Guttikonda and Sheth and Commissioner of Taxation (Taxation)
[2022] AATA 1325
•20 May 2022
Guttikonda and Sheth and Commissioner of Taxation (Taxation) [2022] AATA 1325 (20 May 2022)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2019/3139 & 2021/1239
2019/3073 & 2021/1175
Re:Naga Babu Guttikonda &
Hardik Sheth
APPLICANTS
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President I R Molloy
Date:20 May 2022
Place:Melbourne
In respect of the decisions under review:
a.Naga Babu Guttikonda’s objection decision dated 25 January 2019 is varied to increase the LSPIA Offset to $13,001;
b.Hardik Sheth’s objection decision dated 25 March 2019 is varied to increase the LSPIA Offset to $16,614; and
c.the decisions under review are otherwise affirmed.
........................................................................
Deputy President I R Molloy
Catchwords
TAXATION – underpayment of award wages and entitlements – deeds of acknowledgement and assignment – assignment by taxpayers of rights in consideration of payments equating to unpaid wages, superannuation and interest – whether payments (excluding superannuation) assessable taxable income – whether confined to terms of the deeds - reviewable decisions affirmed
Legislation
Income Tax Assessment Act 1997 (Cth) ss 6-5, 61-210
Income Tax (Transitional Provisions) Act 1997 (Cth), s 4-11(1)
Private Health Insurance Act 2007 (Cth)
Tax Assessment Act 1936 (Cth), ss 159ZRA, 159ZRB
Taxation Administration Act 1953 (Cth), s 353-10 of Sch 1Cases
Blank v Commissioner of Taxation (2016) 258 CLR 439
Commissioner of Taxation v CSR Ltd (2000) 104 FCR 44
Commissioner of Taxation v Phillips (1936) 55 CLR 144
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540
Federal Commissioner of Taxation v McArdle (1988) 19 ATR 1901
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Smith (1981) 147 CLR 578
Norman v Federal Commissioner of Taxation (1963) 118 CLR 32
Reuter v Federal Commissioner of Taxation (1993) 27 ATR 256
Riches v Westminster Bank Ltd [1947] AC 390
Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385
Sommer v Federal Commissioner of Taxation (2002) 51 ATR 102YCNM v Federal Commissioner of Taxation (2019) 110 ATR 151
REASONS FOR DECISION
Deputy President I R Molloy
20 May 2022
BACKGROUND
The Applicants, Mr Naga Babu Guttikonda and Mr Hardik Sheth, were each employed over a number of years in different 7-Eleven stores. The stores were operated as franchises and the Applicants were employed by several different franchisees.
In about 2015, there were reports in the media suggesting widespread under-payment of employees working in 7-Eleven stores. The Applicants were amongst those who claimed to have been under-paid. The Australian franchisor, 7-Eleven Pty Ltd, responded to these matters as set out below.
ISSUES
The main issue is whether certain amounts paid to the Applicants in the 2017 year by a company related to the franchisor, Independent Claims Pty Ltd (“Independent”), pursuant to certain Deeds of Acknowledgement and Assignment executed by the Applicants and Independent, are ordinary income within the meaning of s 6-5 of the Income Tax Assessment Act 1997 (Cth).
There are other issues which are conceded if the main issue is determined in favour of the Respondent. There is a further issue concerning capital gains tax, which the parties have agreed not to argue at this stage but to leave for determination, if necessary, at a later stage.
AGREED FACTS – HARDIK SHETH
The parties have filed Joint Agreed Statements of Facts and Issues. The following are agreed facts relating to Mr Sheth.[1]
[1] Joint Agreed Statement of Facts and Issues in Nos. 2019/3073 & 2021/1175.
7-Eleven Stores Pty Ltd (“7-Eleven”) is the franchisor in Australia. It states it is a privately owned company of the Withers and Barlow families, which has a licence from the US based 7-Eleven Inc to operate and franchise 7-Eleven stores in Australia.
The Applicant, Mr Sheth, is a former employee of five 7-Eleven franchisees in Australia being:
(a)Lalita & Gita Enterprises Pty Ltd (“Lalita”);
(b)Opalmore Pty Ltd (“Opalmore”);
(c)Orient Sunny Pty Ltd (“Orient”);
(d)Arthur Dimopoulos (“Dimopoulos”); and
(e)Hytase (Aust.) Pty Ltd (“Hytase”).
