Income Tax Appeal
54 In respect of the various income tax and related penalty assessments Mr Russell adopted the permissible course of lodging a single objection embracing each of them and the Commissioner, in turn, adopted the equally permissible course of making a single objection decision (see s 14ZR of the TAA). In turn, Mr Russell's appeal is against what one might term that "omnibus" taxation objection decision.
55 I have already summarised the issues pertinent to the income tax appeal.
56 In terms of proximity to the relevant events, the earliest account from Mr Russell which I have before me is that offered in statements made by him for the purposes of proceedings in the Queensland Industrial Relations Commission and in related written submissions prepared by him for the purposes of those proceedings. Mr Russell acknowledged his authorship of these documents in the course of his cross examination.
57 It appears that Mr Russell instituted proceedings against Tradecorp in the Industrial Commission in the "unfair contracts" jurisdiction conferred upon it by s 276 of the Industrial Relations Act 1999 (Qld). It further appears that Tradecorp sought to have those proceedings dismissed. The outcome of those proceedings and especially any conclusions reached by the Industrial Commission as to Mr Russell's credibility, his status vis-ŕ-vis Tradecorp, whether Ancath had a contract for service with Tradecorp or whether Mr Russell ought properly to be regarded an employee of Tradecorp are not relevant in either the income tax or GST appeals: s 91(1) Evidence Act 1995 (Cth) (Commonwealth Evidence Act); National Mutual Life Association of Australasia Ltd v Grosvenor Hill (Qld) (2001) 183 ALR 700 at 715, [46]. Mr Russell's prior statements and submissions are though in a different category.
58 That Mr Russell performed accounting and managerial work for Tradecorp at its Mackay business premises for about four years between August 2000 and August 2004 is clear. His title when performing that work was that of Tradecorp's "financial controller". He was appointed to undertake that work by Tradecorp's managing director, Mr Tony Zarb. That followed an interview with Mr Zarb and Tradecorp's outgoing financial controller, Ms Gillian Sandhoff. It is also clear that Mr Russell ceased undertaking this work following a breakdown in relations between him and Mr Zarb. It is not necessary in these proceedings to explore the rights, wrongs and responsibilities for that breakdown in relations.
59 Relations between Tradecorp and Ancath were at least purportedly regulated by a written agreement made between those companies made on 4 August 2000 (the Tradecorp Agreement). Mr Russell, I note, has signed the agreement on behalf of Ancath underneath the common seal of that company. Mr Zarb has apparently signed on behalf of Tradecorp.
60 The Commissioner did not submit that the Tradecorp Agreement was a sham. The expressed date of commencement for the Tradecorp Agreement was 30 August 2000.
61 In his affidavit evidence filed in these proceedings Mr Russell made reference to the existence of the Tradecorp Agreement. He did not in that evidence state that, from his perspective as a signatory to it on behalf of Ancath, it was a sham. Rather, he stated that there was such an agreement in existence between 30 August 2000 and 30 June 2004. I understood his reference to 30 June 2004 not to be a statement that the Tradecorp Agreement had been terminated on that date but rather that the agreement had been operative for the whole of the 2004 income year, which is the last of the income years covered by the assessments. Neither Mr Zarb nor any other officer of Tradecorp gave evidence, much less gave evidence that Tradecorp regarded the agreement as a sham.
62 I approach the determination of the income tax appeal on the basis that, as it came to be varied, the Tradecorp Agreement did indeed regulate relations between Tradecorp and Ancath according to its tenor until terminated by Tradecorp in August 2004. It transpired that, on 24 September 2001, Ancath and Tradecorp varied their original agreement, effective inter se from 1 September 2001, so as to increase the initial contract sum from $A45,000 per annum to $A65,000 per annum. Again, there was no suggestion that this variation agreement was a sham.
63 What Mr Russell did state in his affidavit evidence in this Court was that he was never an employee of Tradecorp but rather an employee of Ancath in relation to the performance of work at Tradecorp. Obviously enough, his status is a mixed question of law and fact. Insofar as it is factual, his position before me was that he was a mere employee who deferred in terms of decision-making to those who controlled Ancath. This was in marked contrast to the position which Mr Russell adopted in evidence before the Industrial Commission as to his position vis-ŕ-vis Ancath and Tradecorp.
64 The tenor of the statement which Mr Russell gave to the Industrial Commission as to his relationship with Ancath was quite different. His position on that subject before the Industrial Commission was, if anything, even more starkly put in an outline of submissions which he signed and then filed on 31 January 2005 with the Industrial Commission when acting for himself in that forum. Under the heading "The Relationship of Ancath and Myself" Mr Russell stated:
Ancath was only brought into the contractual arrangement for my employment with Tradecorp at the behest of Anthony (Tony) Zarb, Managing Director of Tradecorp.
….
At all times when I was working with Tradecorp, Ancath and myself were treated as one. Changes in the terms of my employment were discussed only with myself, and Tradecorp never at any time attempted to communicate with Ancath.
Throughout the time of my engagement with Tradecorp I effectively controlled Ancath although not so from a strict legal point of view. My wife was the sole shareholder and because of my relationship with her I could run Ancath. I have signing authority on the company's bank account and possess a debit card for use at any ATM any where in the world.
More recently, I have acquired a controlling interest in Ancath giving me formal control of the company. [sic]
65 Mr Russell submitted that I should ignore the material tendered by the Commissioner relating to the statement he gave and the submission he made to the Industrial Commission. He submitted that these had been prepared on legal advice. The written submission which from which I have just quoted was signed not by a lawyer but by Mr Russell personally.
66 Mr Russell did mention that he had initially consulted lawyers in relation to the Industrial Commission proceeding but was unable to afford to continue to be legally represented. Assuming in his favour (as I do) that he was initially given particular legal advice as to how his position as Tradecorp's financial controller ought to be regarded for the purposes of Queensland industrial legislation, that advice must necessarily have been given against an account of facts pertinent to the relationship between Ancath and Tradecorp and of the work performed by Mr Russell. It was Mr Russell who had the intimate knowledge of these facts. It is his account of the facts in his submission to the Industrial Commission which is of interest. That either he or his onetime legal advisers may have been in error as to the characterisation of his position in law on those facts for the purposes of Queensland industrial legislation is nothing to the point. I regard the factual content of the submission which he made to the Industrial Commission as relevant and revealing.
67 It is not difficult to see how Mr Zarb on behalf of Tradecorp may well have perceived advantage for his company in terms of a supposed saving in labour oncosts such as pay-roll tax by securing the services of Mr Russell by means of a contract for service with another body corporate which would in turn deploy Mr Russell to perform work for Tradecorp. Nor is it difficult to see how Mr Russell was able readily to accommodate Mr Zarb's preference if indeed, as Mr Russell also stated, Ancath was a dormant company immediately available to him.
68 It matters not for the purposes of this appeal whether Mr Zarb's perception as to the efficacy for pay-roll tax or other labour on cost purposes of such an arrangement was misconceived in law. What does matter is the striking variance in Mr Russell's accounts as to the nature of his relationship with Ancath as between the Industrial Commission and the present proceeding. I regard it as inherently more likely that his account to the Commission as to his ability to control Ancath was factually correct, ie that he was able, initially in a de facto way and later more formally, to control Ancath's affairs. That may well also explain his reluctance, even in the face of an offer of considerable facilitation, to see Mr Miedema exposed to cross-examination.
69 The income tax returns which Ancath lodged with New Zealand's Inland Revenue Commissioner cover taxation years which end on 31 March. They thus do not align with the usual Australian taxation year, which ends on 30 June. Allowing for this, it nonetheless appears that Ancath has returned in New Zealand as ordinary income, described as "fees received", the amounts paid to it by Tradecorp net of Australian GST. There is no other apparent source of income for Ancath evident in its New Zealand income tax returns for the years ended 31 March 2001 to 31 March 2005 (inclusive).
