Wilson and Commissioner of Taxation (Taxation)

[2017] AATA 119

Wilson and Commissioner of Taxation (Taxation) [2017] AATA 119 (1 February 2017)

Division:TAXATION AND COMMERCIAL DIVISION

File Number:           2016/3489

Re:Noel Wilson

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member T. Tavoularis

Date:1 February 2017

Place:Brisbane

The decision under review is affirmed.

..........................[sgd]..............................

Senior Member T. Tavoularis

TAXATION – Income Tax Assessment Objection was refused – whether income from Applicant’s work overseas should be exempt from tax – interpretation of s 23AF Income Tax Assessment Act 1936 – no exemption given in writing – income not exempt – decision under review affirmed.

Legislation

Income Tax Assessment Act 1936, s 23AF

Income Tax Assessment Act 1997, ss 6.5, 6.20, 11.15,

Acts Interpretation Act 1901, s 33

Secondary Materials

Explanatory Memorandum: Income Tax Assessment Amendment Bill (No. 5) 1980

REASONS FOR DECISION

Senior Member T. Tavoularis

1 February 2017

INTRODUCTION

1. Mr Noel Wilson (“the Applicant”) seeks review of a Notice of objection decision issued on  2 May 2016 (“the objection decision”) by the Australian Taxation Office (“ATO”),[1] which decided that income he earned overseas during the 2010-2011 financial year was not exempt from income tax in Australia.

   [1] Exhibit 4, T Documents, T9, p 26 and T2, pp 3-4.

2. For the reasons below, I affirm the decision under review. The wages and salary the Applicant earned overseas during the 2010-2011 financial year were not exempt from income tax in Australia under s 23AF of the Income Tax Assessment Act 1936
   (“the 1936 Act”).

   RELEVANT BACKGROUND

3. The Applicant was employed as an electrician and mechanic by an American company, IAP Worldwide Services Incorporated (“IWSI”).[2] In this role, the Applicant was classified as a contractor for the United States of America Army.[3] During the 2010-2011 financial year the Applicant travelled to Afghanistan to perform services for the American Army on at least four occasions.[4] By my calculations, in at least one of these periods of travel, the Applicant was based overseas for four months.[5]

   [2] Exhibit 5,p 1.

   [3] Exhibit 4, T documents, T 4, 12-13.

   [4] Exhibit 4, T Documents, T10, p 29.

   [5] Ibid, T10, 29-30.

4. Throughout the Applicant’s written submissions it was advanced that he had worked in Iraq, not in Afghanistan.[6] However, if this were the case, then it is likely that the Applicant would have been making misrepresentations in his outgoing and incoming passenger cards, where he quite clearly stated he would be spending most of his time in Afghanistan.[7] Similarly, the Applicant would have thus been in breach of the “Letter of Authorization” apparently provided by the United States Department of Defence, which authorises the Applicant to work in Afghanistan.[8] The point was ultimately resolved at the hearing with both sides accepting that the Applicant only worked in Afghanistan and not Iraq. When this specific question was put to the Applicant he confirmed that he spent all of his working time in Afghanistan.

   [6]  Exhibit 1, Applicant’s SFIC, p 1-5.

   [7]  Exhibit 4, T Documents, T10.

   [8] Ibid, T4,  p 13.

5. It is not contested that during the 2010-2011 financial year, the Applicant received payments totalling $138,465 from IWSI (“the payments”).[9] However, he did not include these payments in any tax return because no return was lodged for the relevant year of income. Consequently, on 20 February 2015, the ATO wrote to the Applicant indicating: (1) he was yet to lodge a tax return for the financial year ending 30 June 2011; (2) he may be required to do so; (3) they had been alerted he had received a foreign source of income; and (4) he should include foreign-sourced income in his tax return.[10]

   [9] Exhibit 5, p 1.

   [10] Exhibit 4, T Documents, T3, p 5.

6. The Applicant’s tax agent replied in a letter dated 1 April 2015, which asserted that the relevant income was not assessable.[11] The ATO disagreed and subsequently wrote to the Applicant, requiring that he lodge his tax return for the 2010-2011 financial year by
   8 May 2015.[12] The Applicant did not comply with this request. On 26 May 2015 the ATO issued him with a Notice of Assessment - year ended 30 June 2011.[13] This notice indicated that the Applicant owed the ATO $41,258.15, payment of which was due by
   

   [11] Ibid, T4, p 8.

