The meaning of the relevant provisions
21 The parties put detailed submissions on the proper approach to the construction and interpretation of the 1997 Act. I take the principles of statutory interpretation in the common law of Australia, so far as relevant to these proceedings, to be as follows. The relevant words of the statutory provision are read in the context of the statute as a whole and in their legal and historical context, having regard to the aim and purpose of the provision and the legislation, to any established canons of legal construction and to any inconvenience or improbability of result of any given construction. Such inconvenience or improbability of result may assist the Court to reach an available alternative construction reasonably open and more clearly conforming with the legislative intent otherwise discovered. No initial textual or other ambiguity need be divined before context is examined. Fundamental to the task is the giving of close attention to the text and structure of the relevant provisions as the words used by Parliament. This approach, expressed substantially in these terms by the Full Court in Braverus Maritime Inc v Port Kembla Coal Terminal Ltd (2005) 148 FCR 68 at 81 [36], was extracted from the decisions of the High Court such as K & S Lake City Freighters Pty Limited v Gordon & Gotch Ltd (1985) 157 CLR 309 at 312, 315 and 321; Bropho v Western Australia (1990) 171 CLR 1 at 20, citing, specifically, McHugh JA in Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404 at 421-424; CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 [69]-[70] and 384 [78]; Eastman v Director of Public Prosecutions (ACT) (2003) 214 CLR 318 at 368 ftnt 99, agreed in by the whole Court: [1], [32]-[36]; Network Ten Pty Ltd v TCN Channel Nine Pty Limed (2004) 218 CLR 273 at 280-281 [10]-[12]; and Stevens v Kabushiki Kaisha Sony Computers Entertainment (2005) 224 CLR 193 at 206-208 [30]-[34] and 230-231 [124]-[125].
22 For the use of this approach in respect of respect of revenue statutes, see Jeffrey James Prebble Pty Limited v Commissioner of Taxation (2003) 131 FCR 130 at 137-144 [24]-[51]]; HP Mercantile Pty Limited v Commissioner of Taxation (2005) 143 FCR 553 at 564-568 [44]-[63]; and Cameron Brae Pty Limited v Commission of Taxation [2007] FCAFC 135 at [3].
23 The extent to which secondary material is to be considered in the ascertainment of context in "its widest sense": CIC Insurance 187 CLR at 408, may be seen to be affected by the Acts Interpretation Act 1901 (Cth), s 15AB(3): Stevens v Kabushiki Kaisha Sony Computers Entertainment 224 CLR at 230-231 [124]-[125].
24 The issue of the alienation of income from personal exertion was addressed in chapter 7 of the Review of Business Tax: A Tax System Redesigned, July 1999 (the "Ralph Report"). This chapter dealt with three specific concerns about equity in the taxation system: (a) the need for a minimum company tax, (b) deferring losses from non-commercial activities and (c) the alienation of income from personal services.
25 In respect of alienation of income from personal services, the Ralph Report noted an increased use of the technique of employing entities interposed between the acquirer of the services and the individual who performs, or is responsible for performing, the services. The practice, undertaken in order to attract a lower tax rate in the interposed entity, to obtain deductions in the interposed entity that would not or may not be available to the individual and to split income among family or associates of the individual (and thereby reduce overall tax rates and revenue), was seen to pose "significant issues of equity and … a growing threat to the income tax base." (See the Ralph Report pp 287-288.) The Ralph Report recommended that a "systemic approach" be taken as follows at 289:
…The recommended approach is directed towards cases where income should be correctly attributed for taxation purposes to an individual who carries out personal services in a manner broadly similar to the way those services would be carried out if that person was an employee of the person or entity who required the services.
Recommended by the Review is an approach designed solely to address the taxation implications resulting from the commercial arrangements under which labour (including professional and creative activities) may be engaged. The approach does not impinge, and should not be seen as impinging, in any way on any commercial or contractual obligation that may be present between any or all parties concerned with the arrangement, nor as preventing similar arrangements being entered into in the future. Most importantly, the approach recommended does not, of itself, under any circumstances and for taxation or any other purpose make the service provider a common law employee.
Where an individual provides personal services through an interposed entity or a chain of interposed entities, however structured, and one of the interposed entities contracts with the end user of those services (service requirer'), the income derived from the contract (payment in respect of personal services') is often split with members of the family of the individual performing the services (`service provider') thereby reducing the overall amount of tax payable.
