MacArthur and Commissioner of Taxation
[2002] AATA 1110
•29 October 2002
DECISION AND REASONS FOR DECISION [2002] AATA 1110
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT2000/185-187
TAXATION APPEALS DIVISION )
Re PHILIP GEORGE MACARTHUR
Applicant
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Senior Member KL Beddoe
Date29 October 2002
PlaceBrisbane
Decision The Tribunal decides: (a) the decisions under review are set aside; (b) the objections against the amended assessments are allowed; and (c) these proceedings have terminated in a manner favourable to the applicant.
..................(Sgd).......................
KL Beddoe
SENIOR MEMBER
CATCHWORDS
INCOME TAX – whether there was a scheme to which Part IVA of the Income Tax Assessment Act 1936 applies – meaning of "scheme" as defined in the Act – meaning of "tax benefit".
Income Tax Assessment Act 1936 Part IVA, ss 177A(1), 177C(1)(a), 177D
Egan v FCT 2001 ATC 2185
REASONS FOR DECISION
29 October 2002 Senior Member KL Beddoe
The applicant seeks review of objection decisions by the respondent in respect of the years of income ended 30 June 1996, 30 June 1997 and 30 June 1998. In each instance the applicant had objected against an amended assessment whereby income said to have been derived by a company was treated as assessable income of the applicant.
The issue is whether there was a scheme to which Part IVA of the Income Tax Assessment Act 1936 applies.
Part IVA applies to any scheme that has been entered into after 27 May 1981 or commenced to be carried out after that date. Section 177D makes Part IVA applicable where the following criteria are satisfied:
"(a)a taxpayer (in this section referred to as the 'relevant taxpayer') has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b) having regard to –
(i) the manner in which the scheme was entered into or carried out;
(ii) the form and substance of the scheme;
(iii) he time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."
"Scheme" is defined in section 177A(1) to mean:-
(a)any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b) any scheme, plan, proposal, action, course of action or course of conduct.
"Tax benefit" is relevantly to be read as a reference to an amount not being included in the assessable income of the taxpayer where that amount would have been included, or might reasonably be expected to have been so included if the scheme had not been entered into or carried out.
At the hearing at Townsville, Mr Stevenson appeared for the applicant and Mr Logan SC with Mr Marks appeared for the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the "T" Documents and further documents were tendered and marked as exhibits. Oral evidence was given by the applicant, his wife and Mr Mudge, a Main Roads Department manager.
I find the following facts:
(a)the applicant was employed by the Department of Mains Roads ("DMR") as a civil engineer involved in the design, construction and maintenance of roads and bridges from 1972 to 1982;
(b)the applicant resigned from DMR in 1982 and commenced contract work for Australian Development Assistance Bureau at overseas locations until 1986;
(c)in 1986 the applicant, and his wife, returned to Australia and in September 1986 acquired a shelf company of which they became the directors for the purpose of "getting into" engineering consulting work and to facilitate superannuation arrangements;
(d)the applicant holds two A class shares and one ordinary share in the company while his wife holds one B class share and one ordinary share – both are employees of the company and both contribute to the day-to-day conduct of company business according to their expertise and experience;
(e)the business of the company was to provide project management and consulting services for which it obtained some contracts in the Northern Territory;
(f)in 1987 the applicant, his wife and the company's business were moved to Townsville;
(g)in April 1988 the company won a contract with DMR and further contracts followed until September 1990;
(h)from 1990 to 1995 the company undertook design construction work both on the account of its shareholders and for other parties;
during this time (from 1991) the company won contracts with the Queensland Department of Transport and with DMR to management road and bridge construction projects in the Townsville area;
(j)the work required under these contracts was for provision of services for specified road and bridge projects and involved checking contract documents, advertising of tenders, evaluation of tenders and supervision of construction on site;
(k)during the relevant years the company tendered successfully for two DMR contracts;
(l)contract CS26 for the supply of engineering consultant services from January 1994 for two years included provisions to the following effect:-
(i)the company was required to nominate the personnel to perform the services contracted for and could only vary the nominated personnel with the approval of DMR;
(ii)contrary to the standard form contract the supplementary conditions required the consultant to be located in DMR premises at its district office and to have access to the following DMR services:-
clerical (including provision of own desk)
drafting
engineering
materials testing
surveying
quality audit;
(iii)the company contracted to be paid at $48 per hour and nominated the applicant as the consultant setting out his professional qualifications and experience in support of the nomination; and
(iv)it is clear, on the material, that the company was successful in obtaining the contract because it nominated the applicant as the consultant and not because of any inherent expertise on the part of the company – I am satisfied that the Department of Transport contracted on the basis that the applicant was the nominated consultant – Mr Mudge said in his evidence that DMR looks for the particular skills required in the nominated person – in its advertisement and tender the Department called for supply of engineering consultant services but did not specify how the consultant services were to be provided;