   [12] Ibid, T5, p 14-15.

   [13] Ibid, T6, p 18.

   21 November 2011.

7. On 30 November 2015 the Applicant’s tax agent wrote to the ATO objecting to this assessment.[14] On 2 May 2016 the ATO issued the objection decision, which fully disallowed the Applicant’s objection.[15] Consequently, the Applicant applied to this Tribunal for review of that objection decision.[16]

   [14] Ibid, T7, p 22-23.

   [15] Ibid, T9, p 26.

   [16] Ibid, T1, p 1-2.

   THE ISSUES

8. There are two issues that I must address:

   (1)whether the payments the Applicant received from IWSI should be classified as “assessable income” for the 2010-2011 financial year; and

   (2)if they can be classified as “assessable income”, whether the payments are nevertheless exempt from income tax pursuant to s 23AF of the 1936 Act.

   CONSIDERATION

9. “Assessable income” has a broad meaning, particularly for Australian residents. It includes, inter alia, income according to ordinary concepts (“ordinary income”),[17] which itself includes income “derived directly or indirectly from all sources, whether in or out of Australia, during the income year.”[18] The payments received by the Applicant from IWSI, even though they were derived from a source outside of Australia, plainly meet this definition. Consequently, those payments should be classified as ordinary income – and thus “assessable income” – for the financial year ending 30 June 2011.

   [17] Income Tax Assessment Act 1997, s 6-5(1).

   [18] Ibid, s 6-5(2).

10. However, ordinary income is exempt from income tax by operation of ss 6.20 and 11.15 of the Income Tax Assessment Act 1997 (“the 1997 Act”) if it meets the requirements of
    s 23AF of the 1936 Act. Consequently, I will now turn to addressing the second issue I listed above: whether, by operation of s 23AF of the 1936 Act, the payments are exempt from income tax.

11. The relevant portions of s 23AF of the Act stipulate:

    Exemption of certain income derived in respect of approved overseas projects

    (1)Where a taxpayer, being a natural person, has been engaged on qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person that is attributable to that qualifying service is exempt from tax.

    (3)Subject to subsections (4) and (5), a person shall be taken for the purposes of this section to be engaged on qualifying service on an approved project during any period during which:

    (a)the person is outside Australia and is engaged in the performance of personal services in connection with the approved project;

    (b)the person is travelling between Australia and the site of the approved project;

    (c)by reason of an incapacity for work due to accident or illness occurring while the person was, by virtue of paragraph (a) or (b), to be taken to be engaged on qualifying service on the approved project, the person is absent from work; or

    (d)the person is on eligible leave, being leave that accrued in respect of a period during which the person was, by virtue of any of the preceding paragraphs, to be taken to be engaged on qualifying service on the approved project.

    (4)A person shall not be taken to have been engaged on qualifying service on a particular approved project while the person was travelling between Australia and the site of the approved project unless the Commissioner is satisfied that the time taken for the journey is reasonable.

    ……….

    (11)Where the Trade Minister is satisfied that the undertaking of an eligible project that was commenced, or is proposed to be commenced, after 19 August 1980 is, or will be, in the national interest, that Minister may, by writing signed by that Minister, approve that eligible project for the purposes of this section.

    (12)The Trade Minister may, either generally or as otherwise provided by the instrument of delegation, by writing signed by that Minister, delegate to a person that Minister's power under subsection (11).

    (13)The power so delegated, when exercised by the delegate shall, for the purposes of this section, be deemed to have been exercised by the Trade Minister.

    (14)A delegation under subsection (12) does not prevent the exercise of a power by the Trade Minister.

    …….

