Roszkiewicz and Commissioner of Taxation (Taxation) - [2019] AATA 931

Roszkiewicz and Commissioner of Taxation (Taxation) [2019] AATA 931 (20 May 2019)
Division:GENERAL DIVISION
File Number(s):2018/3829 & 2018/6662
Re:Diana Roszkiewicz
APPLICANT

Commissioner of Taxation And
RESPONDENT

DECISION
Tribunal:Member D K Grigg
Date:20 May 2019
Place:Brisbane

The Tribunal affirms the decision under review.
................................[SGD]........................................
Member D K Grigg
CATCHWORDS
TAXATION – where Applicant derived income in 2017 financial year which was earned in 2016 financial year – which accounting method is appropriate – whether income should be included as assessable in 2016 or 2017 financial year – decision under review affirmed.
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth)
CASES
Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418
Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South Australia Ltd (1938) 63 CLR 108
Edwards and Commissioner of Taxation (Taxation) [2016] AATA 781
News Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCA 645
Re Commissioner of Taxation of the Commonwealth of Australia v Cyclone Scaffolding Pty Limited [1987] FCA 455
Re Hannavy v Commissioner of Taxation [2001] 47 ATR 1018; [2001] AATA 370
Re Stuart Fitch Applicant and Commissioner of Taxation Respondent [2002] AATA 695
SECONDARY MATERIALS
Australian Taxation Office, Taxation Ruling TR 98/1
Explanatory Memorandum to the Income Tax Assessment Bill 1996
REASONS FOR DECISION
Member D K Grigg
20 May 2019
BACKGROUND

