Fabry v Commissioner of Taxation of the Commonwealth of Australia

REASONS FOR JUDGMENT 1 The applicant ("the taxpayer") appeals to the Court, pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth), against a decision of the Administrative Appeals Tribunal ("the AAT"). 2 The taxpayer contends that the AAT erred in law in affirming assessments by the respondent ("the Commissioner") under the Income Tax Assessment Act 1936 (Cth) ("the ITA") in respect of the years of income ended 30 June 1991, 30 June 1992, 30 June 1993 and 30 June 1994. The AAT affirmed the assessments because it concluded that certain amounts paid by the Echuca Aboriginal Co-operative Society ("the Echuca Co-Operative") and the Njernda Aboriginal Co-operative ("Njernda") for services provided by the taxpayer constituted income derived by the taxpayer and was assessable to him under s 25(1) of the ITA. 3 The taxpayer claimed that he contracted with the Echuca Co-operative and Njernda to provide his personal services in his capacity as director of the corporate trustee of the Fabry Family Trust ("the trust"), which carried on a consultancy business under the name of "Fabry Management Services". Consequently, the taxpayer contended that the income derived from the provision of those services was taxable income of, and assessable to, the trustee of the trust. The AAT, however, found that the Echuca Co-operative and Njernda had engaged the taxpayer to provide his personal services in his personal capacity with the consequence that the income derived as a result of that engagement was the taxpayer's taxable income and was assessable to him. 4 The evidence before the AAT may be briefly summarised as follows. A & P Fabry & Sons Pty Ltd, in its capacity as trustee of the trust, unsuccessfully conducted a hardware and plumbing supply business in Echuca. After the sale of the business the trustee owed approximately $250,000 to the bank that had financed the acquisition of the business. The taxpayer had guaranteed payment of the debt. 5 In about April 1990 the Echuca Co-operative engaged the taxpayer to conduct a training program in sales, marketing and production management from 30 April 1990 to 27 July 1990. Subsequently, the engagement was extended. In March 1991 the Registrar of Co-operatives, at the request of members of the Echuca Co-operative, engaged the taxpayer to act as Official Administrator of the Co-operative pursuant to s 163(1) of the Co-operation Act 1981 (Vic). In 1993 Njernda, which succeeded to the business of the Echuca Co-operative, engaged the taxpayer to assist it in establishing the new organisation and to provide training. 6 The amounts paid for the taxpayer's services during the relevant years of income were as follows: 1991 1992 1993 1994 Echuca Co-operative 47,459 105,100 106,060 14,050 Njernda 29,850 17,910 Total 47,459 105,100 135,910 31,960 7 The taxpayer claimed that the above amounts constituted income derived by the trustee because he intended to enter into and entered into the contracts with the Echuca Co-operative and Njernda to provide his services in his capacity as a director of the corporate trustee of the trust, rather than in his personal capacity. 8 In his witness statement the taxpayer stated: "It was always my intention that the fees rendered as a consequence of my services were to be paid to the benefit of the Family Trust. The Family Trust would use those fees to repay the bank debt and ensure that my family had sufficient resources to meet our daily living expenses. As I already had a significant credit loan account with the Family Trust as a consequence of the Hardware Business failure, there was no need for me to draw a salary from the Family Trust." 9 In examination in chief the taxpayer stated that he accepted the relevant engagements in his capacity as a director of the trustee but did not communicate that to anyone. Counsel for the Commissioner did not directly challenge the taxpayer's statement of his intent but, rather, challenged his alleged agency by reference to the surrounding circumstances including subsequent acts. 10 Although the taxpayer accepted that he had not mentioned the trustee company or any agency arrangement when he entered into the contracts he claimed that nothing turned on that omission as, at all relevant times, he was a director of the trustee and was authorised to contract on its behalf to provide his services. It was not in dispute that at the time of the engagements in respect of the Echuca Co-operative the directors of the trustee (A & P Fabry & Sons Pty Ltd) were the taxpayer and his wife and that at the time of the engagement by Njernda the taxpayer was the sole director of the then new trustee (Wendy One Pty Ltd). 11 The taxpayer claimed that the trustee, acting through its business name "Fabry Management Services", subsequently rendered accounts for his services and that the receipts were paid into accounts operated by the trust. 12 The AAT summarised the submissions of the parties as follows: "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. [Counsel for the applicant] 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. … 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. [Counsel for the Commissioner] 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 [Fabry] 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 [Echuca Co-operative] and in [Njernda] 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')." 