KRBM and Commissioner of Taxation (Taxation and business)
[2025] ARTA 556
•13 May 2025
KRBM and Commissioner of Taxation (Taxation and business) [2025] ARTA 556 (13 May 2025)
Applicant/s: KRBM
Respondent: Commissioner of Taxation
Tribunal Number: 2024/0791-0794
Tribunal:General Member Darian-Smith
Place:Sydney
Date:13 May 2025
Decision:The Tribunal affirms the decision under review.
...........................[SGD].............................................
General Member Darian-Smith
Catchwords
INCOME TAX – Objection to assessment of asserted partnership income – taxation treatment of timing differences payments - whether s. 92 ITAA applicable – whether Applicant in a “tax law partnership” – Objection disallowed - decision under review affirmed
Legislation
Administrative Appeals Tribunal Act 1975 (Cth) s. 35
Administrative Review Tribunal Act 2024 (Cth) s. 70
Evidence Act 1995 (Cth) s.140
Income Tax Assessment Act 1936 (Cth) ss. 90, 91, 92
Income Tax Assessment Act 1997 (Cth) ss. 6-5, 6-10, 6-25, 15-50, 25-95, 995-1
Taxation Administration Act 1953 (Cth) ss. 14ZZK, 353-10Cases
Case B60 (1970) 70 ATC 284
Cheung v Commissioner of Taxation [2024] FCA 1370
Commissioner of Taxation v Cassaniti (2018) 266 FCR 385
Crommelin v Federal Commissioner of Taxation (1998) 39 ATR 377
Federal Commissioner of Taxation v Galland (1986) 162 CLR 408
Federal Commissioner of Taxation v Grant & Ors (1991) 22 ATR 237
Hedges and Commissioner of Taxation [2020] AATA 5307; (2020) 112 ATR 722
Jamieson v Commissioner of Inland Revenue (1974) 4 ATR 327
Kimchi v Federal Commissioner of Taxation [2004] FCA 1108; (2004) 57 ATR 28
McNally v Commissioner of Taxation [2007] FCA 51; (2007) 65 ATR 738Stapleton v Commissioner of Taxation [1989] FCA 478; 88 ALR606; (1989) 20 ATR 996
Secondary Materials
Explanatory Memorandum, Taxation Laws Amendment Bill (No.5) 2002, Chapter 2
Statement of Reasons
The Applicant states the issue for determination by the Tribunal in this matter as being whether the Applicant is assessable under s. 92 of the Income TaxAssessment Act 1936 (Cth) (ITAA 36) to asserted partnership distributions for the financial years ending 30 June 2018, 30 June 2020, and 30 June 2021 (collectively Relevant Years).[1]
[1] Applicant’s SFIC, [9].
The Respondent (Commissioner) states the issues for determination by the Tribunal as follows:
“Has the Applicant discharged his onus of proving that the assessments in each of the Relevant Years are excessive. and
Whether the Applicant should not have included in his assessable income the sum of $62,602 in each of the Relevant Years because he;
(a) was not a partner of the [Partnership] at the time and, or, alternatively,
(b) did not derive that sum in each of the Relevant Years.”[2]
[2] Respondent’s SFIC, [21], [22].
The Applicant was an equity partner of an accounting firm partnership (Partnership) between 1 July 2012 and 30 October 2016, being admitted to the Partnership on the former date and retiring from it on the latter date. His evidence was that he was a category D equity partner, at least for the period from 2 July 2012 to 30 June 2016.[3]
[3] KRBM Affidavit, [32].
The Partnership prepared income tax returns (ITRs) for the Applicant, returning an amount of $62,602, for each of the Relevant years as follows:
(a)Financial year ended 30 June 2018, the ITR was lodged on or about 10 May 2019[4] and the notice of assessment was issued on 17 May 2019.[5]
(b)Financial year ended 30 June 2020, the ITR was lodged on or about 15 June 2021[6] and the notice of assessment was issued on 22 June 2021.[7] and
(c)Financial year ended 30 June 2021, the ITR was lodged on or about 16 May 2022[8] and the notice of assessment was issued on 23 May 2022.[9]
The three notices of assessment are referred to collectively as the Assessments.
[4] T5, page 244.
[5] T6, page 277.
[6] T7, page 281.
[7] T8, page 315.
[8] T10, page 465.
[9] T11, page 499.
On 8 May 2023, the Applicant, having disagreed with the ITRs prepared for him by the Partnership, lodged an objection against the Assessments under Part IVC of the TaxationAdministration Act 1953 (Cth) (TAA 53) (Objection).[10] The objection was to the inclusion of $62,602 of ‘distributions from partnerships’ in the Applicant’s assessable income for each of the Relevant Years, which amount was said to be excessive.
[10] T15, page 543.
On 13 December 2023, the Commissioner allowed the Applicant an extension of time to lodge the objection to the notice of assessment for the financial year ended 30 June 2018 but otherwise disallowed the Objection (Reviewable Decision).[11]
[11] T2, page 11.
On 10 February 2024, the Applicant applied to the Tribunal for review of the Reviewable Decision.
The Applicant relies upon a Statement of Facts, Issues and Contentions dated 16 May 2024 (Applicant’s SFIC) and an Outline of Submissions dated 12 February 2025 (Applicant’s Submissions). The Applicant reads and relies upon the affidavit of KRBM sworn 16 May 2024 (KRBM Affidavit).
The Commissioner relies upon a Statement of Facts, Issues and Contentions dated 10 July 2024 (Respondent’s SFIC) and an Outline of Submissions dated 5 February 2025 (Respondent’s Submissions).
PARTNERSHIP DOCUMENTS AND THE ISSUES
There were three main documents relevant to the Applicant’s arrangements as a partner of the Partnership which were referred to in the evidence:
(a)Partnership Agreement, as updated periodically.[12]
(b)Partnership Retirement Deed dated 16 November 2016.[13] and
(c)Partner Handbook, as updated periodically.[14]
(collectively the Partnership Documents).
[12] T3, page 18 (incorporating amendments up to 16 June 2016 including amendments by resolutions passed on 28 August 2015 and 16 June 2016); ST5, page 614 (approved on 21 May 2004 as amended by resolutions passed on 18 August 2004, 7 March 2007 and 14 December 2010).
[13] T4, page 234.
[14] T9, page 317 (Edition 9.1: 2021); ST6, page 846 (Fourth edition: 2012); ST7, page 962 (Fifth edition: 2013); ST8, page1098 (Sixth edition: 2014/2015); ST9, page 1238 (Seventh edition: 2016/2017).
On 4 April 2024, the Tribunal made directions under s. 35 of the Administrative AppealsTribunal Act 1975 (Cth) (AAT Act), that the Partnership Documents were not to be published or disclosed other than for the purposes of the present proceedings, or any appeal proceedings.