70 According to Mr Russell, Ancath did though have sources of income which were not referable to his performance of work for Tradecorp. He referred to work performed for clients who were based in Vanuatu. In support of this claim Mr Russell exhibited to an affidavit which he swore a bundle of what purported to be copies of invoices directed by Ancath to such clients (JAT Investments, Cobra Holdings, Barbara Farms) for that work. On the copies he produced, the addresses of the clients had been obliterated. The reason for this, so Mr Russell said, was that, "Vanuatu is a tax haven and income earned and retained there is not subject to income tax and accordingly that proportion of [Ancath's] income was not returned by the company in its New Zealand tax returns". As to the obliteration of client addresses, Mr Russell stated in cross-examination that: "My employer made those available to me on the condition the addresses be blacked out to protect the privacy of the clients". The "employer" concerned, Mr Russell agreed, was Ancath. In light of that reference, the absence, in the result, of evidence from Mr Miedema is eloquent.
71 I have a very particular recollection of Mr Russell's giving this evidence concerning what "his employer" would make available to him. His demeanour was obstinate. His reference to "his employer" had a surreal quality about it when given in oral evidence in light of the earlier exposure of the dogmatic statement as to his control of Ancath which he had made in the Industrial Commission proceedings.
72 Mr Russell admitted in cross-examination that he had never been to Vanuatu. He said that the work concerned had been done by him for Ancath's clients either from his premises near Sarina or when he was in New Zealand. He also admitted that there was no-one other than himself and his former wife who was involved in the preparation of Ancath's New Zealand income tax returns.
73 It transpired that the amounts of these purported invoices to Vanuatu based clients were, in each income tax year, just sufficient to bring Ancath below the 80% threshold which features in the legislation in relation to personal services income. Mr Russell claimed that Ancath had undertaken other such work but that, as it was only necessary for him to show an amount less than 80% all that he had done was to produce copies of sufficient of its invoices to do this.
74 I did not find Mr Russell's explanation as to the reason why no income was returned by Ancath in New Zealand in respect of services performed in Vanuatu either compelling or even persuasive. Quite what relevance Vanuatu's status as a so-called "tax haven" had with respect to such responsibility as Ancath had under New Zealand's revenue laws to return that income in New Zealand escapes me. As viewed from New Zealand, the income that Ancath derived from the performance of services in Australia for Tradecorp via Mr Russell was also foreign sourced income. Yet Ancath's New Zealand income tax returns disclosed this particular foreign sourced income. Mr Russell did not adduce any admissible evidence before me as to the revenue laws of New Zealand or of the revenue laws and other laws of Vanuatu which might in this way serve to explain the omission in the New Zealand returns of the Vanuatu sourced income.
75 Given the control he stated he had over Ancath in the proceedings before the Industrial Commission, I formed the view that Mr Russell had not been at all candid in his evidence before me concerning Ancath, its activities and the degree of control he was able to exercise in respect of that company. His failure to call Mr Miedema did nothing to dissuade me from that view.
76 It is possible, I suppose, that work as purportedly invoiced was indeed undertaken and that the omission of Vanuatu client income might be referable to an innocent mistake as to a requirement to declare the same in New Zealand. In the absence of corroboration, I am not though prepared to find these facts proved. In so concluding I accept that Mr Russell is not at all obliged to prove to demonstration that Ancath undertook such work, only on the balance of probabilities that it did so. Nor is it the law that an appellant taxpayer can only discharge the onus of proof, even on the balance of probabilities, by the tendering of corroborated evidence: Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1. It is just that, recalling on whom the onus lies and applying that standard of proof, I did not regard Mr Russell's uncorroborated evidence on the subject as sufficiently reliable to admit of a conclusion that these facts were proved.
77 I have reached these conclusions without taking into account Mr Russell's New Zealand criminal history, an official copy of which was tendered by the Commissioner in the course of Mr Russell's cross examination. Mr Russell has been convicted in that country of numerous offences of dishonesty including using a document with intent to defraud and forgery. He was, I thought, reluctant to acknowledge his criminal past in cross examination although his statement that it concerned an era in his life that he had sought to put behind him and forget was understandable enough. He also voiced disagreement with his having been truly guilty of some at least of the offences in respect of which convictions were recorded. Mr Russell's criminal history in its own right does give pause for thought about his credibility. However, the divergence in accounts as between evidence in the Industrial Commission and this Court with regard to his control over Ancath engendered in any event my disposition not to act on his uncorroborated testimony as to Ancath's undertaking work for Vanuatu based clients.
78 For completeness, I should record that Mr Russell exhibited to one of his affidavits a letter dated 11 January 2008 addressed to Ancath (by its new name, Juan International) marked for Mr Miedema's attention from the National Bank of New Zealand which stated that a debit card issued on 24 November 2004 for use by Mr Russell had never been used. The letter says nothing as to the position in relation to the use of such a debit card during the period of interest in the appeals. Further, the letter is addressed not to any New Zealand address associated with Ancath or Mr Miedema but rather to the company in Australia at a post office box at Sarina. I did not therefore regard the letter as offering any corroboration with respect to the account Mr Russell gave concerning Ancath's affairs and the role he played.
79 The usual pattern of payment as between Tradecorp and Ancath was by periodic funds transfer in response to an invoice issued by Ancath, initially fortnightly and, on and from 20 March 2001, monthly. The funds transfer to Ancath was net of Australian GST with the amount of the latter being added and separately remitted, again on and from 20 March 2001, by Tradecorp to A W Russell & Co. In this usual pattern, the invoice concerned was expressed to be for "professional services" for a particular month or fortnight. Its amount was calculated by dividing the prevailing agreed annual payment plus an allowance of 8% (presumably in recognition by analogy of superannuation) by either 26 or, as the case may be, by 12.
80 Mr Russell also stated that two amounts received by Ancath from Tradecorp were not derived as a result of work performed by him. The amounts are:
(a) in the 2002 income year, $3,350 (invoice 29 dated 8 May 2002 refers); and
(b) in the 2003 income year, $16,667.65 (invoice 39 dated 4 December 2002 refers).
81 As to the sum of $3,350 (Invoice 29), Mr Russell's evidence was that this income was derived by Ancath as a result of stock checks conducted by others in New Zealand. The invoice concerned, like all of those rendered by Ancath to Tradecorp, is in Mr Russell's handwriting. It refers to stock checks conducted in New Zealand with some related work apparently performed in Australia as well as in New Zealand. It gives no detail as to when the stock checks were performed or by whom. It is also annotated with a reference to an agreement of some sort but it is not possible to decipher all of the detail of that annotation. I do note though that the invoice is apparently annotated in Mr Zarb's writing with the words "OK to pay" and with a question mark after the annotation "GST". In the absence of corroboration, I am not, for reasons already given, prepared to accept that, on the balance of probabilities, these "stock checks" in New Zealand were other than the result of services work undertaken by Mr Russell. I am persuaded by the annotated "OK" that services of the kind described were performed.
82 There is some corroboration in respect of the account which Mr Russell gave in relation to the sum of $16,667.65.
83 Invoice 39 at least purports to be referable to commission in respect of "container lease deals to South Pacific Islands" (the description used in the invoice).
84 A typed schedule is annotated to invoice 39. It giver particulars of, it seems, clients and related commission amounts. That schedule bears the annotation "OK to Pay", a signature and the handwritten date, "5/12/02", each seemingly in the same handwriting.
