Lopez v Deputy Commissioner of Taxation - [2005] FCAFC 157 - FCAFC 2005 case summary — Zoe

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Lopez v Deputy Commissioner of Taxation

[2005] FCAFC 157

Federal Court of Australia (Full Court)|2005-08-15|Before: Crennan JJ

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Source facts

Court

Federal Court of Australia (Full Court)

Decision date

2005-08-15

Before

Crennan JJ

Source

Original judgment source is linked above.

Judgment (144 paragraphs)

[1]

THE COURT: 1 This is an appeal from orders of a single Judge of the Court dismissing an appeal against appealable objection decisions made by the respondent ("the Commissioner") disallowing objections to assessments of the appellant's liability to income tax for the years ending 30 June 1998 and 30 June 1999. 2 At the relevant time, the appellant, who is a chemical engineer, was a director and principal shareholder of Navarro Chemicals Pty Ltd ("Navarro"). By March 1997, as the primary Judge found, the business of Navarro was confined to exploiting the skill and expertise of the appellant in the manufacture of polyurethane foam and its application to insulate pipes used in the transport of liquid gas. At about that time, a Japanese corporation, Meisei Industrial Co Limited ("Meisei") was approached by the principal contractors ("the joint venturers") engaged in the construction of a liquid natural gas facility and pipeline on Bonny Island in Nigeria. Meisei was requested to tender for the "pre-insulation" of the pipeline. As the primary Judge also found, Meisei had no experience in work of this kind but agreed to undertake it at the insistence of the joint venturers and on their advice that the appellant and Navarro should be consulted in the preparation of the tender. 3 Accordingly, Meisei requested Navarro to provide "technical support" and consultancy and advisory support to Meisei in respect of the planning and operation of a plant for the production of polyurethane insulation and its application to pipes forming the pipeline for the Bonny Island Project. Navarro responded on 28 March 1997 with this estimate of its costs; '1. Design, procure and construct plant equipment ) $US 2. Load onto containers for shipment to Nigeria ) 3. Supervise plant set-up and commission ) 4. Provide you with the appropriate method statements and ITP [inspection and test plan] ) 1,200,000.00 ) 5. Supply shear keys and primary guides 470,000.00 6. Plant & Equipment 540,000.00 7. Foam and GRE Materials [glass reinforced epoxy] 1,700,000.00 8. Source expert personnel for foaming operations and glass reinforced epoxy coating of pipes 40.00 per hour

[2]

                                  Provide experienced plant manager for the duration of the project                                                                                                                                                                                                    100.00 per hour

                                 Cost of business class airfares for personnel, accommodation, meals, local transport and other on site costs provided for by Meisei                                                                                                                                  As required

Total estimated cost including 'No. 10' $US4,628,000.00

[4]

                                   Meisei will provide a building measuring 24 metres by 96 metres with a concrete apron on one end measuring 24 metres by 36 metres for pipe inspection and assembly. The opposite end of the building should have a concrete apron for pipe loading and dispatch.

[6]

4 Later, at the request of the joint venturers to have Navarro "representatives" present, the appellant travelled to Paris for discussions of engineering issues connected with the Bonny Island Project, particularly those affecting pipe insulation. Although it had originally been intended that Mr Byrnes, a former director and shareholder of Navarro, should perform the work of Plant Manager for which Navarro, in item 9 of the estimate reproduced at [3] above, had quoted $100 per hour, it was agreed in Paris between Mr Kobayashi of Meisei and the appellant that the appellant himself would undertake that work. Also at the Paris meeting, Mr Kobayashi and the appellant discussed a draft agreement which had been prepared by Navarro. Meisei, in turn, later submitted its own draft which recited, amongst other things, that Navarro would "make available [the appellant] in both the positions of Plant Manager and Coordinator/Consultant to Meisei [and] the technology" for which a "Technology and Management Fee" of $US1,200,000 stipulated in Navarro's original draft was to be payable. Navarro then proposed that the agreement should stipulate that "in consideration of Navarro providing the technology" Meisei would pay the "Technology and Management Fee" to the appellant. However, Meisei pressed for the agreement to recite that the Technology and Management Fee be paid to Navarro. In response, Navarro advised that its "Accounting Division" required changes to the draft "to minimise our tax liabilities." As the primary Judge found, the reference to an "Accounting Division" was one of a number of statements in Navarro's communications with Meisei designed to create an inflated impression of the size and commercial substance of Navarro. 5 Further revisions by Navarro of the draft agreement led to a formulation in which the fee of $US1,200,000 was described as a "Consultancy and Management Fee" and was expressed to be payable to the appellant "as a Consultant in Nigeria" supervising the set-up and commissioning of the insulation plant and making available "services/knowledge ….. to Meisei in Nigeria for the duration of the pre-insulation project." Between 1 and 7 July 1997 the agreement in its final form ("the Agreement") was executed by each of Meisei, Navarro and the appellant. What the learned primary Judge called the "salient points" of the Agreement were as follows; 'It is hereby agreed

[102]