On 13 February 2025, the Tribunal made an order under s. 70(2) of the AdministrativeReview Tribunal Act 2024 (Cth) (ART Act) that, except to the extent contained in these Reasons for Decision, none of the Partnership Document information in ST5, ST6, ST7, ST8 or ST9 was to be published.
The Applicant’s position, in lodging the Objection to the Assessments, is that:
(a)he was not a partner in the Partnership in the Relevant Years and did not have any interest as a partner in the net income of the Partnership in the Relevant Years; and
(b)no distributions of partnership net income were received by him in the Relevant Years.[15]
[15] Applicant’s SFIC, [25] – [27].
The Commissioner disputes that it was necessary for the Applicant to be a partner of the Partnership in the Relevant Years for the $62,602 to be included in his assessable income in each of those years. The Commissioner further contends that the relevant enquiry is not about whether the Applicant received partnership net income in the Relevant Years, but rather whether the Applicant derived[16] those amounts by having them applied for his benefit or at his direction.[17]
[16] See s. 6-5(4) of the Income Tax Assessment Act 1997 (Cth) (ITAA 97).
[17] Respondent’s SFIC, [28].
Section 14ZZK(b)(i) of the TAA 53 provides:
“On an application for review of a reviewable objection decision: …
(b) the applicant has the burden of proving:
(i) if the taxation decision concerned is an assessment—that the assessment is excessive or otherwise incorrect and what the assessment should have been;”
Relying upon this provision, the Commissioner puts the Applicant to proof of the facts upon which he relies to discharge his burden of proving that the Assessments are excessive. The standard of proof is on the balance of probabilities and no special burden exists beyond that.[18] As Logan J stated in Cheung v Commissioner of Taxation,[19] section14ZZK does not mean proof to demonstration, only proof on the balance of probabilities (referencing section 140(1) Evidence Act 1995 (Cth)).[20]
[18] Commissioner of Taxation v Cassaniti (2018) 266 FCR 385, [88] (per Steward J).
[19] [2024] FCA 1370.
[20] [2024] FCA 1370, [17].
The Applicant accepts that he bears this statutory burden of proof to the requisite standard of proof.[21] He submits that:
“In this case, the Applicant will have demonstrated the excessiveness of the Assessments by establishing that he was not in a “tax law partnership” for income tax purposes.”[22]
[21] Applicant’s SFIC, [6]; Applicant’s Submissions, [37].
[22] Applicant’s Submissions, [40].
The Tribunal documents, as originally filed, contained an incomplete version of the Partnership Agreement, provided by the Applicant to the Commissioner under compulsory notice which incorporated amendments approved by the partners up to 16 June 2016 (2016 Partnership Agreement).[23] The circumstances of the 2016 Partnership Agreement being incomplete are explained by the Applicant in the KRBM affidavit[24] and are not material as the Tribunal has before it in evidence a complete copy of the Partnership Agreement[25] as it was in 2012 (incorporating changes up to 14 December 2010) at the time when the Applicant joined the Partnership (2012 Partnership Agreement).[26] The Tribunal accepts that the annotations which appear on the cover pages of each of the 2012 Partnership Agreement and the 2016 Partnership Agreement respectively show that there were no amendments made to the Partnership Agreement in the period between 14 December 2010 and 28 August 2015.
[23] T3, page 18.
[24] KRBM Affidavit, [18].
[25] Provided by the Partnership in response to a summons issued by the Tribunal.
[26] ST5, page 614.
The clauses of the 2012 Partnership Agreement which are relevant for present purposes are:
(a) Clause 11.12 Resignation of offices, handover and debriefing. Clause 11.12 (b)(ii) provides: “A Former Partner, for a period of 1 year after ceasing to be a Partner, and any Outgoing Partner must: … (ii) assist with the collection of work-in-progress and debtors on the Outgoing Partner’s ledger; …” [27]
(b) Clause 11.14 Partner Termination Deed and other action. Clause 11.14 provides: “An Outgoing Partner or Former Partner: (a) must, if required by the CEO, do anything and execute any document considered necessary or desirable by the CEO which relates to the Outgoing Partner or Former Partner ceasing to be a Partner, including executing a Partner Termination Deed in two (2) counterparts; and (b) each Partner irrevocably authorises the CEO to do any such thing or execute any such document on behalf of the Partner.”[28]
(c) Clause 11.4 Termination Payments. Clause 11.4 (a)(i)(A) provides: “(a)(i)(A) A Termination Payment must be paid, in accordance with the applicable Regulation, from National Net Earnings in the case of an Equity Partner… to: (I) An Equity Partner: I. who retires pursuant to clause 11.7…”
This payment is referred to in the evidence as the “retiring gracefully payment”.
(d) Schedule 4 New Partner Admission - pro forma deed. This deed, executed upon entry to the Partnership provides that from the date of execution, the Applicant had the “rights and obligations of an Equity Partner” (clause 2.1) and that this deed, the Partnership Agreement and any letter of offer constitute the entire agreement between the Applicant and the Partnership (clause 2.2(b)).[29]
(e) Schedule 15 Partner Termination Deed – pro forma deed.[30] Clause 2.9 provides: Taxation Timing Differences (Equity Partners only) The Outgoing Partner’s taxation timing differences, [insert amount/which are yet to be determined], will be rolled out over the year(s) ending 30 June [insert years]. The Outgoing Partner acknowledges that [he or she] will return the timing differences as taxable income within the year(s) ending 30 June [insert years].”[31] and
(f) Schedule 17 Partner Retirement Plan. Clause 5 provides “A Category D Partner is not entitled to any Retirement Benefit”.[32]
[27] ST5, page 669.
[28] ST5, page 670.
[29] ST5, page 715.
[30] ST5, page 794.
[31] ST5, page 796.
[32] ST5, page 808.
The Partnership Retirement Deed is in the form of the pro forma deed which is Schedule 15 to the Partnership Agreement. The Partnership Retirement Deed was executed by the Applicant on 11 November 2016,[33] as he was contractually obliged to do under clause 11.14 of the Partnership Agreement upon ceasing to be a partner in the Partnership.
[33] T4, page 234.
The Partnership Retirement Deed contained an acknowledgement by the Applicant that he remained bound by the Partnership Agreement,[34] and provided for the Partnership to assist in the preparation of the Applicant’s income tax returns up to and including the financial year ending 30 June 2023.[35]
[34] Clause 2.2(a), T4, page 235.
[35] Clause 2.10, T4, page 237.