During the period 1 July 2006 to 30 June 2015, this Applicant performed services in respect of 5,677.3 hours of ordinary time in the course of his employment with the franchisees.
At all times, this Applicant was entitled to be paid wages for the hours he worked by the respective franchisees in accordance with the applicable award(s).
None of the franchisees paid the Applicant wages in accordance with the applicable award(s).
In failing to pay wages to the Applicant in accordance with the applicable award(s), the Applicant accrued rights and a cause of action in respect of each of the amounts of wages that ought to have been paid as against each of the franchisees.
Similarly, upon the Applicant performing the work, each of the franchisees became liable to the Applicant to pay to the Applicant an amount of wages equal to the difference between:
(a)the amount of wages that was payable to the Applicant under the applicable award(s); and
(b)the amount of wages that was, in fact, paid to the Applicant by the franchisee.
Set out in Table 1 below, is a summary of the amounts of outstanding wages and interest on those outstanding wages for which each of the Franchisees was liable to the Applicant.
Table 1
Franchisee Applicant’s Ordinary Time Interest Total Lalita $3,765.65 $1,346.05 $5,111.70 Opalmore $11,658.13 $614.02 $12,272.15 Orient $16,027.48 $1,342.02 $17,369.50 Dimopoulos $79,866.30 $16,430.51 $96,296.81 Hytase $20,356.25 $7,671.83 $28,028.08 Total $131,673.81 $27,404.43 $159,078.24 14.In about September 2015, 7-Eleven established an independent panel headed by Professor Allan Fels (referred to as the “Fels Wage Fairness Panel”), with an Independent Secretariat, to investigate claims of underpayments of wages by 7-Eleven franchisees.
In or about December 2015, the Applicant lodged claims with the Independent Secretariat in respect of the underpayment of wages made by the Franchisees.
In or about May 2016, the Fels Wage Fairness Panel ceased and was replaced with the “7-Eleven Wage Repayment Program”, which retained the same Independent Secretariat. Under the replacement program, 7-Eleven Stores Pty Ltd was required to pay claims approved through the “7-Eleven Wage Repayment Program” on an uncapped basis.
On 30 December 2016, the Applicant was notified by the Independent Secretariat of the “7-Eleven Wage Repayment Program” that his:
claim for underpayment of wages by 7-Eleven franchisees has been assessed and approved” under the program and that he was entitled to a payment of $159,078.24 (referred to as the “Determination Amount”), comprising $131,673.81 for “ordinary time” and $27,404.43 for “interest”.
The Notice also stated that “Superannuation will also be calculated by reference to the pay out and will be paid to your relevant Superannuation fund”.
Provided with that Notice were the following documents:
(a)a statutory declaration to be completed by the Applicant;
(b)a document titled “Authorised Witness before whom a statutory declaration may be made in Victoria”; and
(c)a document titled “Frequently asked questions”.
Independent Claims Pty Ltd was stated to be a subsidiary of 7-Eleven and a separate company set up to make payments under the program. Independent has the same directors as 7-Eleven Stores Pty Ltd and is ultimately owned by the Withers and Barlow families.
Following notification that his claims had been accepted, the Applicant executed five documents each titled “Deed of Acknowledgement and Assignment” comprising:
(a)a deed with respect to Hytase;
(b)a deed with respect to Dimopoulos;
(c)a deed with respect to Orient;
(d)a deed with respect to Opalmore; and
(e)a deed with respect to Lalita.
The terms of each deed recorded an agreement between the Applicant and Independent (referred to in the deeds as the “Company”). Each deed was a standard form document with standard terms other than the details of the claimant, the franchisee employer and the debt specified in Schedule 1.
Following execution of the deeds, the Applicant received a payment of $113,651.24 in the 2017 Year that was made by Independent. This comprised the lump sum payment of $131,673.81, less tax withheld of $45,427, plus the interest payment of $27,404.43. In addition, the total amount of superannuation paid to the Applicant’s superannuation fund as directed by the Applicant in respect of the lump sum payment of $131,673.81 was $12,509.01. A member contribution statement was lodged for the 2017 Year naming Independent in the “Employer Details” and referring to an “employer contributed amount” being made to the Applicant’s account with The Trustee for Retail Employees Superannuation Trust.
