Russell v Federal Commissioner of Taxation
[2009] FCA 1224
•30 OCTOBER 2009
FEDERAL COURT OF AUSTRALIA
Russell v Commissioner of Taxation of the Commonwealth of Australia [2009] FCA 1224
TAXATION – Income Tax and Penalty Assessments issued by Commissioner of Taxation – Allegedly false or misleading statements as to personal services by the appellant as to his income resulting in a tax shortfall – Whether the income received by a New Zealand incorporated company from an Australian company was mainly a reward for the appellant’s personal efforts or skills – Whether the aforementioned income constituted the appellant’s “personal services income” – Whether the New Zealand company was a “personal services entity” – Whether 80% of the appellant’s personal services income was from the same entity – Whether the appellant met the results test under s 87-18 Income Tax Assessment Act 1997 (Cth) – Whether an overseas company can be a personal services entity in relation to the assessment of personal services income of an individual – Whether the attribution of income paid to the New Zealand company by the Australian company as the appellant’s personal services income is contrary to the Australia-New Zealand Double Taxation Agreement – Whether the penalty assessment for intentional disregard of a taxation law was assessed correctly – Whether the Commissioner’s related penalty remission decision was attended with error such that the Court should reach its own conclusion on that subject – Held payments from Australian company to New Zealand company constituted part of the appellant’s “personal services income” – Held payments were an additional commission reward for services or skills provided to Australian company – Held New Zealand company was a “personal services entity” – Held appellant’s “personal services income” was not income from conducting a “personal services business” – Held New Zealand company can be a “personal services entity” in respect of Part 2-42 of the Income Tax Assessment Act 1997 (Cth) – Held NZ Double Taxation Agreement subjects the appellant to taxation in Australia in respect of the appellant’s “personal services income” pursuant to Part 2-42 of the Income Tax Assessment Act 1997 (Cth) – Held appeal allowed – Question as to whether possible by court order to increase the amount of an assessment on an appeal from an objection decision – Reserved for consideration after receipt of supplementary submissions
TAXATION – Goods and Services Tax – Whether the assessment of the GST net amount and related penalty assessment was excessive – Whether any of the items the subject of the claimed input tax credits were acquired by the partnership in carrying on an “enterprise” – Characterisation of the “enterprise” of the partnership - Whether the items the subject of the claimed input tax credits were of a private or domestic nature – Whether the statutory pre-conditions to the assessment of the base penalty were satisfied – Whether the Commissioner of Taxation properly exercised his discretion not to remit the base penalty – Whether the Commissioner of Taxation’s opinion that there was an avoidance of tax due to fraud or evasion was an error of law – Held GST assessment excessive – Held entitlement to claim tax credits in respect of forestry enterprise was an entitlement – Held no entitlement to claim tax credits in respect of accountancy practice and naturist retreat – Held Commissioner of Taxation’s remission decision was a error of law – Held appeal allowed
Acts Interpretation Act 1901 (Cth)
A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-20, 11-5, 57-5, 184-1, 195-1
Evidence Act 1995 (Cth) ss 69(2)(b), 91(1)
Evidence and Procedure (New Zealand) Act 1994 (Cth)
Federal Court Rules (Cth) O 14 r 9
Income Tax Assessment Act 1915 (Cth) s 38(1)
Income Tax Assessment Act 1936 (Cth) ss 190, 199, 226J, 318, 340
Income Tax Assessment Act 1997 (Cth) ss 8-1, 84-5(1), 86-15, 86-35, 86-60, 87-1, 87-5, 87-15, 87-18, 87-20, 87-25, 87-30, 170(7), 995-1
International Tax Agreements Act 1953 (Cth) s 4
Judiciary Act 1903 (Cth) s 79
Taxation Administration Act 1953 (Cth) ss 14ZR, 14ZY, 14ZZ, 14ZZO, 14ZZP, 14ZZQ, Sch 1
Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth) s 88Evidence Act 1977 (Qld) s 59(2)
Industrial Relations Act 1999 (Qld) s 276
Partnership Act 1891 (Qld) ss 5(1), 35(1)(c), 35(2), 45Companies Act 1955 (NZ)
Partnership Act 1908 (NZ) ss 4(1), 35(1)(c), 35(2), 45
Partnership Act 1891 (UK)Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 followed
Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 considered
Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 followed
Commissioner of Taxation v Wade (1951) 84 CLR 105 applied
Comptroller-General of Customs v Woodlands Enterprises Pty Ltd [1996] 1 Qd R 589 cited
Cornell v Deputy Commissioner of Taxation (1920) 29 CLR 39 considered
Ell v Commissioner of Taxation 2006 ATC 4098 cited
Ferguson v Commissioner of Taxation (1979) 37 FLR 310 cited
Hart v Commissioner of Taxation (2003) 131 FCR 203 followed
Iannella v French (1968) 119 CLR 84 cited
IRG Technical Services Pty Ltd v Commissioner of Taxation (2007) 165 FCR 57 considered
Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation (1975) 132 CLR 535 followed
McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 cited
Mercantile Credits Ltd v Commissioner of Taxation (1971) 123 CLR 476 considered
National Mutual Life Association of Australasia Ltd v Grosvenor Hill (Qld) (2001) 183 ALR 700 applied
Re Peerless Marine Pty Ltd and Commissioner of Taxation 2006 ATC 2419 considered
Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 66 ATR 1 followed
Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 243 ALR 728 cited
Re A Oyi Abp (2002) 4 ITLR 1009 considered
Re Judiciary and Navigation Acts (1921) 29 CLR 257 considered
Re Société Schneider Electric (2002) 4 ITLR 1077 considered
Russell v Commissioner of Taxation (2008) 168 FCR 330 cited
Saffron v Commissioner of Taxation (1994) 94 ATC 4049 considered
Thiel v Commissioner of Taxation (1990) 171 CLR 338 followed
Thomas v FCT (1972) 46 ALJR 397 citedPires Professor M, International Double Taxation of Income (Kluwer Law and Taxation Publishers, 1989)
Oxford English Dictionary (Oxford University Press, Oxford, 2009)
Vogel K, Klaus Vogel on Double Taxation Conventions (Kluwer Law International, 3rd ed, 1997)Agreement Between the Government of New Zealand and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. 27 January 1995. [1997] ATS 23 (NZ Double Taxation Agreement)
OECD Model Convention with respect to Taxes on Income and on Capital (OECD Model Convention)
ANTHONY WHITWORTH RUSSELL v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
QUD 232 of 2007
LOGAN J
30 OCTOBER 2009
BRISBANE
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 232 of 2007
BETWEEN: ANTHONY WHITWORTH RUSSELL
ApplicantAND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
LOGAN J
DATE OF ORDER:
30 OCTOBER 2009
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties bring in short minutes of orders to give effect to these reasons for judgement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 232 of 2007
BETWEEN: ANTHONY WHITWORTH RUSSELL
ApplicantAND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
LOGAN J
DATE:
30 OCTOBER 2009
PLACE:
BRISBANE
REASONS FOR JUDGMENT
Mr Russell by training, although not professional registration in Australia, is an accountant.
Mr Russell also professes to be a “naturist” - “A person who practises or advocates a natural way of life, esp. as characterized by the practice of communal nudity”: Oxford University Press 2009, Oxford English Dictionary (Oxford University Press, Oxford, 2009) viewed 20 June 2009.
According to his evidence, Mr Russell’s ambitions for his premises, which are situated in the hinterland near Sarina in Central Queensland, extend to affording those of like mind to him in relation to naturism the use of those premises. It is not intended that that use be gratuitous. In furtherance, he says, of that ambition, a variety of trees have been planted at the premises. Their purpose, according to him, is not only ambience and the provision of a privacy screen but also, through selective harvesting, the derivation of income from forestry operations.
Mr Russell’s work as an accountant and his ambitions for his premises have given rise both to income tax and to goods and services tax controversies. These have come to manifest themselves in appeals under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA). In an interlocutory judgement delivered last year I concluded that it was both lawfully possible for him to join his appeals in the one application and that the overlap in the underlying facts was such that it was in the interests of justice that his income tax and goods and services tax (GST) appeals be heard together: Russell v Commissioner of Taxation (2008) 168 FCR 330.
Mr Russell appeared on his own behalf on the hearing of the appeals whereas the respondent Commissioner of Taxation (the Commissioner) was represented by senior and junior counsel. It is no reflection on counsel, who provided valuable assistance, to observe that both in oral and written submissions Mr Russell argued his case with marked and memorable skill. This included the ability, not always found in litigants in person, for the most part to distinguish between his distinct roles as advocate and as witness. While I respect his skill and ability, it does not, as will be seen, follow that I accept all of his evidence.
The taxation assessments, including the related assessments of penalty, each of which was affirmed upon objection by the Commissioner and which underpin the respective income tax and GST appeals are as follows.
Income Tax Assessments
On 9 February 2007, the Commissioner issued the following notices of assessment in respect of income tax to Mr Russell:
(a)notice of assessment for the financial year ended 30 June 2001 by which the Commissioner notified his assessment of Mr Russell’s taxable income to be $43,186 with the amount due for payment being specified as $9,983.59;
(b)notice of assessment for the financial year ended 30 June 2002 by which the Commissioner notified his assessment of Mr Russell’s taxable income to be $87,954 with the amount due for payment being specified as $30,037.69;
(c)notice of assessment for the financial year ended 30 June 2003 by which the Commissioner notified his assessment of Mr Russell’s taxable income to be $106,548 and the amount due for payment being specified as $39,055.78; and
(d)notice of assessment for the financial year ended 30 June 2004 by which the Commissioner notified his assessment of Mr Russell’s taxable income to be $74,893 with the amount due for payment being specified as $23,130.10.
In each of the financial years in question the basis for the Commissioner’s assessment of Mr Russell’s taxable income was his conception that the amount so assessed constituted personal services income attributed to him by virtue of the operation of Part 2-42 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). He adhered to that view in disallowing Mr Russell’s objection and upon the hearing of the appeal against the objection decision.
Penalty (related to income tax) Assessments
Also on 9 February 2007, the Commissioner also issued two notices of assessment of liability to pay penalty (totalling $91,986.75) comprising:
(a)an assessment totalling $71,169.60 made up of:
(i)for the 2001 financial year a penalty amount of $8,985.20;
(ii)for the 2002 income year a penalty amount of $27,034.05;
(iii)for the 2003 income year a penalty amount of $35,150.35; and
(b)an assessment for the 2004 financial year of a penalty amount of $20,817.15.