In respect of taxation timing differences, clause 2.9 of the Partnership Retirement Deed provides:
“Taxation Timing Differences
The Outgoing Partner’s taxation timing differences of $313,008, will be rolled out over the years ending 30 June 2018, 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022. The Outgoing Partner acknowledges that he will return the timing differences as taxable income within the years ending 30 June 2018, 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022.”[36]
[36] T4, pages 236-237.
The Tribunal notes that the term “taxation timing differences” is not a defined term in any of the 2012 Partnership Agreement, the 2016 Partnership Agreement or the Partner Retirement Deed. The term comes from, and is explained in, the Partner Handbook as updated from time to time.
The Partner Handbook makes it clear that to the extent that any inconsistency arises between it and the Partnership Agreement, the latter has overriding authority.[37] Also made clear is that the taxable income of partners will almost always be different to partners accounting income. In respect of equity partners, the differences may include various reconciliation amounts including timing differences.[38]
[37] See for example, ST6, page 847 (Fourth edition: 2012).
[38] ST6, page 885 (Fourth edition: 2012).
The version of the Partner Handbook from which the explanation of “taxation timing differences” was extracted for the purposes of the Reviewable Decision[39] was Edition 9.1:2021.[40] The KRBM Affidavit having confirmed that Edition 9.1: 2021 was not the extant version of the Partner Handbook when the Applicant joined the Partnership,[41] the Commissioner, under summons issued by the Tribunal, obtained from the Partnership a copy of each the earlier editions of the Partner Handbook which were current in the period between 2012 and 2016 when the Applicant was an equity partner of the Partnership.
[39] T2, page 15, [38].
[40] T9, page 376.
[41] KRBM Affidavit, [14].
The version of the Partner Handbook in use when the Applicant became a partner in 2012 was Fourth edition: 2012.[42] As is noted in the Respondent’s Submissions, apart from formatting differences, the text in the Partner Handbook relating to “Timing differences” is identical as between Fourth edition: 2012 and each of the Fifth edition: 2013, Sixth edition: 2014/2015, Seventh edition: 2016/2017 and Edition 9.1: 2021.[43]
[42] ST6, page 846.
[43] Respondent’s Submissions, [28] – [29].
The relevant text from the Partner Handbook Fourth edition: 2012 describing timing differences provides:
“Timing differences
On a partner by partner basis, year by year, the firm tracks timing differences. These are amounts that are taxed in different years from the year in which they are recognised as income or expenses for accounting purposes. Individual timing differences are a product of a partner’s unit entitlement applied to each category of timing differences. Every year each partner’s prior year closing timing differences are reversed, and the current year’s timing differences are recalculated.
Overall, timing differences represent a legitimate deferral of a partner’s tax liability to future years. Ultimately, the benefit received by this deferral reverses on retirement over a five year period, while newly admitted equity partners will have their timing differences phased in over a five year period (refer to the section entitled Retirement benefit).
The main categories of timing differences are as follows:
* Work in progress (WIP): WIP is not taxed until billed. At 30 June each year the Firm calculates each partner’s share of WIP, based upon the partner’s unit entitlement, and deducts the share of WIP from the partner’s accounting income to arrive at taxable income. This deduction is reversed the following year …”[44]
[44] ST6, page 887.
LEGISLATIVE PROVISIONS
The relevant provisions of the income tax legislation for present purposes are contained in the Income Tax Assessment Act 1936 (Cth) (ITAA 36) and the Income Tax Assessment Act 1997 (Cth) (ITAA 97) and are the following:
(a) Section 92(1) of the ITAA 36, which deals with the assessable income of a partner, provides:
“Income and deductions of partner (1) The assessable income of a partner in a partnership shall include: (a) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident; and (b) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was not a resident and is also attributable to sources in Australia.”
(b) The definition of “partnership” is found in section 995-1 of the ITAA 97 and means: “(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly…”. The association of persons carrying on business as partners is generally referred to as a general law partnership. The association of persons in receipt of ordinary income or statutory income jointly is generally referred to as a tax law partnership.
(c) The definition of “net income” is found in section 90 of the ITAA 36 and means: “net income, in relation to a partnership, means the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions except deductions allowable under section 290-150 or Division 36 of the ITAA 97”.
(d) Operative provisions about assessable income, which deal with ordinary income and statutory income, provide:
(i) section 6-5 of the ITAA 97 “Income according to ordinary concepts (ordinary income) (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income…. (2) If you are an Australian resident, your assessable includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year… (4) In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.”
(ii) Section 6-10 of the ITAA 97 “Other assessable income (statutory income) (1) Your assessable income also includes some amounts that are not *ordinary income… (2) Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.”
(iii) Section 6-25 of the ITAA 97 “Relationships among various rules about ordinary income (1) Sometimes more than one rule includes an amount in your assessable income… * the same amount may be included in your assessable income by more than one provision about assessable income….However, the amount is included only once in your assessable income for an income year, and is then not included in your assessable income for any other income year.”
(e) The provisions which deal with the assessability and deductibility of “Work in progress amounts”, provide:
(i) Section 15-50 of the ITAA 97 “Work in progress amounts Your assessable income includes a *work in progress amount that you receive.”
(ii) “work in progress amount” is defined in section 995-1 of the ITAA 97 to have the meaning given by section 25-95(3) of the ITAA 97.
(iii) Section 25-95 of the ITAA 97 “Deduction for work in progress amounts (1) You can deduct a *work in progress amount that you pay for the income year in which you pay it to the extent that, as at the end of that income year: (a) a recoverable debt has arisen in respect of the completion or partial completion of the work to which the amount related; or (b) you reasonably expect a recoverable debt to arise in respect of the completion or partial completion of that work within the period of 12 months after the amount was paid.”
(iiv) Section 25-95(3) of the ITAA 97 “(3) An amount is a work in progress amount to the extent that: (a) an entity agrees to pay the amount to another entity (the recipient); and (b) the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third entity but not yet completed to a stage where a recoverable debt has arisen in respect of the completion or partial completion of the work….”
APPLICANT’S EVIDENCE
In the KRBM Affidavit, the Applicant gave evidence that:
(a)When he joined the Partnership, he was not able to negotiate the terms of the Partnership Agreement,[45] but he signed a New Partner Deed and Power of Attorney which bound him to the Partnership Agreement.[46]
(b)While he was a partner of the Partnership, his taxable income was about 10% less than his accounting draw.[47]
(c)When he left the Partnership, he was treated as a Retired Partner for the purposes of the Partnership Agreement.[48] He was not able to negotiate the Partnership Retirement Deed, other than in relation to the restraints and non-compete clauses, which he mainly focussed on. He signed the Partnership Retirement Deed because he was obliged to do so.[49]
(d)When he ceased being a partner of the Partnership, a few things flowed from that relating to the Relevant Years, including that he” had no interest in any of the [Partnership] assets including but not limited to any work in progress (WIP), whether in relation to WIP for work I previously performed while a partner of the [Partnership] or otherwise”.[50]
(e)He did not physically receive the amount of $62,602 “in money or in kind” from the Partnership in any of the Relevant Years.[51]
(f)He “was astonished to see that [the Partnership] in preparing my income tax returns treated the $62,602 as assessable in my personal income tax returns for the years under review.”[52]
[45] KRBM Affidavit, [30].