On 11 June 2021, Independent, in response to a notice issued by the Commissioner of Taxation pursuant to s 353-10 of Sch 1 to the Taxation Administration Act 1953 (Cth), provided inter alia a spreadsheet showing a breakdown of the amount of $131,673.81 as set out in Table 2 below.
Table 2
Referable year of income Amount Year ending 30 June 2008 $26,334.05 Year ending 30 June 2009 $13,921.30 Year ending 30 June 2010 $13,921.30 Year ending 30 June 2011 $13,921.30 Year ending 30 June 2012 $13,959.44 Year ending 30 June 2013 $24,324.36 Year ending 30 June 2014 $17,627.17 Year ending 30 June 2015 $7,664.89 Total $131,673.81
At no time was the Applicant ever engaged or employed by Independent.
The Applicant’s taxable income in the year ending 30 June 2014 was $27,425.
The Applicant’s taxable income for the year ending 30 June 2015 was $60,881.
The Sheth Agreed Statement of Facts and Issues goes on to include details concerning the lodgement of the Applicant’s tax return for the 2017 year, an amended tax return, and progression through the assessment and objection process, all of which it is unnecessary to set out here.
AGREED FACTS – NAGA BABU GUTTIKONDA
There are also, as I have said, agreed facts relating to Mr Guttikonda’s application for review.[2] Many of the facts are common to each Applicant’s application, so that I will only highlight those particularly relevant to Mr Guttikonda.
[2] Joint Agreed Statement of Facts and Issues in Nos. 2019/3367 & 2021/1239.
Mr Guttikonda is a former employee of three 7-Eleven franchisees, being:
(a)Kapoor International Pty Ltd (“Kapoor”);
(b)Arthur Dimopoulos (“Dimopoulos”); and
(c)Bosen Pty Ltd (“Bosen”).
During the period 1 July 2007 to 30 June 2015, he performed services in respect of 8,769.83 hours of ordinary time and 96 hours of overtime in the course of his employment with the said franchisees. Further, he availed himself of leave entitlements in respect of 9.84 hours in the course of his employment with the Franchisees. Set out in Table 3 below is a summary of the ordinary time, overtime and leave entitlements relating to him:
Table 3
Franchisee Applicant’s hours worked and leave entitlements Ordinary time Overtime Leave entitlements Kapoor 1073.58 0 0 Dimopoulos 7,667.25 96 3.15 Bosen 29 0 6.69 Total 8,769.83 96 9.84
Again, none of these Franchisees paid Mr Guttikonda wages in accordance with the applicable award(s). He also accrued rights and a cause of action in respect of the amounts of wages that ought to have been paid as against each of these Franchisees, and each franchisee became liable to this Applicant to pay an amount of wages equal to the difference between:
(a)the amount of wages that was payable to the Applicant under the applicable award(s); and
(b)the amount of wages that was, in fact, paid to the Applicant by the his franchisee/employers.
Set out in Table 4 below, is a summary of the amounts of outstanding wages and interest on those outstanding wages for which each of these Franchisees was liable to Mr Guttikonda.
Table 4
Franchisee Amount of Applicant’s underpaid wages and interest Ordinary time Overtime Leave entitlements Interest Total Kapoor $32,990.27 $0.00 $0.00 $10,086.44 $43,076.71 Dimopoulos $138,833.69 $2,667.42 $1.75 $18,848.73 $160,351.58 Bosen $277.98 $0.00 $106.08 103.88 $487.94 Total $172,101.94 $2,667.42 $107.83 $29,039.05 $203,916.23
In or about December 2015, Mr Guttikonda lodged claims with the Independent Secretariat in respect of the underpayment of wages.
On 18 November 2016, he was notified by the Independent Secretariat of the “7-Eleven Wage Repayment Program” that his “claim for underpayment of wages by 7-Eleven franchisees has been assessed and approved” under the program and that he was entitled to a payment of $203,916.23 (referred to as the “Determination Amount”), comprising $174,877.18 for “ordinary time”, “overtime” and “leave entitlements”, and $29,039.05 for “interest”.