The related penalty assessments were said to flow from allegedly false or misleading statements as to personal services income which resulted in a tax shortfall for each of the income years in question. For the purposes of s 284-90(1) of Schedule 1 to the TAA, the Commissioner worked out the base penalty on the basis that the tax shortfall had resulted from intentional disregard by Mr Russell of the ITAA 1997. In each instance and in reliance on s 284-220(1) of Schedule 1 to the TAA, the Commissioner also assessed penalty on the basis that the base penalty should be increased by 20%. On the hearing of the appeals he did not press that the base penalty of 20% should be increased.
Income Tax and related Penalty Appeal Issues
The issues which arise for determination in respect of the income tax and related penalty appeal are:
(a)Whether the income received by a New Zealand incorporated company known at the relevant times as The Ancath Corporation Ltd (now called Juan International Ltd – Ancath) from an Australian incorporated company, Tradecorp International Pty Ltd (Tradecorp), was mainly a reward for Mr Russell’s personal efforts or skills?
(b)Whether the income paid to Ancath by Tradecorp constituted the personal services income of Mr Russell?
(c)More particularly:
(i)whether Ancath satisfied conditions of conducting a personal service business for the purposes of s 86-15 of the ITAA 1997?
(ii)whether, having regard to s 87-15 of the ITAA 1997, 80% of Mr Russell’s personal services income was from the same entity?
(iii)whether Mr Russell met the results test under s 87-18 of the ITAA 1997?
(d)Whether an overseas registered company can be a personal services entity in relation to the assessment of personal services income of an individual?
(e)Whether it is contrary to the Double Taxation Agreement between Australia and New Zealand to attribute the income paid to Ancath by Tradecorp as the personal services income of Mr Russell?
(f)Whether the penalties for having tax shortfall amounts were correctly assessed at 75% as resulting from intentional disregard of a taxation law under item 1 of s 284-90 of Schedule 1 to the TAA?
(g)Whether the Commissioner’s related penalty remission decision was attended with error such that the Court should reach its own conclusion on that subject?
Goods and Services Tax and related Penalty Assessments
As to GST, on 30 May 2007, the Commissioner disallowed the following objections:
(a)an objection dated 20 April 2007 against the Commissioner’s assessment of GST net amount (the GST net amount) dated 16 April 2007 for the tax periods 1 July 2000 to 30 June 2006 (the tax periods); and
(b)an objection dated 10 January 2007 against:
(i)the Commissioner’s assessment of penalty dated 13 December 2006 for the tax periods for having a shortfall amount; and
(ii)the Commissioner’s related decision on remission of penalty.
The GST and related penalty assessments concerned a partnership the members of which were Mr Russell and his now former wife, Mrs Catherine Russell (née Orange). Whether the partnership has been dissolved (and, if so, when it was dissolved and what impact such dissolution has on the partnership’s entitlement to claim the ITC amount) is an issue.
In his assessment of the GST net amount the Commissioner:
(a)included an amount of $43,898 in respect of GST collected by the partnership purportedly as agent for Ancath pursuant to s 57-5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) less $3,909 reported by the partnership by its business activity statements (resulting in a net amount of $39,989) (the resident agent amount); and
(b)disallowed various input tax credits totalling $31,545 (the ITC amount) that had been claimed by the partnership in the Business Activity Statements lodged in respect of the periods. The sum of $31,545 comprised the following amounts of input tax credits in respect of three enterprises purportedly carried on by the partnership:
(i)$27,284 in respect of an accountancy practice;
(ii)$1,522 in respect of a forestry activity; and
(iii)$2,739 in respect of a naturist retreat.
Penalty (related to GST) Assessment
The GST penalty assessment assessed:
(a)a base penalty amount at the rate of 75% on the GST shortfall; and
(b)a 20% increase (“the 20% increase”).
On the hearing of the appeals, the Commissioner did not press that the partnership was liable for:
(a)the resident agent amount (and that component of the base penalty amount referable to the resident agent amount); or
(b)the 20% increase.
Goods and Services Tax and related Penalty Appeal Issues
The Commissioner has conceded that the partnership is not liable for the “resident agent amount” (and the related base penalty amount). The GST issues which remain for determination concern the ITC amount and are:
(a)whether the assessment of the GST net amount, insofar as it relates to amount of the input tax credits disallowed by the Respondent, is excessive;
(b)as subsidiary issues arising out of sub-paragraph (a):
(i)whether any of the items the subject of the claimed input tax credits were acquired by the partnership in carrying on an “enterprise”;
(ii)whether the partnership was carrying on an enterprise of:
(a)an accountancy practice;
(b)a forestry activity;
(c)a naturist retreat;
(iii)whether the items the subject of the claimed input tax credits were of a private or domestic nature; and
(c)whether, insofar as it related to a period prior to 1 July 2002, the issuing of the assessment was beyond power?
The Commissioner has further conceded that the appeal in respect of penalty should be allowed insofar as it challenges the 20% increase in base penalty.
As to GST related penalty, the issues are:
(a)whether the statutory pre-conditions to the assessment of the base penalty (set out in s 284-90 of Schedule 1 to the TAA) were satisfied;
(b)whether the Commissioner properly exercised his discretion (pursuant to s 298-20 of Schedule 1 to the TAA) not to remit the base penalty; and
(c)whether, in respect of the period prior to 1 July 2002, it was necessary for the Commissioner to form an opinion that there was an avoidance of tax due to fraud or evasion pursuant to s 105-50 of Schedule 1 to the TAA in order to assess and, if so, whether that opinion is vitiated by relevant error of law?
Onus of proof
Common to each appeal is that it falls on Mr Russell to prove that the assessment concerned is excessive: s 14ZZO(b)(i) of the TAA (taxation liability appeals) and s 14ZZO(b)(iii) of the TAA (penalty appeals).
Business structures, entities and individuals associated with Mr Russell
It is convenient first to reach some conclusions about business structures, entities and individuals with which and whom Mr Russell has been relevantly associated.
A W Russell & Co
Mr Russell and his then wife, Mrs Catherine Russell, came to Australia from New Zealand in 2000. They took up residence here. Before leaving New Zealand and by an agreement evidenced in writing dated 1 January 2000 (the Partnership Agreement) they formed a partnership which was to commence trading after 1 April 2000 under the name of “A W Russell & Co” (the partnership). The original members of the partnership comprised Mr Russell and his then wife alone. Though the Partnership Agreement made provision for the admission of additional partners, in the result Mr and Mrs Russell were the only members of the partnership during its existence.
That such a partnership was formed was not controversial on the hearing of the appeals. There was though some controversy between the parties as to when the partnership came to an end. The controversy was one of law rather than fact.
Mr Russell gave evidence by affidavit that he and his wife separated on 23 February 2004 and “effective from that date she verbally resigned from the partnership”. Mrs Russell did not give evidence. It emerged that she was now residing abroad.
In his oral evidence Mr Russell referred to his former wife having “effectively resigned” from the partnership on the date of their separation. I did not take this to be a departure from the position earlier described by him in his affidavit. Consistent with his wife’s earlier resignation, I note that, later in 2004, Mr Russell caused the Queensland Business Names Register to be altered so as to delete his wife from co-proprietorship of the business name “A W Russell & Co” and to record him as the sole proprietor of that name. I find that Mrs Russell resigned from the partnership on 23 February 2004 by notice given orally to Mr Russell that day.
Mr Russell also deposed: “Since 23 February 2004 Catherine Russell has continued to receive a share of the net profit of the partnership. For the year ending 30 June 2004 she received a full 50% of that year’s net income in accordance with a verbal agreement between us and for each year thereafter she has received 10% of each year’s profit in line with clause 5 of the Partnership Agreement”.
Clauses 2 and 5 of the Partnership Agreement are in these terms:
2.The partnership shall not dissolve for reason of the bankruptcy, death, or resignation of one of the partners, nor shall the partnership dissolve for reasons of a new partner being admitted to the partnership.
…
5.If a partner leaves the partnership for any reason his or her capital in the partnership shall be paid out over a period of years not to exceed five (5) years during which time the leaving partner shall be paid a share of each years profits at a rate to be agreed upon but not exceeding 10% and such profit share shall be in lieu of interest.
The Partnership Agreement also purported to provide that the minimum number of partners might be “one” (cl 3). Save insofar as that agreement provided to the contrary, the Partnership Agreement expressly provided that it was governed by the Partnership Act 1908 (NZ) (Partnership Act (NZ)).
Mr Russell’s submission was that: “Mrs Russell may well have resigned from an active role in the partnership at the time of the marriage separation but she has continued to receive a share of the net profit of A W Russell & Co up until she received her final payout of capital which occurred in June 2008”. He alleged that there was a practice within the Commissioner’s office “to allow a retired partner to remain on a partnership income tax return and receive a share of profit until such time as he/she is completely gone from the business relationship”.
The Commissioner’s position was that the partnership had ceased to exist upon Mrs Russell’s resignation with payments to her thereafter being nothing more than a settlement of accounts. He developed this submission firstly by reference to one of the inherent elements of a partnership for the purposes of legislation modelled on the Partnership Act 1891 (UK) (Partnership Act (UK)), which is that the partnership business must be carried on by two or more persons in common: see, materially, the definition of partnership in s 5(1) Partnership Act 1891 (Qld) (Partnership Act (Qld)) and s 4(1) Partnership Act (NZ).
As there is no presently material difference between the New Zealand and Queensland Partnership Acts it is unnecessary to consider the extent to which the Queensland Act came to apply to Mr and Mrs Russell’s New Zealand-formed partnership upon their commencing to carry on business in Queensland. So as to highlight the absence of any material difference I shall refer, where necessary, to both the New Zealand provision and its Queensland equivalent.
Secondly, because of its particular significance for the GST appeal, the Commissioner drew attention to the definition of “partnership” for the purposes of the GST Act. Section 195-1 of the GST Act incorporates by reference for the purposes of the GST Act the definition of “partnership” found in s 995-1 of the ITAA 1997. The latter definition changed (on and from 2 December 2003) over the course of the tax periods. It is not necessary to reproduce either its former or present terms in full. Common to each version is either that there be an association of persons carrying on business as partners or that persons be in receipt of income jointly. Each version of the definition thus both includes a partnership as understood under the general law of partnership as well as expands its embrace so as to include those in receipt of income jointly, even if they are not carrying on business in common with a view to profit.