[46] KRBM Affidavit, [26].
[47] KRBM Affidavit, [35].
[48] KRBM Affidavit, [39].
[49] KRBM Affidavit, [42].
[50] KRBM Affidavit, [43].
[51] KRBM Affidavit, [45].
[52] KRBM Affidavit, [46].
The Applicant was cross examined as to the circumstances of his entry and exit from the Partnership and as to the operation of the Partnership Documents. He was shown Annexure A to the Partnership Retirement Deed[53] which set out the calculation of the Termination Payment payable under clause 11.4(a)(i)(A)(I) of the Partnership Agreement, being an amount totalling $269,778 to be paid in six annual payments of $44,962.96. The Applicant confirmed that these payments were the retiring gracefully payments referred to elsewhere.[54]
[53] Exhibit 3, page 12.
[54] Transcript T-29, lines 33 – 36.
The Applicant was then asked some questions about his understanding as to what payments he would receive on retirement from the Partnership and what amounts he would have to return as assessable income. The Tribunal notes the following passages from the Applicant’s evidence in cross examination:
“At the time you executed [the Partnership Retirement Deed], what was your understanding? ---So, my expectation was to get a tax statement saying, “here’s your taxable income of being $60,000-odd”, or whatever the number was. And that was it. What I got was surprised when I saw two numbers, being 44,000 for the trusts, not to me, which is – and the 60,000 to me. I was expecting only $60,000 of taxable income which marries up with my understanding of tax laws…”[55]
“Consistent with your evidence today, you’ve said that you were always under the impression that the retiring gracefully – and by that you mean the termination payment – worked so that you only returned the WIP reversal and not the WIP reversal and the cash. Are you able to explain precisely what you mean about your understanding that retiring gracefully meant you only returned the WIP reversal? ---Yes. In the way I’d read the termination deed, it said you return this over five years (indistinct words ‘which it might do”) and then there was a separate amount. And I thought they were linked concepts. Incorrectly as it turned out. What made sense to me at the time, is I got $44,000 for the cash in the partnership. And then I returned $60,000……I see? ---I thought I’d get $40,000 cash, pay tax on $60,000, the timing difference’s the reverse, everyone’s happy.”[56]
[55] Transcript P-30, lines 10 – 18.
[56] Transcript P-30, lines 44 – 47, P-31, lines 1 – 12.
The Applicant went on to say that nothing in his reading of the Partnership Termination Deed suggested that he had to return the $44,000 cash as well as the $60,000.[57] Counsel took the Applicant to the statement in the Note at the bottom of Annexure A to the Partnership Retirement Deed, which reads in respect of the Termination Payment: “The amount is payable to the Outgoing Partner’s fixed capital discretionary trust and is taxable in the beneficiaries hands”. The Applicant confirmed that he had a fixed capital discretionary trust. He did not agree that the amount had been physically paid but he accepted the statement that the payment was taxable in the hands of the beneficiary under the fixed capital discretionary trust.[58]
[57] Transcript P-31, lines 37 – 39.
[58] Transcript P-31, lines 44 – 47, P-32, lines 1-16.
The Applicant confirmed that he was aware of and content to have the WIP amount or the timing difference included in his tax returns in accordance with the Partnership Agreement and the Partnership Termination Deed.“If the 44 wasn’t there as well. I was, it turns out, confused at the time as to which vehicles would get sent in what. I thought all of it was going to go through a trust.”[59]
[59] Transcript P-37, lines 9 – 15.
The evidence was that the Applicant raised his concerns about both the $44,962.96 and the $62,602 being included in his tax return with Mr AB (AB), from the Partnership’s in-house legal team. The Applicant told AB in an email dated 18 March 2019:
“By way of background, I received a huge fright when I realised, I was being asked to include $100k in my tax returns. In short, I was always under the impression … that the Retiring Gracefully worked so that you only returned the WIP reversal, not the WIP reversal and the cash.
I’ve gone back over the Partner Handbook etc, and it is clear the two concepts are linked, and just the name” Retiring Gracefully” suggests there is a net cash benefit.
I also refer to the tax case law that is adamant that you can’t receive a share of net income of a partnership if you don’t have a share of the income. As such, whilst I’m happy to return the WIP adjustment as per the partnership agreement and retirement deed, I can’t see how I’m required to return the actual cash payment as well.”[60]
[60] Exhibit 3, page 26.
The response from AB stated that the tax treatment of the retiring gracefully payment would depend upon how the Applicant’s family trust distributed its income, but that the reversal of timing difference was a matter to be considered separately. AB stated that while “the exact legal position remains unclear”, the ATO was aware of the approach taken by the Partnership and “are comfortable with it”.[61] AB also indicated a preparedness on the part of the Partnership to amend the Applicant’s returns with the alternative approaches being to return all of the timing differences amount ($313,008) in the 2017 return, or to stay with the “concessional” approach whereby the timing differences would be returned (in 5 tranches of $62,602) across 5 years post-retirement.
[61] Exhibit 3, page 25 (email dated 12 April 2019).
In further email exchanges, the Applicant asked AB about whether there was a binding tax ruling on the timing difference treatment,[62] and AB responded:
“As you are aware the approach we take when a partner retires is very concessional…
What we have determined we can do is to remove your entitlement to closing WIP as at 30 June 2017. This will require an amendment to both yours and our returns.
We maintain that our treatment of our return and your distributions is correct and would continue to be correct if we amended your allocation of closing WIP.”[63]
[62] Exhibit 3, page 24 (email dated 15 April 2019).
[63] Exhibit 3, pages 23 – 24 (email dated 21 May 2019).
The Applicant responded to AB:
“As I mentioned previously, I was fine with returning the timing difference, it was being asked to also pay tax on the cash that was the surprise. Given you are confident of the prior year position around the timing difference and the ATO have accepted this, I don’t propose to revisit that.”[64]
[64] Exhibit 3, page 23 (email dated 23 May 2019).