The Notice also stated that “Superannuation will also be calculated by reference to the payout and will be paid to your relevant Superannuation fund”. He was also provided with documents as referred to in paragraph 19 above.
Following notification that his claims had been accepted, Mr Guttikonda executed three documents, described above as “a standard form”, each titled “Deed of Acknowledgement and Assignment” comprising:
(a)a deed with respect to Kapoor;
(b)a deed with respect to Dimopoulos; and
(c)a deed with respect to Bosen.
On 1 December 2016, and further to the Deeds, the Applicant also executed a document titled “Payment details form”.
Following execution of the Deeds, Mr Guttikonda received a payment of $143,583.23 in the 2017 Year. This comprised the lump sum payment of $174,877.18, less tax withheld of $60,333, plus the interest payment of $29,039.05. The payment was made by Independent into the account nominated by this Applicant as disclosed in the “Payment details form”. In addition, the total amount of superannuation paid to the Mr Guttikonda’s superannuation fund as directed by him in respect of the lump sum payment of $174,877.18 was $16,349.69. A member contribution statement was lodged for the 2017 Year naming Independent in the “Employer Details” and referring to an “employer contributed amount” being made to the Applicant’s account with The Trustee for Retail Employees Superannuation Trust.
On 11 June 2021, Independent provided a spreadsheet to the Respondent which included a breakdown of the amount of $174,877.19 as set out in Table 5 below:
Table 5
Income year Amount Year ending 30 June 2008 $8,789.15 Year ending 30 June 2009 $37,088.88 Year ending 30 June 2010 $24,301.96 Year ending 30 June 2011 $22,692.68 Year ending 30 June 2012 $22,754.85 Year ending 30 June 2013 $22,692.68 Year ending 30 June 2014 $22,692.68 Year ending30 June 2015 $13,864.30 Total $174,877.18
On or about 28 June 2017, Independent provided this Applicant with a document titled “PAYG payment summary – individual non-business”. By that document, Independent stated that it had made a lump sum payment of $174,877 at label E from which $60,333 had been withheld as “Total Tax Withheld”.
At no time was Mr Guttikonda ever engaged or employed by Independent. Nor did he provide services to Independent at any time.
Mr Guttikonda’s taxable income in the year ending 30 June 2014 was $74,129.
His taxable income in the year ending 30 June 2015 was $42,087.
There are further agreed facts concerning the lodgement of an income tax return for the 2017 year, an amended return, and assessments and objections, leading to the reviewable objection decision/s. Again, it is not necessary to set out those facts in any detail.
Notice and other documents
Some more detail is called for in respect of the documents, referred to in paragraph 19 above, which were sent to the Applicants with the notification “your claim for underpayment of wages by 7-Eleven franchisees has been assessed and approved”.
The form of statutory declaration, which each Applicant was asked to sign, in paragraph 2, referred to the “Determination Amount” which the Applicant agreed and acknowledged “should be paid to me subject to me completing and returning the Deed of Acknowledgement & Assignment”. The form of statutory declaration contained similar wording in respect of the “Superannuation Amount” to be paid “to my relevant Superannuation fund”.
By paragraph 5 of the statutory declaration, the Applicant acknowledged he would be liable for any personal taxation.
The document entitled “Frequently asked questions” included the following:
Why do I need to sign the Deed of Acknowledgement and Assignment (“the Deed”)?
You need to sign the Deed to acknowledge that you will be paid the Determination Amount and the Superannuation Amount in full and final satisfaction of all wages and entitlements owed to you and Independent Claims Pty Ltd may then require the franchisee/s which employed you to pay to it the money that Independent Claims Pty Ltd paid to you. This is because the franchisee/s which employed you owes you the money but Independent Claims Pty Ltd has paid it to you so that you don’t have to get it from the franchisee/s yourself.
…
What does the Deed mean for me?
