), the personal services business tests, apart from the results test under section 87‑18, do not apply if 80% or more of your personal services income is from one source (but they can still be used in deciding whether to make a personal services business determination).
(2)The 4 personal services business tests are:
(a)the results test under section 87‑18; and
(b)the unrelated clients test under section 87‑20; and
(c)the employment test under section 87‑25; and
(d)the business premises test under section 87‑30.
(3)However, if 80% or more of an individual’s *personal services income (not including income referred to in subsection (4)) during an income year is income from the same entity (or one entity and it’s *associates), and:
(a)the individual’s personal services income is not included in a *personal services entity’s *ordinary income or *statutory income during an income year, and the individual does not meet the results test under section 87‑18 in that income year; or
(b)the individual’s personal services income is included in a personal services entity’s ordinary income or statutory income during an income year, and the entity does not, in relation to the individual, meet the results test under section 87‑18 in that income year;
the individual’s personal services income is not taken to be from conducting a *personal services business unless:
(c)when the personal services income is gained or produced, a *personal services business determination is in force relating to the individual’s personal services income; and
(d)if the determination was made on the application of a personal services entity—the individual’s personal services income is income from the entity conducting the personal services business.
Note: Sections 87‑35 and 87‑40 affect the operation of subsection (3) in relation to Australian government agencies and certain agents.
(4)Subsection (3) does not apply to income:
(a)that the individual receives as an employee; or
(b)that the individual receives as an individual referred to in paragraph 12‑45(1)(a), (b), (c), (d) or (e) (payments to office holders) in Schedule 1 to the Taxation Administration Act 1953; or
(c)to the extent that it is a payment referred to in section 12‑47 (payments to *religious practitioners) in that Schedule.
There are then five ways in which an individual may satisfy the test for conducting a personal services business – by having a personal services business determination or by meeting at least one of the results tests, the unrelated clients test, the employment test or the business premises test.
Succeeding sections specify what is required to satisfy the results test, the unrelated clients test, the employment test and the business premises test. It is unnecessary for present purposes to examine those tests. It is necessary though to examine the statutory criteria for the making of a personal services business determination. Those matters are set out in Subdivision 87-B in these terms:
87‑60 Personal services business determinations for individuals
Making etc. personal services business determinations
(1)The Commissioner may, by giving written notice to an individual:
(a)make a personal services business determination relating to the individual; or
(b)vary such a determination.
(2)The Commissioner may, in the notice, specify:
(a)the day on which the determination or variation takes effect, or took effect;
(b)the period for which the determination has effect;
(c)conditions to which the determination is subject.
Matters about which the Commissioner must be satisfied
(3)The Commissioner must not make the determination unless satisfied that, in the income year during which the determination first has effect, or is taken to have first had effect:
(a)the individual:
(i)could reasonably be expected to meet, or met, the results test under section 87‑18, the employment test under section 87‑25, the business premises test under section 87‑30 or more than one of those tests; or
(ii)but for unusual circumstances applying to the individual in that year, could reasonably have been expected to meet, or would have met, at least one of the 4 *personal services business tests; and
(b)the individual’s *personal services income could reasonably be expected to be, or was, from the individual conducting activities that met:
(i)if subparagraph (a)(i) applies—the results test under section 87‑18, the employment test under section 87‑25, the business premises test under section 87‑30 or more than one of those tests; or
(ii)if subparagraph (a)(ii) applies—at least one of the 4 personal services business tests.
(4)For the purposes of subparagraph (3)(a)(ii) but without limiting the scope of that subparagraph, unusual circumstances include providing services to an insufficient number of entities to meet the unrelated clients test under section 87‑20 if:
(a)the individual starts a *business during the income year, and can reasonably be expected to meet the test in subsequent income years; or
(b)the individual provides services to only one entity during the income year, but met the test in one or more preceding income years and can reasonably be expected to meet the test in subsequent income years.
87‑65 Personal services business determinations for personal services entities
Making etc. personal services business determinations
(1)The Commissioner may, by giving written notice to a *personal services entity whose *ordinary income or *statutory income includes some or all of an individual’s *personal services income:
(a)make a personal services business determination relating to the individual’s personal services income included in the entity’s ordinary income or statutory income; or
(b)vary such a determination.