9 The employment contract provided that the appellant would be paid an hourly rate as Plant Manager once the insulation plant was operational and that the "Consultancy and Management Fee" would cover the pre-production services provided by the appellant such as the set-up, trial and commissioning of the plant. The insulation plant began operations some time in February 1998. However, payments under the employment contract began on 1 January 1998 and continued until the appellant's services were terminated on 30 June 1998. Meisei paid the appellant $US194,067.50 for that period. 10 Meisei also paid Navarro's "Plant and Equipment Fee" of $US518,000 on invoices rendered by Navarro for the cost (with a margin) of plant and equipment acquired by Navarro for construction of the insulation plant. 11 The "Consultancy and Management Fee" was paid to the appellant personally on invoices rendered by Navarro. The fee comprised $US858,104 paid to the appellant in the year ending 30 June 1998 and $US253,076 in the year ending 30 June 1999. 12 In May 1999, the appellant lodged an income tax return for the year ending 30 June 1998. The appellant then amended the return in October 1999 by increasing the amount of income said to have been received as foreign employment income exempt from tax from $287,311 to $2,042,591. On 28 October 1999, the Commissioner determined the appellant's taxable income for the 1998 tax year to be $32,342 on which tax at $15,054.24 was payable. 13 In May 2000, the appellant lodged an income tax return for the year ending 30 June 1999 in which he did not declare any foreign employment income. On 17 May 2000, the Commissioner assessed the appellant's taxable income to be $11,232 for the 1999 tax year on which tax of $1,166.40 was assessed to be payable. 14 In March 2001, after further enquiries, the Commissioner reassessed the appellant's taxable income for the years ending 30 June 1998 and 30 June 1999 to include the "Consultancy and Management Fee" paid to the appellant. This had the effect of increasing the appellant's taxable income for the two years to $1,296,991 and $402,794, respectively. 15 Following reassessment, the appellant's taxable income for the year ending 30 June 1998 was determined to be $1,329,333 on which the tax payable was assessed to be $621,081.36. The appellant's taxable income for the year ending June 30 1999 was assessed at $414,026 and the tax payable as $185,194.22. The amended assessments each included additional tax for late returns, penalties for understatement of income and interest. 16 In the "Statement of Facts, Issues and Contentions" filed by the Commissioner, the amended assessment for the year ending 30 June 1998 is shown to have included in the appellant's taxable income the sum of $1,296,991 said to have been received as the "Consultancy and Management Fee". 17 In fact, it was accepted by the learned primary judge that the amount received by the appellant in the 1998 tax year in respect of his "Consultancy and Management Fee" was $US858,104 ($A1,257,295). The Commissioner also included a sum of $A27,093 which had been paid to the appellant from moneys paid to Navarro for "Consumables". There remained, however, an unexplained difference of $12,603 between those two items and the full amount added to the appellant's taxable income by the Commissioner. 18 It was also accepted in the proceedings at first instance that the "Consultancy and Management Fee" received by the appellant in the year ending 30 June 1999 was $US253,076 ($A402,794) which matched the amount by which the taxable income of the appellant had been increased in the amended assessment for that year. 19 In April 2001 the appellant filed notices of objection to the amended assessments. 20 On 11 June 2001, the appellant was informed that the objection to the amended assessment for the year ending 30 June 1998 had been allowed in part by reducing the taxable income by $12,603, but had been disallowed in relation to the remainder of the objection. Notice of an amended assessment giving effect to that partial allowance of the objection issued in August 2001. The appellant was also informed that the objection to the amended assessment for the year ending 30 June 1999 had been disallowed. 21 In August 2001 the appellant commenced proceedings in this Court. The issue before the primary judge was whether the "Consultancy and Management Fee" constituted earnings to which s 23AG(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") applied amounted to "foreign earnings" derived by the appellant from "foreign service" being service which had been performed in Nigeria in the capacity of an employee. It was not in issue that the remuneration paid to the appellant under the Employment Contract was tax exempt income under s 23AG(1).

[122]

25 The learned primary Judge also considered that the definition of "foreign earnings" in s 23AG(7) was intended to have a broad coverage because "earnings" which occurs first in that definition is a word of wide import and because it was thought necessary to cut down the width of "earnings" by specifically excluding from the definition "superannuation, termination of employment and kindred payments", some of which are not income derived from service in the capacity of an employee. His Honour went on, at [41], to note that; '… where the expression "engaged in the performance of personal services" is expressly defined to include both services performed in the capacity of an employee and services performed under a contract for personal services, the word "earnings" is not used as a descriptor of income derived by a person engaged in the performance of personal services in the capacity of an employee. (See: subs 27A(1) - "eligible foreign remuneration", "exempt resident foreign termination payment", "qualifying service"; subs 23AF(1); subs 23AF(3)(a); subs 23AF(18) - "eligible foreign remuneration").' 26 The learning primary Judge next examined the antecedent of s 23AG, s 23(qa) which had been regarded in Commissioner of Taxation v White (1985) 7 FCR 566 at 571-574 as equivocal in meaning. Support was also derived from the insertion into the Act in 1980, of s 23AF which granted an exemption from tax for income attributable to "the performance of personal services" outside Australia in respect of "an approved project". That section, his Honour considered, made it clear that the exemption from tax applied whether the income was directly attributable to "the performance of personal services" in the capacity of an employee or under a contract for personal services. 27 It was also considered that the Explanatory Memorandum which accompanied the Bill for the Act which inserted s 23AG made clear that the purpose of that section was "to remove the general exemption from tax provided by s 23(q) and replace it with a general liability on an Australian resident to pay tax on earnings derived from foreign sources, offset by a credit for tax paid abroad. Thereafter, exemption from tax for income derived abroad by a natural person who was an Australian resident was to be limited, save for s 23AF, to income derived as salary or wages". In his Honour's view, the phrase "as the holder of an office or in the capacity of an employee" in the definition of "foreign service" in s 23AG(7) has a restrictive rather than an expansive effect and the first limb "holder of an office" was not intended to extend the connotation of "in the capacity of an employee". Accordingly, the learned primary Judge concluded that "in the capacity of an employee" in s 23AG is to be confined to "employee" in its strict sense and, insofar as s 23AG(2)(c) and (d) and the exclusionary words in the definition of "foreign earnings" in s 23AG(7) are capable of application to income derived otherwise than in the capacity of an employee, they are to be taken as having been inserted out of an abundance of caution. 28 In the reasons at first instance the principal issue in this case was identified as being whether the moneys paid to the appellant on account of the "Consultancy and Management Fee" had been derived by him from service in Nigeria "in the capacity of an employee", assuming those moneys to have constituted "foreign earnings" as defined in s 23AG(7). That assumption was disputed by the Commissioner. This principal issue, according to the parties, was to be answered by determining whether the appellant had provided services for the fee as an employee or as an "independent contractor". 29 The matters which weighed with his Honour in concluding that the appellant had derived the Consultancy and Management fee as an independent contractor were chiefly to be found within the four corners of the Agreement between the appellant, Navarro and Meisei. Although the Agreement stipulated that Navarro should assume responsibility for designing, procuring and constructing plant and equipment, loading it for shipment to Nigeria and providing Meisei "with the appropriate method statement and ITP", it made no provision for Navarro to receive any fee over and above the "Plant and Equipment Fee". 30 In his examination of the Agreement, the learned primary Judge noted that, under the first draft Agreement prepared by Navarro, the setting-up and commissioning of the insulation plant were to be performed by Navarro to earn a "Technology and Management Fee" to be paid to the appellant. Under the Agreement in its final form, Navarro's undertaking in respect of the setting up and commissioning of the plant remained unchanged except for the supervision of the work in Nigeria which became a service to be performed by the appellant. As to that change his Honour observed, at [58] of his reasons; '… The final form of the Agreement may be said to reflect the understanding of the parties that the applicant was the controller of Navarro and was the organic source of the skill and expertise to be made available to Meisei by Navarro and the applicant under the Agreement and that the applicant would be the organic personality through which the services offered by Navarro would be performed.'