Payments in respect of personal services include amounts that are wholly or predominantly for the labour or skill of an individual who performs that labour or exercises that skill including those rendered to provide a specific result or outcome. Personal services also include the performance of professional and creative activities.
[emphasis added]
26 At p 291 of the Ralph Report there was a discussion under the heading "employee-like manner", as follows:
The Victorian payroll tax arrangements, along with those that operate in other States and Territories, provide a model for framing the criteria to be considered in determining if payments in respect of personal services relate to services undertaken in an employee-like manner.
A range of criteria concerning the service requirer, the interposed entity and the service provider along with details of the manner in which the services are performed would need to be taken into account.
These criteria include:
• the manner in which the services are being carried out having regard to the level of control exercised by the service requirer in relation to matters such as the time of work and actual hours of work required and where the services are to be performed;
• whether the same services are also contracted to the public at large in the year of income;
• the use by the interposed entity of substantial income producing assets as the predominant source of earning income, with the provision of personal services being incidental;
• whether incidental services are provided in conjunction with the sale of trading stock;
• the extent of the infrastructure provided by the interposed entity;
• whether more than one person is contracted to, and actually provides the services to the service requirer; and
• the degree of any entrepreneurial risk in the way that services are provided.
The responses to these criteria will determine if it can reasonably be concluded that the services are being provided in an employee-like manner. The Commissioner of Taxation will issue a detailed Ruling to provide guidance on the operation of these criteria.
27 At p 292 of the Ralph Report, the implications of the recommendation were elucidated as follows:
…The amount payable by the service requirer to the interposed entity will in effect be treated as though it passed through the interposed entity intact to the individual service provider. This will ensure that income in respect of personal services derived in an employee-like way is treated in the same way for income tax purposes as income actually derived by an employee.
…
This approach will not impact on genuine business undertakings, which provide services to the public generally. It will not affect the capacity of business to continue to engage third parties to perform services -- nor will it imply that the service provider was an employee of the service requirer.
But it will address income taxation inequities such as where two individuals are performing identical services in the same workplace but one seeks to split income through interposing an entity while the other is simply an employee who is taxed at normal marginal rates on such income. Alienation cases that are not employment-like will continue to be considered under the general principles of the taxation law, including the general anti-avoidance rule.
28 The applicants argued that it was not legitimate to take the Ralph Report into consideration. It was said to be too remote from the text of the legislation when the latter was supported not only by Explanatory Memoranda to the relevant Bills, but the Guides within the 1997 Act (in particular, s 87-1) that can be used to understand the purpose of the legislation. I reject those submissions. The Ralph Report was a seminal report in the development of revenue legislation in Australia. Its terms assist in understanding the mischief to which Part 2-42 was directed. They also assist in understanding the underlying purposes and conceptions to which Part 2-42 was directed: in particular, substance over form, equity in the equal taxation of individuals and a desire not to impinge upon real external contractual relationships or to tax real businesses as individuals.
29 The Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000 stated that Part 2-42 was to introduce new rules for the income tax treatment of certain personal services income. The general outline to the Bill stated as follows:-
… Personal services income is generally paid to an individual who provides the services or to a company, partnership or trust (interposed entity) through which the services are provided by an individual.
The measure will not:
· apply where an individual or interposed entity is conducting a personal services business; and
· affect the legal status of an interposed entity or deem an individual to be an employee for the purposes of an Australian law or instrument.
The rules are designed to improve the integrity of the tax system by addressing both the capacity of individuals and interposed entities providing the personal services of an individual to claim higher deductions than employees providing the same or similar services and the alienation of personal services income through an interposed entity.
These improvements will be achieved by:
· limiting and clarifying the deductions available against personal services income at both the individual and interposed entity level; and
· ensuring that, after allowing deductions to the interposed entity, any income remaining is attributed to the individual. Schedule 1 to the Taxation Administration Act 1953 is being amended to provide a collection mechanism for tax payable on any income so attributed.
30 The Explanatory Memorandum later stated at [1.14]:
The new arrangements will not impinge on any commercial or contractual obligations between parties affected by the measures and will not impact on genuine business undertakings. Nor will the measures treat the individual as a common law employee for taxation or any other purpose. The arrangements will achieve a consistent taxation treatment for personal services income irrespective of the structures in place to receive that income.
