FC of T v METASKILLS PTY LTD

Judges:
Lindgren J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2003] FCA 766

Judgment date: 23 July 2003

Lindgren J

Introduction

1. The applicant (``the Commissioner'') ``appeals'' under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (``the AAT Act'') on questions of law from a decision of the Administrative Appeals Tribunal (``the AAT'') [reported at 2002 ATC 2274]. By that decision, the AAT set aside an objection decision of the Commissioner on the application of the present respondent (``Metaskills''), and remitted the matter to the Commissioner with a direction that Metaskills has satisfied subs 87-65(3)(a)(ii) of the Income Tax Assessment Act 1997 (Cth) (``the Act'').

2. Metaskills's application before the AAT arose out of an application by Metaskills to the Commissioner for a personal services business determination under subs 87-65 of the Act in respect of the 2000-2001 income year. The effect of the AAT's direction was that Metaskills had established that, but for unusual circumstances applying to it in that income year, it could reasonably have been expected to meet ``the business premises test'', being one of the four personal services business tests identified in subs 87-15(2) of the Act.

3. The questions of law stated in the Commissioner's notice of appeal can be summarised as follows:

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1. Whether one or more of several errors of law vitiated the AAT's conclusions:
- (a) that ``unusual circumstances'' applied to Metaskills in the 2000-2001 year of income; and
- (b) that, but for such unusual circumstances, Metaskills could reasonably have been expected to meet the ``business premises test''.
2. Whether the requirements of subs 87-65(3)(b) of the Act could not be satisfied in circumstances where all relevant income during the year of income came from IT- Spark Pty Ltd (``IT-Spark'') and the AAT found that ``the contractual arrangements were between [Michael James] Strong, a director and the sole employee of Metaskills] and IT-Spark.''

4. Metaskills cross-appeals against the remitter. The surviving questions of law stated in the notice of cross-appeal can be summarised as follows:

1. In relation to the AAT's conclusion that subs 87-18(3) and s 87-20 of the Act could not apply to Metaskills because ``the contractual arrangements were between Mr Strong and IT-Spark'':
- (a) whether there was any probative evidence to support that finding;
- (b) whether it was open to the AAT, on the basis of its findings, so to conclude;
- (c) whether the AAT erred in failing to consider if Mr Strong was in law an agent of Metaskills;
- (d) whether, on the evidence, the only finding open as a matter of law was that Metaskills was in a contractual relationship with IT-Spark;
- (e) whether the AAT failed to give adequate reasons for, or failed to make findings, on material questions of fact in support of, its conclusion.
2. Whether Metaskills was denied procedural fairness.

5. Another question of law raised by Metaskills's notice of cross-appeal no longer needs to be answered. This was whether the Commissioner, once he, or the AAT exercising his powers on review, has determined that unusual circumstances within s 87-65 of the Act exist, retains a discretion to refuse to make a personal services business determination.

Procedural background

6. On 14 June 2001 Metaskills applied to the Commissioner for a personal services business determination pursuant to s 87-65 of the Act.

7. On 24 July 2001 the Commissioner gave notice that Metaskills's application had been refused.

8. On 19 September 2001 Metaskills objected to the Commissioner's decision to refuse the application.

9. On 22 February 2002 the Commissioner gave notice that the objection was disallowed.

10. On 22 April 2002 Metaskills applied to the AAT for review of the Commissioner's objection decision.

11. On 22 November 2002, the AAT made the decision from which the present appeal is brought.

12. On 20 December 2002 the Commissioner filed his notice of appeal commencing this proceeding. On 1 April 2003, Metaskills filed its notice of cross-appeal.

Legislation

13. The issues which arise relate to Pt 2-42 of the Act (Personal services income), which comprises Div 84 (Introduction), Div 85 (Deductions relating to personal services), Div 86 (Alienation of personal services income), and Div 87 (Personal services businesses).

14. Part 2-42 (Personal services income) was introduced into the Act by the New Business Tax System (Alienation of Personal Services Income) Act 2000 (Cth). Part 2-42 applies to the 2000-2001 income year and later income years.

15. The provisions of Pt 2-42 have been amended (with effect from the beginning of the 2000-2001 income year) by the Taxation Laws Amendment Act (No 6) 2001 (Cth). It is the provisions in their amended form that are relevant for the purposes of this proceeding. The comments that follow relate to the legislative provisions as amended.

16. Part 2-42 was introduced following recommendations made in the report, Review of Business Taxation: A Tax System Redesigned (commonly called ``the Ralph Report'').

17. The Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000, stated (at p 3):

``Schedule 1 to this Bill amends the [Act] to introduce new rules for the income tax

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treatment of certain personal services income. Personal services income is generally paid to an individual who provides the services or to a company, partnership or trust (interposed entity) through which the services are provided by an individual.

The measure will not:

• apply where an individual or interposed entity is conducting a personal services business; and

• affect the legal status of an interposed entity or deem an individual to be an employee for the purposes of an Australian law or instrument.

The rules are designed to improve the integrity of the tax system by addressing both the capacity of individuals and interposed entities providing the personal services of an individual to claim higher deductions than employees providing the same or similar services and the alienation of personal services income through an interposed entity.

These improvements will be achieved by:

• limiting and clarifying the deductions available against personal services income at both the individual and interposed entity level; and

• ensuring that, after allowing deductions to the interposed entity, any income remaining is attributed to the individual. Schedule 1 to the Taxation Administration Act 1953 is being amended to provide a collection mechanism for tax payable on any income so attributed.''