[126]

to act as Plant Manager of Navarro employed by Meisei during shop pre-insulation application in Nigeria.' 33 His Honour also concluded that, insofar as services which had been provided by the appellant in conjunction with his employment by Meisei as Plant Manager also met the responsibilities of Navarro under items 3, 4 and 5 of cl A7 of the Agreement, they had been "services provided by Navarro through" the appellant. That analysis was said to be consistent with the terms of the Employment Contract which recognised that the services provided by the appellant in the setting-up, trial and commissioning of the insulation plant were services for which he was to be paid the "Consultancy and Management Fee". The period of employment under the Employment Contract was variable according to the schedule for the commencement of the pre-insulation work or "actual production". 34 The fact that the appellant performed the services of setting-up and commissioning the insulation plant during the working hours and under the same regime and routines as applied to employees of Meisei and was subject to direction from time to time by officers of Meisei did not, in his Honour's view, tend to a conclusion that the appellant was at all material times serving Meisei in the capacity of an employee. The degree of control exercised by Meisei was regarded as a necessary incident of the need to maintain the safety and security of the whole complex and did not blur the clear distinction which the primary Judge perceived between the work performed as a consultant and that undertaken as an employee of Meisei pursuant to the Employment Contract. His Honour described that distinction as follows, at [67] of his reasons; 'Those circumstances did not make the applicant an employee of Meisei and it was not contemplated by the Agreement that the applicant would become an employee of Meisei save for the period in which the applicant would be the "Plant Manager of Navarro employed by Meisei". The Employment Contract gave effect to that intention. The terms of the Agreement and the Employment Contract made a clear distinction between the services to be provided by Navarro and the applicant as consultants and the work to be performed by the applicant in the capacity of an employee of Meisei. The latter was defined by a period of employment for which a salary was to be paid. The former were services involving the provision of know-how, advice and supervision by Navarro, or the applicant on behalf of Navarro or on his own account, as consultants. The duties under the Employment Contract were limited to supervising the "day-to-day running" of the insulation plant and the desired level of production. As the applicant insisted in cross-examination other services provided by the applicant for the "Consultancy and Management Fee" for the duration of the pre-insulation project, including advice to Meisei in respect of its field operations, were not services provided as Plant Manager under the Employment Contract.' 35 In his Honour's view, the parties understood that the lump sum "Consultancy and Management Fee" which the Agreement provided was to be paid in three instalments was "not remuneration for employment of the [appellant] as an employee of Meisei, but for technical skill and expertise to be provided by the [appellant] and Navarro as consultants to Meisei." 36 In respect of those services, his Honour held, the applicant contracted with Meisei in the same manner as Navarro. Accordingly, the payments comprising the "Consultancy and Management Fee" which had been received by the appellant were not earnings derived from service in Nigeria in the capacity of an employee. They were received for the delivery of advice and technology pursuant to contractual obligations which were not part of, nor subject to, a relationship of employer and employee between Meisei and the appellant. 37 It was next noted in the reasons below that the appellant had sought to explain the items of "Navarro's responsibility" in cl A7 of the Agreement as a "mix-up" attributable to the fact that Nigerian laws restricted the ability of foreign entities to carry on business in that country. However, his Honour rejected that explanation because the restriction had not prevented Meisei, Navarro and the applicant from executing the Agreement in its terms and it had not been contended by Meisei that Navarro had failed to perform any of its obligations thereunder. 38 His Honour held that the Agreement did not contemplate that the appellant would provide services both as a consultant and a plant manager as an employee of Meisei. Moreover, the terms of the Employment Contract demonstrated that the status of employee would only arise when the appellant entered on his duties as Plant Manager. The fact that he was recognised as having done so before production began was attributable solely to Meisei's acceptance of responsibility for delays in putting the plant into operation. 39 Any direction given by Meisei to the appellant before he embarked on his duties as Plant Manager, his Honour considered, "spoke equally of Meisei having contracted for the use of the [appellant's] services as a consultant" directing him as to the services required and when and where they were to be provided. The history of negotiation of the Agreement, the lump sum fee payable under it without deduction of income tax and the appellant's level of skill were all regarded as negativing the existence of an employer/employee relationship. On the other hand, the delivery of the services within normal working hours and conditions did not tend to the opposite conclusion because the appellant had conceded that "sub-contractors and other independent personnel were all subject to the same conditions on site." 40 An application to the facts of the present case of the indicia of the difference between the two relationships spelled out in cases like Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16, Hollis v Vabu Pty Ltd (2001) 207 CLR 21 and Builders Workers' Industrial Union of Australia v Odco Pty Ltd (1991) 29 FCR 104, resulted in an "overwhelming" weight of material being identified as suggesting that the receipt by the appellant of instalments of the lump sum "Consultancy and Management Fee" had been under an agreement for the provision of his services as a consultant and adviser and partly in discharge of Navarro's obligations. His Honour then concluded; 'The [appellant's] position as an employee of Meisei was limited by Meisei and the applicant to the provision of service as a Plant Manager. Services provided by the applicant prior to or outside that employment were in the exercise of the high level of skill and expertise that the applicant possessed and was able to exercise on his own behalf or on behalf of Navarro. Access to that degree and skill of expertise was the linchpin of Meisei's ability to perform its obligations under the sub-contract with the joint venturers and was made available to Meisei by the Agreement. The Agreement was a contract for the provision of services to Meisei by Navarro and the [appellant].'