The Deed says that, once you are paid the amount by Independent Claims Pty Ltd, you accept that you will have been paid all the monies owing to you. This means that you are accepting the Determination Amount and the Superannuation Amount as settlement of your Claim and you cannot make more claims for payment from your franchisee employer/s at these stores or from 7-Eleven or Independent Claims Pty Ltd.
…
Will I have to pay tax on the Determination Amount and the Superannuation Amount?
The amounts paid to you by Independent Claims Pty Ltd may include amounts in respect of:
Wages
Annual leave / long service leave entitlements; and
Interest
These amounts would be expected to be included as assessable income when lodging your income tax return. In consultation with the Australian Tax Office (ATO) it has been agreed that the Determination Amount paid to you will be assessable in the year in which it is paid to you – even though it may relate to earlier years.
The ATO has also advised that Independent Claims Pty Ltd is required to withhold tax from wages and leave entitlements components of the Determination Amount at the rate of 34.5% for residents and 32.5% for foreign residents. No tax will be withheld from the interest component of the Determination Amount. The amount withheld by Independent Claims Pty Ltd will be paid to the ATO as PAYG Withholding.
Independent Claims Pty Ltd will issue a PAYG Payment Summary to you in respect of the wages and leave entitlements paid to you.
…
Depending on your personal financial situation you may be required to pay more or less tax on the Determination Amount and any interest paid following lodgement of your income tax return.
By signing the Deed you acknowledge that you will be responsible for any tax liability that flows from this and will not be able to recover any additional amounts from 7-Eleven, your franchisee employer/s or Independent Claims Pty Ltd.
Deeds
Each Deed reflected what was contained in the Notice, the statutory declaration, and the document entitled Frequently asked questions sent to the Applicants.
By way of example, the Deed made between Mr Guttikonda and Independent Claims Pty Ltd (the “Company”), as it related to this Applicant’s former employer Kapoor, was as follows (excluding formal parts):
1. The Company has agreed to pay to You the amount set out in Schedule 1 (“the Debt”).
2. The Debt has been determined in resolution of your Claim 2399865/13078 (“Claim”) to the 7-Eleven Wage Repayment Program (“Program”).
3. The Debt will be paid by the Company via electronic funds transfer to your nominated account within 10 business days of receiving a copy of this Deed signed by You.
4. The Debt relates to monies owed to You arising from your employment by the following 7-Eleven franchisee as a result of underpayments of wages and employee entitlements set out in your Claim.
Kapoor International Pty Ltd (“7-Eleven Franchisee”)
… [ACN & address]
5. You acknowledge that the Debt is in full satisfaction of any unpaid wages or employee entitlements that you may have been entitled to arising from your employment by the 7-Eleven Franchisee up until the date of your Claim.
6. You acknowledge that the Debt has not been repaid or otherwise compromised, settled or abandoned prior to you executing this Deed.
7. You acknowledge that on signing this Deed you are receiving payment for the Debt from the Company all rights for recovery of the Debt will vest in the Company and will no longer be exercisable by You.
8. In consideration for the payment of the Debt by the Company, You absolutely and unconditionally assign and transfer to the Company any rights, title or interest in the Debt, including such right or rights of action necessary to recover the Debt from the 7-Eleven Franchisee you were employed by until the date of this Deed (which may include amongst other things instituting legal or other proceedings for recovery of the Debt from the 7-Eleven Franchisee).
9. The Company may at its sole discretion assign this Deed or otherwise transfer the benefit of this Deed or any right or remedy under it, without prior written consent from You.
10. You acknowledge you have had the opportunity to seek independent legal advice regarding the contents of this Deed.
11. You acknowledge you are wholly responsible for your own personal taxation or immigration arrangements.
12. You acknowledge that this Deed has not been executed under duress, that You are not relying on any representations or matters contained in this Deed and that the Company in relying on this acknowledgment.
Executed As A DEED … etc
Schedule 1 – Debt
Gross Amount $32,990.27
(Exc. Interest)
Less Tax $11,382.00
Plus Interest $10,086.44
Net Amount $31,694.71
Superannuation $3,134.08
Income – Gross Amounts
The Respondent contends that the Gross Amount and the Interest paid under each Deed are assessable as ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth). In my view, that is clearly correct.