Given the finding of fact I have made as to Mrs Russell’s resignation, the partnership was dissolved on 23 February 2004. It was on that date that Mr Russell received notice from the only other partner then carrying on business under the name A W Russell & Co. The Partnership Agreement did not specify any fixed term for the duration of the partnership. It was thus a partnership at will. Nor did the Partnership Agreement specify any particular manner and form for the giving of notice of the dissolution of the partnership. It was able to be dissolved by Mrs Russell’s giving to Mr Russell notice of her intention to dissolve the partnership; s 35(1)(c) Partnership Act (NZ); s 35(1)(c) Partnership Act (Qld). It was permissible for the notice of dissolution to be given orally. Mrs Russell did not specify any prospective date as the date upon which dissolution of the partnership was to take effect. In those circumstances, dissolution occurred on the day upon which Mr Russell was given notice of dissolution by his wife: s 35(2) Partnership Act (NZ); s 35(2) Partnership Act (Qld). That was 23 February 2004.
The giving of notice by Mrs Russell necessarily brought the then existing partnership to an end. No fresh partnership constituted by continuing partners replaced it. It is the very essence of partnership under the general law that two or more persons carry on business in common. Clause 2 of the Partnership Agreement cannot and does not alter that position. After 23 February 2004, though Mr Russell carried on the business of A W Russell & Co, he did so as a sole trader. He and his now former wife thereafter no longer carried on business in common.
Provision is made in partnership legislation in respect of the entitlements of an outgoing partner where a surviving partner continues to carry on the business of the firm before any final settlement of accounts: s 45 Partnership Act (NZ); s 45 Partnership Act (Qld). That legislative provision is subject to any provision in a partnership agreement to the contrary.
In this instance, and as Mr Russell deposed, he and his wife did come to an agreement to the contrary. Their agreement was that, for the year ended 30 June 2004, she would receive 50% of the profits of the business and thereafter, as cl 5 of the Partnership Agreement provided, in lieu of interest on capital, 10% of those profits would be paid to her for a period of not more than 5 years. The payment of these sums occurred in the course of the winding up of a partnership which had been dissolved. They were payments by Mr Russell in his own right to a former partner. That they were paid did not mean that the partnership was continuing. Nor did it mean that he and his former wife were in receipt of income jointly. The sums were paid from the profits of a new business carried on by Mr Russell in his own right under the name A W Russell & Co.
It follows from the conclusions just reached that, after 23 February 2004, not only was there no partnership under the general law but also there was none under the expanded notion of “partnership” resulting from the definition applicable to the GST Act. After 23 February 2004 Mr and Mrs Russell could not even be classified as persons in receipt of income jointly.
Administrative practices adopted by the Commissioner in relation to partnerships are irrelevant to the operation of the general law of partnership and to the effect of the expansion of the general law by the definition of “partnership” for the purposes of the ITAA 1997. It may be that these practices are referable to circumstances where, after notice of dissolution is given, a partnership business is carried on for a limited time solely for the purpose of collecting fees which were outstanding prior to the giving of that notice. That is not this case. It is unnecessary to consider the extent, if at all, to which any such practice of the Commissioner conforms to the general law of partnership or the expanded statutory definition. I accept though that adherence, however mistaken in law, by a taxpayer to an administrative practice condoned by the Commissioner may be relevant to whether any penalty tax is exigible.
Under the general law, a partnership is not a legal entity separate from its members. Incongruently with the general law, a “partnership” as defined is classed as an “entity” for the purposes of the GST Act: s 184-1. It also follows from the conclusions which I have reached that, after 23 February 2004, the partnership carrying on business under the name A W Russell & Co ceased to be an “entity” for the purposes of the GST Act. Thereafter, a new GST “entity”, Mr Russell as an individual, came to carry on business under that name.
Ancath
One “entity” both for the purposes of the GST Act and under the general law which also features in these appeals is Ancath.
I have no doubt that Ancath was an existing legal entity at all times material to the appeals. It is not necessary just to rely upon Mr Russell’s own evidence for that conclusion. Its certificate of incorporation upon its change of name to Juan International on 5 September 2005 is in evidence. That certificate also discloses that Ancath was originally incorporated under the Companies Act 1955 (NZ) on 23 November 1992.
Other official corroboration of Ancath’s existence comes from the records of New Zealand’s Inland Revenue Commissioner and its Registrar of Companies. Ancath has lodged annual returns with each of these officials. It will be necessary later to make reference to some of the information disclosed on the New Zealand income tax returns.
Ancath also holds a registered mortgage over Mr Russell’s Sarina hinterland property. It secures a loan to him by Ancath in the sum of $250,000.
Read in conjunction with a New Zealand Companies Office search, Ancath’s annual company returns disclose that its sole shareholder is and has been Mr Russell’s now former wife. Her shareholding is recorded under her maiden name, Catherine Orange. A director of Ancath since 1998 has been a Mr Theunis Miedema. Mr Miedema is a resident of New Zealand.
Mr Miedema
Mr Miedema was at one stage going to give affidavit and oral evidence in Mr Russell’s case. Mr Russell had secured and filed affidavits from him. The Commissioner sought to cross-examine Mr Miedema on the affidavits. He gave notice of that intention well before the dates fixed for trial. Where a notice that a deponent attend for cross-examination is given and that deponent does not attend, his or her affidavit may only be used with the leave of the Court: Federal Court Rules O 14, r 9.
Mr Russell sought to explain his failure to have Mr Miedema available in person for cross examination on the additional basis of a recollection on his part that he had been informed early in 2008 by a lawyer in the Australian Government Solicitor’s (AGS) office that he could lodge an affidavit given by Mr Miedema and that, “it certainly was the impression I got that she [the AGS lawyer] wouldn’t be interested in cross-examining him. And I had transmitted that information to Theunis [Mr Miedema], and because it meant he did not have to come back to Australia, he was quite happy to give me that affidavit”. An affidavit from Mr Miedema was filed in March 2008 and another in May 2008.
Whatever might be the accuracy of that recollection, and it must be said that it is inconsistent with the Commissioner’s subsequent forensic disposition, the evidence also disclosed that, by May 2008, it had been made pellucidly clear to Mr Russell by the AGS lawyer then responsible for the case that Mr Miedema was required for cross-examination. Later that month, Mr Russell wrote to the AGS office advising: “I have at last been able to make contact with the witness from New Zealand, Theunis Miedema, and he has confirmed his availability during the period 14 July to 1 August 2008.” Thereafter, it was confirmed to Mr Russell that each of the persons whose affidavits had been filed in his case was required by the Commissioner to attend for cross examination.
Mr Russell sought to make something of the failure on the part of the Commissioner to call the original AGS lawyer he had named. However, against the background that I have just recited, the accuracy of Mr Russell’s recollection of early dealings with the Commissioner’s solicitor is something of a distraction. It would not at all surprise me if there had been some early acknowledgement on the part of those acting for the Commissioner of the expense of bringing a prospective witness from New Zealand and an associated reservation about whether that was necessary prior to the filing, service and consideration of an affidavit from that proposed witness. It is not impossible to see how that might have created an initial impression in Mr Russell’s mind that Mr Miedema was not definitely required for cross-examination. However, it is quite apparent that, by the end of May 2008, he not only was aware of the requirement to produce Mr Miedema for cross examination but had also confirmed that gentleman’s availability over the period during which the hearing of the appeals had been programmed to occur.
Mr Russell’s further response in relation to his failure to secure Mr Miedema’s attendance was that he could not afford to secure his attendance. Upon noting that Mr Russell had qualified for court fee relief on the basis of his financial position and given that he was not legally represented, I drew Mr Russell’s attention to the Evidence and Procedure (New Zealand) Act 1994 (Cth). That Act provides for the service of Australian subpoenas in New Zealand and for the receiving in Australia of evidence by telephone or video link from New Zealand where facilities are available. Inquiries were made which disclosed that it was possible to arrange a video link to a District Court in New Zealand in reasonable proximity to the place in New Zealand where Mr Miedema resided. The availability of this facility was made known in open court to Mr Russell and to the Commissioner. The Commissioner was disposed to utilise such a facility rather than insist upon Mr Miedema’s physical attendance in Australia. I indicated to Mr Russell that I was prepared to adjourn the proceedings to a time when Mr Miedema was able to attend at the District Court.
In the course of his oral evidence Mr Russell mentioned on several occasions his need to report his actions to Mr Miedema and to consult with him because it was Mr Miedema who was the director of Ancath.
I ruled that I would not grant leave to permit the use of an affidavit from Mr Miedema without his attendance for cross examination. I gave brief reasons for this at the time. In essence, my reasons for refusing to grant leave under O 14 r 9 were these. Whether to permit Mr Russell to rely upon an affidavit without producing Mr Miedema for cross-examination required the exercise of a discretion. Mr Russell’s relative impecuniosity was relevant to the exercise of that discretion, particularly where the witness concerned resided overseas. That Mr Miedema did reside overseas was itself a relevant consideration. These considerations were tempered by the ability, buttressed by legislation, to secure Mr Miedema’s testimony in cross examination by video link at a locale in reasonable proximity to his place of residence in New Zealand.
The nature and extent of Ancath’s business operations in the years in question was of particular significance in both the income tax and GST appeals. One might apprehend that, prima facie, as its sole director, Mr Miedema could give first hand evidence on those subjects. Certainly, the role consigned to Mr Miedema by Mr Russell in the course of his evidence in this Court was such that it was understandable that the Commissioner would wish to cross examine Mr Miedema. The role then consigned to Mr Miedema echoed that evident in Mr Russell’s letter of objection dated 10 April 2007. It was evident from the conduct of the Commissioner’s case that Mr Russell’s credibility was a controversial subject. If their use were permitted Mr Miedema’s affidavit evidence had the potential, if accepted, to corroborate some of the evidence that Mr Russell gave concerning Ancath. To permit the adducing of that evidence without the Commissioner’s having the ability to cross examine Mr Miedema did not, on balance, strike me as in the interests of justice in the circumstances.