[127]

Ground 1 41 This ground was directed at the conclusion of the learned primary Judge that it was plain that in enacting s 23AG(7) it was the intention of Parliament to limit the exemption from tax to persons who derived earnings abroad as salary or wages and it was not Parliament's intention to adopt the alternative construction referred to and rejected in Commissioner of Taxation v White (1985) 7 FCR 566 by applying to the words "in the capacity of an employee" a concept of employment that was wider than that accepted in White. It was submitted on behalf of the appellant that the words "earnings" in the definition of "foreign earnings" in s 23AG(7) bears its ordinary meaning of money, wages, income or gain earned or derived (from work etc). In the context of foreign earnings derived by an employee from foreign services within s 23AG(1) it means the full sum for which the employee is engaged to work in the foreign country in the capacity of an employee. 42 In support of this interpretation, Mr Buss QC, who appeared with Mr P Fletcher for the appellant, referred to Glazebrook v Accident Compensation Commission [1988] VR 454 where a Full Court of the Supreme Court of Victoria took an expansive view of the words "earnings" as appearing in the compound expression "the worker's pre-injury average weekly earnings" in s 95(1) of the Workers Compensation Act 1958 (Vic). The applicant in that case was required, as a condition of employment, to provide at his own expense a delivery truck suitable for use in his employer's service. The Full Court held that his "pre-injury average weekly earnings" meant the gross sum for which he was engaged to work and not a rate of pay after deducting the expenses incurred in providing the truck. See also Hagen v Ian Heraud & Associates Pty Ltd (1998) 39 ATR 336 where Byrne J of the Supreme Court of Victoria had to consider the application of the Occupational Superannuation Standards Regulations 1987, reg 3(6)(a) which provided that for the purposes of the Regulations "a person is gainfully employed if a person is employed for earnings including business income, bonuses, commissions, fees, gratuities, salaries or wages." His Honour observed, at 345; '"Earnings" in its ordinary meaning is not limited to monetary remuneration. Accepting that it may take on a more restrictive meaning from the words accompanying it in the regulation, the words which follow "earnings" are connected to it by the word "including". Moreover, expressions such as "business income", "bonuses", or "gratuities" are not limited to mere monetary receipts. This is particularly the case in legislation such as that concerned with taxation and superannuation. It is pertinent to note in this regard that the role which the concept of gainful employment plays in the regulatory scheme. The OSS Regs are not concerned with the amount of the gain nor with its quantification for any calculation or other purpose. It is sufficient in order to characterise a person as employed part-time or full-time that the person be simply gainfully employed.

[130]

Ground 4 44 By this ground the appellant attacked the conclusion, said to have been reached at [40] of the reasons below, that the terms "consultant" and "independent contractor" were synonymous. The passage in which that error was claimed to have been committed is in these terms; 'On their face the words "foreign earnings derived" referred to in subs 23AG(1) would not be confined to wages and salary paid to an employee, and would include earnings by way of fees or other payments derived by a person engaged under a contract for services as a consultant or independent contractor. Subsections 23AG(2)(c) and (d), support that construction in that they provide that foreign earnings derived in a foreign country are not exempt from tax under the section if the law of the foreign country where the earnings are derived generally exempts "income derived in the capacity of an employee", "income from personal services" or "similar income" from income tax or does not provide for the imposition of income tax thereon.' 45 Counsel for the appellant accepted that an independent contractor is one who contracts to perform work for another but is not an employee of that other person. Usually an independent contractor carries on a trade or business on his or her own account and does not serve as an employee in the business of the person to whom the services are rendered. Thus, in Marshall v Whittaker's Building Supply Co (1963) 109 CLR 210, Windeyer J observed, at 217; '… This depends on the distinction between a servant and an independent contractor. That is rooted fundamentally in the difference between a person who serves his employer in his, the employer's, business, and a person who carries on a trade or business of his own. First formulated in its modern form in relation to vicarious liability, the distinction came somewhat deviously and indirectly into the early law of workmen's compensation. It now enters it expressly and directly because, in most workers' compensation statutes, a worker means any person who enters into or works under "a contract of service". It was argued for the appellant that the deceased was a servant of the respondent, paid at a piece work rate. None of the incidents of his employment was, of itself, it was said, necessarily incompatible with his being a servant. That may be so, but the legal character of the relationship created by the contract depends upon the total effect of its terms, and especially on whether the supposed servant was subject to the commands of the employer, not only as to what he should do but as to how he should do it. …' 46 A "consultant", so the appellant's argument went, is one who gives professional or expert advice and the use of the term does not, of itself, signify whether the advice is given in the capacity of an employee or as an independent contractor.

[131]