(2)The Commissioner may, in the notice, specify:
(a)the day on which the determination or variation takes effect, or took effect;
(b)the period for which the determination has effect;
(c)conditions to which the determination is subject.
Matters about which the Commissioner must be satisfied
(3)The Commissioner must not make the determination unless satisfied that, in the income year during which the determination first has effect, or is taken to have first had effect:
(a)the entity:
(i)could reasonably be expected to meet, or met, the results test under section 87‑18, the employment test under section 87‑25, the business premises test under section 87‑30 or more than one of those tests; or
(ii)but for unusual circumstances applying to the entity in that year, could reasonably have been expected to meet, or would have met, at least one of the 4 *personal services business tests; and
(b)the individual’s *personal services income included in the entity’s *ordinary income or *statutory income could reasonably be expected to be, or was, from the entity conducting activities that met:
(i)if subparagraph (a)(i) applies—the results test under section 87‑18, the employment test under section 87‑25, the business premises test under section 87‑30 or more than one of those tests; or
(ii)if subparagraph (a)(ii) applies—at least one of the 4 personal services business tests.
(4)For the purposes of subparagraph (3)(a)(ii) but without limiting the scope of that subparagraph, unusual circumstances include providing services to an insufficient number of entities to meet the unrelated clients test under section 87‑20 if:
(a)the*personal services entity starts a *business during the income year, and can reasonably be expected to meet that test in subsequent income years; or
(b)the personal services entity provides services to only one entity during the income year, but met the test in one or more preceding income years and can reasonably be expected to meet the test in subsequent income years.
As can be seen, whether concerned with an individual or a personal services entity, the Commissioner must be satisfied that one or other of the results test, the unrelated clients test, the employment test or the business premises test is, or will be, satisfied.
The earlier decision
Senior Member McCabe described the issues that he was required to consider in these terms[6],
In order to decide this case, I must determine:
·Is the remuneration received from Treeco under the consulting agreement the “personal services income” of the taxpayer?
·Is Farmco a “personal services entity”?
·If Farmco is a “personal services entity”, is it also a “personal services business” within the meaning of the Act?
He was satisfied that the consulting fees paid to Bimbajong under the consultancy agreement constituted personal services income within the meaning given to that term by the ITAA 1997 and that Bimbajong was a personal services entity. He then turned to consider the question whether Bimbajong was a personal services business.
[6] [2009] AATA 906 at [17]. Treeco was the pseudonym used for Paulownia; Farmco was Bimbajong.
It was accepted at the hearing that there was no personal services determination in force. Senior Member McCabe then went on to consider the “results” test, that in s 87-18 of the ITAA 1997. He concluded that it could not be satisfied in light of findings that he had made that Bimbajong was not required to provide the plant, equipment or other tools of trade needed to perform the work contemplated under the terms of the consultancy agreement. Having reached that conclusion Senior Member McCabe was required by s 87-15(3) of the ITAA 1997 to determine whether 80% or more of Mr Fayle’s income had come from the one source and concluded that it had. That being so, it was unnecessary to consider the unrelated clients test, the employment test and the business premises test.
The result of the findings made was that Mr Fayle’s personal services income was not income from conducting a personal services business and the Commissioner’s decision, to that extent, was affirmed. The matter was, as I have said, remitted to enable Mr Fayle to demonstrate to the Commissioner his claims for deductions. The result of the decision finally made on 27 May 2011 was that the Commissioner’s objection decisions in relation to the 2003, 2004 and 2005 income tax years were set aside to the limited extent conceded by the Commissioner but otherwise affirmed.
The Commissioner’s application
The Commissioner submits that Mr Fayle is seeking to relitigate issues that have already been determined against him. He submits that the key issue in the earlier proceedings and in the present proceedings (if permitted to continue) is whether Bimbajong was a personal services business. And it was said, Mr Fayle sought to demonstrate that at the earlier hearing by demonstrating that he satisfied the business premises test. Reference was made to the Commissioner’s original decision, Mr Fayle’s statement of facts, issues and contentions, and the Commissioner’s written and oral submissions to demonstrate that the issue was a live one at the hearing.