After this ruling I granted an adjournment for the purpose of the parties bringing forward a proposal for the reception of Mr Miedema’s evidence by video link. Upon resuming, Mr Russell decided not to pursue that option. He did so even after being advised that I was prepared to dispense with his paying for the cost of the video link on the basis of his confirmation that his financial position had not materially changed since he obtained fee waiver. Mr Russell’s decision not to make Mr Miedema available for cross examination, even in these circumstances, was, to my then observation and as I distinctly recall, a very deliberate decision.
Failure to call Mrs Russell and Mr Miedema
In the result therefore the only other individuals who might have been able to provide direct evidence from an internal perspective as to the management and operations of the partnership or, as the case may be, of Ancath did not give evidence. Marital estrangement as well as foreign residence might well and, I accept does, sufficiently explain the absence of evidence from Mrs Russell. Mr Miedema was though disposed to give affidavits but not to be cross-examined upon them. It was lawfully and, in my opinion, reasonably possible for his cross examination to occur without his leaving New Zealand. The absence of evidence from Mr Miedema is not unexplained but it is an absence nonetheless. It is the result of a deliberate forensic choice. I regard the absence of evidence from Mr Miedema as a significant absence in terms of Mr Russell’s discharging his obligation to prove the assessments concerned to be excessive.
Income Tax Appeal
In respect of the various income tax and related penalty assessments Mr Russell adopted the permissible course of lodging a single objection embracing each of them and the Commissioner, in turn, adopted the equally permissible course of making a single objection decision (see s 14ZR of the TAA). In turn, Mr Russell’s appeal is against what one might term that “omnibus” taxation objection decision.
I have already summarised the issues pertinent to the income tax appeal.
In terms of proximity to the relevant events, the earliest account from Mr Russell which I have before me is that offered in statements made by him for the purposes of proceedings in the Queensland Industrial Relations Commission and in related written submissions prepared by him for the purposes of those proceedings. Mr Russell acknowledged his authorship of these documents in the course of his cross examination.
It appears that Mr Russell instituted proceedings against Tradecorp in the Industrial Commission in the “unfair contracts” jurisdiction conferred upon it by s 276 of the Industrial Relations Act 1999 (Qld). It further appears that Tradecorp sought to have those proceedings dismissed. The outcome of those proceedings and especially any conclusions reached by the Industrial Commission as to Mr Russell’s credibility, his status vis-à-vis Tradecorp, whether Ancath had a contract for service with Tradecorp or whether Mr Russell ought properly to be regarded an employee of Tradecorp are not relevant in either the income tax or GST appeals: s 91(1) Evidence Act 1995 (Cth) (Commonwealth Evidence Act); National Mutual Life Association of Australasia Ltd v Grosvenor Hill (Qld) (2001) 183 ALR 700 at 715, [46]. Mr Russell’s prior statements and submissions are though in a different category.
That Mr Russell performed accounting and managerial work for Tradecorp at its Mackay business premises for about four years between August 2000 and August 2004 is clear. His title when performing that work was that of Tradecorp’s “financial controller”. He was appointed to undertake that work by Tradecorp’s managing director, Mr Tony Zarb. That followed an interview with Mr Zarb and Tradecorp’s outgoing financial controller, Ms Gillian Sandhoff. It is also clear that Mr Russell ceased undertaking this work following a breakdown in relations between him and Mr Zarb. It is not necessary in these proceedings to explore the rights, wrongs and responsibilities for that breakdown in relations.
Relations between Tradecorp and Ancath were at least purportedly regulated by a written agreement made between those companies made on 4 August 2000 (the Tradecorp Agreement). Mr Russell, I note, has signed the agreement on behalf of Ancath underneath the common seal of that company. Mr Zarb has apparently signed on behalf of Tradecorp.
The Commissioner did not submit that the Tradecorp Agreement was a sham. The expressed date of commencement for the Tradecorp Agreement was 30 August 2000.
In his affidavit evidence filed in these proceedings Mr Russell made reference to the existence of the Tradecorp Agreement. He did not in that evidence state that, from his perspective as a signatory to it on behalf of Ancath, it was a sham. Rather, he stated that there was such an agreement in existence between 30 August 2000 and 30 June 2004. I understood his reference to 30 June 2004 not to be a statement that the Tradecorp Agreement had been terminated on that date but rather that the agreement had been operative for the whole of the 2004 income year, which is the last of the income years covered by the assessments. Neither Mr Zarb nor any other officer of Tradecorp gave evidence, much less gave evidence that Tradecorp regarded the agreement as a sham.
I approach the determination of the income tax appeal on the basis that, as it came to be varied, the Tradecorp Agreement did indeed regulate relations between Tradecorp and Ancath according to its tenor until terminated by Tradecorp in August 2004. It transpired that, on 24 September 2001, Ancath and Tradecorp varied their original agreement, effective inter se from 1 September 2001, so as to increase the initial contract sum from $A45,000 per annum to $A65,000 per annum. Again, there was no suggestion that this variation agreement was a sham.
What Mr Russell did state in his affidavit evidence in this Court was that he was never an employee of Tradecorp but rather an employee of Ancath in relation to the performance of work at Tradecorp. Obviously enough, his status is a mixed question of law and fact. Insofar as it is factual, his position before me was that he was a mere employee who deferred in terms of decision-making to those who controlled Ancath. This was in marked contrast to the position which Mr Russell adopted in evidence before the Industrial Commission as to his position vis-à-vis Ancath and Tradecorp.
The tenor of the statement which Mr Russell gave to the Industrial Commission as to his relationship with Ancath was quite different. His position on that subject before the Industrial Commission was, if anything, even more starkly put in an outline of submissions which he signed and then filed on 31 January 2005 with the Industrial Commission when acting for himself in that forum. Under the heading “The Relationship of Ancath and Myself” Mr Russell stated:
Ancath was only brought into the contractual arrangement for my employment with Tradecorp at the behest of Anthony (Tony) Zarb, Managing Director of Tradecorp.
….
At all times when I was working with Tradecorp, Ancath and myself were treated as one. Changes in the terms of my employment were discussed only with myself, and Tradecorp never at any time attempted to communicate with Ancath.
Throughout the time of my engagement with Tradecorp I effectively controlled Ancath although not so from a strict legal point of view. My wife was the sole shareholder and because of my relationship with her I could run Ancath. I have signing authority on the company’s bank account and possess a debit card for use at any ATM any where in the world.
More recently, I have acquired a controlling interest in Ancath giving me formal control of the company. [sic]
Mr Russell submitted that I should ignore the material tendered by the Commissioner relating to the statement he gave and the submission he made to the Industrial Commission. He submitted that these had been prepared on legal advice. The written submission which from which I have just quoted was signed not by a lawyer but by Mr Russell personally.
Mr Russell did mention that he had initially consulted lawyers in relation to the Industrial Commission proceeding but was unable to afford to continue to be legally represented. Assuming in his favour (as I do) that he was initially given particular legal advice as to how his position as Tradecorp’s financial controller ought to be regarded for the purposes of Queensland industrial legislation, that advice must necessarily have been given against an account of facts pertinent to the relationship between Ancath and Tradecorp and of the work performed by Mr Russell. It was Mr Russell who had the intimate knowledge of these facts. It is his account of the facts in his submission to the Industrial Commission which is of interest. That either he or his onetime legal advisers may have been in error as to the characterisation of his position in law on those facts for the purposes of Queensland industrial legislation is nothing to the point. I regard the factual content of the submission which he made to the Industrial Commission as relevant and revealing.
It is not difficult to see how Mr Zarb on behalf of Tradecorp may well have perceived advantage for his company in terms of a supposed saving in labour oncosts such as pay-roll tax by securing the services of Mr Russell by means of a contract for service with another body corporate which would in turn deploy Mr Russell to perform work for Tradecorp. Nor is it difficult to see how Mr Russell was able readily to accommodate Mr Zarb’s preference if indeed, as Mr Russell also stated, Ancath was a dormant company immediately available to him.
It matters not for the purposes of this appeal whether Mr Zarb’s perception as to the efficacy for pay-roll tax or other labour on cost purposes of such an arrangement was misconceived in law. What does matter is the striking variance in Mr Russell’s accounts as to the nature of his relationship with Ancath as between the Industrial Commission and the present proceeding. I regard it as inherently more likely that his account to the Commission as to his ability to control Ancath was factually correct, ie that he was able, initially in a de facto way and later more formally, to control Ancath’s affairs. That may well also explain his reluctance, even in the face of an offer of considerable facilitation, to see Mr Miedema exposed to cross-examination.
The income tax returns which Ancath lodged with New Zealand’s Inland Revenue Commissioner cover taxation years which end on 31 March. They thus do not align with the usual Australian taxation year, which ends on 30 June. Allowing for this, it nonetheless appears that Ancath has returned in New Zealand as ordinary income, described as “fees received”, the amounts paid to it by Tradecorp net of Australian GST. There is no other apparent source of income for Ancath evident in its New Zealand income tax returns for the years ended 31 March 2001 to 31 March 2005 (inclusive).
According to Mr Russell, Ancath did though have sources of income which were not referable to his performance of work for Tradecorp. He referred to work performed for clients who were based in Vanuatu. In support of this claim Mr Russell exhibited to an affidavit which he swore a bundle of what purported to be copies of invoices directed by Ancath to such clients (JAT Investments, Cobra Holdings, Barbara Farms) for that work. On the copies he produced, the addresses of the clients had been obliterated. The reason for this, so Mr Russell said, was that, “Vanuatu is a tax haven and income earned and retained there is not subject to income tax and accordingly that proportion of [Ancath’s] income was not returned by the company in its New Zealand tax returns”. As to the obliteration of client addresses, Mr Russell stated in cross-examination that: “My employer made those available to me on the condition the addresses be blacked out to protect the privacy of the clients”. The “employer” concerned, Mr Russell agreed, was Ancath. In light of that reference, the absence, in the result, of evidence from Mr Miedema is eloquent.
I have a very particular recollection of Mr Russell’s giving this evidence concerning what “his employer” would make available to him. His demeanour was obstinate. His reference to “his employer” had a surreal quality about it when given in oral evidence in light of the earlier exposure of the dogmatic statement as to his control of Ancath which he had made in the Industrial Commission proceedings.