85 The signature on my inspection corresponds with that of Mr Zarb on a Tradecorp letter dated 8 September 2000 detailing Mr Russell's then monthly income. That same signature, on my inspection, appears to have been placed on behalf of Tradecorp on the Tradecorp Agreement. Both the invoice and its schedule were tendered in Mr Russell's case. It was never part of the Commissioner's case that either of these documents was a forgery.
86 Were the authorship of the schedule to be disputed, it would be open to me, pursuant to s 59(2) of the Evidence Act 1977 (Qld) (Queensland Evidence Act), as applied by s 79 of the Judiciary Act 1903 (Cth) and insofar as the Queensland provision is not inconsistent with the Commonwealth Evidence Act to reach my own conclusion as to its authorship by comparison with a genuine signature. The schedule not being a disputed document, I consider that it is open in any event as a matter of inference and comparison to reach the conclusion that it is Mr Zarb who made the annotation. This conclusion corresponds with Mr Russell's unchallenged statement under cross examination that it was Mr Zarb who had signed the payment approval on the schedule.
87 In these circumstances, I accept Mr Russell's evidence that an arrangement of some sort existed between Tradecorp and Ancath in 2000, 2001 and 2002 whereby Tradecorp would pay Ancath a commission in respect of "container lease deals to South Pacific Islands". Even allowing for the generality of the following description, I consider that, as a subject, container leasing extends beyond the service described in cl 5 of the Tradecorp Agreement, viz:
Ancath shall ensure that Tradecorp is provided with full accounting services including maintaining of computer systems, streamlining of accounting procedures, supervision of staff, production of regular financial reports, evaluation of proposals and generally attending to the entire accounting function of Tradecorp and its associated companies and other business entities. End of year annual accounts and tax returns will continue, at least initially, to be completed by an outside firm of Public Accountants.
88 That agreement, I also note, makes reference to the prospect of "profit share".
89 Mr Russell's evidence also was that the transactional work in relation to container leases was undertaken by others in Tradecorp's office and occasionally by Mr Zarb but not him personally. His evidence was further that others in Tradecorp's office also received a modest bonus by way of a percentage in respect of commissions derived by Tradecorp from the leasing off-shore of containers. In particular, he stated in respect of the payment of commission:
Well it was actually quite a practice in the firm, in Tradecorp. There were other staff, say some of the typists, the clerks, for example, who had nothing to do with the company earning commissions on lease deals. They were given a portion of the commission income as bonuses.
This is not inconsistent with the an approved payment of commission income by Ancath even though Mr Russell had not physically performed any work in relation to off-shore container leases while at Tradecorp. I accept Mr Russell's evidence on this subject.
90 Though the evidence on the topic is compressed, what emerges is that the derivation of income by way of commission from the leasing of containers throughout the South Pacific was part of Tradecorp's business. A practice existed within that company of allocating a percentage of that commission income by way of a bonus above their usual remuneration to persons working at Tradecorp even though they might not have personally undertaken work in relation to the container leasing aspect of that company's business. That practice was not formally documented, but its existence and adaptation to the Tradecorp Agreement is evidenced by invoice 39 and its schedule if, as I do, one accepts Mr Russell's evidence in this regard.
91 It does not follow from this that the payment of this percentage of commission income should be characterised as anything other than an additional reward for Mr Russell's services or skills as provided to Tradecorp by Ancath under the Tradecorp Agreement. The position would be different if Ancath, via Mr Russell or otherwise, had separately put to Tradecorp a business opportunity involving the leasing of containers throughout the South Pacific, an agreement as to profit sharing by way of a percentage of commission in relation to that business opportunity had been reached and then the work in respect of such leases performed by other Tradecorp staff. In those circumstances, the commission income could not, in my opinion, be characterised as mainly a reward for Mr Russell's skills or services. That is not this case. Rather, as with other persons working at Tradecorp, the payment of a percentage of commissions seems to have been by way of a bonus in respect of the services they were rendering whether or not those services related in any way to the leases.
92 There was nothing about such evidence as Mr Russell gave in the taxation appeals or in that which he put before the Industrial Commission concerning the tasks he performed at Tradecorp which suggested to me that, via Ancath's obligations under the Tradecorp Agreement, he was engaged so as to produce a particular result. Rather, the description in cl 5 of the Tradecorp Agreement seemed a fair summary of the tasks which he performed. He seems to have been based at Tradecorp's premises and engaged, albeit in a position of some seniority and responsibility, in the day to day routine of financial and managerial tasks encountered in the course of Tradecorp's business. He brought to the performance of those tasks the personal skills, qualifications and experience which he had accumulated in New Zealand, nothing more and nothing less. By "nothing more and nothing less" I mean that he did not, on the evidence, additionally bring to the performance of those tasks any plant or equipment of any significance. The Tradecorp Agreement did not require that Ancath do so. Further, there was no suggestion by Mr Russell that Ancath deployed anyone other than him to perform tasks at Tradecorp's Mackay premises.
93 What then are the consequences of these findings having regard to the issues identified in respect of the income tax appeals?
94 It is convenient first to answer that question upon the assumption that, contrary to Mr Russell's submissions, an overseas registered company can be a "personal services entity" for the purposes of Part 2-42 of the ITAA 1997 and, further, that there is nothing in the Double Taxation Agreement with New Zealand which would prevent the attribution of the amounts paid to Ancath by Tradecorp to Mr Russell as part of his assessable income.
95 A necessary consequence of the findings which I have made in the evidence is that the amounts received by Ancath from Tradecorp were each in one way or another a reward to it for its provision of Mr Russell's personal efforts or skills. Insofar as Mr Russell sought to prove otherwise I have either not accepted that evidence (the stock checks) or my acceptance of it (the percentage of container lease commissions) does not affect that consequence.
96 It follows from this that the amounts paid by Tradecorp to Ancath (which are Ancath's "ordinary income") constitute Mr Russell's "personal services income" as that term is defined in s 84-5(1) of the ITAA 1997.
97 Mr Russell's assessable income will include an amount of ordinary or statutory income of a "personal services entity" that is his "personal services income": s 86-15 of the ITAA 1997. Subject to any application of the "personal services business" exception for which s 86-15(3) provides, Ancath was in each of the income years in question a "personal services entity" because its ordinary income included Mr Russell's "personal services income": s 86-15(2) of the ITAA 1997.
98 Whether the "personal services business" exception applies requires regard to Division 87 of the ITAA97. A diagram showing how that Division is intended to operate is helpfully included in s 87-5 of the ITAA 1997:
99 As can be seen issues which I identified at the outset in relation to the income tax appeal are represented diagrammatically and in context above.
100 There was no evidence adduced of the making of any applicable "personal services business determination".
101 That being so, the "results test" then falls to be answered. That test is found in s 87-18 of the ITAA 1997. In IRG Technical Services Pty Ltd v Commissioner of Taxation (2007) 165 FCR 57 at 70, [36], Allsop J (as his Honour then was) observed of that section that its elements "were to be understood against the background of the jurisprudence concerning independent contractors". In so doing, his Honour referred with approval to an earlier observation made by Lindgren J in Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 at 254, [28], that, "Broadly speaking, an individual or entity, who or which is an 'independent contractor' under traditional concepts should meet the results test.". Their Honours were not in these cases promoting the use of the common law as a substitute for the language of the statute, for that would clearly be erroneous. It is just that, for example, the phrase "the income is for producing a result" in s 87-1(a) and s 87-18(3)(a) of the ITAA 1997 obviously draws upon one of the traditional touchstones for distinguishing between a contract for service and a contract of service. Thus guidance offered by cases decided at common law as to whether a payment is or is not for the production of a result is relevant. That this is what Parliament intended is confirmed by recourse to secondary materials, as Allsop and Lindgren JJ note in their respective judgements. Approaching the matter this way, I respectfully agree with their Honours observations in relation to s 87-18.