13 The AAT then referred to three decisions relied upon by the applicant (Leidig v Commissioner of Taxation (1994) 50 FCR 461; Tupicoff v Federal Commissioner of Taxation (1984) 4 FCR 505 and Bayly v Commissioner of Taxation (1977) 15 SASR 446) and concluded as follows: "10. …the three … 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 [Echuca] 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 [Counsel for the applicant] 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 [Echuca Co-operative] 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 [Njernda] was similarly the personal income of the applicant being derived from the successor to [the Echuca Co-operative] 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 [Njernda] 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." [Emphasis added] 14 As the AAT concluded that the taxpayer had been engaged as an individual in his personal capacity to provide personal services, it rejected the taxpayer's claim that the contracts of engagement obliged the trustee to provide or to procure the provision of the taxpayer's services. Accordingly, it was unnecessary for the AAT to consider the consequences for tax purposes, if any, of the income in question being derived solely as income for personal service or exertion: see Leidig at 473-475. 15 It is common ground that the taxpayer's appeal to the Court turned on whether the AAT erred in law in concluding that the Echuca Co-operative and Njernda had not contracted with the taxpayer in his capacity as a director of the trustee. The taxpayer acknowledged that the payment of income at his direction to the trustee would not assist him if it was payment of income derived by him: see s 19 of the ITA. 16 Counsel for the taxpayer did not contend that the AAT erred in its discussion of the relevant case law. Rather, counsel contended that the AAT erred in law because it treated the taxpayer's evidence, which it did not reject, of his intention to contract as a director of the trustee: · as either irrelevant or not capable of establishing that the relevant assessments of the Commissioner were excessive; · as being the only evidence that supported his claim of agency. 17 The law in respect of an undisclosed agency was summarised by the Privy Council in Siu v Eastern Insurance Co Ltd (1994) 2 A.C. 199 at 207-208: "For present purposes the law can be summarised shortly as follows. (1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on the principal's behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or by implication, exclude the principal's right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal. The origin of, and theoretical justification for, the doctrine of the undisclosed principal has been the subject of much discussion by academic writers. Their Lordships would especially mention the influential article by Goodhart and Hamson 'Undisclosed principles in contracts' (1932) 4 CLJ 320, commenting on the then recent case of Collins v Associated Greyhound Racecourses Ltd [1930] 1 Ch 1. It seems to be generally accepted that, while the development of this branch of the law may have been anomalous, since it runs counter to fundamental principles of privity of contract, it is justified on grounds of commercial convenience. The present case is concerned with the fifth of the features noted above. The law in that connection was stated by Diplock LJ in Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 All ER 886 at 890, [1968] 2 QB 545 at 555, as follows: 'Where an agent has ... actual authority and enters into a contract with another party intending to do so on behalf of his principal, it matters not whether he discloses to the other party the identity of his principal, or even that he is contracting on behalf of a principal at all, if the other party is willing or leads the agent to believe that he is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract. In the case of an ordinary commercial contract such willingness of the other party may be assumed by the agent unless either the other party manifests his unwillingness or there are other circumstances which should lead the agent to realise that the other party was not so willing.'" 18 There is no anomaly in the taxpayer personally contracting as director of an undisclosed principal. It is well recognised that "it is a logical consequence of the decision in Salomon's case [1897] AC 22 that one person may function in dual capacities": see Lee v Lee's Air Farming Ltd [1961] AC 12 at 26 and Hamilton v Whitehead (1988) 166 CLR 121 at 128. 19 I do not, however, accept the taxpayer's contention that the AAT disregarded his oral evidence or wrongly treated that evidence as not being capable of discharging the burden of proof imposed upon the taxpayer. Rather, the AAT took into account the taxpayer's evidence of his intent but concluded, for the reasons it gave, that the relevant contracts of engagement to provide the taxpayer's personal services were made with the taxpayer personally rather than with the trustee. 