Grounds 5, 6, 7 and 8 47 These grounds focused on an analysis of the Agreement between Meisei, Navarro and the appellant. They involved the contention that, even in deriving the "Consultancy and Management Fee", the appellant had been an employee of Meisei. That fee constituted "foreign earnings" as defined in s 23AG(7) derived by the appellant from service in a foreign country in the capacity of an employee within the definition of "foreign service" in the same sub-section. By corollary, it was said, the learned primary Judge had erred in holding that the Consultancy and Management Fee had been paid to the appellant as an independent contractor to, and not as an employee of, Meisei. A related error imputed to his Honour was in holding that the Consultancy and Management Fee had been paid, at least in part, for technical skill and expertise to be provided by Navarro as consultant to Meisei. It should have been held payable and paid (to the extent that it was actually paid) to the appellant in the capacity of an employee of Meisei. 48 It was first submitted in support of these grounds that modern authorities allow a greater degree of flexibility in characterising a relationship as that of employer and employee than that permitted by the "compartmentalised" approach ordained in earlier cases. The "control test" in its modern emanation focuses more on the right of the putative employer to exercise control than on the degree to which control has actually been exercised; Stevens v Brodribb (supra), at 24. 49 It was submitted, in the same context, that the so-called "organisation test" is one of the indicia which may be evaluated in drawing the distinction, but it cannot be determinative in characterising the contract as being one of service if the application of the control test, either on its own or with other indicia, yields the conclusion that it is a contract of services: Stevens v Brodribb (supra), at 27. The adaptation of the common law to changes in the nature of work including increased specialisation and the deployment in commerce and industry of members of professional bodies has been noted by the High Court in Hollis v Vabu Pty Ltd (supra), at 39-41. The fact that a presumptive employer has knowledge and skill in relation to the work performed which is at least equal to that of the presumptive employees, but chooses to allow them great scope for individual initiative in how and when they perform the work does not militate against the contracts being ones of employment rather than for services: Federal Commissioner of Taxation v Barrett (1973) 129 CLR 395 at 404. 50 Counsel for the appellant also referred to the judgment of the Victorian Court of Appeal in Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vic) (1997) 37 ATR 528 [(1997) 97 ATC 5070] as supporting the propositions that the way in which the parties to the contract have chosen to characterise the relationship, although relevant, is not determinative and the question is one to be resolved, not mechanically, but as a matter of fact and degree on an overall impression of the accumulated details of a given case. 51 It was accepted that this exercise required, in part, an application, on their proper construction, of the Agreement, the "Contract Conditions Bonny Island" and other associated documents. That application was said to compel the conclusion that the appellant had been employed by Meisei as a technical and production consultant in addition to his acknowledged employment as Plant Manager. The Consultancy and Management Fee had been paid to him for his service as such consultant. 52 Counsel for the appellant undertook a detailed identification of numerous provisions of the Agreement which were said to support a finding that the appellant had been employed by Meisei as a technical and production consultant as well as a plant manager. None of those provisions stipulated in terms that the relationship between the appellant and Meisei was to be one of employee and employer. Nor, however, did any of the provisions expressly state that the appellant was to be an independent contractor to Meisei. 53 As to the "Contract Conditions Bonny Island," it was noted that the written document obliged Meisei to install a "shop building measuring 24 metres by 96 metres". There was an obligation imposed on Meisei by cl 11 of the same document to; 'provide workers for the site facility erection: 2 electricians, 2 welders and 2 fitters. Meisei shall erect facilities including electric and cable trays overhead plus piping for an air distribution (Details shall be provided by Navarro).' 54 The appellant also relied on facsimile transmissions ("the facsimiles"), the first of which, dated 8 July 1997, was from Meisei to Navarro. That message sought from Navarro; '(1) The reasons why Consultancy & Management Fee (USD 1,200,000) will be payed to Mr. Ciano Lopez, not to Navarro Chemicals. Also, we would like to receive your clear statements regarding the scope of Navarro Chemicals and scope of Mr. C Lopez.' 55 The second facsimile was by way of response and dated 9 July 1997. It contained these substantive paragraphs; '(1) Fidenciano Lopez will perform his duties in Nigeria employed by Meisei as Plant Manager. He is also employed by Meisei as a Consultant in Nigeria to provide Meisei with whatever services are required to satisfy the client, TSKJ, and Meisei. Since all these activities are carried out in a foreign country and F.L. is employed in the above mentioned capacities by a foreign company (Meisei), his earnings are tax exempt in Australia, provided he is out of the country for a minimum of 91 days.

[134]

56 The third document to which the appellant pointed in this context was the Employment Contract which had been signed by the appellant on behalf of Navarro in early August 1997. It provided that the "start of the employment" would be "around October 1st 1997" and the "end of the employment" would be "around May 1st 1998". It also provided "The employment period and start/end date will be adjusted according to the developed Pre-insulation schedule". 57 Counsel for the appellant noted the appellant's evidence that he was supposed to arrive in Nigeria on 1 October 1997 but did not, in fact, arrive in that country until 10 November of the same year. Specific reference was made to the stipulation in cl 3-1 of the Employment Contract reproduced at [8] of these reasons that "Services before actual productions such as set-up, trial and commissioning shall be scope of contract for consultant and management fee." Counsel for the appellant also referred to other clauses of the Employment Contract whereby Meisei undertook to pay certain costs which might be expected to be incurred by, or in connection with, Australian workers performing work in Nigeria. It was said to be apparent from the Agreement and the facsimiles that the appellant was to work as a "coordinator/consultant". That, combined with the fact that the period of "the employment" covered by the Employment Contract was to be from 1 October 1997 to 1 May 1998 was said to indicate that the appellant's work as a coordinator/consultant started in October or November 1997 and was intended to be governed by the Employment Contract. That indication, Counsel submitted, was reinforced by the conduct of the parties. 58 As to the characterisation of the fee of $1,200,000, Counsel submitted that it was common ground that it was income on which the appellant, not Navarro, had been assessed to tax. The Commissioner did not attempt to apply Pt IVA of the Act to the arrangement between Navarro, the appellant and Meisei which was not suggested to be, in any respect, a sham. The only question in issue was whether the fee was assessable or exempt income of the appellant. Since the fee had been payable and paid by Meisei to the appellant it was only necessary to determine from the contractual documents the manner of the payment and the reason for it, being the consideration for which the fee had been paid. Once that had been determined it was only necessary to construe and apply s 23AG of the Act to ascertain whether the fee constituted "foreign earnings" derived by the appellant from "foreign service" and, if so, what apportionment of the fee should be made to reflect work done by the appellant in Australia and work done by him in Nigeria. 59 Although acknowledging that the appellant had originally intended that he and the other Australian personnel required to discharge Navarro's contractual obligations to Meisei should be employees of Navarro, Counsel for the appellant maintained that he had at all times intended that the fee which he was to receive for working more than 91 days outside Australia should be exempt from Australian tax. Against that consistent intention the "transition" from Navarro to Meisei as employer did not detract from the significance of the fact that the fee was always to be payable by Meisei to the appellant. 60 The size of the "Consultancy and Management Fee" was said to be irrelevant to the characterisation of the relationship between the appellant and Meisei: see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 60. In any event, the magnitude of the fee was not disproportionate to the time which he was required to spend in Nigeria and the upheaval and inconvenience attendant on working in that country. 61 In relation to the work which the appellant performed to earn the fee it was pointed out that Attachment - 1 to the Agreement, which provided for what the Consultancy and Management Fee should include, stipulated that the appellant was; 'to supervise plant set-up and commissioning as a Consultant to Meisei in Nigeria;

[138]