There is an obvious nexus between the Gross Amounts agreed to be paid by Independent to the Applicants and the services provided by the Applicants to their former employers. However these payments are described, they are the product of the services provided by the Applicants and properly characterised as income.
The Deeds themselves, in clauses 4 and 5 and Schedule 1, make clear that the payments were rewards for services provided by the Applicants during their employment with the franchisees.
The cases referred to by the Respondent demonstrate that the characterisation of a payment for services rendered as income is not lost simply because the payment is in a lump sum, or payment is deferred, or made by someone other than the employer, or is expressed to be in consideration of the disposal of rights.[3]
[3] See Blank v Commissioner of Taxation (2016) (“Blank”) 258 CLR 439, [45], [56] & [59]; Reuter v Federal Commissioner of Taxation (“Reuter”) (1993) 27 ATR 256, 263; Federal Commissioner of Taxation v Dixon (“Dixon”) (1952) 86 CLR 540; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 (“Myer Emporium Ltd”), 218-219; Sommer v Federal Commissioner of Taxation (2002) 51 ATR 102 (“Sommer”).
That is not to say that one or more of these matters, depending on the facts and circumstances, may not influence or even be determinative in characterising the true nature of a receipt. On the facts of these applications, however, in my view, the payments were obviously income. The Applicants contended that the cases relied on by the Respondents differed from these applications, particularly on the facts, and submitted that they were of no assistance. In view, however, the principle to be derived from these cases is directly applicable to the facts of these applications.
The Respondent contended, in the alternative, that the payments were in substitution for income and, relying on cases such as Federal Commissioner of Taxation v Dixon[4] and Federal Commissioner of Taxation v Smith,[5] submitted that they took on the same income characteristic as the moneys they replaced. Some, although not all, of the cases relied on by the Respondent for this submission, involved payments made under insurance policies or schemes where the payments can be readily described as in substitution for lost income.
[4] Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540, 568.
[5] Federal Commissioner of Taxation v Smith (1981) 147 CLR 578, 583.
That description does not so readily apply to these applications, although admittedly the cases do not always or uniformly draw the distinction between payments received as income and receipts in substitution for income.[6] In my view the Gross Amounts should be regarded as income but, if they are properly characterised as payments in substitution for income, then I consider they are taxable as income in accordance with the cases relied on by the Respondent.
[6] See, for example, Commissioner of Taxation v Phillips (1936) 55 CLR 144, and Dixon per Starke J.
The Applicants placed particular reliance on the decision of the Full Court of the Federal Court in Federal Commissioner of Taxation v McArdle[7] to submit that the payments were in the nature of a capital receipt. In that case the Court said that the amount received by the taxpayer “was a capital receipt, being received as consideration for the surrender of valuable rights. The sum was not received by way of a reward for services and was negotiated as the consideration of the surrender of valuable rights”.[8] That is quite different from this case.
[7] Federal Commissioner of Taxation v McArdle (1988) 19 ATR 1901.
[8] Ibid, at page 1909.
The Deeds were amongst the documents provided to the Applicants, and which they were asked to sign, so as to receive the wages and other employee entitlements which they claimed and were due to them from their former employers. The Applicants were finally to receive their unpaid wages and other entitlements by signing the Deeds. The Gross Amounts were rewards for services provided by the Applicants during their employment with the franchisees.
In written submissions on behalf of the Applicants it was submitted that regard should only be had to the terms of the Deeds.[9] It was submitted that because the receipts comprised payments made to the Applicants by Independent under the Deeds, the character of the payments falls to be assessed having regard only to the terms of the Deeds and the nature of the consideration given by the Applicants for the payments that they received by reference to the Deeds. Reliance was placed on Commissioner of Taxation v CSR Ltd (“CSR Ltd”).[10]
[9] Applicants’ Outline of Submissions, [9]; and Applicants’ Outline of Submissions in Reply, [27] – [28].
[10] Commissioner of Taxation v CSR Ltd (2000) 104 FCR 44 (“CSR Ltd”).
In oral submissions on behalf of the Applicants it seems to have been accepted that regard could be had to the surrounding circumstances. Be that as it may, I do not accept that CSR Ltd does stand for the proposition advanced on behalf of the Applicants in their written submissions. In CSR Ltd the Full Court of the Federal Court rejected a submission by the Commissioner that, where a question arose as to whether an amount received under a written agreement was income, one must take a broad view of the taxpayer’s situation. That, however, is not this case.