THE APPLICANT’S SUBMISSIONS
The Applicant’s Submissions contend that:
(a)The Applicant will have discharged the onus of proving, under section 14ZZK(b)(i) of the TAA 53, that the Assessments are excessive by establishing that he was not in a “tax law partnership” in the Relevant Years.[65]
(b)This case is distinguished from the cases which have considered retired partner payments,[66] because the Applicant was not paid any amount in the Relevant Years which the Commissioner has assessed.[67]
(c)An earlier version of the Partnership Agreement was considered in McNally v Commissioner of Taxation[68] (McNally), a decision said to be binding on the Tribunal, in which Jessup J held that the additional component of “timing differences” should not be treated as part of the assessable income of the firm (Partnership) and accordingly the Applicant’s share of (or interest in) that income could not include an element for “timing differences”.[69]
(d)Section 15-50 of the ITAA 97, introduced after McNally, does not apply because the Applicant did not receive a work in progress amount (as defined in section 25-95(3) of the ITAA 97) during the Relevant Years. In the section 15-50 context, a taxpayer “receives”[70] a work in progress amount when the amount “comes home” to the taxpayer or is “applied” at the direction of or on behalf of the taxpayer.[71]
(e)The Applicant did not have the timing difference amounts under consideration “come home” to him, and nor were they “applied at his direction” or for his benefit. He denies that there was constructive receipt by him of the amounts assessed by the Commissioner for the Relevant Years. On the proper construction of section 15-50, the “timing differences” should have been assessed in the year payment was “received”, which was not during the Relevant Years.[72]
(f)In ceasing to be a partner of the Partnership, and no longer in receipt of ordinary income or statutory income jointly (for the purposes of the definition of partnership in section 995-1 of the ITAA 97), there was no “tax law partnership” between the Applicant and the partners in the Partnership.[73] Nor was there a general law partnership between the Applicant and the partners in the Partnership in the Relevant Years.[74]
(g)The Applicant is not assessable under section 92 of the ITAA 36 for the adjustments for “timing differences” when he had ceased to be a partner of the Partnership in the Relevant Years (and did not have any interest as a partner in the net income of the Partnership in the Relevant Years) and had not received any distributions of Partnership net income in the Relevant Years.[75] and
(h)The Tribunal should find that the Applicant is not assessable under section 92 of the ITAA 36 and that accordingly the Assessments are excessive.[76]
[65] Applicant’s Submissions, [40].
[66] Crommelin v Deputy Federal Commissioner of Taxation (1998) 39 ATR 377 (Crommelin); Jamieson v Commissioner ofInland Revenue (1974) 4 ATR 327: Stapleton v Federal Commissioner of Taxation (1989) 20 ATR 996 (Stapleton).
[67] Case B60 (1970) 70 ATC 284; Applicant’s Submissions, [47] – [48].
[68] [2007] FCA 51; (2007) 65 ATR 738.
[69] Applicant’s Submissions [50] – [59].
[70] Hedges v Federal Commissioner of Taxation (2020) 112 ATR 722, [23] (Hedges).
[71] Applicant’s Submissions, [60] – [63].
[72] Applicant’s Submissions, [64] – [69].
[73] Applicant’s Submissions, [72] – [75], [82] – [83].
[74] Applicant’s Submissions, [77], [79], [81].
[75] Applicant’s Submissions, [76] – [80].
[76] Applicant’s Submissions, [84].
In his oral submissions, Mr Josifoski took the Tribunal through the McNally decision to indicate first that Jessup J had held that timing differences are not assessable income, and second that the Applicant is entitled to have his position determined in accordance with sections 90, 91 and 92 of the ITAA 36. He further submitted that the “parties can’t agree to circumvent the law in respect of their obligations for tax.”[77]
[77] Transcript P-46, lines 1 – 2.
Mr Josifoski went on to say that section 15-50 of the ITAA 97 now provides the answer, in that a taxpayer’s assessable income includes a work in progress amount that he received. He referred to the Explanatory Memorandum, Taxation Laws Amendment Bill (No. 5) 2002 (EM) at paragraph 2.30, which states:
“A work in progress amount that is received will be included in the assessable income of the recipient under section 15-50 of the ITAA 1997. It will be assessable income in the income year in which it is received.”
He further makes the point that the legal effect of what the Partnership Agreement says in relation to timing differences and work in progress has not been settled by any decision of a court or tribunal. He noted the reference in the evidence to the ATO being aware of what the Partnership was doing and being comfortable with it, but that there was no evidence before the Tribunal of any tax ruling or letter of comfort on the point.[78]
[78] Transcript P-48, lines 40 – 44.
THE RESPONDENT’S SUBMISSIONS
The Commissioner contends in the Respondent’s Submissions that:
(a)The Applicant has not discharged his onus of proving under section 14ZZK(b)(i) of the TAA 53 that the Assessments are excessive.[79]
[79] Respondent’s Submissions, [45].
(b)The amount of $62,602.00, assessed to the Applicant in each of the Relevant Years, was assessable “as it represented his interest, as regulated by the 2012 Partnership Agreement (and later iterations) and the Partner Retirement Deed, in the [Partnership’s] taxable income in each of the Relevant Years.”[80]
[80] Respondent’s Submissions, [46].
(c)The Applicant did not need to be a partner of the Partnership in the Relevant Years to have assessable income included in the Assessments under section 92 of the ITAA 36.[81]
[81] Respondent’s Submissions, [49] – [56].
(d)The net income of the Partnership is determined by reference to section 90 of the ITAA 36 and is calculated as if the partnership was a taxpayer. Section 91 requires the Partnership to file a return, but it is not liable to pay tax.[82]
[82] Respondent’s Submissions, [49] – [51].
(e)The net income of the Partnership (whatever that amount is determined to be under section 90 of the ITAA 36), has in this case been allocated between the partners, including the Applicant, in accordance with the binding contractual arrangements reached between the partners.[83]
[83] Respondent’s Submissions, [50].
(f)There is no temporal restriction contained in section 92 of the ITAA 36 as to when the Applicant is a partner in the Partnership, but it applies to ensure that he is assessed on that part of the income of the Partnership that is attributable to him according to his interest in the Partnership’s earnings from time to time.[84]
[84] Respondent’s Submissions, [53] – [54]. Citing Federal Commissioner of Taxation v Galland (1986) 162 CLR 408, 422, Stapleton at [31], Federal Commissioner of Taxation v Grant (1991) 22 ATR 237, 246 – 247, Hedges at [23].
(g)It does not matter that the Applicant was not a current partner of the Partnership in the Relevant Years. The part of the net income of the Partnership which was assessed to the Applicant in the Relevant Years “concerns the timing difference amount that was calculated by reference to work in progress, prepayments and other amounts which related to the period when the Applicant was a partner of the [Partnership].”[85] It is sufficient that the amount can be identified as having been paid to the Applicant for that reason.[86]
[85] Respondent’s Submissions, [55].