102 Neither the Tradecorp Agreement itself nor the descriptions in the consequential invoices nor Mr Russell's evidence as to his tasks at Tradecorp suggest that the amounts being paid by Tradecorp were for the production of any result. The services supplied by Ancath and provided by him were just accounting and managerial services generally. Mr Russell has not proved that the "results test" in s 87-18(3)(a) is satisfied in any of the income years in question. To the contrary, the evidence shows that it has not been satisfied.
103 That conclusion itself dictates a need next to have regard to the "80% rule" found in s 87-15(3). In short, that poses a question as to whether 80% or more of Mr Russell's "personal services income" came from the one source. That need is reinforced by an inability of Mr Russell, on the evidence, not even on the face of the Tradecorp Agreement, to show that Ancath was required to supply any plant or equipment: as one element of s 87-18(3)(b) requires.
104 As to the 80% rule, Lindgren J made the following observation in Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 at 253, [26], with which I respectfully agree:
Subsection 87-15(3) distinguishes between two situations, namely, where less than 80% of an individual's personal services income (not including certain specified classes of income not presently relevant) is income from the same entity, and where 80% or more of an individual's personal services income is income from the same entity. In the former case (less than 80% from the same entity), if any one or more of the four personal services business tests is satisfied, the personal services income is taken to be from a personal services business, and it is not necessary to apply for a personal services business determination. In the latter case (80% or more from the same entity), if the results test is satisfied, the personal services income is taken to be from a personal services business, and it is not necessary to apply for a personal services business determination. But otherwise, it is necessary for there to be a personal services business determination in force, if the personal services income is to be taken to be from a personal services business.
105 On the findings I have made with respect to the purported Vanuatu invoices and his evidence concerning them, Mr Russell has failed to prove that, in any of the income years in question, more than 80% of Ancath's income did not come from the one source. During those income years Tradecorp was the source of Ancath's income and that income in turn was a reflection of Mr Russell's efforts or skills.
106 For completeness, I should record that Mr Russell did not lead any evidence which would admit of a conclusion that either the unrelated clients test found in s 87-20, the employment test found in s 87-25 or the business premises test found in s 87-30 of the ITAA 1997 were satisfied.
107 What follows from these conclusions is that the personal services income is not income from conducting a personal services business. That means that the exemption is not engaged.
108 Before turning to the subject of whether any deductions are open I should address Mr Russell's two technical submissions as to the inapplicability of the personal services income regime found in Part 2-42 of the ITAA 1997.
109 The first of these may be disposed of shortly. Mr Russell's submission that the personal services income regime found in this Part can have no application because a foreign registered company cannot be a personal services entity requires that the word "company" in s 86-15(2) be read in this limited way even though neither there nor elsewhere in Part 2-42 is it so limited. Materially, s 995-1 of the ITAA 1997 defines "company" to be a "body corporate' (paragraph (a) of the definition). "Body corporate" is not separately defined for the purposes of the ITAA 1997 by s 995-1. There is nothing in the Acts Interpretation Act 1901 (Cth) which requires that, in any Commonwealth Act and in the absence of an intention to the contrary, "body corporate" should be construed as referring only to a corporation formed within the limits of the Commonwealth.
110 To construe "company" in the narrow way submitted by Mr Russell would be incongruous with other employments of the word in the ITAA 1997. For example, it is inherently unlikely that the word "company" as used in Division 975, "Concepts about Companies" of the ITAA 1997 was intended to be limited to Australian registered companies. Further, the term "CFC" is used repeatedly throughout the ITAA 1997. That term bears the same meaning in the ITAA 1997 as it does in Part X of the ITAA 1936: s 995-1 of the ITAA 1997. Regard to s 340 of the ITAA 1936, which defines "CFC" for the purposes of Part X of that Act, materially discloses that "CFC" is an abbreviation for "controlled foreign company". Given this, neither as used in Part X of the ITAA 1936 itself nor as the term "CFC" is used in the ITAA 1997 would it make any sense at all to regard the word "company" as referring to an Australian registered company. Rather, the word is used generically with adjectival qualification employed as required to designate a particular kind of "company".
111 Nor does context or purpose suggest that the word "company" as used in Part 2-42 of the ITAA 1997 should, exceptionally, nonetheless be construed in the limited way submitted, even in the absence of adjectival qualification. Certainly not expressly, nor even impliedly, is there anything in the language of that Part which would support such a construction of the word "company".
112 I reject the submission.
113 At a general level of abstraction and from an economic point of view, it is not difficult to have sympathy with Mr Russell's double taxation submission. Its essential premises were these:
(a) Ancath's income from Tradecorp forms part of its assessable income in New Zealand;
(b) Were Ancath itself taxed in Australia on this income it would receive a credit as against its New Zealand tax for any Australian tax it paid;
(c) The personal services income regime in Part 2-42 of the ITAA 1997 deems Ancath's income to be part of his assessable income;
(d) Ancath receives no credit in New Zealand for any Australian tax it pays on income so included by deeming; and
(e) The outcome, at least potentially, is double taxation and hence it is in breach of the Double Taxation Agreement.
114 More particularly, Mr Russell made the following submission by reference to the Double Taxation Agreement:
(a) Clause 1 of Article 7 materially provides, "The profits of an enterprise of a Contracting State shall be taxable only in that State …";
(b) "Article 23 deals with sources of income"; and
(c) "Article 24 deals with elimination of double taxation."
115 He then submitted that the effect of the requirement flowing from s 4 of the International Tax Agreements Act 1953 (Cth) (International Tax Agreements Act) to read that Act with the ITAA 1997 meant that Part 2-42 could have no application so as to deem what was Ancath's income to be his when that income formed part of Ancath's assessable income in New Zealand because that would amount to taxing the profits of Ancath, which was an enterprise of New Zealand, in Australia rather than, as art 7 of the Double Taxation Agreement required, in New Zealand only.
116 The Double Taxation Agreement between Australia and New Zealand made in Melbourne on 27 January 1995 (hereafter the NZ Double Taxation Agreement) is reproduced as Schedule 4 to the International Tax Agreements Act. That agreement is given force of law in Australia and affects Australian tax by s 6B(1A) of that Act.
117 Section 4 of the International Tax Agreements Act does indeed, as Mr Russell submitted, require that the ITAA 1997 be incorporated and read as one with that Act. Further, the effect of s 4(2) of the International Tax Agreements Act is that, in so doing and subject to an exception not presently material, the provisions of the International Tax Agreements Act (and hence a double taxation agreement given the force of domestic law by that Act) have effect notwithstanding anything inconsistent in those provisions in, materially, the ITAA 1997. In other words, a provision in the International Tax Agreements Act or a double taxation agreement given effect by it prevails over a provision in the ITAA 1997 to the extent of any inconsistency.
118 The NZ Double Taxation Agreement generally follows the OECD Model Double Taxation Agreement (OECD Model). It is settled that, in construing such an agreement, a court may have regard to, inter alia, the OECD Commentary on its model agreement: Thiel v Commissioner of Taxation (1990) 171 CLR 338 at 344, 356-357. The interpretative use of that type of extrinsic material is a manifestation of the recognition that a double taxation agreement is but a particular example of an international treaty. The Full Court has sounded a cautionary note in relation to the use for the purpose of interpretation of commentary published after the ratification of a double taxation agreement: McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 at 144, [42].