Ground 9 64 The final contention on behalf of the appellant was that the learned primary Judge had erred in ruling as inadmissible pars 34 and 66 of the appellant's affidavit sworn 3 June 2003 and exhibits FNL32 and FNL37 to that affidavit. Paragraph 34 apparently referred to the issue of identification badges to the appellant by TSKJ, a consortium which had been set up to manage the Bonny Island Project. The badges comprised exhibit FNL32 to the appellant's affidavit. Two of them bore the appellant's name in the space reserved for "Name" and, in the space designated "Employer", recited "Marubeni Eng W/A Limited." The appellant in par 17 of the affidavit sworn 3 June 2003 explained that he had been told by Mr Kobayashi of Meisei that; '… the way it had to happen was that a letter of invitation would be issued and this would come not from Meisei but from Marubeni Corporation because Meisei itself was not registered to carry on business in Nigeria, whereas Marubeni, with whom Meisei had a close relationship, was and without that registration no company is permitted to bring employees into Nigeria. Mr I. Kobayashi also statedto me words to the effect that the process for a non-resident company to become registered to do business in Nigeria was complicated and involved having an approved Nigerian partner in its Nigerian business and that because Marubeni had been in Nigeria for a long time, it was a lot easier for Meisei to use Marubeni instead of going through the process of itself registering to carry on business in Nigeria. He also stated to me words to the effect that the project was already behind schedule and Meisei could not afford the delay involved in getting registered in Nigeria.' 65 Paragraph 66 of the same affidavit apparently exhibited, as exhibit FNL37, a letter related to the payment of taxes in Nigeria which had been written on 12 December 1997. The letter was on the letterhead of "MEISEI Industrial Co Ltd / MARUBENI ENGINEERING West Africa Ltd" and was in the following terms; 'To whom it may concern. Re:- Payment of taxes. This letter serves to notify you that Mr Fidenciano Lopez, employed by us since the 10th November 1997 on the Bonny Island NLNG Project in Nigeria has paid all income and personal taxes as required by the Federal Government of Nigeria.'

[139]

The Commissioner's Submissions 66 Mr Corboy SC, who appeared with Mr Kirkwood for the Commissioner, accepted that the learned primary Judge had determined the application of s 23AG by resolving that the appellant had not earned the Consultancy and Management Fee "in the capacity of an employee". However, Counsel submitted, if a finding can be imputed on his Honour that the Consultancy and Management Fee was "not foreign earnings", that finding accorded with the proper construction of the definition of "foreign earnings" in s 23AG. It was pointed out in support of this contention that the definition does not include the term "fee", which must be taken to have been a deliberate omission. Secondly a lump sum fee payable in instalments, one by way of a deposit, the second on the completion of commissioning of the plant and the others on acceptance of produced pipes did not fit comfortably within the genus erected by the expression "earnings, salary, wages, commission bonuses or allowances". 67 As to Ground 4 of the Notice of Appeal, Counsel for the Commissioner disputed that the learned primary Judge had held that the term "consultant" was synonymous with "independent contractor". However, it was submitted that the former expression carries a connotation "that is more consistent with a person being an independent contractor than an employee". 68 There was no real difference between the parties to the appeal as to the principles to be applied in determining whether the appellant had earned the Consultancy and Management Fee as an independent contractor to, or an employee of, Meisei. The differences were essentially ones of emphasis. Counsel for the Commissioner stressed that the exercise requires an examination of the substance of the relationship and does not depend on the terms used by the parties or the way in which they choose to document their arrangements: Roy Morgan Research Centre v Commissioner of State Revenue (Vic) (supra) at 537. The right to exercise control over the performance of work may be a useful guide but the reservation of such a right cannot transform into a contract of service which is in essence a contract for service: Queensland Stations Pty Ltd v Federal Commissioner of Taxation (1945) 70 CLR 539 at 552 and Federal Commissioner of Taxation v Barrett (supra), at 401. A critical index was said to be the identification of the party who is to produce the contemplated result. If it is the party supplying the labour, that supports the characterisation of that party as an independent contractor. On the other hand, if the principal himself is to produce the result, the person supplying labour which contributes to the achievement of that result is more likely to be an employee: World Book Pty Ltd v Federal Commissioner of Taxation (1992) 23 ATR 412 at 419-420. Reference was also made to the observation of Steytler J in Climaze Holdings v Dyson (1995) 13 WAR 487 at 494 that the concept of rendering invoices for work done was quite foreign to an ordinary relationship of employer and employee and arrangements for the payment of taxation may be a significant factor. Counsel for the Commissioner identified several respects in which the facts of the present case were said to contradict a conclusion that the appellant had derived the Consultancy and Management Fee as an employee of Meisei. In the first place the Agreement distinguished between the appellant "in his personal capacity as a Professional Consultant" and "as a Plant Manager employed by Meisei". It was only in the latter capacity that the appellant was to be employed pursuant to the Employment Contract after the commissioning of the plant and equipment had been completed and production of pre-insulated pipes had commenced. That dichotomy, Counsel for the Commissioner contended, was consistent with the course of negotiations between Meisei, Navarro and the appellant, during which the appellant was added as a party to the Agreement. 