    (18)In this section, unless the contrary intention appears:

    approved project means a project in respect of which there is in force an approval granted under subsection (11).

    eligible contractor means:

    (a)a resident of Australia;

    ...

    eligible foreign remuneration, in relation to a person, means income (not being excluded income) that is derived by the person at a time when the person is a resident, being:

    (a)income consisting of salary, wages, commission, bonuses or allowances, or of amounts included in a person's assessable income under Division 83A of the Income Tax Assessment Act 1997 (about employee share schemes), derived by the person in his or her capacity as an employee of an eligible contractor; or

    (b)income, or amounts included in a person's assessable income under that Division, derived by the person under a contract with an eligible contractor, being a contract that is wholly or substantially for the personal services of the person;

    that is directly attributable to qualifying service by the person on an approved project and includes any payments received in lieu of eligible leave that accrued in respect of a period during which the person was a resident and was engaged on qualifying service on an approved project.

    …

    eligible project means:

    (a)a project for the design, supply or installation of any equipment or facilities; or

    (b)a project for the construction of works; or

    (c)a project for the development of an urban area or a regional area; or

    (d)a project for the development of agriculture; or

    (e)a project consisting of giving advice or assistance relating to the management or administration of a government department or of a public utility; or

    (f)a project included in a class of projects approved in writing for the purposes of this section by the Trade Minister.

12. I would make the observation that whether the Applicant engaged in “qualifying service”, per s 23AF(3), is dependent on whether or not the Applicant was working on an “approved project”. I otherwise accept the Applicant’s submission that his work should be considered personal services on a project, and, if the project does meet the requirements for an “approved project”, he will meet the requirements of s 23AF(3).

13. Consequently, whether or not the Applicant can avail himself of s 23AF of the 1936 Act and therefore be exempted from paying income tax on the payments depends on whether or not the project he worked on was an “approved project”.

    Was it an “approved project”?

14. To be an “approved project”, an overseas project must have been granted approval under s 23AF(11) of the Act.[19] Subsection 23AF(11) provides that the Trade Minister – or, under ss 23AF(12)-(14), a delegate of the Trade Minister – may grant approval to an “eligible project”. However:

    (a)the Trade Minister must be satisfied that the undertaking of the eligible project will be in the national interest; and

    (b)

    the project must meet the description of an “eligible project” contained in

    
    

    s 23AF(18); and

    (c)that approval must be in writing and signed by the Trade Minister.

    It is mandatory for each of these elements to be met for a project to be classified as an “approved project”. However, as I explain below, their satisfaction (particularly (a) and b)) does not necessitate that the project be approved.

    [19] The 1936 Act, s 23AF(18).

    Arguments raised by the Applicant

15. Before I turn to a discussion of whether these elements have been satisfied in fact, I will first address two of the submissions made by the Applicant’s representative at the hearing on whether the project could be considered an “approved project”. In written submissions the Applicant’s representative contended that because the legislation uses the word “may”, as opposed to “must”, an eligible project could be considered to be an “approved project” even if it was not approved in writing in a document signed by the Trade Minister.[20] This argument indicates a fundamental misunderstanding of statutory interpretation and the proposition advanced is thus misconceived.

    [20] Exhibit 1, Applicant’s SFIC, 4.

16. Applying the rules of statutory interpretation, when the word “may” is used in legislation such as this, the act or thing may be done at the discretion of the relevant entity, in this case the Trade Minister.[21] The essence of the present discretion is that the Trade Minister has the option to grant or refuse to grant approval for an eligible project. For present purposes, satisfaction of s 23AF(11) requires that the contemplated project must (a) be in the national interest, (b) be an eligible project, and, if approved, to (c) then be reduced to writing and signed by the Minister (or his/her delegate). Conversely, if the word “must” appeared in the legislation instead, the Trade Minister would be compelled to approve a project once elements (a) and (b) had been satisfied. Even in that circumstance, however, it would only have effect once it was put into writing and signed by the Trade Minister.

    [21] Acts Interpretation Act 1901, s 33(2A).

17. To reiterate the point that the “may” refers to the discretion to approve the project, as opposed to a discretion to put it in writing, the Explanatory Memorandum issued contemporaneously with enactment of the legislation,[22] brings the matter into sharper focus. At the hearing, I was referred to the portion of the Explanatory Memorandum that deals with s 23AF(11). There, the Explanatory Memorandum says:

    “The exemption form tax under section 23AF in respect of income derived for services performed on an overseas project will only be available where the project, being an eligible project, has been approved in writing by the Minister.”