119 On the basis of the evidentiary findings I have made, Part 2-42 of the ITAA 1997 will apply so as to subject Mr Russell, not Ancath, to taxation in Australia. It is true that art 7, cl 1 uses the language, "the profits of the enterprise". Read in isolation, and affording primacy to the NZ Double Taxation Agreement as incorporated by the International Taxation Agreements Act, that might be thought to support the notion that any measure which would subject those profits to taxation, even if the means of so doing was to deem the same to form part of the assessable income of an individual, rather than the enterprise which derived them, was inconsistent with the NZ Double Taxation Agreement. The foundation for such an approach to interpretation would be "juridical" in the sense that it would be textual.
120 The difficulty with that approach is that, read in the context not only of the balance of art 7 but the NZ Double Taxation Agreement as a whole, the focus of the clause is on the prevention of the double taxation of an "enterprise", not of profits as an abstract, economic concept.
121 There is no prior Australian authority directly touching upon the intersection between Part 2-42 of the ITAA 1997 and either the NZ Double Taxation Agreement or any other of the OECD Models to which Australia is a party.
122 The industry of counsel for the Commissioner did result in my being taken in supplementary written submissions to a number of foreign authorities in which national courts have had to grapple with the conundrums presented by the reconciliation of an attribution regime in their national revenue law with their country's adoption of a double taxation agreement on the OECD Model which would, under their national law, prevail to the extent of any inconsistency with the attribution regime.
123 Of these, the case from which I have derived particular assistance is a decision of Finland's Supreme Administrative Court in relation to whether an inconsistency existed between the attribution rules in that country's controlled foreign company (CFC) regime in its domestic revenue law and art 7 of its double taxation agreement with Belgium, which was in conformity with the OECD Model: Re A Oyi Abp (2002) 4 ITLR 1009 (Re A Oyi Apb). In that case, the Supreme Administrative Court observed (at 1064):
Tax treaties are therefore concerned with judicial double taxation which means that the same taxable person is taxed on the same income in two different countries. Tax treaties do not generally concern economic double taxation, that is, where the same income is taxed in the hands of several taxable persons. Unless otherwise provided in a tax treaty, the removal of economic double taxation is a task which remains the responsibility of the national legislation. The tax treaty between Finland and Belgium does not contain provisions on the removal of economic double taxation.
124 There are passages in a decision of the French Conseil d'État in Re Société Schneider Electric (2002) 4 ITLR 1077 which, read in isolation, might be thought to support an opposite conclusion in relation to the immateriality of economic consequences when considering whether a national CFC regime was in conflict with Article 7 of an OECD model treaty with Switzerland. For example, in referring to Article 7 of the Franco-Swiss double taxation agreement, the Conseil d'État opined (at 1108):
In the absence of any factor requiring a different interpretation, the 'profits' to which art 7 of the convention refers are those determined according to the rules established by the [French General Tax Code]. It follows that the court below did not make any error in deciding that there is an identity in nature between the business profits (bénéfices) of the Paramer company, the taxation of which is attributed to Switzerland by art 7(1) of the Franco-Swiss tax treaty, and the profitable results (résultats beneficiaries) of the Paramer company which are taxed in France in the name of the Schneider company on the basis of the [CFC regime in the French General Tax Code].
125 The actual decision in that case was that that the French CFC regime was in conflict with and was overridden by the relevant tax treaty. However, on closer analysis, the tax treaty concerned contained, apart from an OECD Model art 7 provision, another provision (art 25(A)(1)), which expressly exempted from the relevant French tax "income … where such income is liable to taxation in Switzerland". Against that background, where the treaty itself authorised a focus on income per se, rather than enterprise, the seeming incongruence of result with that inRe A Oyi Abp is explicable.
126 There is no equivalent of art 25(A)(1) of the Franco-Swiss Double Taxation Agreement in the NZ Double Taxation Agreement.
127 Assistance in the resolution of any doubt about the focus of art 7, cl 1 is gained by having regard to the commentary concerning the OECD Model. I refer to the commentary as published in OECD Model Tax Convention on Income and Capital, Condensed Version - 2008 and Key Tax Features of Member countries 2008 published by IBFD (Copyright as to the Convention, OECD and as to the Key Features, IBFD - "OECD Commentary"). Article 7, cl 1 of the NZ Double Taxation Agreement replicates art 7, cl 1 of the OECD Model Convention.
128 In the introduction to the OECD Commentary (para 1) the following statement is made:
International juridical double taxation can generally be defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods.
129 The following opinion is given in the OECD Commentary (para 9 and para 10) in respect of art 7 of the OECD Model:
9 This paragraph is concerned with two questions. First, it restates the generally accepted principle of double taxation conventions that an enterprise of one State shall not be taxed in the other State unless it carries on business in that other State through a permanent establishment situated therein. …
10 The second principle, which is reflected in the second sentence of the paragraph, is that the right to tax of the State where the permanent establishment is situated does not extend to profits that the enterprise may derive from that State but are not attributable to the permanent establishment. …
130 These quoted statements and expressions of opinion in the OECD Commentary predate the NZ Double Taxation Agreement. They are not, as sometimes occurs with explanatory memoranda for statutes, in conflict with the language of either the OECD Model or the latter's replication of present interest, the NZ Double Taxation Agreement. The understanding of the meaning of art 7 reflected in the commentary is that the intended approach to the construction of art 7 of the OECD Model is juridical, not economic. Hence the reference in the commentary to "enterprise". Accepting this, Part 2-42 violates neither the letter nor the spirit of the intent of the Double Taxation Agreement in that it does not effect juridical double taxation.
131 Regard to academic literature in relation to double taxation does not support a construction of art 7(1) of the NZ Double Taxation Agreement based on a conception that its design is to eliminate economic, as opposed to juridical taxation.
132 In his seminal work, Klaus Vogel on Double Taxation Conventions (3rd ed, Kluwer Law International, 1997), the late Professor Dr Klaus Vogel of the University of Munich, a leading academic commentator on international double taxation, deliberately contrasts (at pp 9-10) international juridical taxation with economic double taxation. He uses (at p 10) attribution rules which differ as between domestic taxation laws of different nations to exemplify one way in which economic double taxation can occur. He further notes (ibid) that, though "the concept of 'double taxation', its prerequisites and its limitations, have been subject to much academic controversy … Application of tax treaties, however, is merely a matter of interpretation of the respective treaty. What conceptually is - and what is not - 'double taxation' is therefore of no importance for the treaty's application". [As to academic controversy and nuances concerning what constitutes "double taxation", regard might usefully be had to the comprehensive summary offered by Professor M Pires in his work International Juridical Double Taxation of Income, (1989, Kluver Law and Taxation Publishers) at Chapter 1. I note that, in this chapter, at pp 15-16, para 2.2.2.2.2.1, Professor Pires states that the requirement for the taxable person to be the same is an "often used criteria for differentiating [economic] double taxation from the juridical".
133 Article 7 of the OECD Model forms part of what Professor Vogel describes (at p 357) as "distribution rules" ('Metatatbestand'), to be contrasted with that particular item under domestic tax law the taxation of which the distribution rule is designed to restrict ('Objekattatbestand'). Article 7's role in the OECD Model is to lay down what Professor Vogel describes (at p 400) as the "residence and permanent establishment principle". He classifies arts 7-9 of the OECD Model as rules concerning the profits of an enterprise. He notes (at pp 403-404) of art 7 that, while it affords the primary right of taxation to the State of the permanent establishment, being the State of source, it "leaves open the question of the taxation of such profits by the State of residence". The question of whether the profits of the enterprise should be exempted in the State of residence or whether credit should be allowed there for State of source tax paid is, he notes, governed by one or the other versions of Article 23, i.e. the "exemption" or the "credit" version of that article in the OECD Model.