18. A convenient starting point for a consideration of Pt 2-42 is the definition of ``personal services income'' in s 84-5 of the Act. Section 84-5 is as follows:

``(1) Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).

(2) Only individuals can have personal services income.

(3) This section applies whether the income is for doing work or is for producing a result.

(4) The fact that the income is payable under a contract does not stop the income being mainly a reward for your personal efforts or skills.''

Accordingly, the ordinary income or statutory income of a company, for example, if it is mainly a reward for the personal efforts or skills of an individual, is called the ``personal services income'' of the individual, not of the company. (Assessable income comprises all ordinary income and statutory income, other than exempt income: ss 995-1, 6-5, 6-10, 6-15.)

19. Division 85 sets out amounts that an individual can and cannot deduct against personal services income. The rules in Div 85 apply to individuals (except employees, certain office holders and religious practitioners - see s 85-35) earning personal services income. Generally speaking, subs 85-10(1) limits such individuals to the deductions that could be claimed under the Act against the personal services income if that personal services income were paid to the individual as an employee. Subsection 85-10(2) sets out exceptions to this general rule. Importantly, the general rule does not apply to an amount relating to income from the conduct of a personal services business (as to which, see below).

20. Division 85 is not of immediate relevance to the issues in the proceeding, but suggests that a more liberal legislative policy applies towards deductibility where a personal services business is carried on, than where one is not.

21. Division 86 includes in the assessable income of an individual, that individual's personal services income which forms part of the ordinary income or statutory income of a company, partnership or trust: subs 86-15(1). The company, partnership and trust, whose ordinary income or statutory income includes the personal services income of one or more individuals, is called a ``personal services entity'': subs 86-15(2). However, the personal services entity's personal services income is not included in the assessable income of the individual concerned if:

• the personal services entity gains the income from conducting a personal services business (as to which, see below); or

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• the personal services entity promptly pays the income to the individual as salary or wages.

22. Division 87 deals with determining whether there is a personal services business. As the above comments have indicated, if there is a personal services business the principal measures in Pt 2-42 (ie, the limitations on deductions and the inclusion of personal services income in the assessable income of the individual) do not apply.

23. Subdivision 87-A is headed ``General''. Section 87-10 explains that the object of the Division ``is to define personal services businesses in a way that ensures that it covers genuine businesses but not situations that are merely arrangements for dealing with the personal services income of individuals''.

24. Subsection 87-15(1) provides that an individual or personal services entity conducts a personal services business if:

(a) for an individual - a personal services business determination is in force relating to the individual's personal services income;
(b) for a personal services entity - a personal services business determination is in force relating to an individual whose personal services income is included in the entity's ordinary income or statutory income; or
(c) in any case - the individual or entity meets at least one of the four personal services business tests in the relevant year.

25. Subsection 87-15(2) provides that the four personal services business tests are:

• the results test under s 87-18;
• the unrelated clients test under s 87-20;
• the employment test under s 87-25; and
• the business premises test under s 87-30.

26 Subsection 87-15(3) distinguishes between two situations, namely, where less than 80 percent 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 percent or more of an individual's personal services income is income from the same entity. In the former case (less than 80 percent 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 percent 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. (In the present case, 80 percent or more of Mr Strong's personal services income during the 2000-2001 year was income from the same entity.)

27. The results test, the unrelated clients test, the employment test and the business premises test are defined in ss 87-18, 87-20, 87-25 and 87-30 respectively.

28. Under s 87-18, an individual or a personal services entity meets the results test if, in relation to at least 75 percent of the relevant personal services income:

• the income is for producing a result;
• the individual or entity (as the case may be) is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the individual or entity produces the result; and
• the individual or entity (as the case may be) is, or would be, liable for the cost of rectifying any defect in the work performed.

Broadly speaking, an individual or entity, who or which is an ``independent contractor'' under traditional concepts should meet the results test. Indeed, the Revised Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 2001 (Cth) stated (at par 7.6): ``the results test... is based on the traditional tests for determining independent contractors''.

29. Under subs 87-20(1), an individual or personal services entity meets the unrelated clients test in a year of income if:

• the individual or entity gains or produces income from providing services to two or more entities that are not associates of each other or of the individual or entity; and
• the services are provided as a direct result of the individual or entity making offers or invitations (for example, by advertising) to the public at large or to a section of the public, to provide the services.

30. But subs 87-20(2) contains this important qualification:

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``The individual or personal services entity is not treated... as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity.''

(emphasis in original)

Subsection 87-20(2) has the potential to operate because IT-Spark arguably satisfies the latter part of the provision.

31. The employment test is set out in s 87-25 of the Act. Metaskills did not rely on this test and therefore I need not refer to it further.

32. Under subs 87-30(1), an individual or personal services entity meets the business premises test in an income year if, at all times during the income year, the individual or entity maintains and uses business premises:

• at which the individual or entity mainly conducts activities from which personal services income is gained or produced;
• of which the individual or entity has exclusive use;
• that are physically separate from any premises that the individual or entity, or any associate of the individual or entity, uses for private purposes; and
• that are physically separate from the premises of the entity to which the individual or entity provides services and from the premises of any associate of the entity to which the individual or entity provides services.