I accept the Respondent’s submissions that cases such as Blank, Reuter, Phillips, Myer Emporium Ltd and Sommer demonstrate that regard should be had to the surrounding circumstances, and should not be limited to the agreements under which the particular payments were made.[11] In Reuter v Federal Commissioner of Taxation[12] the Full Court of the Federal Court (Jenkinson, Lee and O’Loughlin JJ) said:[13]
Counsel for Reuter had submitted to his Honour, and contends in this appeal, that whilst it is appropriate to look at all the circumstances which bear upon the character of the payment made, a clear statement in the Deed of Covenant that the payment had been made in return for Reuter's acceptance of a restriction of his right to claim, or commence proceedings in relation to, the Tryart fee demonstrated the character of the payment, namely a receipt in the nature of capital and not one received as income according to ordinary concepts.
…
The consideration for the payment described in the Deed of Covenant is only part of a matrix of relevant events providing the context in which the Deed was executed and in which the character of the payment must be found. The record in the Deed that the payment made to Reuter had connection with the covenants to be provided by Reuter in the Deed, did not exclude connection with other events and was not conclusive of the nature of the payment received by Reuter. The issue to be decided was whether, in fact, the payment was a "product" of the taxpayer's services having regard to all relevant material. (See Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 per Fullagar J at pp 57-58.)
…
… Part of the relevant evidence was within the Deed but significant evidence outside the Deed made it obvious that the nexus between the sum of $8m received by Reuter from BML and the services provided by Reuter to Rothwells was such that it could be said that the sum received, however described, was a product of those services and properly characterized as income according to ordinary concepts.
[11] See also YCNM v Federal Commissioner of Taxation (2019) 110 ATR 151, [139] and [145].
[12] Reuter v Federal Commissioner of Taxation (1993) 27 ATR 256.
[13] Ibid, at pages 261, 262 and 263.
The Applicants submitted there is no scope to conclude otherwise than that the Deeds effected assignments by the Applicants of property comprising rights owned by them to Independent for consideration, being an amount calculated as “the Debt”. The Applicants submitted that nothing arises from the amount paid under each Deed being calculated based on the wages or other entitlements due the Applicants arising out of their employment. The Applicants placed particular reliance on clause 8 of the Deeds. They submitted that the Respondent’s submissions “give primacy to peripheral matters over substantive facts”.[14] I do not accept those submissions. Clause 8 must be read in context – not just in context within the Deeds, including clauses 4 and 5 - but also in the context of the events by which the Deeds were entered into.
[14] Applicant’s Outline of Submissions in Reply, [1].
I have had regard to all of the Applicants’ arguments, including their reliance on Shepherd v Federal Commissioner of Taxation[15] and Norman v Federal Commissioner ofTaxation.[16] I am satisfied that the Gross Amounts paid pursuant to the Deeds were the product of the Applicants’ services provided to their former employers and, based on the facts and for the above reasons, properly characterised as income.
[15] Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385, especially pages 391, 392, 394 and 397.
[16] Norman v Federal Commissioner ofTaxation (1963) 109 CLR 9.
Interest payments
Mr Guttikonda received what was described in the Deeds as an Interest payment of $29,039 and Mr Sheth received a payment of $27,404. On behalf of the Applicants, it was submitted that they “did not receive any amount of interest”.[17]
[17] Applicants’ Outline of Submissions in Reply, [29].
The Applicants submitted that interest is an amount flowing from a principal sum as compensation to a lender for being kept out of the use and enjoyment of the principal sum. The Applicants never advanced any principal sum to Independent. Therefore, the Applicants could never have received any amount by way of interest from Independent.[18]
[18] Ibid, [30].
In Myer Emporium Ltd the High Court characterised interest as “flowing from the principal sum” and as “compensation to the lender for being kept out of the use and enjoyment of the principal sum: Riches v Westminster Bank Ltd.”[19] The case cited by the High Court, Riches v Westminster Bank Ltd,[20] a decision of the Privy Council, is an example of interest as income where there was no loan in the traditional sense, but where the interest is paid as the compensation for the use or retention by one person of a sum of money belonging to, in a colloquial sense, or owed to another.[21]
[19] Myer Emporium Ltd, at page 218.