The Applicant, Ms Diana Roszkiewicz (“Ms Roszkiewicz”), commenced employment with Bristow Defence Industries on 7 June 2016. Between 7 June 2016 and 30 June 2016, Ms Roszkiewicz earned salary and wages totalling $4,632.08.[1] Those wages were paid to her on 15 July 2016.
[1]Exhibit 1, T Documents, T12, pages 38 – 39, Email from Ms Roszkiewicz to the ATO dated 6 July 2018.
On 19 December 2017 Ms Roszkiewicz lodged her income tax return for the 2016 financial year (“2016 ITR”) and the 2017 financial year (“2017 ITR”) with the Australian Tax Office (“ATO”).[2] The 2016 ITR provided that Ms Roszkiewicz’s occupation was as an Electrician and that in the 2016 financial year she had received total gross payments of $4,632 and that her employer had withheld $897 tax from her salary. The 2017 ITR provided that in the 2017 financial year Ms Roszkiewicz had received total gross payments of $67,938 and that her employer had withheld $15,024 tax from her salary.
[2]Exhibit 1, T Documents, T4, pages 9 – 14, Income Tax Return for the year ended 30 June 2016; T5, pages 15 – 21, Income Tax Return for the year ended 30 June 2017.
On 5 January 2018 the ATO issued:
(a)a notice of assessment of income tax for the year ended 30 June 2016 indicating that no tax was payable and that the withheld amount of $897 would be returned to Ms Roszkiewicz;[3] and
(b)a notice of assessment of income tax for the year ended 30 June 2017 indicating that no tax was payable, and that Ms Roszkiewicz would be credited $495.48.[4]
[3]Exhibit 1, T Documents, T6, pages 22 – 23, Notice of Assessment – year ended 30 June 2016.
[4]Exhibit 1, T Documents, T7, pages 24 – 25, Notice of Assessment – year ended 30 June 2017.
In April 2018 the ATO decided to audit Ms Roszkiewicz’s tax returns, because it did not match the group certificates that had been issued by her employer.[5] A letter from Ms Roszkiewicz’s employer was obtained confirming whether some of the income Ms Roszkiewicz had declared she received in the 2017 financial year related to the 2016 financial year.[6]
[5]Exhibit 1, T Documents, ST1, pages 45 – 48, Letter from ATO to Ms Roszkiewicz dated 13 April 2018.
[6]Exhibit 1, T Documents, T8, pages 26 – 28, Email correspondence to the ATO attaching a copy of the SARS payslip for the July 2016 period.
The payslip provided by the employer to the ATO indicated that Ms Roszkiewicz had been paid an additional $4,632 of income in the year 30 June 2017, which had related to a period of work she performed in the 2016 financial year.[7]
[7]Exhibit 1, T Documents, T8, page 28, Ms Roszkiewicz’s payslip for the July 2016 period; ST1, page 47, Reported payment summaries for the year ended 30 June 2017.
On 5 June 2018 Ms Roszkiewicz objected to the ATO’s notices of assessment on the following grounds:[8]
I was working for Bristow from the 07/06/2016. Due to monthly pay system my first pay was on the 15^th July. This pay covered from my start date 07/06/2016. I received no other income for this period. My children bought me food and fuel to get to work. My annual income was $67938.06. The fact they paid my 2016 income in the 2017 tax year is why there is a discrepancy. My income received in the tax year was in fact for the 2017 tax year PLUS 23 days of the previous tax year. As I was in such financial crisis in the 2016 year it would be inaccurate and unfair to tax that income in the 2017 tax year.
[8]Exhibit 1, T Documents, T9, pages 29 – 32, Objection dated 5 June 2018.
As a result of the information provided by Ms Roszkiewicz’s employer, the ATO issued an amended assessment of income tax for the year ended 30 June 2017 which indicated that Ms Roszkiewicz owed the ATO $701.03. The amended assessment was based on a gross income of $72,570 as opposed to the previously declared gross income of $67,938.[9]
[9]Exhibit 1, T Documents, T10, pages 33 – 36, Notice of amended assessment – year ended 30 June 2017 issued on 18 June 2018.
On 4 July 2018 the ATO advised Ms Roszkiewicz that they had considered her objection and had amended her income tax return for the year ended 30 June 2016 to reduce the assessable income from $4,632 to nil and the tax withheld from $897 to nil, because the ATO had determined that that income had in fact been derived in the 2017 financial year not the 2016 financial year.[10]
[10]Exhibit 1, T Documents, T11, page 37, Notice of objection decision dated 4 July 2018.
On 5 July 2018 Ms Roszkiewicz’s employer wrote to Ms Roszkiewicz confirming that:[11]
(a)her total earnings in the tax year ending 30 June 2017 was $67,938 and that $4,632.08 of those earnings (gross) related to the tax year ending 30 June 2016 as they were earned in the period 7 June 2016 to 30 June 2016; and
(b)the reason the June 2016 earnings were paid in July 2016 was because her employment commenced after the payroll for June 2016 had been processed.
[11]Exhibit 1, T Documents, T12, page 39, Letter from Ms Roszkiewicz's employer dated 5 July 2018.
Ms Roszkiewicz forwarded the letter from her employer to the ATO.[12] The ATO advised that salary and wages are assessable on receipt even though they relate to a past income period and that because she had received the payment of wages on 15 July 2016 they are to be included in the 2017 financial year.[13]
[12]Exhibit 1, T Documents, T12, page 38, Email from Ms Roszkiewicz to the ATO dated 6 July 2018.
[13]Exhibit 1, T Documents, T13, page 40, Email from the ATO to Ms Roszkiewicz dated 9 July 2018.