33. Subdivision 87-B is headed ``Personal services business determinations''. Section 87-60 deals with personal services business determinations for individuals. Section s 87-65 is the section of most importance in the present case, and is as follows:

``(1) The Commissioner may, by giving written notice to a personal services entity whose ordinary income or statutory income includes some or all of an individual's personal services income:

(a) make a personal services business determination relating to the individual's personal services income included in the entity's ordinary income or statutory income; or

(b) vary such a determination.

(2) The Commissioner may, in the notice, specify:

(a) the day on which the determination or variation takes effect, or took effect;

(b) the period for which the determination has effect;

(c) conditions to which the determination is subject.

(3) The Commissioner must not make the determination unless satisfied that, in the income year during which the determination first has effect, or is taken to have first had effect:

(a) the entity:

(i) could reasonably be expected to meet, or met, the results test under section 87-18, the employment test under section 87-25, the business premises test under section 87-30 or more than one of those tests; or

(ii) but for unusual circumstances applying to the entity in that year, could reasonably have been expected to meet, or would have met, at least one of the 4 personal services business tests ; and

(b) the individual's personal services income included in the entity's ordinary income or statutory income could reasonably be expected to be, or was, from the entity conducting activities that met:

(i) if subparagraph (a)(i) applies - the results test under section 87-18, the employment test under section 87-25, the business premises test under section 87-30 or more than one of those tests; or

(ii) if subparagraph (a)(ii) applies - at least one of the 4 personal services business tests.

(4)...''

(my emphasis)

34. Section 87-70 provides for an individual or a personal services entity to apply to the Commissioner for a personal services business determination.

35. Section 87-85 provides that a person who is dissatisfied with, inter alia, the Commissioner's refusal of an application for a personal services business determination may object against the decision in the manner set out

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in Part IVC of the Taxation Administration Act 1953 (Cth) (``the TA Act'').

Reasoning of the AAT

36. The AAT noted in par 3 of its Reasons for Decision that Metaskills was a proprietary company of which the directors were Michael James Strong and his wife Jann Strong. The paragraph continued as follows [at 2275]:

``... The company is the vehicle through which Mr Strong provides business and information technology consulting services.''

37. The Senior Member referred to various provisions of the Act and set out what he described as the rationale of the scheme of the Act as stated in the Second Reading Speech on the New Business Tax Systems (Alienation of Personal Services Income) Bill 2000 (Cth) as follows [at 2276]:

``This bill will prevent individuals reducing their tax by diverting the income generated by their personal services to a company, partnership or trust and limit work-related deductions available in those cases...

The Commissioner's determination that a business is a personal service business may be given on one of four grounds:

• having two or more unrelated clients

• having one or more employees

• having a separate business premises

• that the individual or entity is producing a result, supplies their tools of trade and is liable for the cost of rectifying defective work.''

38. The AAT noted that Metaskills relied on the unrelated client test, the business premises test and the results test, and the proposition that, but for unusual circumstances applying to it in the year 2000-2001, Metaskills could reasonably have been expected to meet one or more of those three personal services business tests.

39. The Senior Member concluded that Metaskills did not satisfy the results test because the work done was done pursuant to a contract between Mr Strong and IT-Spark Pty Limited (``IT-Spark'').

40. There was in evidence before the AAT a three page document in the form of a letter dated 30 November 1999 from IT-Spark to Mr Strong offering Mr Strong an invitation to join IT-Spark's ``panel of Professionals''. The letter set out the terms of arrangement which were to prevail between IT-Spark and Mr Strong if IT- Spark offered Mr Strong engagements in the future. The letter was signed by Chris Doney as Managing Director of IT-Spark, and bears an acceptance of its terms signed by Mr Strong. The document referred in numerous places to ``you'' as if it was to represent the terms which were to apply to any engagements by IT-Spark of Mr Strong, as distinct from engagements by IT-Spark of Metaskills. There is no reference in it to Metaskills. I will call this agreement ``the Overarching Agreement''.

41. There were also in evidence before the AAT, seven letters of engagement addressed by IT-Spark to Mr Strong, bearing dates from 29 April 2001 to 4 June 2001. They were in common form. Each bore a ``Project Number'', and, in each case, the name of the ``Instructor'' was stated as ``Mike Strong''. Each letter commenced as follows:

``I am pleased to offer you the following assignment. This assignment is offered to you under the general terms of contract which you have signed with IT-Spark. You are asked to provide [in some of the letters, the word `deliver' was used] the following [ there followed particulars of the assignment, including the name and address of IT-Spark's client, the start date and finish date and daily fee].''

The concluding paragraph in each letter was as follows:

``Submit invoices to us quickly, so we can arrange payment for you. Any problems which cause the assignment not to run as planned, need to be documented carefully, along with your actions to fix the situation.''

42. There were also in evidence before the AAT copies of four tax invoices for ``Consulting''. They were rendered by Metaskills to IT-Spark, or, more accurately, to ``Chris Doney, IT-Spark Pty Ltd...''.

43. Finally, there were in evidence copies of thirteen standard form documents on the stationery of IT-Spark, signed by Mr Strong and a representative of IT-Spark's client. For example, one of IT-Spark's clients was One.Tel Ltd and the document in that case was signed by a person on behalf of One.Tel Ltd and by Mr Strong as ``Consultant''. The document set out in tabular form the work which Mr Strong had

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performed and the hours he had spent in performing it, and concluded:

``The above contracting services have been provided by IT-Spark to the satisfaction of One.Tel.''

The name ``Michael Strong'' was typed into the document where it provided for a statement of the ``Consultant's Name''.