[20] Riches v Westminster Bank Ltd [1947] AC 390.
[21] Ibid.
As the Respondent submits, the Applicants were entitled to receive their full wages during the course of their employment with the franchisees. They were not paid that remuneration when it was due. The Interest, as so-called in the Deeds, was paid to compensate the Applicants for only receiving “the use and enjoyment” of the balance of their wages at a later time when they received the lump sums from Independent. As such, the interest payments were correctly assessable to the Applicants as ordinary income.
I note that the Respondent, in the alternative, submitted that the payments were in substitution for interest payable by the franchisees, and are of the same nature as if paid to them by those franchisees. I accept the Respondent’s primary submission that the Interest is properly characterised as income, but again, if the payments are to be regarded as payments in substitution, then I accept that they are of the same nature as the payments they replace, and on this basis are also to be regarded as income.
I am therefore satisfied that the lump sum amounts paid to the Applicants by Independent in the 2017 year for unpaid wages and interest were assessable to the Applicants as ordinary income under s 6-5 of the of the Income Tax Assessment Act 1997 (Cth).
Should the Lump Sum Payments in Arrears be increased?
This and the remaining issues (excluding the capital gains tax matter) are conceded by the Applicants in light of my decision on the main issue. It is therefore sufficient that, in dealing with them, I substantially reproduce the Respondent’s submissions which I accept.
The Applicants were entitled to a rebate of tax in respect of the lump sum payments in arrears (“LSPIA”) for unpaid wages pursuant to s 159ZRA of the Income Tax Assessment Act1936 (Cth) (“the 1936 Act”). The amount of the LSPIA Offset is calculated under s 159ZRB of the 1936 Act.
In the objection decisions, the Commissioner calculated the LSPIA Offsets to be $11,626 (Guttikonda) and $11,386 (Sheth). Independent subsequently provided a complete breakdown of the lump sums paid to the Applicants across the accrual years. Applying these breakdowns to the calculation required under s 159ZRB, the correct LSPIA Offsets should be $13,001 (Guttikonda) and $16,614 (Sheth).
Liability for temporary budget repair levy
Section 4-11(1) of the Income Tax (Transitional Provisions) Act 1997 (Cth) relevantly provides that the Applicants must pay the ‘temporary budget repair levy’ in the 2017 Year if their taxable incomes exceeded $180,000.
The Applicants were liable to pay the levy because they had taxable incomes of $262,403 (Guttikonda) and $234,602 (Sheth).
Hardik Sheth’s private health insurance rebate
The amount of the private health insurance rebate under s 61-210 of the Income Tax Assessment Act 1997 (Cth) is calculated by reference to Mr Sheth’s share of the private health insurance incentive under the Private Health Insurance Act 2007 (Cth), which is dependent on Mr Sheth’s and his spouse’s incomes. In the present case.
Mr Sheth’s rebate of $142.59 has been correctly calculated based on his taxable income of $234,602 and his spouse’s taxable income of $12,778.
CONCLUSION
For the reasons above:
(a)Naga Babu Guttikonda’s objection decision dated 25 January 2019 should be varied to increase the LSPIA Offset to $13,001;
(b)Hardik Sheth’s objection decision dated 25 March 2019 should be varied to increase the LSPIA Offset to $16,614; and
(c)the decisions under review should otherwise be affirmed.
I certify that the preceding 79 (seventy-nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy
..................[SGD]......................................................
Associate
Dated: 20 May 2022
Date of hearing: 3 May 2022 Counsel for the Applicant: Mr Michael Y Bearman and Mr Daniel R Diaz Solicitors for the Applicant: HDL Legal & Consulting Pty Ltd Counsel for the Respondent: Mr Matthew Meng Solicitors for the Respondent: The Australian Taxation Office
Key Legal Topics
Areas of Law
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Tax Law
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Statutory Interpretation
Legal Concepts
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Statutory Construction
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Remedies
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Appeal
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