Mr Douglass's submissions summarised
20 In support of question of law 2 and the related grounds of appeal, Mr Douglass identified as a primary issue for determination the question of whether and how s 87-18(4) operates to modify s 87-18(1) and (3) and then ascertain whether the AAT properly applied the provision.
21 In brief, Mr Douglass contended that the AAT inverted the operation of s 87-18(4). He contended that, on its proper construction, that provision operated such that an individual taxpayer would meet the first criterion in s 87-18(1)(a) (i.e. the requirement that the income is for producing a result) even if the taxpayer's income for the relevant year is not income for producing a result, as long as there was evidence that the income of the taxpayer's peer group was not income for producing a result. Mr Douglass contended that s 87-18(4) operated in a similar fashion in respect of the other two criteria in s 87-18(1)(b) and (c).
22 Mr Douglass's position regarding the meaning and operation of s 87-18(4) is reflected in his counsel's oral submission at T13, line 32 (which is partly expressed by reference to the second element which is set out in s 87-18(1)(b) concerning the supply of plant and equipment):
So we say that's really important that if the independent contractor isn't required to provide tools, and the custom and practice is that true independent contractors also don't need to provide tools, then sub (b) may be satisfied. So we say it follows that if the independent contractor does not earn income for obtaining a result, and the evidence is that independent contractors do not earn - the peer group do not earn their income for producing a result, then sub (4) indicates that (a) is satisfied. Now, with the greatest respect to the tribunal, we say the tribunal looked for the complete opposite, and we say that by looking for the complete opposite in order to pass (4), the tribunal was trying to establish that the peer group was diametrically opposed to the individual or the taxpayer in order to pass the results test.
23 Mr Douglass contended that the AAT adopted an erroneous construction of s 87-18(4) by focussing on the wrong question, namely whether or not there was some evidence upon which findings of fact could be made on custom or practice, with the consequence that if there was, even though the individual taxpayer could not show that his or her income was for producing a result, that criterion is satisfied if the evidence of custom or practice enables a finding to be made that the income of the peer group was for producing a result. Mr Douglass submitted that this erroneous approach was first manifested in Taneja at [19], [22] and [23], an approach which was adopted and applied erroneously by the AAT here. In particular, Mr Douglass referred to [80] and [92] of the AAT's reasons for decision here. Paragraph 92 is set out in [17(d)] above. Paragraph 80 is as follows:
80. Nothing that Messrs Lacy, Janossich and White had to say was at all informative in relation to the "custom or practice" urged on Mr Douglass' behalf. Their evidence was gravid with ambiguity and correspondingly undermined by its imprecision. Nothing that any of them said went close to providing justification for a conclusion that there was any meaningful practice where independent consultants derived their income "for producing a result". Their evidence indicates the unremarkable reality that independent contractors will ordinarily have been engaged to provide their expert services in the course of contributing to, and having some management responsibility in, completing complex, multi-disciplinary infrastructure projects for the purpose of performing particular tasks. It also indicates that in contributing their services contracting engineers will typically be expected to meet performance standards (commensurate with their professed skill and experience) in relation to the quality of their work. But it also indicates that they are typically engaged, and paid, for the provision of their services. Consequently, the overall effect of their evidence closely parallels the evidence and the conclusions in Skiba (see paragraphs 28 to 30 above) and by Allsop J in IRG (see paragraph 39 above).
24 Mr Douglass contended that his construction was supported by what Allsop J said in IRG at [113] and [114]:
113. In taxation ruling 2001/8, the ATO has given the following guidance:
…[H]aving regard to the words of the law and the purpose of the provision, …if no equipment or tools are needed, it is arguable that the provision will always be met in these circumstances. Also, [s 87-18(4)] allow[s] regard to the custom or practice of individuals or entities (other than employees) "to be required to supply" the equipment or tools "needed to perform the work", "as the case requires" suggesting that equipment and tools are not required if they are not needed to perform the work. They also highlight the distinction between independent contractors and employees. This reflects the purpose of the "results test", the object of the condition in [s 87-18(3)(b)] being to ensure that individuals or personal service entities who claim to be independent contractors do in fact provide the necessary equipment or tools where genuine independent contractors would be expected to do so.
114. With respect, that is a well-expressed and serviceable working exposition. To give the provision (as it should be given) a sensible working meaning conformable with its place in the context of the jurisprudence concerning independent contractors, I am prepared to adopt this approach.