31 Part 2-42 was amended by the Taxation Laws Amendment Act (No 6) 2001 with effect from 1 July 2000. The general outline of the amendments in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001 was in similar terms to those in the earlier Bill.
32 By these 2001 amendments section 87-18 was inserted into Division 87 in Part 2-42.
33 The 2001 Explanatory Memorandum discussed both the personal services business tests and the results test. These are discussed at [7.32]-[7.35] and [7.38]-[7.42], as follows:
7.32 It is necessary to consider the personal services business tests only if an individual (working as a sole trader or through an entity) has personal services income. Personal services income is income that is mainly a reward for a particular individual's personal efforts or skills. An entity's income from the rendering of personal services by an arm's length employee of the entity is not normally personal services income of such an employee, if the employee has no entitlement to that income of the entity other than as salary, wages, commissions, bonuses or allowances.
7.33 The primary rules about what is a personal services business are contained in section 87-15. The section will be amended to reflect the proposed changes to allow self-assessment of the results test for a personal services business and to allow the Commissioner to grant personal services business determinations regardless of whether 80% or more of an individual's personal services income is from one source.
7.34 The amendments to subsection 87-15(1) reflect the fact that all individuals and personal services entities will be able to apply for a personal services business determination. Therefore anyone who has a personal services business determination will be carrying on a personal services business. [Schedule 6, item 4, subsection 87-15(1)]
7.35 Taxpayers may self-assess whether they are conducting a personal services business against the results test, which is included in the list of personal services business tests in subsection 87-15(2). This will ensure that independent contractors are treated as conducting personal services businesses and therefore, are outside the measure. Subsection 87-15(3) is amended to reflect the fact that, regardless of whether 80% or more of an individual's personal services income is from one source, the individual or personal services entity can self-assess against the results test. In contrast, a taxpayer cannot self-assess against any of the other tests if 80% or more of an individual's personal services income is from one source. [Schedule 6, item 4, subsection 87-15(3)]
…
7.38 Proposed section 87-18 contains the results test. The conditions that make up the results test were previously contained in subsections 87-60(5) to (7) and subsections 87-65(5) to (7) as the further grounds on which the Commissioner could make a determination. These amendments will make those same conditions into a new personal services business test. [Schedule 6, item 4, section 87-18]
7.39 As a personal services business test, if an individual or personal services entity meets the results test, they will be conducting a personal services business. There is no need to obtain a personal services business determination although an individual or entity could apply for a determination if they were unsure. In addition, taxpayers could apply to the Commissioner for a private binding ruling about the potential application of Part IVA to their activities.
7.40 The results test is also the only personal services business test that is available for self-assessment where 80% or more of an individual's personal services income is from one source. If 80% or more of an individual's personal services income is from one source and the individual or personal services entity does not meet the results test, they will be a personal services business only if they obtain a personal services business determination. Without these amendments, if 80% or more of an individual's personal services income is from one source, the individual or personal services entity is conducting a personal services business only if they obtain a personal services business determination.
7.41 The existing conditions for the results test (which are traditional tests for determining whether a taxpayer is an independent contractor), are in subsections 87-60(5) and 87-65(5). The 3 conditions are:
· the individual's personal services income is for producing a result (whether or not it is received by a personal services entity);
· the individual or personal services entity is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the individual or personal services identity produces the result; and
· the individual or personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.
7.42 Previously the conditions in the results test were only relevant to a personal services business determination. As a result of these amendments, taxpayers will now be able self-assess against them. The discussion of these conditions can be found in the explanatory memorandum to the bill that introduced these provisions, the New Business Tax System (Alienation of Personal Services) Bill 2000.
34 It is clear that the expression "independent contractor" began to be infused, not only into the Explanatory Memorandum, but also the legislation itself. This conformed with the expressed aim of the Ralph Report not to "impact on genuine business undertakings". Though the Explanatory Memorandum, the Guide and the operative provisions of Part 2-42 do not use the expression "employee-like" or "employment-like", what is conveyed by these expressions can be seen to be at the heart of Part 2-42 and the operation of the results test.