    [My emphasis added]

    [22] Exhibit 13, Explanatory Memorandum: Income Tax Assessment Amendment Bill (No. 5) 1980, pp 9 & 10.

18. To my mind, the reason the Explanatory Memorandum resolves the question of whether the relevant discretion relates to either: (1) approval of the project or (2) putting that approval in writing, is precisely because the above quoted part of the Explanatory Memorandum makes no reference to the word “may”. It is abundantly clear from the abovementioned terms of the Explanatory Memorandum that s 23AF(11) affords the Trade Minister no discretion as to whether or not the approval has to be in writing. Put simply, the approval must be in writing.

19. I therefore agree with and endorse the Respondent’s interpretation of s 23AF(11), which follows:

    [26.] “Grammatically, the word “may” has an auxiliary function; qualifying the verb “[to] approve” but doing no more. That is to say, “that Minister may approve that eligible project for the purposes of this section”. It does not also qualify the way in which that Minister is to approve the project; such that that Minister may approve that eligible project “by writing signed by that Minister” or in some other way.”[23]

    [23] Exhibit 3, The Commissioner’s Outline of Argument, [26].

20. Any contrary argument is, to my mind, misconceived and incapable of proper implementation. If an approval decision was not put in writing, how else would other limbs of government and/or administration, such as the Respondent, be instructed to give effect to the resulting concession? It is untenable to suggest that an entity such as the Respondent could be lawfully empowered to perform a given task or apply a certain concession via a simple reference to (or nuance taken from) a Minister or other government representative’s speech or confidential Cabinet discussions. This is precisely why s 23AF(11) compels the Trade Minister (or his delegate) to put such an approval decision in writing.

21. The Applicant’s representative further asserted that “I believe that the Prime Minister delegates his power to his ministers…”.[24] Consequently, he argued that because there had been statements by former Prime Ministers to the effect that the wars in Iraq and Afghanistan were in the national interest, no such finding was necessary by the Trade Minister.[25]

    [24]  Exhibit 1, Applicant’s SFIC, p 4.

    [25] Ibid, p 5.

22. I am uncertain how much assistance this argument provides to the Applicant, as it only deals with one of the elements necessary for s 23AF(11) to apply; the project must still meet the description of an “eligible project”, and it must be in writing and signed to take effect. In any event, this assertion put on behalf of the Applicant lacks merit.

23. Although the Applicant is somewhat correct in asserting that there has been a delegation in this case, it was not from the Prime Minister to the Trade Minister. Rather, to the extent that one institution granted a power to another, it was from Parliament to the Trade Minister. This occurred when Parliament inserted s 23AF(11) into the Act and came into force from the time of that provision. In cases such as this, it is important to remember and respect Parliamentary sovereignty. There is no indication that Parliament intended to allow the discretionary power of s 23AF(11) to be exercised by anyone other than the Trade Minister or the Trade Minister’s delegate. This is made abundantly clear in the Explanatory Memorandum to the Amendment Bill introducing this provision. It provides that the relevant authority to exercise the discretion rests with “the Minister for Trade and Resources” or as per subsection (12) the Minister for Trade and Resources is authorised to delegate this power.[26]  Thus, the only relevance of the Prime Minister to the matter at hand is that it is the Prime Minister recommends to the Governor-General who should be appointed Trade Minister. Any other decision or declaration made by the Prime Minister is therefore irrelevant to the matter at hand.

    [26] Exhibit 13, Explanatory Memorandum: Income Tax Assessment Amendment Bill (No. 5) 1980, pp 9 & 10.

    Did the applicant work on an “eligible project”?

24. The Applicant has supplied two letters from American military personnel referring to the work he had undertaken in Afghanistan. The letters alternately refer to his role in “outside plant construction” for the expansion of “fibre infrastructure”,[27] and being “a critical part of the future power distribution network”.[28] Taken in conjunction with the Applicant’s evidence, I am satisfied that the work he did in Afghanistan fits into both subsections (a) and (b) of the definition of “eligible project” in s 23AF(18) of the Act. Consequently, I consider that the project(s) the Applicant worked on should be considered to be an “eligible project”.