69 Particular reference was made to the requirement in cl A4 of the Agreement that the appellant make himself in Australia and Nigeria "as technical and production consultant". Another point of distinction was said to be that Attachment - 1 estimated an hourly rate of pay of US$100 an hour for the appellant as one of the key personnel "sourced by Navarro, employed by Meisei" in respect of whom Meisei was to arrange "All Insurance" at a premium of up to US$500 a year. 70 It was next emphasised that Attachment - 2 to the Agreement stipulated that the appellant was to supervise plant set-up and commissioning "as a consultant to Meisei in Nigeria" but only when acting as Plant Manager was he described as "employed by Meisei". That was said to be consistent with the fact that Navarro had assumed responsibility under the Agreement for supervising plant set-up and commissioning which was one of the matters included in the consideration for the Consultancy and Management Fee. That assumption of responsibility by Navarro was inconsistent with service being provided by the appellant as an employee of Meisei. No such inconsistency would arise if Navarro were to be responsible for consulting services to be provided to Meisei by the appellant as an independent contractor. The facsimiles were said not to contradict the respondent's analysis because they were sent after the Agreement had been reduced to writing in its final form and did not evince any intention or acceptance by Meisei that it should be party to a contract of service with the appellant in his capacity as project co-ordinator or consultant. 71 The Employment Contract was a focus, according to the Commissioner, of the difference between the appellant's work as a consultant or co-ordinator on the one hand and as a Plant Manager employed by Meisei on the other. As Plant Manager the appellant was to receive a "rate of pay" of US$100 an hour whereas the Consultancy and Management Fee was a lump sum of US$1,200,000 payable contrary to normal employment practice in three instalments. In the event, the third instalment was paid progressively against invoices rendered by Navarro. The appellant's wages or salary as Plant Manager were by contract paid monthly evidenced by a pay advice generated by Meisei after the appellant had completed and submitted time sheets for the month. That was said to be consistent with normal employment practice as was the payment of the wages or salary into a joint bank account in Perth in the names of the appellant and his wife. By way of further contract, the Consultancy and Management Fee was paid into a Swiss bank account established by the appellant for the purpose. 72 Another significant difference between the terms and performance of the Agreement and the Employment Agreement was said to be that the appellant was not required to keep and did not keep a record of work done by him as a consultant or co-ordinator. On the other hand, he was required to, and did, keep time sheets when employed as Plant Manager. Similarly, no local tax was paid on the Consultancy and Management Fee which the appellant did not declare in his Australian tax return. However, Meisei paid Nigerian tax on the conceded salary as Plant Manager which the appellant also included in his Australian tax return for 1998. Moreover, by cl B7 of the Agreement in the event of "force majeure (riot, war, revolution etc) that causes the work to be stopped indefinitely" Meisei was to pay "wages up to stopping point". However, in the same circumstances, the amount outstanding from the total Consultancy and Management Fee was to be paid in full. 73 The Commissioner's analysis of the Agreement and the Employment Agreement and the conduct of the parties thereunder was said to be consistent with the preliminary negotiations, the quotation reproduced at [3] above and the successive drafts of the Agreement. It was not until 23 June 1997 that the appellant was added as a party to the proposed contract which became the Agreement. In the course of making the changes, no reference was made to a need for the appellant to become an employee of Meisei in order to accommodate the immigration and business laws of Nigeria. The only contemporaneous explanation of the changes was that they "are necessary to minimise our tax liabilities" - clearly a reference to liabilities to Australian income tax. 74 Counsel for the Commissioner further submitted that, when account is taken of the plant and equipment fee to which Navarro rendered invoices being US$540,000 less the agreed value (US$22,000) of an item ultimately supplied by Meisei, the inference is that the Consultancy and Management fee of US$1,200,000 was intended to compensate both Navarro and the appellant for time and money expended on designing, procuring and constructing plant and equipment, loading it for shipment and providing method statements. The fact that the appellant performed work referable to the Consultancy and Management Fee says nothing about the capacity in which the work was performed. 75 It was accepted on behalf of the Commissioner that if it were found that part of the Consultancy and Management fee had been derived by the appellant from service rendered to Meisei in Nigeria and part from service rendered in Australia, an apportionment would be required to afford to the former part of the earnings the exemption provided by s 23AG(1). A reasonable method of apportionment in accordance with Ronpibon Tin NL v Federal Commissioner of Taxation (supra) would be by reference to the number of days spent by the appellant from 1 July 1997 and the number of days spent in Nigeria until 1 January 1998 when the appellant commenced to be paid at the rate of US$100 an hour for his service as Plant Manager. 76 There was no error, the Commissioner contended, in the learned primary Judge's ruling that pars 34 and 66 of the appellant's affidavit sworn 3 June 2003 were admissible.