[86] Crommelin at page 386.
(h)The Applicant’s contentions seek to ignore the express binding legal obligations entered by him under the 2012 Partnership Agreement and the Partnership Retirement Deed. The Applicant voluntarily agreed to be contractually bound by the 2012 Partnership Agreement, abiding by the obligations arising under it and receiving the benefit of it. The Applicant executed the Partnership Retirement Deed in accordance with the requirements of the terms of the 2012 Partnership Agreement. The Tribunal ought not to ignore those contractual arrangements.[87]
[87] Respondent’s Submissions, [56].
(i)The receipt, actual or constructive, by the Applicant of part of the assessable income of the Partnership in the Relevant Years is not required. To say that it is required, is to misconceive the term “derived” because “[t]he relevant enquiry is whether the Applicant derived statutory income in the Relevant Years by applying or dealing with it in any way on his behalf or as he directed: ITAA 97, section 6-5(4).”[88]
[88] Respondent’s Submissions, [57] – [58].
(j)The Applicant is assessable for $62,602 in each of the Relevant Years because that represented his net income of the Partnership (as regulated by the contractual agreement between the partners) in those years. “That income has “come home to” or been derived by the Applicant because he was a partner, and his liability arises when that income is ascertained, not because it has actually been received.”[89]
[89] Respondent’s Submissions, [58]. Citing Galland at page 422.
(k)The sum of $62,602 was a sum which was applied by the Partnership at his direction and for his benefit in each of the Relevant Years in accordance with the terms agreed to by him under the 2012 Partnership Agreement and the Partnership Retirement Deed.[90]
(l)Given that the Applicant had executed the Partnership Retirement Deed and had, by clause 2.9, expressly acknowledged and agreed that he would include the taxation timing differences in his income tax returns for the financial years ending 30 June 2018, 2019, 2020, 2021 and 2022, the Applicant’s evidence that he was “astonished” to have the now-disputed amounts assessed to him should be rejected by the Tribunal. Rather, the Tribunal should find that given the terms of the 2012 Partnership Agreement and the Partnership Retirement Deed, a person with the Applicant’s experience and training should have been expecting the Assessments to include the now-disputed amounts.[91]
(m)The Applicant has not sought to adduce any evidence of the income returned by the Partnership under section 90 of the ITAA 36 for any of the Relevant Years. The evidence before the Tribunal comprises Distributable Income Statements prepared by the Partnership which identify opening and closing balances for the timing difference amounts for the Relevant Years and tax returns prepared by the Partnership for the Applicant in accordance with the contractual arrangements between the parties. The Commissioner has not gone behind the information provided by the Applicant to enquire further about whether the timing difference amount, and its amortisation over a 5-year period, in fact reflects the maturation of work in progress. The Commissioner does not have to make any further enquiries. The onus of proving these matters by way of showing that the Assessments were excessive lies with the Applicant, and he has failed to discharge the onus.[92]
(n)The Applicant agreed under the terms of the 2012 Partnership Agreement and the Partnership Retirement Deed, explained in the Partner Handbook, to defer income arising from work in progress during his first 5 years of being a partner, with a reversal of that deferral process then arising in part in the Relevant Years. So far as the “timing difference” amounts identified in the Partnership Retirement Deed were attributable to work in progress, they represent a share of the Partnership’s net earnings that arose when the Applicant was a partner. Section 92 of the ITAA 36 applies to those amounts because those amounts are referrable to the individual interest of the Applicant in the net income of the Partnership in the period when he was a partner.[93]
(o)Since the relevant provisions of the ITAA 97 took effect on 23 September 1998, work in progress amounts have been both assessable (section 15-50 of the ITAA 97) and deductible (section 25-95 of the ITAA 97). The Applicant’s assessable income after September 1998 could include, as assessable statutory income, a work in progress amount which meets the definitional requirements of section 25-95(3) of the ITAA 97. The Commissioner is not able to know whether any work in progress amounts were in fact included in the Applicant’s returns completed for him by the Partnership for the Relevant Years. The Partnership identified and assessed to the Applicant in each of the Relevant Years, an amount in respect of timing differences arising from work in progress and other prepayments calculated consistently with the terms of the Partnership Agreement and the Partnership Retirement Deed.[94]
(p)The Commissioner contends the Tribunal should accept that the timing difference arrangements reflect the way professional services income is earned:
“The timing difference, in essence, meant that the Applicant was not taxed on a portion of the income of the [Partnership] in his early years as a partner; this reflected that the profits received by the [Partnership] in those earlier years may not have been the product of his efforts. Conversely, the inclusion of the amounts under challenge in these proceedings in the years after he retired recognises that his effort as a partner may have contributed to the ongoing receipts of the [Partnership]. Accordingly, the manner in which the Applicant has been required to include those amounts in his assessable income reflects not only his agreement with the [Partnership] but also aligns with the way in which professional services income is gained.”[95] and
(q)Finally, to the extent that the net income of the Partnership includes work in progress amounts in the Relevant Years, section 92 of the ITAA 36 required the Applicant to include in his assessable income the amount reflecting his interest in the net income of the Partnership in the Relevant Years.[96]
[90] Respondent’s Submissions, [59].
[91] Respondent’s Submissions, [62] - [63].
[92] Respondent’s Submissions, [64] – [65].
[93] Respondent’s Submissions, [66] – [67].
[94] Respondent’s Submissions, [68] – [71].
[95] Respondent’s Submissions, [71].
[96] Respondent’s Submissions, [72].
In her oral submissions, Ms Gatland supplemented the Respondent’s Submissions with several further matters.
The first was to look in overview at the way taxation law and the administration of taxation law deals more generally than in just the partnership context with deferral of income and taxation timing differences. Ms Gatland submitted:
“So it’s relatively clear that there are instances other than the present situation where the Commissioner and the Parliament have reached a position where, while not strictly in conformity with a black letter approach to the law…there are instances where there is a treatment of taxation timing differences to allow a concessional approach. In relation to the receipts of the applicant concerning work in progress amounts, the effect of the applicant being successful[97] in this case would be that the correct reflex of the taxation laws would be that he should be liable to be assessed for the full amount of work in progress adjustments brought forward to the date of his retirement …that would mean that an amount of $313,008 should have been properly included in the applicant’s assessable income in the year ended 30 June 2017.”[98]
[97] The Tribunal notes that the transcript reads “unsuccessful” but believes that the submission meant to say “successful”.
[98] Transcript P-50, lines 33 – 42 and 45 – 47.
The second was in relation to taxation law partnership, where the submission was:
“In relation to that, the Commissioner of Taxation is empowered to consider that a taxation partnership can be a partnership in the orthodox common law sense, or it can be an association of persons in receipt of ordinary or statutory income jointly.