35 It was submitted on behalf of the applicants that the adoption of the expression "independent contractor" in the Guide in s 87-1 and the terms of s 87-1 itself, together with the taxation rulings issued by the Australian Taxation Office, meant that there was no room for any penumbra of circumstances in which the results test might not apply, but the individual may still be seen as an independent contractor. It was submitted that this revealed a divergence from what was intended in the Ralph Report, by the linking of the results test to the jurisprudence concerning the distinguishing of the independent contractor from the employee.
36 The difficulty with this submission is that the Explanatory Memorandum and s 84-10 expressly contemplate that just because Part 2-42 applies to an individual (and, on this hypothesis, the individual's circumstances do not satisfy the results test) does not mean that the individual is an employee for the purposes of any Australian law or any instrument made under an Australian law. There is no doubt that s 87-18(3) and its elements of "result", necessary tools and liability for defects are to be understood against the background of the jurisprudence concerning independent contractors. Thus, in Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248, Lindgren J, in the course of reaching his decision, examined Part 2-42, particularly Division 87 and observed at [28]:
Broadly speaking, an individual or entity, who or which is an 'independent contractor' under traditional concepts should meet the results test. Indeed, the Revised Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001 (Cth) stated (at para 7.6): 'the results test … is based on the traditional tests for determining independent contractors'.
37 I agree with the following submission of the respondent:
While the "results test" is based on the common law criteria for characterising an independent contractor from an employee/employer relationship, the "results test" is satisfied by meeting 3 specified criteria (all being traditional indicia of a contract for service). Thus for the purposes of section 87-18(3) it is not necessary that all the recognised indicia of an independent contract are present. However, where many of the indicia of an independent contractor are present but the 3 "results test" criteria are absent the interposed entity or personal services entity is not entitled to a PSB Determination.
38 I was taken to taxation rulings dealing with the operation of the 1997 Act and the relevant revenue legislation. Whilst these rulings may in various degrees "bind" the Commissioner in the conduct of his duties, they do not bind me and were not shown to be secondary material that could be said to form part of the context of the legislation. The rulings, no doubt, contain the Australian Taxation Office's views of the relevant legislation. Those views on the meaning of the statute have, however, no particular weight coming from the arm of the Executive dealing with a statute with which it works daily: Corporation of the City of Enfield v Development Assessment Commission (2000) 199 CLR 135 at 151-154 [40]-[44]. The results test was discussed in [106]-[139] of TR 2001/8. The purpose and context of s 87-18(3) and the terms of the Guide in s 87-1 (made relevant for the purposes in s 950-150(2)(a),(b) and (c)) make relevant the well-known body of jurisprudence on the nature and characteristics of independent contractors to understanding the meaning and application of the provision. The rulings are of assistance in rehearsing the issues and discourse in that area. Both sides addressed at length upon that body of jurisprudence. Ultimately there was little, if any, difference between the contentions in this respect. It is unnecessary for me to undertake a detailed exegesis on the law distinguishing independent contractors from employees. It is sufficient to state the following.
39 The totality of the relationship between the parties is to be considered in order to ascertain the true nature of the relationship between the parties: Hollis v Vabu Pty Limited (2001) 207 CLR 21 at 33 [24] and Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 at 29. Control, in the sense of capacity to control, is an important, but not determinative, factor in the essential enquiry as to whether the individual is the servant or employee of another, in that other's business, or whether the individual carries on a trade or business on his or her own behalf. In that latter sense, is the individual conducting his or her own business? See Hollis v Vabu 207 CLR at 38-39 [39]-[40], citing with approval what was said by Dixon J in Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-Operative Assurance Co of Australia (1931) 46 CLR 41 at 48 and Windeyer J in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210 at 211-23.
40 The essential question posed in Hollis v Vabu may be seen to take one towards the so-called "integration" test discussed in cases such as Stevenson Jordan and Harrison Ltd v MacDonald and Evans [1952] 1 TLR 101 at 111 and Bank Voor Handel En Scheepvaart NV v Slatford [1953] 1 QB 248 at 295.
41 The right to control the manner of exercise of the work is a "prominent factor" and the "surest guide": Stevens v Brodribb 160 CLR at 24 and 36, respectively. A high degree of control or direction as to the character of the result may, however, not gainsay a contract for services, rather may only identify the care with which the principal attends the result to be produced: see Queensland Stations Pty Limited v Federal Commissioner of Taxation (1945) 70 CLR 539.
42 The contract to produce a specified result is also a mark, though not a conclusive one, of the independent contractor: World Book (Australia) Pty Limited v Commissioner of Taxation 92 ATC 4327 at 4334.