[140]

Resolution of the issues on the appeal 77 In our view it is unhelpful, as part of the process of statutory construction required by this case, to focus solely on the expression "foreign earnings". What s 23AG(1) exempts from tax are "foreign earnings derived … from … foreign service" which has been engaged in for a continuous period of not less than 91 days. What the expression "foreign earnings" connotes is therefore limited or controlled by the requirement that the earnings be derived from "foreign service". That requirement, in turn, directs attention to the need created by the definition in s 23AG(7), of "foreign service" for the service to be rendered in a foreign country "as the holder of an office or in the capacity of an employee." 78 "Earnings", we accept, has a wider connotation than salaries or wages and includes, as the definition of "foreign earnings" in s 23AG(7) indicates commission, bonuses and allowances all of which are capable of being, and frequently are, derived in the capacity of an employee from an employer. We also incline to think that the presence of the word "earnings" in the definition is sufficient to allow it to comprehend remuneration, like tips or gratuities, received from persons other than the employer provided that it is sufficiently incidental to the employment to permit it to be characterised as having been received in the capacity of an employee. A person who is concededly an employee but derives a fee or other remuneration as an independent contractor pursuant to a contract separate from his or her contract of employment, whether that separate contract is with the conceded employer or some third person, does not derive that fee or other remuneration "in the capacity of an employee". 79 We therefore consider, with respect, that the learned primary Judge was correct in identifying the principal issue to be resolved in this case as being whether the Consultancy and Management Fee of US$1,200,000 had been derived by the appellant in Nigeria in the capacity of an employee. 80 We accept that, in drawing the distinction between a contract of service and a contract for services, the term "consultant" is not to be treated as synonymous with "independent contractor." Not infrequently as a matter of current usage firms of solicitors or accountants or the like hold out, as a "consultant," a person who, on a proper application of the tests discussed below, is concededly an employee of the firm. The fact that the parties to the relevant contract choose to confer on such a person a title or nomenclature like "consultant" is not determinative of the true character of the relationship between them: Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vic) (supra) at 537 and the cases there cited. 81 However, we do not consider that in the passage quoted at [44] above the learned primary Judge treated the terms "consultant" and "independent contractor" as synonymous. All that his Honour was there saying was that remuneration derived by a consultant or independent contractor howsoever called under a contract antecedently determined to be one "for services" is prima facie comprehended within the phrase "foreign earnings". The question remained in the present case, as his Honour recognised, whether the Consultancy and Management Fee had been derived by the appellant as a party in his personal capacity to a contract with Meisei "of service" or "for services". 82 The authorities canvassed in the respective submissions of the appellant and the Commissioner make it clear that drawing the distinction involves questions of fact or of mixed fact and law. It is not to be undertaken mechanically by checking a list of indicia which decided cases have identified as tending towards or against characterising a person as either an employee or an independent contractor: see Hall (Inspector of Taxes) v Lorimer [1992] 1 WLR 939 at 944 which was cited with approval by Tadgell JA in Green v Victorian Workcover Authority [1997] 1 VR 364 at 375. As the High Court noted in Stevens v Brodribb Sawmilling Co Pty Ltd (supra) at 37, the available indicia do not always point in the same direction and do not always have the same significance. In the present case, this Full Court has had available to it the oral testimony and the documentary evidence which had been received by the learned primary Judge. However, it has not been demonstrated by the appellant that his Honour misapplied any of the tests made available by that material or overlooked some feature of it which should, or could, have proved decisive in characterising the appellant's work in Nigeria before 1 January 1998 as having been undertaken as an employee of Meisei. 83 Minds may obviously differ on the weight or significance to be attached to particular elements of the relationship which are demonstrated by the evidence in a case such as this. Although it may not be essential to the dismissal of the appeal, the members of this Full Court, if deciding the matter afresh after drawing all appropriate and available inferences, would, on balance, have come to the same conclusion as the learned primary Judge. 84 In particular, we agree with his Honour's analysis of the Agreement as reflecting an understanding that the appellant, as the controller of Navarro, was to be the "organic source" or natural person through whom the services, skill and expertise offered by Navarro were to be supplied in consideration of the Consultancy and Management Fee. On that analysis, Navarro had in Nigeria its own "organisation" which was complementary to, but not subsumed by, the larger organisation with its own employees created by Meisei to install the shop building and other facilities on Bonny Island. The same understanding is reflected by the facsimile message from Meisei to Navarro of 8 July 1997 which is reproduced at [54] above. In our view, Meisei was thereby enquiring why the Consultancy and Management Fee was to be paid to the appellant and not to Navarro which was to provide the consultancy and management services. The response of 9 July 1997, suggesting that the appellant was to be "employed by Meisei as a Consultant in Nigeria", was not effective to displace that understanding because it reaffirmed the terms of the Agreement and asserted that the appellant "will be 100% backed by Navarro Chemicals". The legal basis for that backing could only have been that Navarro was to continue as a party principal to the Agreement and to remain vicariously liable for the activities of the appellant otherwise than as Plant Manager under the Employment Contract after the plant had been commissioned. 85 The fact that the parties found it necessary to create two distinct contractual documents indicates that the relationships to be created by those documents were perceived as different. That does not entail that the Agreement was incapable of creating a relationship of employer and employee between Meisei and the appellant. However, the existence of a parallel contract which is concededly one of service by the employees which it covered invites the closest scrutiny to be given to the Agreement before concluding that it also obliged the appellant, otherwise than as Plant Manager, to serve Meisei as its employee. 86 The size and mode of payment of the Consultancy and Management Fee is an important point of distinction in this regard. In Ronpibon Tin NL v Federal Commissioner of Taxation (supra) it was held that the size of management and directors' fees was irrelevant to the question of whether those expenses had been incurred in earning assessable income. As the Full High Court said, at 60; 'It is important not to confuse the question how much of the actual expenditure of the taxpayer is attributable to the gaining of assessable income with the question how much would a prudent investor have expended in gaining the assessable income. The actual expenditure in gaining the assessable income, if and when ascertained, must be accepted. The problem is to ascertain it by an apportionment. It is not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent: see per Ferguson J. in Tooheys Ltd. v. Commissioner of Taxation [(1922) 22 SR (NSW) 432], at p. 440; per Williams J. in Tweddle v. Federal Commissioner of Taxation [(1942) 7 ATD 186], at p. 190. The question of fact is therefore to make a fair appointment to each object of the companies' actual expenditure where items are not in themselves referable to one object or the other.' 87 It may be acknowledged that a comparatively very high salary paid to a worker with specialised or exceptional skills, particularly one required to work in an onerous or uncongenial location, does not, of itself, detract from his or her being an employee. However, where, as here, high remuneration is payable in a small number of large instalments not specifically referable to the amount of work performed or the time spent in performing it, the inference is more readily available that it was to be paid for the achievement by the recipient of a particular result rather than for his or her contribution as an employee to the achievement of that result by the putative employer: World Book Pty Ltd v Federal Commissioner of Taxation (supra) at 415 and 419-420. We are reinforced in drawing that inference by the fact that instalments of the Consultancy and Management Fee were paid against invoices rendered by Navarro, whereas the admitted salary or wages at the rate of US$100 an hour were paid to the appellant as Plant Manager against time sheets completed by him like an ordinary employee. Likewise, the obligation to pay the Consultancy and Management Fee even if work were stopped by force majeure argues strongly that it was payable in consideration of a promise given as an independent contractor. 88 We do not regard as significant the fact that, to comply with Nigerian regulations governing the presence of foreign workers and the taxation of income which they derived, the appellant had been issued with a badge or name tag designating him as an employee of Meisei's Nigerian associate, Marubeni Engineering West Africa Ltd and was correspondingly notified in that way to the Nigerian tax authorities. The treatment of the appellant in that way for Nigerian tax purposes is at least cancelled out, for the purposes of the characterisation, by the appellant's failure to return any part of the Consultancy and Management Fee in his personal Australian income tax returns. 89 In a related context, we have not been assisted in endeavouring to characterise the nature of the appellant's relationship with Meisei by the evidence that he was subject to the same restrictions on access to, and egress from, the site as persons who were accepted on all sides as being employees. It is not uncommon in a project in a remote area or involving highly hazardous activities for all personnel visiting the site, even those who are indisputably independent contractors or who have no contractual connection with the head contactor, to be subject to restrictions of that kind for reasons of security or safety. Similar considerations have led us to regard as neutral the requirement for the appellant, before he became Plant Manager, to adhere to a regime of working hours and conditions which was uniform across the whole site.