Mr Russell admitted in cross-examination that he had never been to Vanuatu. He said that the work concerned had been done by him for Ancath’s clients either from his premises near Sarina or when he was in New Zealand. He also admitted that there was no-one other than himself and his former wife who was involved in the preparation of Ancath’s New Zealand income tax returns.
It transpired that the amounts of these purported invoices to Vanuatu based clients were, in each income tax year, just sufficient to bring Ancath below the 80% threshold which features in the legislation in relation to personal services income. Mr Russell claimed that Ancath had undertaken other such work but that, as it was only necessary for him to show an amount less than 80% all that he had done was to produce copies of sufficient of its invoices to do this.
I did not find Mr Russell’s explanation as to the reason why no income was returned by Ancath in New Zealand in respect of services performed in Vanuatu either compelling or even persuasive. Quite what relevance Vanuatu’s status as a so-called “tax haven” had with respect to such responsibility as Ancath had under New Zealand’s revenue laws to return that income in New Zealand escapes me. As viewed from New Zealand, the income that Ancath derived from the performance of services in Australia for Tradecorp via Mr Russell was also foreign sourced income. Yet Ancath’s New Zealand income tax returns disclosed this particular foreign sourced income. Mr Russell did not adduce any admissible evidence before me as to the revenue laws of New Zealand or of the revenue laws and other laws of Vanuatu which might in this way serve to explain the omission in the New Zealand returns of the Vanuatu sourced income.
Given the control he stated he had over Ancath in the proceedings before the Industrial Commission, I formed the view that Mr Russell had not been at all candid in his evidence before me concerning Ancath, its activities and the degree of control he was able to exercise in respect of that company. His failure to call Mr Miedema did nothing to dissuade me from that view.
It is possible, I suppose, that work as purportedly invoiced was indeed undertaken and that the omission of Vanuatu client income might be referable to an innocent mistake as to a requirement to declare the same in New Zealand. In the absence of corroboration, I am not though prepared to find these facts proved. In so concluding I accept that Mr Russell is not at all obliged to prove to demonstration that Ancath undertook such work, only on the balance of probabilities that it did so. Nor is it the law that an appellant taxpayer can only discharge the onus of proof, even on the balance of probabilities, by the tendering of corroborated evidence: Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1. It is just that, recalling on whom the onus lies and applying that standard of proof, I did not regard Mr Russell’s uncorroborated evidence on the subject as sufficiently reliable to admit of a conclusion that these facts were proved.
I have reached these conclusions without taking into account Mr Russell’s New Zealand criminal history, an official copy of which was tendered by the Commissioner in the course of Mr Russell’s cross examination. Mr Russell has been convicted in that country of numerous offences of dishonesty including using a document with intent to defraud and forgery. He was, I thought, reluctant to acknowledge his criminal past in cross examination although his statement that it concerned an era in his life that he had sought to put behind him and forget was understandable enough. He also voiced disagreement with his having been truly guilty of some at least of the offences in respect of which convictions were recorded. Mr Russell’s criminal history in its own right does give pause for thought about his credibility. However, the divergence in accounts as between evidence in the Industrial Commission and this Court with regard to his control over Ancath engendered in any event my disposition not to act on his uncorroborated testimony as to Ancath’s undertaking work for Vanuatu based clients.
For completeness, I should record that Mr Russell exhibited to one of his affidavits a letter dated 11 January 2008 addressed to Ancath (by its new name, Juan International) marked for Mr Miedema’s attention from the National Bank of New Zealand which stated that a debit card issued on 24 November 2004 for use by Mr Russell had never been used. The letter says nothing as to the position in relation to the use of such a debit card during the period of interest in the appeals. Further, the letter is addressed not to any New Zealand address associated with Ancath or Mr Miedema but rather to the company in Australia at a post office box at Sarina. I did not therefore regard the letter as offering any corroboration with respect to the account Mr Russell gave concerning Ancath’s affairs and the role he played.
The usual pattern of payment as between Tradecorp and Ancath was by periodic funds transfer in response to an invoice issued by Ancath, initially fortnightly and, on and from 20 March 2001, monthly. The funds transfer to Ancath was net of Australian GST with the amount of the latter being added and separately remitted, again on and from 20 March 2001, by Tradecorp to A W Russell & Co. In this usual pattern, the invoice concerned was expressed to be for “professional services” for a particular month or fortnight. Its amount was calculated by dividing the prevailing agreed annual payment plus an allowance of 8% (presumably in recognition by analogy of superannuation) by either 26 or, as the case may be, by 12.
Mr Russell also stated that two amounts received by Ancath from Tradecorp were not derived as a result of work performed by him. The amounts are:
(a)in the 2002 income year, $3,350 (invoice 29 dated 8 May 2002 refers); and
(b)in the 2003 income year, $16,667.65 (invoice 39 dated 4 December 2002 refers).
As to the sum of $3,350 (Invoice 29), Mr Russell’s evidence was that this income was derived by Ancath as a result of stock checks conducted by others in New Zealand. The invoice concerned, like all of those rendered by Ancath to Tradecorp, is in Mr Russell’s handwriting. It refers to stock checks conducted in New Zealand with some related work apparently performed in Australia as well as in New Zealand. It gives no detail as to when the stock checks were performed or by whom. It is also annotated with a reference to an agreement of some sort but it is not possible to decipher all of the detail of that annotation. I do note though that the invoice is apparently annotated in Mr Zarb’s writing with the words “OK to pay” and with a question mark after the annotation “GST”. In the absence of corroboration, I am not, for reasons already given, prepared to accept that, on the balance of probabilities, these “stock checks” in New Zealand were other than the result of services work undertaken by Mr Russell. I am persuaded by the annotated “OK” that services of the kind described were performed.
There is some corroboration in respect of the account which Mr Russell gave in relation to the sum of $16,667.65.
Invoice 39 at least purports to be referable to commission in respect of “container lease deals to South Pacific Islands” (the description used in the invoice).
A typed schedule is annotated to invoice 39. It giver particulars of, it seems, clients and related commission amounts. That schedule bears the annotation “OK to Pay”, a signature and the handwritten date, “5/12/02”, each seemingly in the same handwriting.
The signature on my inspection corresponds with that of Mr Zarb on a Tradecorp letter dated 8 September 2000 detailing Mr Russell’s then monthly income. That same signature, on my inspection, appears to have been placed on behalf of Tradecorp on the Tradecorp Agreement. Both the invoice and its schedule were tendered in Mr Russell’s case. It was never part of the Commissioner’s case that either of these documents was a forgery.
Were the authorship of the schedule to be disputed, it would be open to me, pursuant to s 59(2) of the Evidence Act 1977 (Qld) (Queensland Evidence Act), as applied by s 79 of the Judiciary Act 1903 (Cth) and insofar as the Queensland provision is not inconsistent with the Commonwealth Evidence Act to reach my own conclusion as to its authorship by comparison with a genuine signature. The schedule not being a disputed document, I consider that it is open in any event as a matter of inference and comparison to reach the conclusion that it is Mr Zarb who made the annotation. This conclusion corresponds with Mr Russell’s unchallenged statement under cross examination that it was Mr Zarb who had signed the payment approval on the schedule.
In these circumstances, I accept Mr Russell’s evidence that an arrangement of some sort existed between Tradecorp and Ancath in 2000, 2001 and 2002 whereby Tradecorp would pay Ancath a commission in respect of “container lease deals to South Pacific Islands”. Even allowing for the generality of the following description, I consider that, as a subject, container leasing extends beyond the service described in cl 5 of the Tradecorp Agreement, viz:
Ancath shall ensure that Tradecorp is provided with full accounting services including maintaining of computer systems, streamlining of accounting procedures, supervision of staff, production of regular financial reports, evaluation of proposals and generally attending to the entire accounting function of Tradecorp and its associated companies and other business entities. End of year annual accounts and tax returns will continue, at least initially, to be completed by an outside firm of Public Accountants.
That agreement, I also note, makes reference to the prospect of “profit share”.
Mr Russell’s evidence also was that the transactional work in relation to container leases was undertaken by others in Tradecorp’s office and occasionally by Mr Zarb but not him personally. His evidence was further that others in Tradecorp’s office also received a modest bonus by way of a percentage in respect of commissions derived by Tradecorp from the leasing off-shore of containers. In particular, he stated in respect of the payment of commission:
Well it was actually quite a practice in the firm, in Tradecorp. There were other staff, say some of the typists, the clerks, for example, who had nothing to do with the company earning commissions on lease deals. They were given a portion of the commission income as bonuses.
This is not inconsistent with the an approved payment of commission income by Ancath even though Mr Russell had not physically performed any work in relation to off-shore container leases while at Tradecorp. I accept Mr Russell’s evidence on this subject.
Though the evidence on the topic is compressed, what emerges is that the derivation of income by way of commission from the leasing of containers throughout the South Pacific was part of Tradecorp’s business. A practice existed within that company of allocating a percentage of that commission income by way of a bonus above their usual remuneration to persons working at Tradecorp even though they might not have personally undertaken work in relation to the container leasing aspect of that company’s business. That practice was not formally documented, but its existence and adaptation to the Tradecorp Agreement is evidenced by invoice 39 and its schedule if, as I do, one accepts Mr Russell’s evidence in this regard.
It does not follow from this that the payment of this percentage of commission income should be characterised as anything other than an additional reward for Mr Russell’s services or skills as provided to Tradecorp by Ancath under the Tradecorp Agreement. The position would be different if Ancath, via Mr Russell or otherwise, had separately put to Tradecorp a business opportunity involving the leasing of containers throughout the South Pacific, an agreement as to profit sharing by way of a percentage of commission in relation to that business opportunity had been reached and then the work in respect of such leases performed by other Tradecorp staff. In those circumstances, the commission income could not, in my opinion, be characterised as mainly a reward for Mr Russell’s skills or services. That is not this case. Rather, as with other persons working at Tradecorp, the payment of a percentage of commissions seems to have been by way of a bonus in respect of the services they were rendering whether or not those services related in any way to the leases.