44. I do not regard this ``signing off'' by Mr Strong as ``Consultant'' on these documents as indicating that Mr Strong, rather than Metaskills, had contracted with IT-Spark. Mr Strong was in fact the individual ``consultant'' whom IT-Spark had procured to do the work for its client. The AAT, correctly in my view, did not attach any importance to these ``acquittance'' or ``signing off'' documents. The documents to which the AAT referred in its reasons were the Overarching Agreement, the seven letters of engagement and the four tax invoices issued by Metaskills.

45. Against the above background, pars 12-16 of the AAT's Reasons for Decision may more readily be understood [at 2277]:

``12. Documents T3-23 to 31 inclusive are copies of offers by IT Spark for the engagement of an IT consultant for a specific assignment (or task). It would seem that the contract was accepted by the performance of the task and the submitting of accounts for the work done to IT Spark. All of the said offers are addressed not to the Applicant company but to `Mike Strong'.

13. The said offers also refer to the offer being `under the general terms of contract you have signed with IT Spark'. A copy of that document became Exhibit A2 in these proceedings. That document is addressed to Mike Strong and the signature accepting the terms and conditions of the contract is that of Michael James Strong.

14. It is clear from the documents referred to above that although any accounts for work done may have been rendered to IT Spark in the name of the Applicant, the contractual arrangements were between Mr Strong and IT Spark.

15. Subsection 87-18(3) of the Act cannot therefore be applied to the Applicant as in the year of income the personal services entity [Metaskills] could not meet the test in subparagraphs 87-18(3)(b) and (c).

16. Similar difficulties attended the Applicant's ability to meet the test in section 87-20, the unrelated clients test, in that the Applicant did not provide any services as opposed to the services provided by Mike Strong.''

46. The Commissioner submits that, in view of the AAT's conclusion that all contractual arrangements were with Mr Strong personally rather than with Metaskills, the income in question was not that of Metaskills, with the result that Metaskills was not in a position to satisfy any of the personal services business tests. Metaskills, on the other hand, submits, first, that in par 3 of its Reasons for Decision, the AAT had made a finding that Metaskills was the income earning entity, and that, in any event, in reaching the conclusion in pars 12-15 set out above, the AAT erred by failing to take into account much evidence pointing to Metaskills as the income earning entity.

47. Turning to the unrelated clients test, the AAT began by stating (in par 16 - set out at [ 45] above) in effect that Metaskills did not derive the income because Mr Strong, rather than it, provided the services, because he, rather than it, had contracted with IT-Spark.

48. Further, in respect of the unrelated clients test, the AAT referred to par 87-20(1)(b) and subs 87-20(2) which it set out as follows:

``(1) An individual or a personal services entity meets the unrelated clients test in an income year if:

(a)...

(b) the services are provided as a direct result of the individual or personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.

(2) The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity.''

49. In relation to the application of these provisions, the AAT stated (in par 19) as follows [at 2277]:

``Although the Applicant may have advertised by having its name on the jerseys

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of a local football club, which could be characterised as an offer to the public at large and has sought work by word of mouth and by making enquiries within the industry, the services in the income year were provided as a result of an ongoing relationship with the one head contractor.''

50. Turning to the ``business premises test'', the AAT first referred to subs 87-30(1) and noted that in the 2000-2001 year Metaskills did obtain separate premises, after having had its place of business for five years previously at Mr Strong's residence. However, it observed that the move to separate premises took place late in that income year.

51. The Senior Member noted that in his testimony Mr Strong had referred to the following as reasons why Metaskills had not relocated earlier:

• the nature and intensity of the work required meant that there was ``no suitable time to take focus off the contract work for long enough to find and establish new premises until late in the year [of income]'';
• complications arising from the introduction of the GST;
• the fact that Mr Strong was in negotiations with third parties, which, if completed, would have eliminated the occasion to move to separate premises.

52. In relation to the third matter, the Senior Member referred to letters from three companies which were in evidence and which were to the effect that Mr Strong and those companies had had discussions about a merger of their business interests. Of these discussions, the Senior Member stated (at par 24) [at 2278]:

``... The discussions appeared to have been initial negotiations rather than concrete proposals for any business relationship.''

53. Without delving further into the business premises test, the Senior Member turned to the ``unusual circumstances'' provision found in subpar 87-65(3)(a)(ii) of the Act. He discussed the meaning of the expression ``unusual circumstances'' and thought that pressure of work and the introduction of the GST, while they would not individually amount to ``unusual circumstances'', did operate in combination to take the year 2000-2001 ``out of the ordinary''. The Senior Member stated as follows (at par 39) [at 2280]:

``39. I accept that the Applicant company had for five years previously been conducted out of the residential premises of its directors and shareholders, Mr and Mrs Strong. I am also satisfied that were it not for the legislation any search for separate premises would not have taken place when it did but would have awaited the natural evolution of the business. However, as alluded to above, changes in an entity's operation brought about by changes in legislation are matters which can be taken into account. The directors of the company were aware of the change in legislation, consequently I am satisfied and so find that but for the unusual circumstances identified above, the Applicant could reasonably have been expected to have met the business premises test under section 87-30 of the Act.''

54. Stating that the ultimate decision was for the Commissioner, the Senior Member decided that the decision under review should be set aside and the matter remitted to the Commissioner with a direction that Metaskills had satisfied the provisions of subs 87- 65(3)(a)(ii) of the Act in relation to the business premises test.

Facts

55. I turn to consider the course of events in relation to the ``Whose income?'' and ``Natural Justice'' issues discussed later.

