The Taxpayer and Commissioner of Taxation

[2001] AATA 341

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2001] AATA 341

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No  VT1999/31-34

TAXATION       APPEALS      DIVISION		)
Re		THE TAXPAYER

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B. H. Pascoe, Senior Member

Date24 April 2001

PlaceMelbourne

Decision The Tribunal affirms the decisions under review.

....…(Sgd) B. H. Pascoe..........

Senior Member

CATCHWORDS

INCOME TAX – income as consultant and administrator – whether derived beneficially by applicant – whether acting as agent for trustee of family trust – whether income derived by family trust

Income Tax Assessment Act 1936

Leidig v Federal Commissioner of Taxation (1994) 50 FCR 461
Tupicoff v Commissioner of Taxation (1984) 4 FCR 505

Bayley v Commissioner of Taxation (1977) 15 SASR 446

REASONS FOR DECISION

24 April 2001   Mr B. H. Pascoe, Senior Member

1.      These are applications to review decisions of the respondent to disallow objections to assessments and amended assessments of income tax for the years ended 30 June 1991 to 1994 inclusive.  The issue in dispute was whether income included in income tax returns of a trust estate was properly the assessable income of the applicant.

2. Pursuant to section 14ZZE of the Taxation Administration Act 1953, the applicant requested that the hearing be in private.  At the hearing the applicant was represented by Mr M. Bearman of counsel and the respondent by Ms H. Symon, senior counsel.  Evidence was given by the applicant.

3.      The applicant said that, prior to 1986, a company as trustee of a family trust operated a manufacturing business.  In 1986 he moved to a country town and purchased a business.  The business was unsuccessful financially and, after an attempted sale in 1990, it was sold in 1991.  The family trust was left with substantial carry forward losses and debt to the bank.  The original company retired as trustee of the trust and a new company was formed and appointed trustee.  The applicant said that he decided to establish a management consultancy business to be called A Management Services to be operated by the trust.  In 1990 he was approached by the E Co-operative Society to conduct a training program in sales, marketing and production management.  The applicant thought that the training program consisted of two periods of three months.  He said that, during this time, he was approached to provide assistance in management.  In March 1991, with the Co-operative having significant debts, the Registrar of Co-operatives appointed the applicant as Official Administrator of the E Co-operative Society at the request of its members.  The only staff employed were existing staff of the Co-operative.  The administration of this Co-operative took approximately three years.  The applicant said that during this time other consultancy work was undertaken including establishing a consultancy company, C Pty Ltd, which tendered and secured work from a government agency to produce plans for disadvantaged communities.  Further consultancies were provided to a government department including the viability and purchase of a business and establishing a new business for disadvantaged groups.  Another co-operative society sought assistance in developing programs for employment and training of a disadvantaged group.  Ultimately, a new corporation, the N Corporation, was established and acquired the assets of the E Co-operative Society.  The applicant was retained to establish the new organisation and provide training.

4.      The applicant maintained that all of the work done in this period was done by A Management Services and his involvement was as director of the trustee company.  He maintained that no co-operative society, government department or agency considered him an employee.  He said that all accounts were rendered by A Management Services and receipts paid into accounts operated by the family trust.  He said that he drew no salary from the family trust as the fees were used to repay the bank debt and provide for family living expenses.  Any funds drawn by him were debited to his loan account.

5.      The applicant accepted that there were no contracts between A Management Services or the trustee company with the co-operatives, the Registrar of Co-operatives or any consultancy client.  He accepted also that he had not mentioned the trustee company when accepting appointments.  He did not dispute that the records of the Co-operative showed that the payee of many of the cheques in relation to fees as an administrator was shown as he and his wife jointly.  However, he maintained that all invoices for the work were made out in the name of A Management Services and many cheque payments of fees were in the name of A Management Services.  He believed that all cheques, irrespective of payee, were deposited to the credit of the family trust bank account.  While the applicant said that all consulting work was performed on behalf of A Management Services, he could not recall why that business name was not registered until 10 October 1990, showing the business commencing on 1 October 1990, when the first consulting appointment was on 30 April 1990.