43 In contracts for a result, the method of payment may be important - whether payment is for the identified results that have been contracted for or for time spent at work. The latter will not necessarily be determinative against a contract for a result, but it may be an important factor in that conclusion. Nor is the existence of a contract for results inconsistent with an employment relationship: see Hollis v Vabu 207 CLR 21.
44 The capacity of work to be delegated or subcontracted, if present, is a significant factor weighing in favour of a conclusion of an independent contractor. So is the question of risk of costs for defective work.
45 Provision of necessary tools and equipment has always been an important factor: Stevens v Brodbribb 160 CLR at 36-37; Queensland Stations 70 CLR at 548. This is so because it tends to reflect the operation of a separate business. But, as made clear in Hollis v Vabu 207 CLR 21 (where the delivery riders owned and maintained their own bicycles, but were found to be employees) this is not determinative.
46 Custom and practice are important as part of all the relevant circumstances to be examined.
47 As can be seen from this brief outline, the Parliament has used three elements as the framework in which to answer the question whether the "results test" is met. Set against this background of well-known jurisprudence, governed by the need to assess the substance of the relevant relationships and circumstances contained in s 87-18(3)(a),(b) and (c) and understanding the proper width of those provisions, it is necessary to turn to the facts of each case.
48 Before turning to the facts of the applications, it is necessary to say something about the approach to the interpretation and application of s 87-18(3), in the light of the context and purpose revealed by the Ralph Report, the Explanatory Memoranda and the text and structure of Part 2-42.
49 The applicants, in dealing with the elements in s 87-18(3)(a), (b) and (c), focused substantially on the contract between Dare, and IRG and Mr Owen as trustee, respectively. To go beyond that contractual boundary, so it was submitted, required the treatment of each such contract as a sham or required each such contract to be varied. Dare was the immediate source of the income that flowed to IRG and Mr Owen as trustee under each contract with Dare and that Part 2-42 would treat as the personal services income of Mr Green and Mr Owen, subject to PSB determinations being granted. Thus, the result produced for which the income was received was to be ascertained, so it was submitted, from the contract between Dare and the relevant personal services entity. Likewise, whether s 87-18(3)(b) and (c) were satisfied was to be assessed by reference to the relevant contracts with Dare. At other points in the applicants' submissions it was put that the relevant issue was whether Mr Green (or Mr Owen) was an employee or independent contractor of Dare.
50 That, in my view, is too limited an approach. It can be accepted that neither Mr Green nor Mr Owen was an employee of Dare. The whole purpose of s 87-18(3), as is plain from the secondary material, is to bring an eye guided by substance, not form, to the circumstances of the provision of the personal services to the party who acquires or receives them. The central relationship for examination (irrespective of the nature and number of interposed entities) is between the individual whose exertions produce the personal service income and the requirer or acquirer of those exertions or services. Thus, in assessing what the income is "for" and whether the income is "for producing a result" (in s 87-18(3)(a)), one directs attention to all the circumstances of the individual, and in particular, what the individual does at, and with, the ultimate acquirer or requirer of the services. Here, as will be seen in the next section on the facts, Dare is a labour procurement agency. (Nothing turns on the particular choice of words to describe its function.) Mr Green and Mr Owen were passed on to the KJV as skilled engineers, for which Dare received a commission. Mr Green and Mr Owen did not provide their services to Dare, but to the KJV. The personal service entities, IRG and Mr Owen in his capacity as trustee, contracted with Dare to bring about the provision of the services of the individuals to the KJV. The question whether the income was for producing a result directs attention to how the services were provided and what they brought about when they were deployed at the KJV. This may be assisted, but is not governed, by the terms of the contract with Dare.
51 As to s 87-18(3)(b), the notion of the personal services entity being "required" to do what is identified may be seen to direct attention to the source of any such requirement, the contract with Dare. The notion of requirement, the balance of the words of the paragraph and the need to examine the substance of the matter, however, direct attention to the requirements at the point of delivery of the services. Again, to that question, the content of the Dare contract is not irrelevant, but it is not determinative.
52 As to s 87-18(3)(c), the liability of the personal services entity will depend upon the rights and legal obligations created by the various parties. Again, this will be affected by the Dare contract but not governed by it.
53 Of course, s 87-18(4) affects all these questions.