On 12 July 2018 the ATO issued an amended assessment of income tax for the year ended 30 June 2016 which indicated that Ms Roszkiewicz owed the ATO $897. The amended assessment was based on a gross income of $4,632 as opposed to the previous gross income of $0.[14]
[14]Exhibit 1, T Documents, T14, pages 41 – 43, Notice of amended assessment – year ended 30 June 2016 issued on 12 July 2018.
On 9 July 2018 Ms Roszkiewicz applied to this Tribunal for review of the ATO’s decision.[15] The Tribunal has jurisdiction to review decisions under the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”) pursuant to section 25 of the Administrative Appeals Tribunal Act 1975 (Cth) and Part IVC of the ITAA 1997.
[15]Exhibit 1, T Documents, T1, pages 1 – 6, Application for review dated 9 July 2018.
On 23 October 2018 Ms Roszkiewicz lodged an objection to the amended assessment of income tax for the year ended 30 June 2017.[16]
[16]Exhibit 1, T Documents, ST2, pages 49 – 52, Objection dated 23 October 2018.
Ms Roszkiewicz contended that she had been working with her employer from 7 June 2016, but that due to the monthly pay system her first pay was not received until 15 July 2017. Ms Roszkiewicz contends that it would be inaccurate and unfair to tax the income related to work performed in 2016 in the 2017 financial year.
On 23 October 2018 the ATO advised Ms Roszkiewicz that they had considered her objection and had disallowed it.[17]
[17]Exhibit 1, T Documents, ST3, pages 53 – 54, Notice of objection decision dated 23 October 2018.
LEGISLATIVE BACKGROUND
Pursuant to subsections 6-5(2) and (3) of the ITAA 1997, taxpayers must include in assessable income the gross income derived.
Section 6-5 of the ITAA 1997 provides that:
6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.
6-5(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
…
6-5(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.
The ATO issues taxation rulings pursuant to authority of the Commissioner.[18] These Rulings are binding advice and express the ATO’s interpretation of the relevant taxation legislation. Pursuant to paragraph 42 of Taxation Ruling TR 98/1 (“TR”), income from employment would normally be assessable on a receipt basis even if they relate to a past or future income. It explains:[19]
[18]A Ruling is capable of being a public ruling in terms of Division 358 (public rulings), Schedule 1 to the Taxation Administration Act 1953 (previously Part IVAAA of the Taxation Administration Act 1953). Taxation Rulings 92/1 and 97/16 explain when a Ruling is a public ruling and how it is binding on the Commissioner. TRs 92/1 and 97/16 were superseded in 2006 with TR 2006/10. TR 2006/10 states that a public ruling is written binding advice on the way in which in the Commissioner’s opinion a relevant provision applies.
[19]Australian Taxation Office, Taxation Ruling TR 98/1.
2. Where income is earned in one year of tax but received in another, the adoption of an appropriate method of determining when income is derived under subsections 6-5(2) and (3) in a relevant year of income is an issue of practical concern to taxpayers and their advisers. Two commonly used methods of determining when income is derived in a relevant year of income are the receipts method and the earnings method.
…
8. …Under the receipt’s method, income is derived when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997.
…
17. When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income.
18. The receipts method is likely to be appropriate to determine:
*income derived by an employee;
…
…
42. Income from employment would normally be assessable on a receipt’s basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.
(emphasis added)
In other words, TR 98/1 provides that when assessing an employee’s income, the receipts method is “normally” the most appropriate method. When the receipts method is used, income is taken to have been derived in the year the income is received.[20]
[20]Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 at 429; 71 ATC 4195 at 4200; (1971) 2 ATR 563 at 571.
ISSUES FOR THE TRIBUNAL
The issue for determination by the Tribunal is whether the income received by Ms Roszkiewicz for work performed in the 2016 financial year should be assessed in the 2016 or 2017 financial year.
WAS THE INCOME CORRECTLY ASSESSED IN THE 2017 FINANCIAL YEAR?
It is not in dispute that Ms Roszkiewicz received the income in issue in the 2017 financial year. If that income was assessed in the 2016 financial year, no additional tax would be payable.
The common practice, or “normal” practice, is for an employee’s income to be assessed on a receipts basis in the financial year in which the income is received, rather than when the income is earned.
TR 98/1 uses the word “normally” leaving open the possibility that the specific circumstances of the taxpayer may result in a different accounting method being appropriate. Whichever method is adopted it must give “a substantially correct reflex of income”.
Ms Roszkiewicz submitted that:
(a)“I don’t think that the intention of that act is to take extra tax from that person, taxing them for nearly 13 months’ pay over 12 months”;
(b)Taxing someone in one financial year in relation to 13 months of wages is not normal.
Ms Cassandra Stokman, representing the Commissioner, said that the position taken by the Commissioner is that for salary and wage earners in employment situations, their income is assessable on a receipts basis.
At the Tribunal’s request, the Commissioner conducted further research to ascertain whether there were any case examples where an employee’s income had not been assessed on a receipts based method. No specific case authorities were identified with respect to when income is paid in a new financial year, when the work was completed in the previous financial year.