25 Thus, in Mr Douglass's submission, once it is accepted that it is the custom or practice that work of the kind in question is not performed by an employee, then the operation of the test is modified based on that practice before applying the results test. If the taxpayer meets the custom then the results test is satisfied.
26 In contrast, the Commissioner contended that Mr Douglass was wrong to suggest that s 87-18(4) "modifies" the results test. Rather, he contended that the provision "identifies a matter which is potentially probative of it, which the decision-maker is directed to have regard to in forming a conclusion about the circumstances of the individual tax-payer". The Commissioner submitted that, on Mr Douglass's construction, the provision operated in effect to displace or discard each of the three criteria in s 87-18(1). For example, if an individual taxpayer cannot satisfy the first criterion in paragraph (a) (namely that the taxpayer's income is for producing a result), merely because the evidence demonstrates that the income of the peer group is similarly not for producing a result does not excuse the taxpayer from having to meet that criterion.
27 Furthermore, the Commissioner contended that Allsop J's obiter observations in IRG were supportive of the Commissioner's position that evidence of custom or practice is a matter which informs the ultimate conclusion whether or not a criterion is satisfied, but is not itself a separate inquiry. Thus, for example, Allsop J indicated that if the evidence reveals for a particular kind of work that there was no requirement to supply plant and equipment or tools of trade that may mean that the relevant criterion is taken to be satisfied. Evidence of custom or practice may assist that factual enquiry. The Commissioner's counsel submitted, however, that s 87-18(4) is "not an invitation to have regard to a custom or practice not to require the provision of tools or equipment as somehow displacing or discarding the need for that satisfaction or the element of the results test, and that, I think, is the way the taxpayer seeks to treat it".
28 On Mr Douglass's case, the AAT's findings at T[78] and T[80] that the work done by him was ordinarily done by an independent contractor and that it is the custom or practice that work of the relevant kind is not performed by an employee, meant that the results test in s 87-18(4) was satisfied. This is simply because on his case, on its proper construction, s 87-18(4) requires a finding whether it is the custom or practice that work of the kind in question is not performed by an employee, and if that question is answered affirmatively, then unless there is specific rebutting evidence, the results test is passed. Mr Douglass cited IRG at [157] in support of that contention. There, Allsop J said:
157. For the same reasons as I concluded that the income of Mr Green was not for producing a result, I conclude that the income of Mr Owen was not for producing a result. Like Mr Green, Mr Owen worked in the business of the KJV, controlled in the sense that I discussed in relation to Mr Green, being paid by the hour for doing the skilled and specialised work of an instrument engineer. In my view, for the same reasons which I expressed in relation to Mr Green, it would be a misuse of language to say that he was paid for producing a result or results. He was paid to work as a skilled engineer and expected in that work to produce data sheets. That is not being paid for results. The work was completed in an iterative fashion, through teamwork and co-ordinated skill and experience of a group of engineers working in the KJV's business designing the plant. All the documentation was produced in the business of the KJV, on the KJV computer system. Like Mr Green, Mr Owen did not produce his own documents. He participated in the production of documents which were the product of coordination, co-operation and supervision in which not only he, but others, signed off. The deliverables were the product of the work of Mr Owen (and Mr Green) and their colleagues.
29 In brief, Mr Douglass contended that the AAT's error lay in its insufficient appreciation that there is a two stage step in applying s 87-18(3)(a), namely:
(a) first, ascertain what the custom and practice was around producing a result (which the AAT did do in this case by finding that project outcomes were typically identified only in the course of the work); and
(b) secondly, then ask whether the test in s 87-18(3)(a) was, in the circumstances, as modified by s 87-18(4), satisfied.
30 Mr Douglass contended that the AAT did not undertake this second step.
31 Mr Douglass's submissions on penalty may be summarised as follows. After outlining the four levels of the sliding scale for base penalty as contained in the various items in s 284-90 of Sch 1 to the Taxation Administration Act 1953 (Cth) (TA Act), he submitted that the AAT erred by not first asking whether there had been a failure of reasonable care, which would attract a base penalty of 25 per cent. Instead, the AAT went straight from the question of whether there was a reasonably arguable position (see T[114] to [117]) to recklessness (T[118]ff).
32 Mr Douglass also contended that the AAT erred at T[126] which indicated that its approach involved comparing his conduct to what a reasonable person ought to have done, whereas the AAT's finding at T[126] was in substance one of failure to take reasonable care and not recklessness.