56. On 24 July 2001 the Commissioner stated his reasons for refusing to make a personal services business determination. The statement said:

``Metaskills Pty Ltd (Metaskills) provides Information Technology services.

Metaskills receives more than 80% of its personal services income from IT-Spark Pty Ltd (ITS).

Mr Michael Strong generates the personal services income for Metaskills.

ITS is a labour hire company.''

The Commissioner's stated reasons for refusing Metaskills's application were that Metaskills did not satisfy any of the personal services business tests, and that it could not be said that it could reasonably have been expected to do so but for ``unusual circumstances'' applying to it.

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57. In its reasons for objection dated 19 September 2001, Metaskills addressed the Commissioner's statement of reasons for refusing its application. Throughout, Metaskills referred to itself as the provider of the services in question. It referred to the fact that since it had begun operations more than six years previously, it had ``continuously maintained professional indemnity insurance... against the possibility of claims from clients...''. (In its original application for the personal services business determination, Metaskills had also referred to ``Professional Indemnity Policy AO7989357ICT with QBE''.)

58. Under cover of a letter dated 22 February 2002 the Commissioner notified Metaskills of his reasons for his objection decision. The statement of reasons included the following:

``We considered these to be the relevant facts:

Metaskills Pty Ltd (Metaskills) provides Information Technology services.

Metaskills receives more than 80% of its personal services income from IT-Spark Pty Ltd (ITS).

In the financial years prior to year ended 30 June 2001 Metaskills provided services to a number of different clients through the different labour hire firms. Mr Michael Strong generates the personal services income for Metaskills. ITS is a labour hire company.''

It will be noted that, apart from the new third (middle) sentence (``In the financial years...''), this passage is identical to that contained in the Commissioner's statement of his reasons for his original decision refusing Metaskills's application (see [56] above). The Commissioner's reasons again assume that Mr Strong's personal services income is ordinary income of Metaskills. The Commissioner's reasons again go to Metaskills's non- satisfaction of the personal services business tests for other reasons.

59. In its application for review filed in the AAT on 23 April 2002, Metaskills identified four ``issues'', none of which were apt to refer to the ``Whose income?'' issue.

60. On the morning of Tuesday 5 November 2002, the day before the hearing before the AAT, Mr Strong had a telephone conversation with Virginia Rands of the Australian Taxation Office (``ATO''), which, according to his affidavit read before me, was as follows:

``VR: `I want to let you know that we have briefed counsel to appear at the hearing tomorrow. He has not had time to fully consider the matter but we might raise the argument that the contract with IT-Spark was with you personally and not with Metaskills .'

MS: `What do you mean?'

VR: `The copy of the contract in the T documents is addressed to you and it is unsigned.'

MS: `I think I have a signed copy, I will bring it to the hearing tomorrow.'''

(my emphasis)

61. Early in the afternoon of the same day, the ATO sent a letter to Mr Strong by facsimile transmission. The letter stated, relevantly, as follows:

``I also confirm the following points:

• The Commissioner will now be represented by counsel at tomorrow's hearing.

• The Commissioner may advance the argument that the document at page T3.20 (contract between yourself and IT- Spark) is flawed by being unsigned, and that it does not represent an agreement between the applicant (Metaskills) and IT-Spark, as it is expressed to be an agreement with yourself personally .

• I understand that you may wish to advance an argument that s 87-40 of ITAA 1997 supports your case for a determination. The Commissioner in response may advance the argument that the grounds in this case should not be extended to include an argument advancing s 87-40 in support of your case.

• It is also my understanding that you will be seeking to obtain a more satisfactory document evidencing the contract between IT-Spark and Metaskills.''

(my emphasis)

62. At the hearing before the AAT, Metaskills was represented by Mr Strong, and the Commissioner was represented by Mr Quinn of counsel. Within the first few minutes of the hearing, Mr Quinn handed up the

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Commissioner's ``Statement of Facts and Contentions''. This document was dated 12 September 2002, well before the date of the letter faxed by the ATO. I assume that a copy had previously been supplied to Mr Strong. The document's statement of ``FACTS'' commenced as follows:

``1. The Applicant is a company that provides business and information technology consulting services. Mr Michael Strong, a director of the Applicant, provides these services for the Applicant. The other director of the Applicant is Mrs Jann Strong.

2. On 14 June 2001, the Applicant applied for a Personal Services Business Determination for the year ended 30 June 2001 (`the relevant year').

3. For approximately five years prior to the relevant year, the Applicant's business was operated out of the residential premises of its two directors.

4. The Applicant has, toward the end of the relevant year, obtained separate business premises.

5. The Applicant has stated that unusual circumstances existed, which were:

• Pressure of work in the relevant period;

• Joint venture negotiations with other organisations were underway, which cast doubt over the requirement for business premises, and

• Additional administrative load learning and implementing GST and other aspects of the New Business Tax System.

6. In the six years the Applicant has been operating, its services were provided through three organisations - Technology Solutions Pty Ltd, FMS International Inc and IT-Spark Pty Ltd (`IT-Spark'). These organisations are labour hire firms (ie firms that conduct a business of arranging for third-parties to provide services directly for clients of that firm).

7. The contract with IT-Spark specifies that an appropriate fee will be offered for each assignment, with a working day based on 7 hours, and a half day 3.5 hours. The agreement between IT-Spark and Mr Strong may be terminated by either party with 7 days notice.''