A review of that material demonstrates that the question whether Mr Fayle could satisfy the business premises test was certainly an issue in the proceedings before Senior Member McCabe. Indeed at the initial hearing of this application on 28 May 2012 Mr O’Brien went so far as to submit that the evidence was capable of satisfying the business premises test and that Senior Member McCabe ought to have decided that question in the context of deciding whether a personal services determination ought to have been made. Subsequently when the hearing was resumed briefly for the purpose of clarifying the use that Mr O’Brien sought to make of excerpts from the transcripts of earlier hearings[7] he appeared to resile from that stance and submitted that the request for a determination could not have been before the Tribunal on that occasion as the Commissioner had not made a determination.
[7] Exhibit 2.
However the fact is that it was not necessary to reach a conclusion on that issue. The question did not, and could not, arise once it was determined that the results test was not satisfied and that more than 80% of Mr Fayle’s income came from one source.
In the proceedings that have been concluded Mr Fayle sought to demonstrate that the amended assessments were excessive. He sought to do that by demonstrating that the relevant income was income from conducting a personal services business. He did not succeed in that endeavour because he was unable to satisfy the results test and because more than 80% of his personal services income came from the one source, Paulownia. Those conclusions meant that the question whether Mr Fayle satisfied the business premises test did not arise. Thus I do not consider that, by seeking to now demonstrate that Mr Fayle could satisfy that test, Mr Fayle is seeking a relitigation of the same issues.
For the same reason I do not accept, as Mr O’Brien submitted, that Senior Member McCabe ought to have determined whether Mr Fayle was entitled to a personal service determination because he was able to satisfy the business premises test. He was not asked to do so.
But that highlights what seems to me is the difficulty for Mr Fayle and why, in substance, the Commissioner’s argument must be accepted.
What Mr Fayle sought to demonstrate in the earlier proceedings was that the Commissioner’s amended assessments for 2003, 2004 and 2005 were excessive because they attributed to him, wrongly so he argued, personal services income.
The ITAA 1997 sets out a variety of ways in which personal services income is income from conducting a personal services business with the consequence that that personal services income is not attributed to the individual. One method involves obtaining a personal services business determination from the Commissioner. Mr Fayle was entitled to a determination if he could demonstrate that he passed the business premises test. Prior to the original hearing Mr Fayle sought to obtain a determination from the Commissioner. The Commissioner refused to make a determination because of the proceedings then on foot. It was open to Mr Fayle to seek a review of that refusal decision in the Tribunal and to do so in the existing proceedings. That raises the question whether Mr Fayle ought now be permitted to bring second proceedings that have as their ultimate aim demonstrating that the amended assessments for 2003, 2004 and 2005 were excessive.
There is authority for the proposition that the principle known as Anshun[8] estoppel operates in the Tribunal. In that case the plurality adopted the principle in the following passage from the judgment of Sir James Wigram V.C. in Henderson v Henderson[9]
… where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.
[8] From Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589.
[9] (1843) 3 Hare 100 [67 E.R. 313] at p. 115 [67 E.R. at p. 319].
The question whether this principle has application in the Tribunal arose directly in Singh v Secretary, Department of Employment and Workplace Relations[10]. The applicant in that case had received social security payments following an industrial accident. He was awarded lump sum compensation. By operation of the Social Security Act 1991 (Cth) he was obliged to repay the sum representing the social security payments he had received. He had sought unsuccessfully to review decisions made on behalf of the Secretary to recover those sums. Subsequently he made a further application to review a decision of the Secretary, alleging, for the first time, conspiracy and fraud on the part of various bodies. The Tribunal determined that the further proceedings were frivolous and vexatious and dismissed them without proceeding to a hearing. On appeal to the Federal Court, Weinberg J concluded that an Anshun estoppel could operate in the Tribunal and that it was not open to Mr Singh to come back to the Tribunal with a point that should have been raised long ago. He concluded that the proceedings had been rightly dismissed.
[10] [2006] FCA 1381; (2006) 43 AAR 469,
The matter went to the Full Court. Mr Singh’s appeal was dismissed.
But in any event it cannot be doubted that the Tribunal has ample power in s 33 of the Administrative Appeals Tribunal Act 1975 (Cth) to achieve the same outcome. In Re Quinn and Australian Postal Corporation[11] O'Connor J, the President of the Tribunal, and Mr Barbour observed,
[Section]33 of the Administrative Appeals Tribunal Act provides the Tribunal the flexibility needed to control its process. It is with regard to the dictates of fairness and expedition, after proper consideration of all the facts, that the Tribunal conducts itself.’