There was nothing about such evidence as Mr Russell gave in the taxation appeals or in that which he put before the Industrial Commission concerning the tasks he performed at Tradecorp which suggested to me that, via Ancath’s obligations under the Tradecorp Agreement, he was engaged so as to produce a particular result. Rather, the description in cl 5 of the Tradecorp Agreement seemed a fair summary of the tasks which he performed. He seems to have been based at Tradecorp’s premises and engaged, albeit in a position of some seniority and responsibility, in the day to day routine of financial and managerial tasks encountered in the course of Tradecorp’s business. He brought to the performance of those tasks the personal skills, qualifications and experience which he had accumulated in New Zealand, nothing more and nothing less. By “nothing more and nothing less” I mean that he did not, on the evidence, additionally bring to the performance of those tasks any plant or equipment of any significance. The Tradecorp Agreement did not require that Ancath do so. Further, there was no suggestion by Mr Russell that Ancath deployed anyone other than him to perform tasks at Tradecorp’s Mackay premises.
What then are the consequences of these findings having regard to the issues identified in respect of the income tax appeals?
It is convenient first to answer that question upon the assumption that, contrary to Mr Russell’s submissions, an overseas registered company can be a “personal services entity” for the purposes of Part 2-42 of the ITAA 1997 and, further, that there is nothing in the Double Taxation Agreement with New Zealand which would prevent the attribution of the amounts paid to Ancath by Tradecorp to Mr Russell as part of his assessable income.
A necessary consequence of the findings which I have made in the evidence is that the amounts received by Ancath from Tradecorp were each in one way or another a reward to it for its provision of Mr Russell’s personal efforts or skills. Insofar as Mr Russell sought to prove otherwise I have either not accepted that evidence (the stock checks) or my acceptance of it (the percentage of container lease commissions) does not affect that consequence.
It follows from this that the amounts paid by Tradecorp to Ancath (which are Ancath’s “ordinary income”) constitute Mr Russell’s “personal services income” as that term is defined in s 84-5(1) of the ITAA 1997.
Mr Russell’s assessable income will include an amount of ordinary or statutory income of a “personal services entity” that is his “personal services income”: s 86-15 of the ITAA 1997. Subject to any application of the “personal services business” exception for which s 86-15(3) provides, Ancath was in each of the income years in question a “personal services entity” because its ordinary income included Mr Russell’s “personal services income”: s 86-15(2) of the ITAA 1997.
Whether the “personal services business” exception applies requires regard to Division 87 of the ITAA97. A diagram showing how that Division is intended to operate is helpfully included in s 87-5 of the ITAA 1997:
As can be seen issues which I identified at the outset in relation to the income tax appeal are represented diagrammatically and in context above.
There was no evidence adduced of the making of any applicable “personal services business determination”.
That being so, the “results test” then falls to be answered. That test is found in s 87-18 of the ITAA 1997. In IRG Technical Services Pty Ltd v Commissioner of Taxation (2007) 165 FCR 57 at 70, [36], Allsop J (as his Honour then was) observed of that section that its elements “were to be understood against the background of the jurisprudence concerning independent contractors”. In so doing, his Honour referred with approval to an earlier observation made by Lindgren J in Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 at 254, [28], that, “Broadly speaking, an individual or entity, who or which is an ‘independent contractor’ under traditional concepts should meet the results test.”. Their Honours were not in these cases promoting the use of the common law as a substitute for the language of the statute, for that would clearly be erroneous. It is just that, for example, the phrase “the income is for producing a result” in s 87-1(a) and s 87-18(3)(a) of the ITAA 1997 obviously draws upon one of the traditional touchstones for distinguishing between a contract for service and a contract of service. Thus guidance offered by cases decided at common law as to whether a payment is or is not for the production of a result is relevant. That this is what Parliament intended is confirmed by recourse to secondary materials, as Allsop and Lindgren JJ note in their respective judgements. Approaching the matter this way, I respectfully agree with their Honours observations in relation to s 87-18.
Neither the Tradecorp Agreement itself nor the descriptions in the consequential invoices nor Mr Russell’s evidence as to his tasks at Tradecorp suggest that the amounts being paid by Tradecorp were for the production of any result. The services supplied by Ancath and provided by him were just accounting and managerial services generally. Mr Russell has not proved that the “results test” in s 87-18(3)(a) is satisfied in any of the income years in question. To the contrary, the evidence shows that it has not been satisfied.
That conclusion itself dictates a need next to have regard to the “80% rule” found in s 87-15(3). In short, that poses a question as to whether 80% or more of Mr Russell’s “personal services income” came from the one source. That need is reinforced by an inability of Mr Russell, on the evidence, not even on the face of the Tradecorp Agreement, to show that Ancath was required to supply any plant or equipment: as one element of s 87-18(3)(b) requires.
As to the 80% rule, Lindgren J made the following observation in Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 at 253, [26], with which I respectfully agree:
Subsection 87-15(3) distinguishes between two situations, namely, where less than 80% of an individual’s personal services income (not including certain specified classes of income not presently relevant) is income from the same entity, and where 80% or more of an individual’s personal services income is income from the same entity. In the former case (less than 80% from the same entity), if any one or more of the four personal services business tests is satisfied, the personal services income is taken to be from a personal services business, and it is not necessary to apply for a personal services business determination. In the latter case (80% or more from the same entity), if the results test is satisfied, the personal services income is taken to be from a personal services business, and it is not necessary to apply for a personal services business determination. But otherwise, it is necessary for there to be a personal services business determination in force, if the personal services income is to be taken to be from a personal services business.
On the findings I have made with respect to the purported Vanuatu invoices and his evidence concerning them, Mr Russell has failed to prove that, in any of the income years in question, more than 80% of Ancath’s income did not come from the one source. During those income years Tradecorp was the source of Ancath’s income and that income in turn was a reflection of Mr Russell’s efforts or skills.
For completeness, I should record that Mr Russell did not lead any evidence which would admit of a conclusion that either the unrelated clients test found in s 87-20, the employment test found in s 87-25 or the business premises test found in s 87-30 of the ITAA 1997 were satisfied.
What follows from these conclusions is that the personal services income is not income from conducting a personal services business. That means that the exemption is not engaged.
Before turning to the subject of whether any deductions are open I should address Mr Russell’s two technical submissions as to the inapplicability of the personal services income regime found in Part 2-42 of the ITAA 1997.
The first of these may be disposed of shortly. Mr Russell’s submission that the personal services income regime found in this Part can have no application because a foreign registered company cannot be a personal services entity requires that the word “company” in s 86-15(2) be read in this limited way even though neither there nor elsewhere in Part 2-42 is it so limited. Materially, s 995-1 of the ITAA 1997 defines “company” to be a “body corporate’ (paragraph (a) of the definition). “Body corporate” is not separately defined for the purposes of the ITAA 1997 by s 995-1. There is nothing in the Acts Interpretation Act 1901 (Cth) which requires that, in any Commonwealth Act and in the absence of an intention to the contrary, “body corporate” should be construed as referring only to a corporation formed within the limits of the Commonwealth.
To construe “company” in the narrow way submitted by Mr Russell would be incongruous with other employments of the word in the ITAA 1997. For example, it is inherently unlikely that the word “company” as used in Division 975, “Concepts about Companies” of the ITAA 1997 was intended to be limited to Australian registered companies. Further, the term “CFC” is used repeatedly throughout the ITAA 1997. That term bears the same meaning in the ITAA 1997 as it does in Part X of the ITAA 1936: s 995-1 of the ITAA 1997. Regard to s 340 of the ITAA 1936, which defines “CFC” for the purposes of Part X of that Act, materially discloses that “CFC” is an abbreviation for “controlled foreign company”. Given this, neither as used in Part X of the ITAA 1936 itself nor as the term “CFC” is used in the ITAA 1997 would it make any sense at all to regard the word “company” as referring to an Australian registered company. Rather, the word is used generically with adjectival qualification employed as required to designate a particular kind of “company”.
Nor does context or purpose suggest that the word “company” as used in Part 2-42 of the ITAA 1997 should, exceptionally, nonetheless be construed in the limited way submitted, even in the absence of adjectival qualification. Certainly not expressly, nor even impliedly, is there anything in the language of that Part which would support such a construction of the word “company”.
I reject the submission.
At a general level of abstraction and from an economic point of view, it is not difficult to have sympathy with Mr Russell’s double taxation submission. Its essential premises were these:
(a)Ancath’s income from Tradecorp forms part of its assessable income in New Zealand;
(b)Were Ancath itself taxed in Australia on this income it would receive a credit as against its New Zealand tax for any Australian tax it paid;
(c)The personal services income regime in Part 2-42 of the ITAA 1997 deems Ancath’s income to be part of his assessable income;
(d)Ancath receives no credit in New Zealand for any Australian tax it pays on income so included by deeming; and
(e)The outcome, at least potentially, is double taxation and hence it is in breach of the Double Taxation Agreement.
More particularly, Mr Russell made the following submission by reference to the Double Taxation Agreement:
(a)Clause 1 of Article 7 materially provides, “The profits of an enterprise of a Contracting State shall be taxable only in that State …”;
(b)“Article 23 deals with sources of income”; and
(c)“Article 24 deals with elimination of double taxation.”
He then submitted that the effect of the requirement flowing from s 4 of the International Tax Agreements Act 1953 (Cth) (International Tax Agreements Act) to read that Act with the ITAA 1997 meant that Part 2-42 could have no application so as to deem what was Ancath’s income to be his when that income formed part of Ancath’s assessable income in New Zealand because that would amount to taxing the profits of Ancath, which was an enterprise of New Zealand, in Australia rather than, as art 7 of the Double Taxation Agreement required, in New Zealand only.
The Double Taxation Agreement between Australia and New Zealand made in Melbourne on 27 January 1995 (hereafter the NZ Double Taxation Agreement) is reproduced as Schedule 4 to the International Tax Agreements Act. That agreement is given force of law in Australia and affects Australian tax by s 6B(1A) of that Act.
Section 4 of the International Tax Agreements Act does indeed, as Mr Russell submitted, require that the ITAA 1997 be incorporated and read as one with that Act. Further, the effect of s 4(2) of the International Tax Agreements Act is that, in so doing and subject to an exception not presently material, the provisions of the International Tax Agreements Act (and hence a double taxation agreement given the force of domestic law by that Act) have effect notwithstanding anything inconsistent in those provisions in, materially, the ITAA 1997. In other words, a provision in the International Tax Agreements Act or a double taxation agreement given effect by it prevails over a provision in the ITAA 1997 to the extent of any inconsistency.