(v)the tender documents required the successful tenderer to be self-insured as to public liability, professional indemnity, and workers compensation and liable for taxation, leave entitlements, superannuation guarantee levy and workplace health and safety;
(m) contract CS83 from January 1996 had similar requirements to contract CS26;
(n)the company was remunerated at $48 per hour under the first contract and $49 per hour under the second contract without distinction for "overtime" hours work;
(o)most aspects of the services supplied by the company for DMR were actually provided by the applicant as an employee of the company but the applicant's wife also provided limited services through the applicant by assisting him with matters within her experience;
(p)in 1996 the company entered into a contract with individuals trading as Sacilotto Engineering Services for the provision of engineering services to the company from time to time involving supervision of DMR projects on behalf of the company;
(q)the applicant's understanding of his relationship with DMR was that he was not an employee of that organisation;
(r)ultimate responsibility as an engineer rested with Mr Mudge as the DMR engineer but the applicant undertook the role of engineers' representative at on-site works and in DMR correspondence;
(s)the applicant's wife performed work for the company for which she had particular experience from earlier employment with DMR;
(t)payments of fees by DMR to the company were based on time sheets submitted by the company (signed by the applicant) to DMR and based on hours worked on projects by the applicant.
Consideration
The arrangements between the company and DMR as evidenced by the written contracts are arrangements within the definition of "scheme" in section 177A of the Act.
The essential question in this case is whether the applicant has obtained a tax benefit in connection with the scheme (section 177D(1)).
Section 177C(1)(a) determines what is a tax benefit as an amount not being included in the assessable income of the taxpayer where that amount would have been included, or might reasonably be expected to have been included, in that assessable income if the scheme had not been entered into or carried out.
If the company had not entered into the contracts with DMR there would be no relevant assessable income to be considered unless it is somehow assumed that the applicant had a subsisting contract of employment with DMR. There is, however, nothing in the material to suggest that there was a contract of employment. Certainly an officious bystander may have come to the conclusion that the applicant appeared to be an employee but the contract between the company and DMR denies that to be the case because it specifically makes the company liable for the applicant's entitlements of employment as an employee of the company.
The fact of the applicant's employment with DMR until 1982 but not thereafter, distinguishes this case from cases where an employee seeks to change the contract of employment to a contract for service. It might be thought to be clear in such a case that a tax benefit arises under the scheme.
That is not the case on the facts of this case. While there is clearly a scheme in this case there is, just as clearly, no tax benefit that can be determined in accordance with section 177C(1) of the Act. There is no basis for finding that if the scheme had not been entered into or carried out an amount would have been included in the assessable income of the applicant.
I am satisfied that if the scheme had not been entered into there would be no relevant amount which could be included in assessable income of the company nor any relevant amount that could be included in the assessable income of the applicant. There was no tax benefit. I am not satisfied that if the company had not entered into the arrangements with DMR that the applicant would have or may reasonably be expected to have entered into a scheme with DMR whereby the applicant derived fees payable under such a supposed contract.
In Egan v FCT 2001 ATC 2185, Senior Member Pascoe decided that Part IVA applied to arrangements similar, but not the same, as the scheme in the present case. In particular, the Tribunal decided, at paragraph 24, to the effect that if the arrangements had not been entered into it would be reasonable to expect Mr Egan to have derived the subject assessable income. While that inference may have been available on the facts of that case I am not satisfied that such an inference is open on the facts of this case. The company had been conducting business for a number of years using the skills of the applicant and his wife. There is no basis for saying that the DMR contracts resulted in an amount not being included in the assessable income of the applicant or that it might be reasonable to expect that an amount would have been included in the applicant's assessable income as the Tribunal found in Egan.
The decisions under review will be set aside and the objections allowed.
I will certify that these proceedings have terminated in a manner favourable to the applicant.
I certify that the 17 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member KL Beddoe
Signed: Denise Burton
Administrative AssistantDate/s of Hearing 24 and 25 September 2001
Date of Decision 29 October 2002Solicitor for the Applicant Mr Stevenson, Solicitor
Counsel for the Respondent Mr Logan SC with Mr Marks
Solicitor for the Respondent ATO Legal Practice
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