The Commissioner identified the following decisions which consider circumstances in which the taxpayer was assessed on a receipt’s basis:[21]
(a)a chartered accountant (a sole practitioner) who employed five or six people but no other chartered accountants. The taxpayer took responsibility for all work and billed work when it was completed;[22]
(b)a Vietnam veteran who was paid a special allowance in his capacity as an employee for his military service. The Applicant had been entitled to receive the allowance in previous income years;[23]
(c)lump sum payments in arrears of invalidity benefits[24] or worker’s compensation;[25]
(d)advance payments for leave when the payment was made in a different financial year to which the leave period related;[26]
(e)certain payments which the taxpayer was entitled to upon cessation of employment, which were withheld in the 2007 financial year by the taxpayer’s employer but paid in January 2008 at the taxpayer’s request to the Swiss tax authorities in discharge of the taxpayer’s Swiss tax obligations. The amount was received when it was applied for the taxpayer’s benefit;[27]
(f)a lump sum payment received from Comcare which related to previous income years. The payment resulted in a higher tax rate and loss of Centrelink entitlements for the financial year in which the payment was received.[28]
[21]The Respondent’s Final Submissions dated 8 April 2019, para 19.
[22]Federal Commissioner of Taxation v Dunn (1989) 85 ALR 244.
[23]Case R23 84 ATC 215.
[24]Re Cooper v Federal Commissioner of Taxation (2003) 52 ATR 1199.
[25]Re Applicant v Commissioner of Taxation 2006 ATC 155.
[26]Re Yan Zhang v Commissioner of Taxation [2010] AATA 940; Case B53 (1951) 2 TBRD 223; Case M6, 80 ATC 59; Case P93, 82 ATC 444; Case V163, 88 ATC 1081; Case T88, 86 ATC 1124.
[27]Blank v Commissioner of Taxation [2015] FCAFC 154.
[28]Edwards v Commissioner of Taxation [2016] AATA 781.
The following cases also provide guidance.
In Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South Australia Ltd (1938) 63 CLR 108 (“Carden’s Case”), at 152-4, the High Court found that the correct method of determining when income is derived is the method that gives a “substantially correct reflex of the taxpayer’s true income”. This phrase has been reflected in TR 98/1.
In Carden’s Case, the issue for determination was whether a professional man could account for his income on a "cash received", rather than a "fees earned", basis. Dixon J opined that "according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income". Dixon J referred to Sir Houldsworth Shaw and Mr Baker in their work on the Law of Income Tax, and noted that they say:
“There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something ‘coming in’; that is, for income tax purposes, receivability without receipt is nothing” (Law of Income Tax, p. 111).
(emphasis added)
The Court held in Carden’s Case that earnings without receipt were not income.
In Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418, Gibbs J explained at 427-8:
The Act does not define the word “derived” and does not establish a method to be adopted as a general rule to determine the amount of income derived by a taxpayer, although particular situations not relevant to the present case are dealt with. The word “derived” is not necessarily equivalent in meaning to “earned”. “Derive” in its ordinary sense, according to the Oxford English Dictionary, means “to draw, fetch, get, gain, obtain (a thing from a source)”. It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which “is calculated to give a substantially correct reflex of the taxpayer's true income” (Commissioner of Taxes (S.A.) v. Executor, Trustee and Agency Co. of South Australia Ltd. (Carden’s Case)) [1938] HCA 69; (1938) 63 CLR 108 at 152-154.
(emphasis added)
The Full Federal Court in Re Commissioner of Taxation of the Commonwealth of Australia v Cyclone Scaffolding Pty Limited [1987] FCA 455 held that “the question whether a given system represents a ‘correct reflex’ is one of fact”.
To determine the most appropriate accounting method, Pagone J explained in News Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCA 645 that:
The decision requires consideration of the nature of the source of the income in question by reference to the activities of the taxpayer and to the nature of the income in question to determine which method of accounting best reflects the taxpayer’s income.
…
The inquiry into derivation is not into whether an entitlement to receive has arisen or whether an amount has been received, although both entitlement and receipt may be relevant in determining whether there has been derivation. The inquiry is, rather, into when an item of ordinary income can be said to have come home to the taxpayer in a realised or immediately realisable form: see Carden’s Case at [155].
(emphasis added)
In Re Stuart Fitch Applicant and Commissioner of Taxation Respondent [2002] AATA 695, the Applicant received an advance payment of salary which covered the period July 2000 to November 2000. The advance payment also included a salary payment for the period 25 May 2000 to 22 June 2000. There was some concern about the advice the Applicant had received from the HR department about how he would be taxed for the advanced payment. The Tribunal found that based on the wording of the legislation and TR the whole of the payment received must be assessed in the taxation year ending 30 June 2000.