So joint recipients.[99] …So where there is a receipt, ordinary or statutory income jointly, that is a taxation partnership. It’s not simply a question of carrying on business. Now, applying that definition to this case, the applicant makes a great deal of a comment in the Commissioner’s reasons for decision on objection that is an apparent concession that the applicant is no longer a partner at general law.
With the greatest respect, the onus falls on the applicant to prove such things. The decision on objection is not in a technical sense an admission but nonetheless, in this case, the applicant exercised his obligations under the partnership agreement and executed the partnership retirement deed, in which he expressly acknowledged ongoing obligations under the partnership agreement. He is in a situation where he is obliged to continue with those obligations until the obligations are completely fulfilled. And it is arguable …that there are some obligations under the partnership agreement that he remains obliged to fulfill.
In those circumstances, one construction of the position of the applicant is that he does remain in a partnership with the firm because he is in receipt of statutory income jointly with it. Being in this case, work in progress amounts.”[100]
[99] E.g. the common example of spouses who own an investment property as partners.
[100] Transcript P-51, lines 45 – 26 and P-51, lines 1 – 26.
The third matter was to clarify the Commissioner’s position in relation to the application of work in progress assessability and deductibility to a tax law partnership. Ms Gatland submitted:
“…the deductibility and assessability of work in progress amounts is limited to where it is expected that payment will arise within the next twelve months. It isn’t simply that one labels an amount as a work in progress amount and says suddenly, it’s assessable or deductible. There needs to be that further “abridgement”.
In relation to this case, it appears to be accepted by the applicant that what occurred in his course of partnership with the firm was that for the first few years, he was relieved of being assessed for amounts that the [Partnership] had identified were work in progress amounts. That was the taxation timing difference or the effective benefit that arose for him in relation to work in progress amounts. Each year the EPIC statements show that an amount of taxation timing differences was accounted for …And when the applicant retired, those opening and closing differences started to be drawn down because he was then receiving or said to be receiving because he was returning it, an amount in respect to work in progress. I think I understood my friend to say that the work in progress deductions and assessability provisions can’t apply to a tax law partnership. I’m unaware of a legislative basis for that submission.”[101]
[101] Transcript P-52, lines 34 – 47 and P-53, lines 1 – 5.
The fourth matter was to address the Applicant’s submission that he did not receive a work in progress amount in the Relevant Years. Ms Gatland submitted:
“…the Commissioner’s position is that the definition of work in progress amount is the definition that’s adopted and recognised by the case authorities and, indeed, it’s an accounting definition more than anything. The work in progress amount is identified in each of the EPIC statements in each of the relevant years that the applicant received …
And the EPIC statement that I took KRBM to in cross examination was at ST2-572...
…if one goes over the page to schedule 2, in the Commissioner’s submission the evidence [giving] rise to that opening timing differences are comprised of WIP and prepayments and provisions. Likewise, the closing timing differences are comprised of those items …
The Commissioner doesn’t take an overly technical approach around whether it’s a work in progress amount for the purposes of section 15-50 including that limitation around the 12 months, but rather, says, well on the evidence as provided by the applicant, and as prepared by the [Partnership], the timing differences are comprised of those two categories of amounts. And that’s consistent with the categories of amounts that were identified by Justice Jessup in McNally. It doesn’t go further to say that it’s a section 15-50 amount.
Because…the receipt of work in progress for the purposes of the ongoing business of the [Partnership], is a matter for the [Partnership] and there’s no evidence concerning what the total amount of work in progress amounts were. What’s happened here is there is an amount allocated almost by way of a label, though we don’t know whether it has a particular meaning or derivation. What we can go on is that [the Partnership] says there is a timing difference when you come on as a partner. That’s to do with various things including work in progress. And here it is after the partner has retired, being wound out to the partner in what [AB] correctly says is a concessional basis.”[102]
[102] Transcript P-55, lines 16 – 21, 34 – 35, 39 – 42, 46 – 47; P-56, lines 1 – 17.
CONSIDERATION OF THE ISSUES
The Tribunal is satisfied on the evidence before it as to the following matters:
(a)The Applicant entered into the Partnership Agreement and the Partnership Retirement Deed and was contractually bound by the terms of those documents.
(b)Under clause 2.9 of the Partnership Retirement Deed, the Applicant agreed to return taxation timing differences totalling $313,008 as taxable income in five tranches of $62,602 over the 30 June 2018 to 30 June 2022 financial years under the concessional arrangements offered by the Partnership, rather than having the $313,008 assessed in the 30 June 2017 financial year.
(c)It is to be inferred that the Applicant paid a lower amount of income tax (actual amounts not in evidence) by reason of the timing differences arrangements with the Partnership in the financial years during which he was a partner of the Partnership, his taxable income being lower than his accounting income by “about 10%”[103] which was principally comprised of a deduction on account of work in progress.
(d)It was the benefit of being able to pay reduced income tax in the period when he was a partner of the Partnership between 2012 and 2016 which the Applicant agreed in the Partnership Documents to have unwound by being assessed for the timing differences amounts in the 30 June 2018 to 30 June 2022 financial years.
(e)The evidence given in the KRBM Affidavit at paragraph [43] to the effect that he was “astonished” to see the amount of $62,602 returned in his Assessments for the Relevant Years does not seem to be right. The Applicant’s cross examination made it clear that he was expecting to be assessed for that amount in each of the Relevant Years and “was fine with returning the time differences.”
(f)What the Applicant was not expecting, and was not fine with, was that he would be assessed in each of the Relevant Years on both the timing differences amount and on the retiring gracefully payment of $44,962.96 (payable to the Applicant’s discretionary trust).The Applicant conceded in cross examination that he had mistakenly linked the retiring gracefully payment and the timing differences amount, which had resulted in him misunderstanding the effect of the Partnership Documents on this point.
[103] KRBM Affidavit, [35].
To discharge the onus under section 14ZZK(b)(i) of the TAA 53 of proving the Assessments to be excessive, the Applicant needs to make out his argument that he should not have been assessed at all in the Relevant Years for the $62,602 timing differences amount. He seeks to do this by establishing the proposition that he was neither in a general law partnership nor in a tax law partnership in the Relevant Years, and thus not liable for assessment under section 92 of the ITAA 36. The difficulty for the Applicant, if he fails on the argument that he was no longer in a general law partnership or a tax law partnership in the Relevant Years, is that he has not otherwise adduced the evidence he would need to discharge the onus of establishing on the balance of probabilities that the Assessments are excessive.