6.      In the assessments and amended assessments issued on 16 May 1996, the respondent included all fees for consulting work and acting as administrator of the Co-operative Society as assessable income of the applicant.  After objection the respondent allowed the objection to the extent of excluding $28,210 in the year ended 30 June 1993 and $8,761 in the year ended 30 June 1994.  These amounts represented fees relating to consultancies through a government department, a government agency and the development of programs and training for a co-operative.  These consultancies were those referred to in the latter part of paragraph 3 above and represented income other than from E Co-operative Society and its successor, N Corporation.

7.      It was submitted for the applicant that a consulting business was carried on by the trustee of the family trust and that, at all times, the applicant was acting in his capacity as a director of the trustee company.  It was said that the pattern of invoices and payments into the trust bank account was consistent with the carrying on of a business by the trust.  Mr Bearman submitted that the applicant, at all times, acted as agent of the trustee company and, in so acting for an undisclosed principal, it was unnecessary for the other parties to be aware of such agency.  The applicant was said to be a lay person who intended to be acting as a director of the trustee company at all times, had authority to so act and bind the company but did not necessarily have a full understanding of the legal relationship.  It was argued that, even if the applicant had received the relevant fees personally, they would have been received on a constructive trust on behalf of the trustee company.  Finally, it was submitted that the additional tax of 25% for incorrect returns was excessive given the difficulty of the questions involved and the fact that the respondent had excluded some fees on objection.

8. For the respondent, it was submitted that there was no evidence of any relationship between the trustee company and the payers of fees nor any evidence other than the applicant’s oral evidence of any relationship between the applicant and the trust. It was said that the contract of 19 April 1990 for the training program with the Co-operative Society was in the applicant’s own name and the appointment as administrator was of the applicant personally. Ms Symons submitted that there were no minutes of any resolutions by the trustee company, no accounts of the family trust and no evidence of any services provided by any person other than the applicant. It was noted that, while invoices were in the name of A Management Services, many of the payments showed the payee as the applicant and his wife jointly and so authorised by the applicant as administrator of the Co-operative Society. The respondent noted, also, that, when interviewed by an officer of the respondent, the applicant gave no reason other than “That was the way we did it” when asked why the income from the E Co-operative Society and the N Corporation was banked in the trust’s bank account. As a consequence it was submitted that the income was that of the applicant and, where not received directly by the applicant, was deemed to be derived by him pursuant to section 19 of the Income Tax Assessment Act 1936 (“the Act”).

9.      The applicant sought to rely on decisions such as Leidig v Federal Commissioner of Taxation (1994) 50 FCR 461 and Tupicoff v Commissioner of Taxation (1984) 4 FCR 505. In the former case, the taxpayer was a licensed land broker who purchased the goodwill and other assets of a land broking business carried on by his father-in-law and mother-in-law in partnership. The agreement for purchase provided that the taxpayer would acquire the business as trustee and thereafter conduct it for the benefit of his wife and himself equally. Hill J accepted that the income, although primarily derived from the personal services of the taxpayer, was derived as trustee and that the income paid to the taxpayer’s wife and called “salary” was income of the wife and not the taxpayer. In Tupicoff (supra), the taxpayer was a life insurance agent who resigned his personal appointment as agent with an insurance company and arranged the appointment in his stead of a corporate trustee. While section 260 of the Act was held to apply, the Court took the view that, without the operation of that section, the legal source of the income was the contract of agency and was not the income from the personal exertion of the taxpayer. In Bayley v Commissioner of Taxation (1977) 15 SASR 446, income from a pharmacy owned by a wife who was not a qualified pharmacist was held to be her income and not that of her qualified husband who conducted the business.