    [27] Exhibit 6.

    [28] Exhibit 7.

    Was the project found to be in the national interest?

25. I note that most of the arguments regarding whether the project was in the national interest come as statements by or on behalf of previous Prime Ministers and relate to the war in Iraq. There are a number of difficulties with this:

    ·as mentioned above, the Applicant worked in Afghanistan, not Iraq. Whether anything to do with the Iraqi war was in the national interest is irrelevant for any consideration of the status of income sourced in Afghanistan;

    ·as I stated above, statements by previous Prime Ministers are not binding on the Trade Minister’s decision making process and/or discretion as to whether a specific project was in the national interest;

    ·even if that were not the case, the statement from the Parliamentary Secretary to the Prime Minister, dated 9 February 2015, only refers to contemporaneous activities in Iraq, not to activities in Afghanistan during the 2010-2011 financial year;[29]

    ·Similarly, the speech by John Howard in April 2013 exclusively seeks to address the foreign policy and other considerations behind Australia’s commitment of forces to the Iraqi war.[30]

    [29] Exhibit 11.

    [30] Exhibit 8, Speech by the Hon. John Howard to the Lowe Institute in April 2013, ‘We were right to invade Iraq’.

1. It is concerning to say that the Tribunal’s resources were expended on such wholly irrelevant arguments. Not only are they not relevant to the question at hand, they are entirely disconnected to the factual situation of this case.

2. In any event, it would be fallacious to assume that the entire war in Iraq (or Afghanistan war for that matter) could be an “eligible project” that the Trade Minister could determine to be in the national interest. That would be reading the legislation far too broadly. Rather, the legislation relates to specific projects. I have seen no evidence indicating that the Trade Minister or his delegate found any of the projects the Applicant actually worked on – some of which are appropriately classified as eligible projects – to be in the national interest. Consequently, this element has not been met. Over and above this, it is timely to remember that the Applicant was sub-contracted by the USA Army and was not deployed either contractually with, or in any volunteer or conscripted military capacity by, the Australian government.

   Was there a determination by the Trade Minister in the appropriate form?

3. Even if there had been a finding that the projects the Applicant worked on were in the national interest, which there plainly was not, that is still insufficient to show that s 23AF applies. The Trade Minister or his delegate still needed to exercise their discretion to classify the project as an “approved project”, and this needs to be in writing and signed.

4. I note that on 20 December 2016, the Applicant’s representative wrote on behalf of this Applicant and his other clients (who had related matters before this Tribunal) to the Commonwealth Trade Minister seeking such a determination under s 23AF(11) of the 1936 Act.[31] This indicates to me that neither the Trade Minister, nor his delegate ever did make a determination to exercise their discretion under s 23AF(11) for the Applicant.

   [31] Exhibit 14.

5. There is no evidence before me that the Trade Minister - or any delegate of his - exercised the discretion granted to them by s 23AF(11). There is certainly no evidence that this was then put in writing and signed. I therefore cannot find that this requirement has been met.

   CONCLUSION

6. For the Applicant’s overseas payments to be exempt from income tax in the 2010-2011 financial year, s 23AF of the 1936 Act must have been satisfied. However, based on the evidence before me I have no option other than to determine that the Applicant did not work on an “approved project”. Although he may have worked on “eligible project(s)”, I have seen no evidence that the Trade Minister or his delegate either determined that those projects were in the national interest, or exercised their discretion to approve them in a written and signed document. Consequently, I cannot be satisfied that
   s 23AF applies.

   DECISION

7. Therefore, the decision under review is affirmed. The payments the Applicant received from IWSI, totalling $138,465, were correctly considered taxable income for the financial year ending 30 June 2011.

I certify that the preceding 32 (thirty-two) paragraphs are a true copy of the reasons for the decision herein of Senior Member T. Tavoularis

............................[sgd].......................................

Associate

Dated: 1 February 2017

Date of hearing:	18 January 2017
Advocate for the Applicant:	David O'Brien, David O'Brien Accountants
Counsel for the Respondent:	V.G. Brennan
Solicitors for the Respondent:	ATO Legal Services Branch