134 In his explanatory notes in respect of the "exemption" and "credit" versions of art 23 of the OECD Model (p 1129 et seq) Professor Vogel does not seek to controvert the OECD Commentary on those model articles (which he also reproduces, at p 1124 et seq). That commentary (Vogel at p 1124) asserts that those model articles are concerned with juridical, as distinguished from, economic double taxation. Professor Vogel's explanatory notes are directed to the relative advantages and disadvantages and underlying philosophies of the "exemption" and "credit" model article versions and to highlighting that neither is exhaustive of the ways in which a contracting State may seek to reduce or avoid double taxation.
135 Article 24 of the NZ Double Taxation Agreement exemplifies the "credit" version of those offered in art 23 of the OECD Model. Though Mr Russell also sought to rely on art 24 of the NZ Double Taxation Agreement so as to support his submission that art 7 of the NZ Double Taxation Agreement overrode Part 2-42 of the ITAA 1997, once it is appreciated, as the OECD Commentary underscores, that its provision for the affording of foreign tax credits to an enterprise is concerned with the reduction or elimination of juridical, not economic, double taxation of a particular enterprise by contracting States, not of profits per se, that reliance can be seen to be misconceived.
136 It would be inconsistent with Professor Vogel's conception of the role of art 7 in the OECD Model to construe art 7 of the NZ Double Taxation Agreement as being directed to the subject of the elimination of the double taxation of profits irrespective of identity of enterprise in the contracting States or of the location of that enterprise's "permanent establishment".
137 Mr Russell also relied on art 23 of the NZ Double Taxation Agreement. Neither has any relevance or application in the circumstances of this case. Article 23 is directed to the subject of source of income. Its lack of present utility for Mr Russell may be demonstrated by inserting the names of pertinent countries and entities into a material part of the text of cl 1 of that article, "Income, profits or gains derived by Ancath (assuming it to be a "resident" of New Zealand) which, under … art 7, may be taxed in Australia shall, for the purposes of the law of Australia relating to Australian tax, be deemed to be income from sources in Australia". Ancath does not fall for taxation in Australia in respect of such of its income derived in Australia as is Mr Russell's personal services income and deemed to form part of his assessable income.
138 Insofar as Part 2-42 may effect economic double taxation, given the subjection of Ancath to New Zealand income taxation on the income it derived under the Tradecorp Agreement, the rectification of any resultant hardship or injustice would require either renegotiation of the NZ Double Taxation Agreement or unilateral Australian or New Zealand legislative action.
139 In principle therefore, the NZ Double Taxation Agreement does not prevent a conclusion that Mr Russell is in fact and law liable to assessment in respect of his personal services income by virtue of the operation of Part 2-42 of the ITAA 1997. The question then becomes whether the actual amounts so assessed are correct?
140 On the evidence it is apparent that the Commissioner has made some errors of omission and inclusion in his calculation of the amount of Mr Russell's personal services income and, as a consequence, in his assessment of Mr Russell's taxable income.
141 In respect of the 2001 income year, an amount of $1869.23 has been omitted from Mr Russell's personal services income. That amount is referable to a payment made by Tradecorp to Ancath on or about 21 September 2000. That means that the correct amount of Mr Russell's personal services income for the 2001 income year is $45,055.00.
142 As to the 2002 income year, the Commissioner concedes that the calculation of Mr Russell's personal services income which was made for the purposes of the assessment overstates the amount of that income by $416.00.
143 The question then becomes as to whether any deductions ought to be made from the personal services income included as part of Mr Russell's assessable income? This is the province of Division 86 of the ITAA 1997.
144 Section 86-20 of the ITAA 1997 contemplates that a person's personal services income may be reduced by such deductions to which the personal services entity, here Ancath, is entitled.
145 Mr Russell submits that his personal services income should be reduced by the deduction of amounts paid by Ancath to the partnership A W Russell & Co in each of the 2001 to 2004 income years. Obviously enough, for reasons already given, insofar as any of the amounts put forward as deductions were paid in the 2004 income year after 23 February 2004 they could not be a payment to the partnership but rather were in law nothing more than a payment to Mr Russell personally. I shall assume for the present in Mr Russell's favour that the partnership did perform services for Ancath in relation to Tradecorp. It will be necessary to return to that subject in relation to the GST appeal.
146 The partnership was, in each income year, an "associate" as that term is defined for the purposes of s 86-35 of the ITAA 1997 by s 995-1 of that Act. That definition incorporates by reference the provision made in s 318 of the ITAA 1936 in respect of who or what is an "associate". On the findings that I have made and viewing Ancath as the "primary entity", Mr Russell, either alone or in conjunction with his former wife, constitutes a "controlling entity" for the purposes of s 318(2)(d) of the ITAA 1936 because Ancath's actions are sufficiently influenced by either Mr Russell alone or in conjunction with his former wife.
147 On the evidence, Tradecorp was Ancath's sole source of income in each of the income years in question. And that income constitutes Mr Russell's personal services income. In these circumstances, any payments to the partnership must, for the purposes of s 86-35(1)(b), necessarily be "attributable" to that income. In these circumstances, the amount of those payments to the partnership is not an amount which Ancath can deduct, for that is expressly foreclosed in respect of such payments by s 86-35(1)(d) of the ITAA 1997.
148 I note in passing that domestic double taxation in these circumstances is precluded by s 86-35(1)(c), which excludes such payments from the assessable income of the partnership.
149 Approaching matters from the perspective of whether, having regard to s 86-60 of the ITAA 1997, Ancath, as a personal services entity, might deduct an amount to the extent that it relates to the gaining or producing of Mr Russell's personal services income. Neither of the conditions there specified could be met - Ancath was not conducting a personal services business and, had the circumstances giving rise to the postulated deduction applied to Mr Russell personally he could not claim a deduction for he would be trying to claim a payment to himself as a deduction (s 86-60(b) and (a) respectively).
150 Yet another of Mr Russell's submissions in relation to the quantum of personal services income assessed to him was that it overstated that because Ancath had made two refunds to Tradecorp. He identified these refunds as follows in a schedule exhibited to one of his affidavits (Exhibit G to his affidavit filed on 18 March 2008):
(a) NZD$27,680.83 in respect of services the subject of invoice 29; and
(b) NZD$21,266.23 in respect of services the subject of invoice 33.
151 I have already above referred to each of these invoices in the context of other submissions made and evidence given by Mr Russell.
152 I did not have the benefit of a detailed explanation from Mr Russell in his affidavit evidence as to how the asserted refunds came about. In the relevant affidavit (para 10) Mr Russell just states: "My time and effort gave rise to the invoices that were rendered by [Ancath] to Australian resident Tradecorp. A schedule of those invoices is attached …" The subject was explored in Mr Russell's cross examination. In the course of that Mr Russell stated that the refunds were made in cash. His explanation as to how this came about was aptly described in the Commissioner's submissions as "convoluted", referring to the payment by Tradecorp of a sum in United States dollars to Ancath and to the equivalents of that sum in New Zealand and Australian dollars. His former wife was said to have brought some of the cash back with her to Australia from New Zealand. I did not have the benefit of corroborative testimony from the former Mrs Russell. Nor did I have any evidence before me from Mr Russell of Ancath's bank account statements or from Mr Zarb which might have assisted in evidencing a money trail in respect of Ancath's receipt of payments in respect of invoices 29 and 33 and of withdrawals so as to effect the asserted refunds. Each of invoices 29 and 33 is apparently annotated by Mr Zarb with the words "OK to pay". Given that and the convoluted nature of Mr Russell's explanation, I am not disposed to accept his evidence that refunds were made in the absence of corroboration.