In Edwards and Commissioner of Taxation (Taxation) [2016] AATA 781, a lump sum payment was received by the Applicant as back pay for a successful Comcare claim. The payment was made in early February 2015 for the period covering approximately 2000-2006. The Applicant lodged an application with the ATO for a private ruling. The private ruling determined that the lump sum payment would be assessed in the year it was received. The Applicant appealed to the Tribunal. The Tribunal determined that the lump sum payment was to be assessed in the year of receipt and not for the years to which the arrears payment related.
In Re Hannavy v Commissioner of Taxation [2001] 47 ATR 1018; [2001] AATA 370 a tax payer was made redundant and was paid a lump sum payment for annual leave and long service leave. The payments covered several financial year periods. The payment was made in April 2000 and it was the 2000 financial year in which the total of the lump sum payment was assessed. That is, it was assessed on a receipts basis.[29] The Senior Member hearing the decision noted that the tax legislation has consistently been applied on the basis that employees’ income is assessable in the financial year in which the income is received, even if it relates to work performed in a previous year.
[29]See also Re Yan Zhang v Commissioner of Taxation [2010] AATA 940.
The Tribunal notes that none of these decisions consider the taxpayer’s personal circumstances, such as whether they are ill or financially impecunious. These factors are simply not relevant to a determination of when income can be said to be derived.
The Explanatory Memorandum to the Income Tax Assessment Bill 1996 (“the EM”) included an explanation of the operation of subsections 6-5(4) and 6-10(3). The EM acknowledged the generally accepted tax accounting principle, being that:[30]
“…an amount accountable on a receipts basis can be your income, even if it has not been actually received, as soon as it is applied or dealt with in any way on your behalf or as you direct. In other words, an amount is treated as received as soon as the taxpayer gets benefit from it.
[30] Explanatory Memorandum to the Income Tax Assessment Bill 1996, page 39.
It is a longstanding accounting principle that, generally speaking, ordinary income is derived when it is received or applied for the recipient’s benefit.
The source of Ms Roszkiewicz’s income was her employer in the form of wages. Ms Roszkiewicz did not receive that income until the 2017 financial year. It cannot be said to have “come home” to her until then. Ms Roszkiewicz’s gain was not realisable until the 2017 financial year.
The income tax legislation’s focus, when considering an employee’s earnings, is on what a taxpayer has received in the financial year not to which period of time those earnings relate. The tax legislation has been consistently applied by the highest Courts in holding that employees are assessed when they receive the payment or the income.
In Ms Roszkiewicz’s situation, the receipts method is the most appropriate. There are no relevant circumstances which would justify the treatment of Ms Roszkiewicz’s income differently. The Tribunal finds that the ATO has correctly assessed Ms Roszkiewicz’s income for the 2016 and 2017 financial years.
DECISION
The decision under review is affirmed.

I certify that the preceding 44 (fourty-four) paragraphs are a true copy of the reasons for the decision herein of Member D K Grigg

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Associate
Dated: 20 May 2019

Dates of hearing:
Date reserved:

1 April 2019

8 April 2019

Applicant:

Advocate for the Respondent

By telephone

Ms Cassandra Stokman
Australian Taxation Office

Respondent:

ATO Review and Dispute Resolution