If section 92 of the ITAA 36 does apply, the Applicant would need to prove what he says his assessable income should have been to make good an argument that the Assessments are excessive. As Jessup J explained in McNally:
“Strictly speaking, the process of identifying the assessable income of the taxpayer should have involved two steps: determining what was the net income of Deloitte’s and calculating the individual interest of the taxpayer in that income.”[104]
The necessary evidence to undertake this process is not before the Tribunal. As the Commissioner submits (as summarised in paragraph 42(m) above) there are Distributable Income Statements prepared by the Partnership before the Tribunal, but no evidence of the income returned by the Partnership for any of the Relevant Years. The consequence of that is that the Applicant needs to persuade the Tribunal that section 92 of the ITAA 36 does not apply.
[104] McNally, [42].
The Tribunal is not persuaded that the Applicant had ceased to be in a tax law partnership in the Relevant Years. It accepts the Commissioner’s submissions, summarised in paragraph [45] above, to the effect that the Applicant accepted some ongoing obligations to the Partnership under the Partnership Agreement after he left the Partnership[105] and remained in a tax law partnership after 30 October 2016 because he was in receipt of statutory income[106] (being work in progress amounts) jointly with the Partnership. As the Commissioner contends, the relevant amount of that statutory income was identified by the Partnership and included in the Assessments for the Relevant Years, consistently with the terms of the Partnership Agreement, the Partnership Retirement Deed and in accordance with section 92 ITAA 36.[107]
[105] For example, the obligation under clause 11.12(b) (ii) to assist with the collection of work in progress and debtors for a period of 1 year after ceasing to be a partner. ST-5, page 669.
[106] Section 6-10 of the ITAA 97.
[107] Respondent’s SFIC, [32].
The Tribunal accepts the Commissioner’s submissions (summarised in paragraphs [42] (f) and (g) above) that the Applicant did not need to be a partner of the Partnership in the Relevant Years to have assessable income included under section 92 of the ITAA 36.
The Tribunal also accepts the Commissioner’s submissions (summarised in paragraphs [42] (i), (j) and (k) above) that actual or constructive receipt of part of the assessable income of the Partnership in the Relevant Years was not required. The Tribunal agrees that the relevant enquiry in relation to receipt is that which flows from the wording of section 6-5(4) of the ITAA 97 that the amount in question is received when “it is applied or dealt with in any way on your behalf or as you direct”, and that actual receipt of the amount is not the critical element. The answer to the enquiry is that the amount in question ($62,602) was a sum which was applied by the Partnership at the Applicant’s direction and for his benefit in each of the Relevant Years in accordance with the terms agreed to by the Applicant under the 2012 Partnership Agreement and the Partnership Retirement Deed.
The Tribunal agrees with the parties that the Applicant’s tax liability is to be determined according to the taxation law and not simply by the dictates of the Partnership Documents.[108] Having said that, the Tribunal agrees with the Commissioner’s submission that the Partnership Documents are not to be ignored as their terms bear directly on questions such as when statutory income has been applied or dealt with as directed by the Applicant in accordance with section 6-5(4) of the ITAA 97.
[108] Applicant’s Submissions, [66]; Respondent’s Submissions, [49].
The Tribunal does not accept the Applicant’s submission that the case can be “disposed of”[109] by the application of section 15-50 of the ITAA 97, the submission being that there has been no receipt by the Applicant of a work in progress amount (as defined in section 25-95(3) of the ITAA 97) in the Relevant Years. The Commissioner has made the point that there is insufficient evidence before the Tribunal to enable much more than the identification of the opening timing differences and the closing timing differences in the EPIC statements. There is no evidence concerning what the total amounts of work in progress payments of the Partnership were, just evidence of what has been allocated to the Applicant in accordance with the Partnership Agreement and the Partnership Retirement Deed. The Tribunal accepts that as being the reason why the Commissioner says than an overly technical approach cannot be taken about whether it is a work in progress amount for the purposes of section 15-50 of the ITAA 97.
[109] Transcript, P-46, lines 34 – 35.
There was a recurring theme in the Applicant’s case that the way in which the Partnership deals with the return of timing differences amounts may not comply with the taxation law as it is meant to operate around the assessability and deductibility of work in progress amounts. Mr Josifoski said that the parties cannot agree to circumvent the law in respect of their tax obligations, with reference to the Partnership Agreement and the debate about “whether or not what’s there in relation to timing differences and WIP accords with the law.”[110] He also noted the reference in the email exchange between the Applicant and AB to the ATO being “comfortable” with what the Partnership are doing and that there was no tax ruling or letter of comfort on point in the evidence before the Tribunal.
[110] Transcript P-48, lines 23-25.
The evidence was that the concessional arrangements reflected in the Partnership Documents work in practice because they can accommodate the deferral by a partners of his or her taxation liability relating to timing differences amounts in the early years they are in the Partnership, and allow for the unwinding of the deferral and the assessment for taxation purposes to occur after the partner leaves the Partnership. The current application for review has arisen in the unusual circumstances that the Applicant has misunderstood his obligations under the Partnership Documents and seeks to avoid the assessment and payment of tax under the concessional approach.
As is noted in paragraph [44] above, Ms Gatland stated that the Commissioner and Parliament have not insisted on a strict black letter approach in order to allow for the concessional approach of the Partnership to the treatment of timing differences amounts. The adoption of a strict black letter approach by the Commissioner may well have required that a taxpayer in the Applicant’s position would be liable to be assessed for the full amount of the work in progress adjustments ($313,008), brought forward to the date of his retirement and included in his tax return for the year of his retirement (FYE 30 June 2017). As Ms Gatland submitted, that stricter approach might be the correct “reflex of the taxation laws” were the Applicant to succeed on his application for review.
The was no direct evidence on the question of whether the Commissioner is “comfortable” with the concessional approach of the Partnership. The Tribunal infers that the Commissioner is prepared to be tolerant of the concessional arrangements because, as submitted in paragraph [71] of the Respondent’s Submissions (extracted at paragraph [42] (p) above), they do align practically with the way in which many professional services firms or partnerships earn their income.
CONCLUSION AND DECISION
The Tribunal has concluded that the Applicant was properly assessable under section 92 of the ITAA 36 for the Relevant Years and he has not discharged his onus under section 14ZZK(b)(i) of the TAA 53 of proving that the Assessments are excessive.
It follows from what has been said in these Reasons that the Tribunal is of the view that the Commissioner’s decision to disallow the Objection was the correct decision. The Tribunal affirms the Reviewable Decision.
Date of Hearing: 13 February 2025
Counsel for the Applicant: Mr K Josifoski
Solicitors for the Applicant: Ms Meena Hanna, White Knight Lawyers Pty Ltd
Counsel for the Respondent: Ms J Gatland
Solicitors for the Respondent: Mr A Pagano, Australian Taxation Office
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