The NZ Double Taxation Agreement generally follows the OECD Model Double Taxation Agreement (OECD Model). It is settled that, in construing such an agreement, a court may have regard to, inter alia, the OECD Commentary on its model agreement: Thiel v Commissioner of Taxation (1990) 171 CLR 338 at 344, 356-357. The interpretative use of that type of extrinsic material is a manifestation of the recognition that a double taxation agreement is but a particular example of an international treaty. The Full Court has sounded a cautionary note in relation to the use for the purpose of interpretation of commentary published after the ratification of a double taxation agreement: McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 at 144, [42].
On the basis of the evidentiary findings I have made, Part 2-42 of the ITAA 1997 will apply so as to subject Mr Russell, not Ancath, to taxation in Australia. It is true that art 7, cl 1 uses the language, “the profits of the enterprise”. Read in isolation, and affording primacy to the NZ Double Taxation Agreement as incorporated by the International Taxation Agreements Act, that might be thought to support the notion that any measure which would subject those profits to taxation, even if the means of so doing was to deem the same to form part of the assessable income of an individual, rather than the enterprise which derived them, was inconsistent with the NZ Double Taxation Agreement. The foundation for such an approach to interpretation would be “juridical” in the sense that it would be textual.
The difficulty with that approach is that, read in the context not only of the balance of art 7 but the NZ Double Taxation Agreement as a whole, the focus of the clause is on the prevention of the double taxation of an “enterprise”, not of profits as an abstract, economic concept.
There is no prior Australian authority directly touching upon the intersection between Part 2-42 of the ITAA 1997 and either the NZ Double Taxation Agreement or any other of the OECD Models to which Australia is a party.
The industry of counsel for the Commissioner did result in my being taken in supplementary written submissions to a number of foreign authorities in which national courts have had to grapple with the conundrums presented by the reconciliation of an attribution regime in their national revenue law with their country’s adoption of a double taxation agreement on the OECD Model which would, under their national law, prevail to the extent of any inconsistency with the attribution regime.
Of these, the case from which I have derived particular assistance is a decision of Finland’s Supreme Administrative Court in relation to whether an inconsistency existed between the attribution rules in that country’s controlled foreign company (CFC) regime in its domestic revenue law and art 7 of its double taxation agreement with Belgium, which was in conformity with the OECD Model: Re A Oyi Abp (2002) 4 ITLR 1009 (Re A Oyi Apb). In that case, the Supreme Administrative Court observed (at 1064):
Tax treaties are therefore concerned with judicial double taxation which means that the same taxable person is taxed on the same income in two different countries. Tax treaties do not generally concern economic double taxation, that is, where the same income is taxed in the hands of several taxable persons. Unless otherwise provided in a tax treaty, the removal of economic double taxation is a task which remains the responsibility of the national legislation. The tax treaty between Finland and Belgium does not contain provisions on the removal of economic double taxation.
There are passages in a decision of the French Conseil d'État in Re Société Schneider Electric (2002) 4 ITLR 1077 which, read in isolation, might be thought to support an opposite conclusion in relation to the immateriality of economic consequences when considering whether a national CFC regime was in conflict with Article 7 of an OECD model treaty with Switzerland. For example, in referring to Article 7 of the Franco-Swiss double taxation agreement, the Conseil d'État opined (at 1108):
In the absence of any factor requiring a different interpretation, the ‘profits’ to which art 7 of the convention refers are those determined according to the rules established by the [French General Tax Code]. It follows that the court below did not make any error in deciding that there is an identity in nature between the business profits (bénéfices) of the Paramer company, the taxation of which is attributed to Switzerland by art 7(1) of the Franco-Swiss tax treaty, and the profitable results (résultats beneficiaries) of the Paramer company which are taxed in France in the name of the Schneider company on the basis of the [CFC regime in the French General Tax Code].
The actual decision in that case was that that the French CFC regime was in conflict with and was overridden by the relevant tax treaty. However, on closer analysis, the tax treaty concerned contained, apart from an OECD Model art 7 provision, another provision (art 25(A)(1)), which expressly exempted from the relevant French tax “income … where such income is liable to taxation in Switzerland”. Against that background, where the treaty itself authorised a focus on income per se, rather than enterprise, the seeming incongruence of result with that in Re A Oyi Abp is explicable.
Of the development activities described in this “plan”, only those set out in Stage 1 have been undertaken. Mr Russell stated that he had deferred the undertaking of “Stage 2” activities as a result of his separation from his wife and because of unfinancial uncertainties introduced by the taxation investigation and subsequent assessments which remained under challenged.
The Commissioner did not, in terms, submit that the plan was a recent fabrication. The work described in Stage 1 has indeed been undertaken. In a sense, that corroborates Mr Russell’s account, but that work is equally consistent with the development of a residential property for purely private residential purposes.
Whether, truly, these steps evidence the first stage in a plan directed to the conduct of a naturist retreat relies very much on taking Mr Russell at his word. The variance between his evidence before the Queensland Industrial Relations Commission and before me in relation to his ability to control Ancath does make one sceptical. Nonetheless, Mr Russell did, in the course of his oral evidence, exhibit what I thought was unfeigned, unrehearsed and uncontrived knowledge on subjects about which one might expect a person interested in naturism and proposing to establish a resort at Sarina might have knowledge. He was aware, for example, of beaches at Sarina and further north in Queensland (Balding Bay on Magnetic Island) where nude bathing, though not lawful, was nonetheless tolerated. He described, candidly and, I thought, spontaneously, in his oral evidence the nature and extent of the demand for naturist facilities, particularly amongst the “Grey Nomads”. Further, the very nature of the proposal is so unusual that it seemed to me inherently unlikely that it was a contrivance.
It does not follow from this that the partnership should be regarded as carrying on an enterprise of a naturist retreat for the period up to 23 February 2004.
To date, some fellow naturists have stayed at the Sarina hinterland property at Mr Russell’s invitation but not on a paying basis. Some, doubtless, have been “WWOOFers”. Mr Russell described such non-paying attendances as “market research”. To like end, he is also visited an operating naturist retreat in the Sarina area.
Mr Russell also prepared, as part of the naturist retreat business plan, financial projections. One item of income shown on these projections is income from the provision of massage. Mr Russell stated, and I accept, that he had secured massage qualifications. These projections do show that it is possible for the retreat to operate at a profit after its commencement. I accept that these projections are not a recent contrivance. That they form part of a document entitled with the name of Mr Russell’s now former wife assists in the reaching of that conclusion. They do though seem optimistic in terms of guest numbers; optimistic in the sense that they are assume that in excess of 3,000 people will stay that the retreat in the first year of its operation. I note though that Mr Russell and his former wife travelled extensively in the North Queensland (so he related and I accept) to various naturist retreats to get what he described as a “feel” for likely demand.
Section 11-5 of the GST Act provides:
What is a creditable acquisition?
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a * creditable purpose; and
(b) the supply of the thing to you is a * taxable supply; and
(c) you provide, or are liable to provide, * consideration for the supply; and
(d) you are * registered, or * required to be registered.In relation to the acquisition of a thing a “creditable purpose” is defined, materially, as follows by s 11-5 of the GST Act:
Meaning of creditable purpose
(1)You acquire a thing for a creditable purpose to the extent that you acquire it in * carrying on your * enterprise.
(2)However, you do not acquire the thing for a creditable purpose to the extent that:
(a)the acquisition relates to making supplies that would be * input taxed; or
(b)the acquisition is of a private or domestic nature.
(3) …
If the partnership made a creditable acquisition it will be entitled to an input tax credit. In respect of the naturist retreat the claimed input tax credits of $2,739 relate to acquisitions of $30,139, principally in respect of the construction of the swimming pool on the Sarina hinterland property.
When the definition of “carrying on” is recalled, it can be seen that a thing may be acquired for a creditable purpose to the extent that it is acquired in the course of the commencement of, materially, a business. The converse of this, necessarily, in my opinion, is that a thing acquired otherwise than in the course of the commencement of a business, even though it may ultimately be deployed in a business once that business commences, is not a acquired for a creditable purpose.
An acquisition may be a creditable acquisition even though it would not give rise to a deduction under s 8-1 of the ITAA 1997. For example, an acquisition on capital account in the course of the carrying on of a business would not give rise to a deduction under s 8-1 of the ITAA 1997 but, all other things being equal, would give rise a creditable acquisition.
That the notion of a creditable acquisition is wider than the notion of an income tax deduction expenditure raises an interrogative note about why “carrying on” was defined in such an inclusive way. Commencement and termination expenditures can, in the income tax deduction context, be regarded as not incurred in, ie in the course of, the carrying on of a business. Are, for example, expenditures on capital works in respect of an accommodation facility before that facility has opened its doors to paying customers, to be regarded as expenditures “in the course of the commencement of the accommodation facility business”?
Identifying the “commencement” of a business is, obviously, a question of fact but that does not mean that the question will always admit of an easy answer. That is nicely illustrated by Peerless Marine. Peerless Marine professed to be carrying on a boat production business in respect of luxury motor cruisers. It had sold none but sought, inter alia, to claim input tax credits in respect of the design and construction of a prototype. It succeeded in establishing that its then activity did amount to an “enterprise” for GST purposes because, inter alia, there was evidence that the development and successful exhibiting and availability for inspection of a prototype was an essential first step in the carrying on of such a business, not a precursor to the commencement of that business. Determining whether or not a particular business exists calls for a thorough understanding of the nature of the market in which the asserted business operates and exactly what is entailed in commencing to carry on business in that market.
On this basis, the partnership is not entitled to the input tax credits claimed because they were not acquired for a creditable purpose. During the course of what Mr Russell termed “Stage 1” in his business plan, there was not yet a business of a naturist retreat being carried on, only the undertaking of steps which were precursors to the commencement of such a business.
A remaining issue is whether, insofar as it related to a period prior to 1 July 2002, the issuing of the GST assessment was beyond power. The inspiration for Mr Russell’s raising this issue would seem to be the supposed expiration of the 4 year period after which, subject to an exception to which I shall shortly refer, in the absence of a notice from the Commissioner within that period requiring payment, an unpaid net amount together with any related general interest charge ceases to be payable: see s 105-50 of Schedule 1 to the TAA. The exception to this statutory expiration arises where the Commissioner is satisfied that the payment of the amount was avoided by fraud or evasion.