[11] (1992) 15 AAR 519, 526.
That procedural flexibility has been regarded as a source of power to prevent a matter finally determined from being relitigated. In Comcare v Grimes[12]Wilcox J considered the authorities and concluded,
the AAT, which is master of its own procedures, will not allow a finally determined matter to be relitigated.
To similar effect, O’Connor J and Mr Barbour said in Re Quinn[13],
It would seem inappropriate and unreasonable to us for there to be relitigation without reason of the same issues before the Tribunal. It would be unjust to applicants to have to face a situation where a decision may be made today and relitigated tomorrow on the very same facts. The Tribunal should not generally allow relitigation of issues already decided and previous Tribunal decisions should be regarded as establishing the matters actually decided and of the grounds for the determination. In compensation cases like the present, the issues of causation and level of incapacity for the period the subject of the earlier decision would thus not be areas contested in a subsequent hearing.
Finally, reference should be made to the decision of the Full Court in Morales v Minister for Immigration and Multicultural Affairs[14] where the Court said,
The procedural flexibility that the AAT Act gives to the Tribunal has been seen as a source of power not to allow a matter finally determined before it to be relitigated (see Comcare Australia v Grimes at 67; 592 per Wilcox J and Re Quinn and Australian Postal Corporation at 525-526), and it has been suggested that s 33 provides a series of bases on which the Tribunal can decline to revisit previously determined matters or, as the situation demands, reconsider the totality of the matter or some aspect of it. The point is made by McEvoy (at p 52) by reference to the decision of Senior Member Dwyer and Members McLean and Shanahan in Matusko and Australian Postal Corporation (1995) 21 AAR 9 esp at 20-21 where the Tribunal concluded that although it should not generally allow relitigation of issues already decided, it could use its flexible procedures to allow a second claim in respect of an injury that already had been the subject of a claim.
In our view, the essentially administrative nature of the Tribunal's function and the nature of its task in looking to the correct or preferable decision, in circumstances where it is to have regard amongst other things to the dictates of fairness, point to the conclusion that the Tribunal may, in appropriate circumstances, conclude that a previous decision should be applied again as the correct and preferable decision when it is sought to revisit the earlier decision at some later time. Of course, the circumstance that a Court has set aside an entire decision may mean that it is either impermissible, or quite inappropriate, to adopt such a course but that would not necessarily be the case where, as here, a particular determination had not itself been the subject of challenge.
[12] [1994] FCA 1054; (1994) 50 FCR 60.
[13] 15 AAR at 526.
[14] [1998] FCA 334; (1998) 82 FCR 374, 389-90.
In the present case Mr Fayle sought, in the 2009 and 2011 proceedings, to demonstrate that the amended assessments were excessive. He sought to do so by demonstrating that the personal services income attributed to him in those assessments ought not to have been attributed to him because, as he then argued, Bimbajong was conducting a personal services business. He chose to argue why that was so in a particular manner. Well prior to the hearing he asked the Commissioner to make a determination that Bimbajong was conducting a personal services business. When the Commissioner refused to do so he had the opportunity to raise the Commissioner’s refusal in the proceedings then on foot and thus, by an alternative argument, demonstrate that the amended assessments were excessive. He chose not to do so. He proffers no explanation for that choice.
It would not be appropriate to now allow Mr Fayle to again litigate the question whether the amended assessments are excessive when he did not avail himself of the opportunity to do so in the earlier proceedings, all the more so when it is recalled that the matters were adjourned at his request after the first chapter of the litigation to enable Mr Fayle to mount a case on allowable deductions that he was not in a position to present at the original hearing.
I am then satisfied that, for these reasons, these new proceedings are frivolous and vexatious and that the power in s 42B of the Administrative Appeals Tribunal Act 1975 (Cth) ought be used to dismiss them.
I certify that the preceding 33 (thirty -three) paragraphs are a true copy of the reasons for the decision herein of Deputy President PE Hack SC .............................[Sgd].................................
Associate
Dated 12 July 2012
Dates of hearing 28 May 2012; 3 July 2012 Advocate for the Respondent Mr K O'Seighin, ATO Legal Practice
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