20 I also do not accept that the AAT accepted, or did not reject, the taxpayer's statement of his intent. Rather, it considered that other circumstances, upon which it preferred to rely, were inconsistent with that evidence. For example, the AAT referred to the taxpayer's initial appointment being in April 1990, which was some six months prior to the registration of "[Fabry] Management Services" as a business name and prior to the date on which its business was stated in the registration form to have commenced. Also, the AAT relied upon the applicant's evidence that he had been engaged by the Echuca Co-operative, the Registrar, and subsequently Njernda, as an individual to provide his personal services to them and that he had not said that those services were not being provided by him but by the trustee or by Fabry Management Services. In that regard it was open to the AAT to conclude that a distinction is to be drawn between the taxpayer contracting with an employer to provide his personal services to the employer, and the trustee contracting with the employer for the trustee to provide or procure the provision of the taxpayer's personal services to the employer. In such circumstances "[t]he contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal": see Siu at 207. Also, the AAT regarded the post contractual conduct of the taxpayer and the trustee as equivocal. For example, it stated that: · payments to the trust were understandable "given the large outstanding debt to the bank which the applicant had personally guaranteed"; · many of the payments were made to the taxpayer and his wife, rather than to the trust; · the receipt of money by the trustee was "after it had been derived as income by the [taxpayer]". 21 The circumstances relied upon by the AAT were matters to which it, as the arbiter of fact, was entitled to have regard as matters that were logically probative of the issue it was determining. However, as I later explain, it appears that in arriving at its conclusion concerning the taxpayer's evidence the AAT regarded the post contractual conduct as relevant only to credit, and not as evidence of the existence of the undisclosed agency. 22 The taxpayer relied upon the trustee's post contractual conduct of sending invoices and receiving payments as evidence of his agency. He contended that the AAT had erred in law in stating that there was "no evidence" of the agency other than the taxpayer's statement that he believed he was acting as a director of the trustee. Although, in general, evidence of the acts of the parties subsequent to a written contract may not be admissible as an aid in its construction, such evidence is admissible to establish the existence of a contract: see Howard Smith & Co. Ltd. v Varawa (1907) 5 CLR 68 at 78 per Griffith CJ, Ferguson v Dawson [1976] 2 Lloyd's Rep 669 at 680-682 and Darter Pty Ltd v Malloy (1993) 2 Qd R 615 at 619. In Australian Broadcasting Commission v XIVth Commonwealth Games Ltd (1989-1990) 18 NSWLR 540 at 547-548 Gleeson CJ observed that, particularly where the intention of the parties to enter into a contract is in issue, post contractual communications between the parties may often be the best evidence on that subject. 23 A similar approach applies to proof of the existence of agency. As was said by Lord Keith in Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC 1130 at 1137: "The relationship between principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it… The consent must have been given by each of them, either expressly or by implication from their words and conduct. Primarily one looks to what they said and did at the time of the alleged creation of the agency. Earlier words and conduct may afford evidence of a course of dealing in existence at that time and may be taken into account more generally as historical background. Later words and conduct may have some bearing, though likely to be less important." 24 The threshold issue was whether what amounts in law to an agency relationship existed when the taxpayer contracted to provide his services. That issue requires consideration of whether the taxpayer intended to contract as director of the trustee, with its actual authority to do so, when he was engaged to provide his services. While the AAT is not bound by the rules of evidence (s 33(1)(c) of the AAT Act) and while it was open to the AAT to regard the post contractual conduct to which it referred as ambivalent, giving it such weight as it deemed appropriate, it was not open to it to regard the post contractual conduct relied upon by the applicant as not constituting evidence of the agency upon which the taxpayer's case depended. 25 The distinction between such conduct being relevant to credit and it being evidence of agency can be significant. For example, the invoicing by the trustee or "Fabry Management Services" of the employing entities was evidence, albeit post contractual conduct, of the existence of the agency relied upon by the taxpayer. While the weight to be attached to that conduct and its significance was a matter for the AAT to determine, it was not at liberty to disregard it on the erroneous ground that it did not constitute evidence of the agency. Yet, to my mind, that appears to be what the AAT has implicitly, if not explicitly, done. 26 A wrong approach to deciding a question of fact or a wrong approach to its task by the AAT has been held to be an error of law for the purposes of s 44(1): see Times Consultants Pty Ltd v Collector of Customs (Qld) (1987) 16 FCR 449 at 463-464 and Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 at 12. The error of the AAT in stating that the only evidence of agency was the taxpayer's statement of intent, is one of law rather than fact, as it reveals that the AAT misunderstood the evidence to which it was entitled to have regard as evidence of the existence of the agency relied upon by the taxpayer. Put another way, the AAT adopted a wrong approach to its task of deciding the question of agency. 27 It follows that, as the AAT erred on a question of law in reaching its decision, the appeal under s 44(1) of the AAT Act is to be allowed, the decision is to be set aside and the