The short answer to Mr Russell’s reliance on this provision was provided by the Commissioner in submissions. It only applies to the situation where a net amount of GST is payable to the Commissioner. That conclusion flows necessarily from the words “payable by you” in the provision. Section 105-50 of Schedule 1 to the TAA has nothing at all to say where, as is now the case here, there is no controversy about an unpaid net amount, only a controversy about an entitlement to claim particular input tax credits.
GST Penalty Assessment
Given the concessions made by the Commissioner, the GST assessment is, for those reasons alone, excessive.
It is also excessive insofar as the base penalty amount has been predicated on the basis of a lack of entitlement on the part of the partnership to claim input tax credits in respect of a forestry enterprise. The claiming of these input tax credits was a matter of entitlement and did not give rise to a tax shortfall.
Tax shortfall amounts have though occurred insofar as, on the partnership’s business activity statements (BAS), input tax credits have been claimed on the basis of the alleged conduct of an accountancy practice and a naturist retreat by that “entity”. The amount of the entitled input tax credits is in this regard false. It is overstated.
The Commissioner’s position is that, if it is concluded that the partnership was dissolved on or about 23 February 2004, there will be no shortfall amounts the subject of the appeal from March 2004 onwards. I agree. There are though shortfall amounts in respect of the period before then. These amounts are not as assessed by the Commissioner because those shortfall amounts include the disallowance of the input tax credits claimed in respect of the carrying on of a forestry enterprise. The shortfall amounts attributable to the wrongful claiming of input tax credits in respect of the asserted accountancy practice and naturist retreat enterprises are though correct. The table of shortfall amounts annexed to the Commissioner’s submissions on the GST appeal gives monthly total shortfalls undifferentiated by reference to component parts. There are therefore necessary calculations and adjustments to be made to these figures so as to allow for the success which Mr Russell has enjoyed.
The Commissioner has assessed base penalty on the 75%, “intentional disregard” basis in respect of all of the tax shortfalls. I have already discussed what is entailed in the application of this and the other, lesser base penalty percentages when considering the income tax penalty assessments. It does not at all follow the same base penalty amount or even any should apply to all of the remaining tax shortfalls.
The tax shortfalls fall into two distinct groups, those attributable to the misconceived accountancy practice enterprise claim and those attributable to the misconceived naturist retreat claim.
Of these two groups, the shortfall in respect of the accountancy practice input tax credit claims is the more serious. Mr Russell knew that he was an employee of Ancath. Further, on the evidence, he was able to control Ancath. GST was an area in respect of which, on the strength of his New Zealand experience, he professed expertise in this country as well. There are close affinities between New Zealand’s GST legislation and the GST Act. Against this background, I am not satisfied that Mr Russell has proved that the assessment of base penalty in respect of these tax shortfalls was excessive. To put forward, as Mr Russell did, BAS in which the partnership claimed an input tax credit in respect of an accountancy practice with Ancath as its client in circumstances where he knew that he as an employee, not as a partner in A W Russell & Co, was rendering services on behalf of Ancath to Tradecorp was, for a man of his professed knowledge of GST, intentionally to disregard a known position. It was more than reckless.
The position in respect of the claimed naturist retreat enterprise input tax credits requires separate consideration. The naturist WWOOFers who assisted in the forestry enterprise doubtless gave feedback incidentally and anecdotally to Mr Russell as to the demand for and likely success of a naturist retreat enterprise on the property, but that did not mean that a naturist retreat enterprise was then being conducted. The presence of such persons on the property was primarily referable either to the forestry enterprise then being conducted or to the development of the property to a stage where a naturist enterprise could be conducted (or to both). It is not hard though to see how the very presence of fellow naturists on the property might make it seem to Mr Russell that the naturist enterprise had commenced. I did not have the impression from his evidence in respect of the naturist retreat that he set out intentionally to disregard a lack of entitlement to claim input tax credits, as opposed not to turning his mind to an obvious fact, which was that the property was not yet at the stage where the naturist retreat enterprise could commence. In so doing, he closed his eyes to the obvious. That was reckless.
As to the Commissioner’s remission decision in respect of penalty, it follows that, both by concession and having regard to the conclusions which I have reached not only as to which enterprises were and were not being conducted as well as the appropriate base penalty percentages, that the remission decision was made on diverse premises which were wrong in law. The remission discretion having thus miscarried, it falls on appeal to determine how it ought to have been exercised.
At the time when the various BAS were submitted, Mr Russell was new to Australia but not, by his own acknowledgement, new to the operation of an analogous GST regime in his country of former residence. Insofar as his GST tax shortfall is referable to intentional disregard, I do not consider that any remission of penalty is warranted. He was well aware of his status with Ancath and, knowing that, cast the partnership BAS to that extent on a knowingly false premise.
The position in relation to the tax shortfall flowing from the misconceived naturist enterprise input tax credit claim is more complex. Though Parliament has, in the modern era, adopted fixed base penalty categories, it has conferred a power to remit penalty otherwise imposed by law as a matter of discretion. In other words, though a taxpayer’s case might fall within a particular penalty category, a discretion remains to be exercised in that person’s particular circumstances having regard also to the purpose of the penalty regime. The latter must include the purposes of both encouraging compliance and discouraging non-compliance both generally and in the particular case.
While I consider that he closed his eyes to the obvious, it must be acknowledged that Mr Russell nonetheless had the task of differentiating in his own mind and in respect of the one property a forestry operation which one might regard as having commenced with the internal clearing of the property’s fences and the initial plantings and the development phase of the naturist retreat which had not as that stage commenced business. Like naturist minded WWOOFers were, in part, assisting in each activity. Had the naturist retreat already commenced as an enterprise, the addition of a swimming pool to improve the site’s amenities might well have given rise to input tax credit entitlements (subject to resolving any proportional private or domestic use issues).
Mr Russell uncritically took the course advantageous to him whereas one might have expected a person of his background and experience to take the more prudent course of seeking a ruling from the Commissioner. That, to me, tells against any remission of the penalty for recklessness in the particular circumstances of his case.
Outcomes and orders
In respect of the income tax and the GST appeals respectively there is a single objection decision under challenge. Both by concession and otherwise for reasons given above, the appeals must be allowed.
Mr Russell has, however, only enjoyed limited success. Other orders must be made under s 14ZZ of the TAA which will enable the Commissioner to take necessary action to implement this decision in accordance with the reasons for judgement, including amending assessments. There is a question as to whether such orders may permissibly include an order which would, in respect of one income year, increase the amount of Mr Russell’s taxable income.
As a consequence of the conclusions which I have reached on the appeals it will be necessary to make orders providing for the following:
Income Tax Appeal
(a)Confirmation of the objection decision insofar as it relates to the confirming of the income tax assessments for the 2003 and 2004 income years;
(b)Setting aside the objection decision insofar as it relates to the 2002 income year and, in respect of that year, ordering that the matter be remitted to the Commissioner for the issuing of an amended assessment on the footing that Mr Russell’s taxable income for that year as presently assessed should be reduced by $416.00 with the tax payable on that reduced taxable income being reduced accordingly.
(c)Confirming the objection decision insofar as it concludes that the assessment in respect of the 2001 year was not excessive but on the basis that Mr Russell’s taxable income for that year was $1869.23 higher than that assessed and thus his assessed tax was in fact lower than that payable in respect of that higher taxable income.
Income tax Penalty Appeal
(a) Setting aside the objection decision insofar as it relates to penalty;
(b) In lieu thereof:(i) ordering that each of the penalty assessments be set aside;
(ii)declaring that Mr Russell is liable under item 3 of s 284-90(1) to Schedule 1 of the TAA to a base penalty of 25% in respect of the tax shortfall for each income year.
(c)Setting aside the Commissioner’s remission decision and, in lieu thereof, ordering that Mr Russell’s base penalty liability be remitted in full.
Goods and Services Tax Appeal
(a) Setting aside the objection decision.(b)In lieu thereof, setting aside the assessment and remitting the matter to the Commissioner for the issuing of an amended assessment on the footing that the resident agent amount should be excluded and that the partnership is entitled to such input tax credits as relate to the conduct of a forestry enterprise up to 23 February 2004 but not otherwise entitled to the input tax credits claimed.
Goods and Services Tax Penalty Appeal
(a) Setting aside the objection decision;(b)In lieu thereof, remitting the matter to the Commissioner for the issuing of an amended assessment on the footing that:
(i)as to so much of the partnership’s tax shortfall as is referable to the claiming of input tax credits in respect of the alleged carrying on by the partnership of an accountancy practice enterprise, the partnership is liable under item 1 of s 284-90(1) to Schedule 1 of the TAA to a base penalty of 75% in respect of the tax shortfall;
(ii)as to so much of the partnership’s tax shortfall as is referable to the claiming of input tax credits in respect of the alleged carrying on by the partnership of an naturist retreat enterprise, the partnership is liable under item 2 of s 284-90(1) to Schedule 1 of the TAA to a base penalty of 50% in respect of the tax shortfall;
(c)Setting aside the Commissioner’s remission decision but in lieu thereof ordering that there be no remission of the partnership’s base penalty liability as determined by the Court.
To pronounce some final orders immediately and to defer the making of others pending consideration of supplementary submissions would be to bifurcate the period from which the time for any appeal would run. While that might be remedied by an appropriate order extending time, the better course, in my opinion, is to direct the parties to bring in short minutes of orders to give effect to the reasons for judgement accompanied by such supplementary submissions as they may be advised in respect of the ability to increase an assessment and then later to list the matter for the pronouncing at the one time of final orders and the publication of such supplementary reasons for judgement as may be consequentially necessary. That course particularly commends itself given the number of issues dealt with, the need for the parties to have time to consider lengthy reasons for judgement and that it is in the interests of justice that Mr Russell be permitted to attend by telephone the publication of these reasons.
I propose therefore to give directions to achieve this end.
I certify that the preceding two hundred and seventy-three (273) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate:
Dated: 30 October 2009
Counsel for the Applicant: Applicant appeared in person Counsel for the Respondent: Mr K Dorney QC with Mr S Lumb
Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 28-31 July 2008, 8-9 September 2008 Date of Last Written Submission: 7 October 2008 Date of Judgment: 30 October 2009
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