There was nothing in the document to alert a reader to the possibility that the Commissioner might argue that the income received from IT- Spark was not that of Metaskills at all. The last sentence in par 7 (set out above) did not suffice to do so. The Statement of Facts and Contentions assumes that the income is that of Metaskills.

63. Mr Strong produced a copy of the Overarching Agreement which was admitted to evidence as an exhibit.

64. Later in the hearing, but still prior to the luncheon adjournment, Mr Quinn handed up what he described as ``some submissions in draft form'' he had prepared, observing that he had come into the case only two days earlier, and that there might yet be some minor changes. It seems clear that Mr Quinn had come into the matter on Monday 4 November 2002 and that the ``Whose income?'' issue had suggested itself to him or to someone else on the Commissioner's side on that day or on the morning of Tuesday 5 November. The draft submissions, a copy of which was handed to Mr Strong at the same time, comprised six pages and 30 paragraphs. In par 14, at the top of the fourth page, the document stated:

``The first problem for the applicant is that it did not contract with either IT-Spark or the clients of IT-Spark to provide service - see T3-20, 23, 24, 26, 27, 28, 29. The contract is between Mike Strong and IT-Spark and the applicant was not under any contractual obligation to provide any services.''

The ``T documents'' referred to were an unsigned copy of the Overarching Agreement and copies of the seven letters of offer of particular engagements. Through oversight, page T3-21, the final page of the unsigned copy of the Overarching Agreement, was not referred to. Another document not referred to was Document T3-22, a Policy Schedule of QBE Insurance (Australia) Ltd in respect of Policy number AO7989357ICT in the name of Metaskills for the period 29 June 2000 to 29 June 2001 in respect of a business of ``Computer Consultant and as more fully described in the proposal form''.

65. It was in para 14 of the Commissioner's submissions (set out above) that, for the first time, the Commissioner gave notice that he was

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indeed advancing the argument that the income was not that of Metaskills. But I do not infer that Mr Strong or the Senior Member read the document, and, in particular, that paragraph, immediately.

66. Mr Quinn outlined the operation of the legislation to the Senior Member, stating:

``The personal services entity is defined in 86-15(2) as a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals.''

There followed these exchanges:

``MR QUINN: Essentially the personal services entity is that entity which is interposed between the individual providing the work or services to the party making payment for the supply of the services.

MR ALLEN: What you would say is that Mr Strong's company is a perfect example of this sort of entity, that is to say, that he performs what I will term, for want of a better term, IT work for various persons or entity - well, bodies. I don't have to say Federal Police or something else, etcetera.

MR QUINN: Yes.

MR ALLEN: The money is then paid not so much to him but to Metaskills Pty Ltd.

MR QUINN: That is certainly the case, Senior Member, in the context - in the factual context of the proceeding that is certainly the case and we move on from there. The attribution rule in 86-15 attributes - if the entity does not satisfy certain tests, then the attribution rule in 86-15 attributes income that is included in the assessable income of the interposed entity back to the individual. It provides IT services. Now, that is the basic rule and...''

These exchanges were consistent with the Commissioner's case being, as Mr Strong still understood it to be, that the income in question was income of Metaskills and that the Act required it to be treated, instead, as income of Mr Strong.

67. During the morning session, Mr Strong gave evidence before the AAT. That was before he had an opportunity to read counsel's outline of submissions. In his testimony, Mr Strong referred to the fact that Metaskills had held professional indemnity insurance and workers' compensation insurance for the period of more than seven years it had been in operation.

68. Counsel for the Commissioner cross- examined Mr Strong in relation to the Overarching Agreement and the seven individual letters of offer of engagement as follows:

``MR QUINN: The document which contains the terms and conditions addressed to you, is it not, Mr Mike Strong? - That's correct. The negotiations between the two organisations were carried out between me and the principal of IT-Spark specifically.

In fact, there is no - the contractual relations of the contracting parties on the basis of this document are yourself and IT- Spark, are they not? - As I pointed out in my submission, this is a basic terms of agreement, not a specific contract so all I'm doing here is acknowledging that I understand the way that IT Spark normally does business and in fact, that's - the actual contracts are the result of separate engagement letters. I think a relevant point would be that all invoices that pass between the two organisations are from Metaskills to IT-Spark.

Isn't it the case though that the document which is at T3-20 says: dear Mike, I'm pleased to offer you an invitation to join the IT-Spark panel of professionals. Set out below are the bases -? - That's an indisputable fact, yes.

- basic terms of the arrangement between IT-Spark and yourself and further on the intention is that this document contains the general terms which will apply to our business relationship on each occasion on which you are engaged to provide services to IT-Spark, details of each particular engagement to be offered separately to you in writing. The document goes on to say: after reading the content of this letter, please sign the extra copy enclosed and return it to me as your acknowledgment that you are prepared to accept offers of engagements to provide services under the general terms set out in this letter. The next part of the document refers to fees. Each time you, being Mike Strong, are given an assignment, an appropriate fee will be offered and that sets out the working day with regard to seven hours. Further on, the document says:

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until further notice, the only person authorised to you to offer you assignments is Chris Doney. Do you agree with me that there is no mention or reference in that document to Metaskills? - I would obviously have some difficulty disagreeing with you. If I could just make a clarifying statement at that point and that is that you'll note from the date - dating on the signed version of the document that this agreement was prepared well before the requirements of the subsequent APSI legislation - something that we were in any way aware of and in addition this was a standard form of agreement from IT-Spark that resulted from negotiations conducted at personal level between myself and the principal of IT- Spark.