153 As already mentioned, the onus lies on Mr Russell to prove the assessments concerned to be excessive. Insofar as the asserted refunds might serve to reduce the amount of personal services income which has been included in Mr Russell's assessable income, it thus lies upon him to prove on the balance of probabilities that these refunds were made. This he has not done. That is not to say that it is not possible that the asserted refunds were made, only that on the evidence to hand I am not satisfied that it is more probable than not that they were made.
154 For completeness, I should also record that Mr Russell asserted in his affidavit evidence (para 7) that, in each of the 2001 to 2004 income years, the partnership A W Russell & Co had included in error monthly payments which had been made into its bank account by Tradecorp. He further asserted that the partnership should not have returned these payments as income as they had been taken into account by Ancath "as part of partnership 'drawings' in calculating annual increases in my loan account". This, in turn, he asserted had led to his overstating his share of the partnership income in his personal returns.
155 This particular basis for a conclusion that each of his income tax assessments was excessive did not feature in his objection. No leave to amend the grounds of objection was sought. Absent a grant of leave to amend, an applicant is confined to the grounds specified in the notice of objection: s 14ZZO(a) of the TAA. In any event, as the Commissioner's submissions also made apparent, each of the assessments which issued was predicated upon the inclusion as assessable income only of the amount of Mr Russell's assessed personal services income in each income year. These amounts were included to the exclusion of amounts received from the partnership. There was no double counting. In these circumstances, even had these assertions been manifested in a ground of objection, they would have been but a distraction.
156 Mr Russell also alleged that the Commissioner's staff had not given him notice that an income tax audit in respect of his personal, as opposed to the partnership's taxation affairs was being conducted, that this was a breach of the "Taxpayer's Charter" and that, accordingly, the Commissioner was "estopped" from issuing amended assessments. It is not necessary to explore the merits of the factual substratum of this allegation. Even if true, no conduct on the part of the Commissioner can affect the operation of a taxing statute in respect of facts the occurrence of which gives rise to a taxation liability: Commissioner of Taxation v Wade (1951) 84 CLR 105 at 117 per Kitto J.
157 Mr Russell further advanced in his written submissions that there was no lawful ability to "reopen", ie issue amended assessments in respect of the 2001 and 2002 income years. This was not raised as a ground of objection in respect of the assessments. He is confined to those grounds in the absence of a grant of leave to amend. I decline to grant any such leave. So to do after the close of evidence would not be fair to the Commissioner who did not as the objection stood choose or need to lead evidence in respect of the formation of an opinion that in these income years there had been an avoidance of tax due to fraud or evasion.
158 The Court's powers on the hearing of a taxation appeal are set out in s 14ZZP of the TAA. It is there provided that: "the Court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision". The "decision" referred to in this section is the Commissioner's objection decision.
159 The outcome in respect of so much of the appeal as relates to the objection decision as concerns Mr Russell's assessment to income tax in respect of the 2002, 2003 and 2004 income years is clear.
160 In respect of the 2003 and 2004 years, Mr Russell has failed to prove that the income tax assessment concerned is "excessive". Thus, insofar as the objection decision relates to Mr Russell's objection against the 2003 and 2004 income tax assessments, those assessments should be confirmed.
161 Solely as a result of the conceded error of calculation to which I have referred, the income tax assessment in respect of the 2002 income year is excessive. The decision to disallow the objection was, in this regard, incorrect. It is necessary therefore to extinguish the effect of the objection decision and to make provision for the correct result in respect of Mr Russell's taxable income for that income year. Insofar as the objection decision in respect of this income year constitutes a disallowance decision and a confirmation of the income tax assessment, the necessary correction to me, requires more than a "variation" of the disallowance. Rather, so much of the objection decision as disallows the objection to the 2002 income tax assessment should be set aside and, in lieu thereof, it should be ordered that the objection to that assessment be allowed and Mr Russell's taxable income for that income year varied by reducing it by $416.00. Section 14ZZQ of the TAA makes provision for how the Commissioner is to implement such an order. The matter should be remitted to him for that purpose.
162 In respect of the 2001 income year, not only has Mr Russell failed to prove that his income tax assessment is excessive but, as noted, an amount of $1869.23 has been shown to have been omitted from his taxable income. That omission certainly supplies an additional reason why the 2001 assessment has not been shown to be excessive but does it also mean that the objection decision confirming that assessment should nonetheless be set aside as in error and a declaration made as to Mr Russell's taxable income for that income year with it then falling to the Commissioner, pursuant to s 14ZZQ, to issue an amended assessment for that income year so as to give effect to these orders once they become final?
163 The Commissioner's submissions rather assumed that it did, but did not elaborate on the foundation for that assumption. Mr Russell did not expressly challenge the Court's power to make an order which would authorise the amendment of his 2001 assessment so as to increase the amount of his taxable income and the tax payable thereon for that income year.
164 Uninstructed by authority, legislative or judicial, that an appellant dissatisfied with an objection decision that has confirmed an assessment of his taxable income to be X and who has failed to prove that X is an excessive amount might be the recipient of an order which not only dismissed his appeal but also set aside the objection decision and directed, in lieu, that the assessed taxable income be amended to X plus Y gives pause for thought about the nature and extent of the power presently exercisable by the Court on the hearing of a taxation appeal.
165 Upon the institution of an appeal against an objection decision by the Commissioner, the Court is "seized of the decision in its entirety": Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 at 476 (ANZ Savings Bank Case). In that same case (ibid) it was said of a statutory predecessor of s 14ZZP of the TAA, s 199 of theITAA 1936 that:
This power is expressed in the widest terms. An appeal relates to the objection decision made by the Commissioner albeit a taxpayer is dissatisfied with only part of that decision. A power to make such order as the Court thinks fit is clearly not unconstrained but there is nothing in s 199 to suggest that the Federal Court may not make such order in relation to the objection decision as is appropriate in all the circumstances once the subject matter of the taxpayer's dissatisfaction with the assessment has been resolved.
At the time those remarks were made, the language of s 199 of the ITAA 1936 was in materially identical terms to those of s 14ZZP of the TAA. Section 199 came to be in that form following amendments made to that section by s 88 of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth).
166 In the ANZ Savings Bank Case (at 479) it was further observed:
The question for the Court hearing an appeal is not whether the grounds of objection have been made out but whether the taxpayer has satisfied the burden cast by s.190(b) of proving that the assessment is excessive. … Since the Court is concerned to determine whether the amounts assessed as taxable income are excessive, the Commissioner must be able to raise for the Court's determination the deductions properly to be allowed in the light of the Court's decision as to assessable income. [Emphasis added]
The burden once cast on an appellant by s 190(b) of the ITAA 1936 is now the subject of like provision by s 14ZZO(b) of the TAA.
167 Here, I have resolved, adversely to him as it transpires, the subject matter of Mr Russell's dissatisfaction with the 2001 year income tax assessment and I have determined that that assessment is not excessive. What then becomes the appropriate order to make in all of the circumstances bearing in mind that the power, though expressed in the widest terms, is not unconstrained?
168 In its pre-1986 amendment form, s 199(1) of the ITAA 1936 provided that the court in which the Federal original jurisdiction to hear a taxation appeal was then vested (a State or Territory Supreme Court) might, on the hearing of the appeal, "make such order as it thinks fit, and may by such order confirm, reduce, increase or vary the assessment" (emphasis added). The 1986 amendment changed the focus of the issue for determination on the appeal from the assessment to the objection decision, consigning to the Commissioner the derivative administrative function of making such amendment to the assessment as was necessary to give effect to the Court's decision once that decision had become final. While that amendment meant that, in the absence of a stay, the requirement to make a refund pursuant to an assessment reduced by a court order which was under appeal was removed, so, too, was removed the express recognition that it was possible for a court hearing a taxation appeal, in which a taxpayer bore the onus of proving the assessment in question to be excessive, to increase that assessment.