10.     All of the three foregoing cases have a common thread of contractual obligations and/or trust property as the starting point of the derivation of income.  In Leidig, the Court had a purchase of a business under a written agreement and support from evidence of the father-in-law as to the arrangements for the purchase.  In Tupicoff, the source of the income was held to be the agency agreement with the insurance company in the name of the corporate trustee.  In Bayley, the source of the income was a pharmacy business involving substantial assets and legal ownership of the wife.  Here there are no apparent trust assets, no indicative signs of a business being carried on by the trustee and the source of the income from both the training contract and the administration of E Co-operative Society was the appointment of the taxpayer in his personal capacity to provide personal services.  The initial appointment in April 1990 was some six months prior to the registration of the business name.  There is simply no evidence other than the oral evidence of the applicant, some ten years later, that the appointment was in any capacity other than the applicant personally.  The subsequent appointment as administrator by a formal document dated 19 March 1991 was of the applicant as an individual and the consent to the appointment was signed by the applicant.  While Mr Bearman maintained that there is nothing in Co-operation Act 1981 which prevents a company being appointed as administrator, the simple fact was that the trustee company was not appointed, the applicant was.  In his evidence, the applicant accepted that, in relation to his work as a consultant or administrator there was no mention of a company, trust or any other entity for whom he was acting.  It is possible for an agent to act as such for an undisclosed principal but normally in buying or selling and, of necessity, with some form of principal and agent agreement on which the agent can rely for indemnity.  Here there is no agreement and no evidence to support the applicant acting as agent other than his statement that he believed he was so acting.

11.     In my view, the appointment of the applicant in his initial training role and as administrator of the E Co-operative Society was in his individual capacity and the income derived therefrom was derived by him personally.  The banking of that income to the trust bank account was understandable given the large outstanding debt to the bank which the applicant had personally guaranteed but it was received by the trustee after it had been derived as income by the applicant.

12.     The respondent appears to have maintained the view that the income from N Corporation was similarly the personal income of the applicant being derived from the successor to E Co-operative Society under similar arrangements and with continuity of services by him.  It is not clear why the respondent excluded the income from the other consulting roles in 1993 and 1994.  However, as this was not argued before me by either party, I see no reason to seek to disturb the partial allowance of the objection.  While no documentation regarding the appointment of the applicant to provide services to N Corporation was provided, the evidence appears to indicate that the appointment was again in his personal capacity with no evidence of being agent for the corporate trustee.  It is relevant, also, to note that the applicant received no salary or director’s fee from the trust as remuneration for any services said to have been provided to the trust.  It is difficult to regard the trust as having carried on any business activity where it paid no remuneration to the applicant who was said to be performing services on behalf of the trust.

13. It follows that I find that the relevant income included in the assessments and amended assessments was derived by the applicant in his personal capacity and was properly assessable to him. He has not been able to discharge the burden of proof placed upon him by section 14ZZK of the Taxation Administration Act 1953 of proving that the relevant assessments were excessive.

14. The respondent imposed additional tax pursuant to section 223 of the Act in respect of the years ended 30 June 1991 and 1992 and pursuant to section 226G of the Act in respect of the years ended 30 June 1993 and 1994. The former section which provided a penalty for false or misleading statements ceased to apply after 1 July 1992. The latter section provided for additional tax equal to 25% of a tax shortfall caused by a failure to take reasonable care. Pursuant to section 227 of the Act the respondent remitted the section 223 penalty to that same rate of 25%. It should be noted, also, that section 226K of the Act provides for a similar 25% rate of additional tax where a statement by a taxpayer treats the income tax law as applying in a certain way and it was not reasonably arguable that such application was correct. In the circumstances of this case, it is clear that the applicant was personally appointed to positions and derived income from his personal services. Given a previously unsuccessful business and losses incurred by his family trust, he then sought to have such income treated as trust income and to be set off against those losses. He failed to provide even the basics of any agreement to be agent for the trustee or to establish any indicia that the trust was carrying on any business of providing such services. Consequently, it is inappropriate to remit the additional tax to any further amount than that already done by the respondent.

15.     Therefore it follows that the decisions under review should be affirmed.

I certify that the fifteen (15) preceding paragraphs are a true copy of the reasons for the decision herein of  

Mr B. H. Pascoe, Senior Member

Signed:         .....................................................................................
  Personal Assistant

Date/s of Hearing  19 February 2001
Date of Decision  24 April 2001
Counsel for the Applicant         Mr M. Bearman
Solicitor for the Applicant          Maddock Lonie & Chisholm
Counsel for the Respondent     Ms H. Symon
Solicitor for the Respondent     Australian Government Solicitor