But in fact -? - And the principal of IT- Spark at all times understood and expected that he would be receiving invoices from Metaskills not me personally. So it's just a, I suppose, carelessness on our part, you could say, that we did it under my name and not under the company name.

But necessarily setting out the terms and the conditions and the contracting parties. That is what I'm suggesting to you that the contracting parties in relation to the arrangement between IT-Spark and - are yourself and IT-Spark. If I could take you further to - on that point to the particular assignments which were offered to you by IT-Spark and in particular T3-23.

MR ALLEN: Sorry, T3, page?

MR QUINN: T3-23, Senior Member.

MR ALLEN: Thank you.

MR QUINN: This is on IT-Spark's letterhead and again there is no mention on - in that document as to Metaskills. That is right, isn't it? - That is an example of IT- Spark specifying a particular deliverer that they wish to have for a particular contract.

But nevertheless addressed to you, Mike Strong. I'm pleased to offer you the following assignment. This assignment is offered to you under the general terms of the contract which you have signed with IT- Spark which is the document we were looking at just previously? - Yes.

Again, that document contains no mention of Metaskills, does it? - That's correct.''

69. The Senior Member invited Mr Strong to reply, following his cross-examination. Accepting the invitation, Mr Strong said:

``With the experience I now have, I would have been much more careful about the distinction between Metaskills and myself in writing any documentation to do with business relationships with other organisations. I'd like to repeat that all of the actual billing documentation which is contained in - or samples of which are contained in documents 116 through to 135 clearly identify that Metaskills was the deliverer and - but Metaskills was the billing entity that was intended to be dealing directly with IT-Spark. I think in terms of all the points I wish to raise, that those are all the ones I can think of at this time.''

While the invoices in question were issued by Metaskills, it is going too far to say that they ``clearly identify that Metaskills was the deliverer''. They are expressed to be for ``Consulting'', and charge for a stated number of days at the rate of $900 per day (one of the seven letters of offer of engagement stipulated a rate of $900 per day).

70. Submissions were well under way by the luncheon adjournment. Counsel for the Commissioner was elaborating on his outline of submissions. Not long before the luncheon adjournment he stated:

``... the difficulty there in relation to the results tests is that the test has to be satisfied by the entity. Now, there is no result which Metaskills produced because it was not in any contractual relation with IT-Spark or for instance - for the purposes of this particular year, the contract was directly between Mr Strong. So [Metaskills] was not capable of producing a result.''

This is the first time that the Commissioner, through counsel, can be said to have drawn the attention of the Senior Member and Mr Strong to the argument which lay, waiting to be read, in par 14 of his outline of submissions.

71. In cross-examination before me, Mr Strong said that he spent the luncheon adjournment preparing his own submission. His cross-examination before me included the following exchange:

ATC 4657

``You had the opportunity to read the written submissions that he [Mr Quinn] handed up over the lunch time? - I would certainly have re-examined them at that time, but at the time I was preparing the closing remarks that I had been advised that I had the opportunity to present, so they would have been relevant. I would have read them again at that time but, you know, I think it was several pages. I doubt that I thoroughly absorbed every word in them in that time.''

72. During the afternoon, the ``Whose income?'' issue was clear and both counsel for the Commissioner and Mr Strong addressed the Senior Member on it. For example, Mr Strong stated:

``My contention is that as a representative of the organisation, my name can be interpreted as being representative of the organisation and, in fact, he has ignored all of my suggestions that the invoices actually constitute the execution of the agreement and all of the invoices went from Metaskills to IT- Spark or other bodies. In fact, there is a saying in the industry that the most sincere form of flattery is paying the invoice. The entity that got paid was Metaskills. If the ATO had ever questioned the organisations concerned, they would have found that the organisations believed they were dealing with Metaskills .

Even though they had the opportunity and the contact details they needed to do that, they never made such contact or indicated to me that they required to do so. Metaskills in general and I in particular don't have great experience to judge what is important . They've gained a lot out of this process so in some cases, the absence of questions from the ATO or indications that they - the absence of indications they felt that a particular point was not proven is significant because I then had no idea that I needed to take the assertion I had made further to satisfy them that it was proven .''

(my emphasis)

Mr Strong referred to some of the paragraphs in Mr Quinn's outline of submissions. Although he did not mention par 14, the above passage shows that he was aware of the issue raised in it. That passage also expresses a sense of grievance that the Commissioner had raised the issue so late. In a rather unclear manner, Mr Strong was suggesting that further evidence relevant to the issue would have been available if it had been raised earlier. I say ``rather unclear manner'', because I do not understand what relevance the belief of any ``organisation'' other than that of IT-Spark could have to the identity of the party who or which contracted with IT-Spark.

73. On the hearing before me, senior counsel for Metaskills read, subject to objection, an affidavit of Mr Strong to which was annexed a statement signed by Chris Doney, a director of IT-Spark, of the testimony he would have been prepared to give, if asked, before the AAT. Mr Strong's affidavit was to the effect that, if he had known he was entitled to do so, he would have requested an adjournment and sought to lead that evidence from Mr Doney. Mr Doney's statement was to the effect that:

• he had known Mr Strong for approximately 15 years and had known that he ``operate[d] his business through... [ Metaskills]'';
• he had determined, prior to engaging Metaskills, that it (Metaskills) ``carried appropriate professional indemnity insurance''; and
• that he had intended to engage Metaskills, not Mr Strong personally.