169 In Cornell v Deputy Commissioner of Taxation (1920) 29 CLR 39 and at a time when s 38(1) of the Income Tax Assessment Act 1915 (Cth) (ITAA 1915) was in a form not materially distinguishable from s 199(1) of the ITAA 1936 as it stood prior to its amendment in 1986, i.e. the words "increase or vary" were employed in relation to the assessment, it was opined (at 48) in a joint judgement of six judges that "the fact that an assessment is for too small an amount is [not] any reason for setting aside the assessment at the instance of the person assessed". That judgement is silent as to whether the assessment might have been increased at the instance of the Deputy Commissioner, had positions been reversed, although the express conferral of a power to increase the assessment suggests that such an order could lawfully then have been made.
170 Again in respect of an appeal determined when the Court's powers, including that of reducing the assessment, were as set out in the former s 199(1) of the ITAA 1936, and notwithstanding that he did not adopt the method of calculation promoted by the taxpayer on objection and before him on appeal, Windeyer J in Mercantile Credits Ltd v Commissioner of Taxation (1971) 123 CLR 476 at 489 had no difficulty in concluding that the assessments concerned should be varied by order so as to reduce the amounts of the tax payable.
171 Saffron v Commissioner of Taxation (1994) 94 ATC 4049 (Saffron's Case) is a case which preceded the ANZ Savings Bank Case but which was decided after the 1986 amendments. Saffron's Case was an appeal from the Administrative Appeals Tribunal, not an appeal in the original jurisdiction against an objection decision. Nonetheless, in his reasons for judgement, Davies J (at 4050-4051) made the following observations of a generic nature as to the role of either this Court or the Tribunal when seized with a challenge to (termed by him a review of) an objection decision:
The review authority, the Court or the Tribunal, must come to its own decision on the facts and the issues. Walsh Jsaid inKrew's case at 4216:-
"I have a duty to reach my own conclusions on the questions of fact which have to be decided and to give effect to those conclusions. .. I must make my own decisions as to the facts."
Although the taxpayer may be untruthful and a tax evader, thatfactor, of itself, is no reason not to undertake a calculation of income tax as contemplated by the Act, if such a calculation can be made. AsWalsh Jsaid in Krew's case at 4219, "Awitness upon whose word one cannot rely may yet give evidence which is true in part." In that case, although Walsh J held that he could not accept the appellant himself as a reliable witness, he nevertheless found that several of the facts alleged by the taxpayer were established as a matter of probability and accordingly that four of the amended assessments before the Court should be set aside. Moreover, in the calculation of the taxable incomes of years past, exact proof may not be available. AsBurchett Jsaid in Ma v Commissioner of Taxation (1992) 92 ATC 4373 at 4379:-
'… the making of estimates upon Inexact evidence, which IS so much a feature of both judicial and administrative decision-making, cannot be uniquely excluded from appeals against betterment assessments.'
If, despite the general untruthfulness of a witness and the lack of records, the Court or the Tribunal nevertheless feels satisfied, as a matter of probability, as to the existence of a relevant fact or factor, effect must be given to that conclusion.
Though these observations predate by some months those made later in that year by the High Court in the ANZ Savings Bank Case, they draw upon the same cases which the High Court regarded as authoritative and are not inconsistent with the High Court's own observations. However, though the observation made by Davies J that "effect must be given to that conclusion" is no less generic than his Honour's other observations, it is necessary to recall that he was not called upon in that case expressly to decide whether it was within the Court's power to set aside the objection decision so as to increase the amount of an appellant taxpayer's taxable income. The other two judges constituting the Full Court in Saffron's Case, Gummow and Lee JJ, did not find it necessary to make such generic observations.
172 In this case, though I have not accepted aspects of Mr Russell's evidence as to his income in the years in question, I am in respect of the 2001 income year satisfied, as a matter of probability, that Mr Russell's taxable income for that year has been incorrectly assessed and that the true amount of his taxable income for that year is $1869.23 higher than that assessed. Had the former s 199(1) been applicable, I should therefore have ordered that the assessment be increased.
173 One constraint on the width of the powers which the Court may now exercise under s 14ZZP of the TAA must be the nature and extent of the "matter" in respect of which the Court is invested with Federal jurisdiction. In respect of a taxation appeal that investment of jurisdiction is implicit in the conferring, pursuant to s 14ZZ of the TAA, on a person dissatisfied with the Commissioner's objection decision of a right of appeal to this Court against that decision as an alternative to applying to the Administrative Appeals Tribunal for the review of that decision. Since 1986, it has been the correctness of the decision on the objection against the assessment which is, in terms of the formulation of "matter" in Re Judiciary and Navigation Acts (1921) 29 CLR 257 at 265, "the subject matter for determination" and the source of the "immediate right, duty or liability to be established by the determination of the Court". The Commissioner's obligation in respect of an objection is, materially, within the required period, to decide whether to:
(a) allow it, wholly or in part; or
(b) disallow it (s 14ZY of the TAA).
174 What s 14ZY does not put forward as an alternative for the Commissioner in deciding the objection is the increasing of the assessment which is the subject of the objection. That being so, it would be seem an odd result if the subject matter for determination on appeal included whether the Commissioner should not only have disallowed the objection but also whether he should have increased it.
175 In respect of the 2001 to 2004 income years, s 170(7) of the ITAA 1936 then provided:
(7) Nothing contained in this section shall prevent the amendment of any assessment in order to give effect to the decision upon any appeal or review, or its amendment by way of reduction in any particular in pursuance of an objection made by the taxpayer or pending any appeal or review. [Emphasis added]
Apart from the express reference to reduction, the absence of any reference to "increase" will be noted.
176 That is not to say that an administrative sequel to the disallowance of an objection might not have been a decision to issue an amended assessment increasing a taxpayer's liability. Consideration of an unmeritorious objection might nonetheless reveal that the original assessment of taxable income was too low. That though would be a separate decision from the objection disallowance decision and permissible only to the extent that the issuing of an amended assessment which increased liability was still lawfully possible pursuant to s 170 of the ITAA 1936. If so, separate rights of objection and subsequent appeal to this Court or review by the Tribunal in the event of dissatisfaction with the objection decision would exist in respect of that amended assessment and later objection decision.
177 For these reasons, I do not, as presently advised, conclude that the powers exercisable by the Court in the circumstances obtaining in respect of the 2001 income year extend to the setting aside of the decision disallowing the objection, the making of an order setting aside the assessment concerned and the making of a declaration that Mr Russell's taxable income for that income year was $1869.23 higher than that assessed.
178 I have used the qualification "as presently advised" deliberately. Whether the amount of Mr Russell's 2001 taxable income and related tax liability might lawfully be the subject of increase by consequential amended assessment as a consequence of the orders disposing of the income tax appeal was not a subject expressly addressed by the parties in submissions. Nor did I raise that subject of my own motion in the course of submissions. The conclusion which I have reached as to an absence of power is therefore necessarily provisional. I consider that procedural fairness dictates that, in respect of so much of the income tax appeal as relates to the 2001 income year income tax, Mr Russell and the Commissioner should, in the first instance, have an opportunity, after considering these reasons for judgement, to bring in short minutes of the orders which they submit are appropriate to give effect to the conclusions and findings which I have made, together with supplementary submissions as to the lawful authority for the making of such proposed orders.