Reasoning

74. I have referred at [3]-[5] above to the issues arising on the appeal and the cross- appeal. It is convenient to commence with an issue raised by the cross-appeal.

Issue 1: Was it open to the AAT to consider whether the Commissioner's objection decision should be affirmed on the ground that Mr Strong's personal services income was not ordinary income or statutory income of Metaskills?

Legislation relevant to Issue 1

75. Being dissatisfied with the Commissioner's refusal of its application for a personal services business determination, Metaskills was entitled to object against that decision in the manner set out in Pt IVC of the TA Act.

76. Part IVC of the TA Act applies to the Commissioner's decision, which is called in that Part, a ``taxation objection'': TA Act, s 14ZL.

ATC 4658

77. Division 3 (ss 14ZU-14ZZ) of Pt IVC describes how taxation objections are to be made and how they are to be dealt with by the Commissioner: s 14ZN. Section 14ZU provides that a person, such as Metaskills, making a taxation objection, must, inter alia, in the taxation objection, state ``fully and in detail, the ground that the person relies on''. I will refer below to the terms of Metaskills's taxation objection.

78. Subsection 14ZY(1) provides, relevantly, that the Commissioner must decide whether to allow the taxation objection, wholly or in part, or to disallow it. The Commissioner's decision is called an ``objection decision'', notice of which must be served on the person who made the taxation objection: subs 14ZY(2), (3).

79. Since the Commissioner's objection decision was a ``reviewable objection decision'' (s 14ZQ) and Metaskills was dissatisfied with it, Metaskills was entitled to apply to the AAT for ``review'' of it: s 14ZZ.

80. The AAT Act applies in relation to reviewable objection decisions: TA Act s 14ZZA. Section 14ZZF of the TA Act modifies s 37 of the AAT Act in its application to an application for review of a reviewable objection decision. Subsection 37(1) of the AAT Act requires a person whose decision is the subject of an application for review by the AAT to lodge with the AAT certain documents. In substance, subs 14ZZF(1)(a) of the TA Act substitutes a requirement that the Commissioner lodge copies of:

``(i) a statement giving the reasons for the decision; and

(ii) the notice of the taxation decision concerned; and

(iii) the taxation objection concerned; and

(iv) the notice of the objection decision; and

(v) every other document that is in the Commissioner's possession or under the Commissioner's control and is considered by the Commissioner to be necessary to the review of the objection decision concerned; and

(vi) a list of the documents (if any) being lodged under subparagraph (v)...''

81. Section 14ZZK of the TA Act provides as follows:

``On an application for review of a reviewable objection decision:

(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and

(b) the applicant has the burden of proving that:

(i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or

(ii) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or

(iii) in any other case - the taxation decision concerned should not have been made or should have been made differently.''

82. Metaskills submits that the scheme of the provisions referred to above implicitly defines the scope of the issues before the AAT. In particular, Metaskills submits that, at least in the absence of anything further, the Commissioner is limited to his stated reasons for the objection decision.

Resolution of Issue 1

83. Both parties proceeded on the footing that it was only if Metaskills contracted with IT- Spark, that the income in question formed part of its ordinary income.

84. Metaskills submits that it was not open to the AAT to address the ``Whose income?'' issue in circumstances where the Commissioner did not:

(a) raise the issue in the reasons for his decision to refuse the application for a personal services business determination;
(b) raise the issue in the reasons for his objection decision;
(c) raise the issue in his Statement of Facts and Contentions before the AAT; or
(d) seek to add the issue as a ground at the hearing before the AAT.

Metaskills submits that the Commissioner had accepted that the conditions identified in subs 87-65(1) were satisfied, that is, that Metaskills was a personal services entity whose ordinary income or statutory income included all of Mr Strong's personal services income, and that the only issue was whether the conditions specified in subs 87-65(3) were

ATC 4659

satisfied. Metaskills argues that the AAT was bound to proceed on the same basis.

85. Metaskills relies on
Liedig v FC of T 94 ATC 4269; (1994) 50 FCR 461, but in my view, the case is distinguishable. In that case the Commissioner disallowed the taxpayer's taxation objection on the ground stated in it and the AAT affirmed the objection decision. On appeal to this Court, the taxpayer unsuccessfully argued that the AAT had erred in law by having failed, of its own motion, to extend the taxpayer's grounds of objection. Hill J (at ATC 4272; FCR 465) referred to ss 14ZZ, 14ZZA and 14ZZK of the TA Act in emphasising that the AAT's function was one of review , and therefore one ``purely within the confines of the taxpayer's objection''.

86. There is no question here of the AAT having gone beyond the confines of the taxpayer's objection; rather, the AAT has gone beyond the reasons given by the Commissioner for his objection decision.

87. Subsection 43(1) of the AAT Act provides that, for the purposes of reviewing a decision, the AAT may exercise all the powers and discretions that are conferred by any relevant enactment on the decision-maker. That it may do so is consistent with the wide range of decisions the subsection empowers it to make.

88.
Fletcher & Ors v FC of T 88 ATC 4834; (1988) 19 FCR 442 illustrates the breadth of subs 43(1). Although the Commissioner had not purported to exercise the discretion given by subs 177F(1) of the Income Tax Assessment Act 1936 (Cth), or referred to s 177F in the reasons for his objection decision, a Full Court of this Court held (at ATC 4845; FCR 452-453) that since it would have been open to the Commissioner to exercise that discretion when dealing with the taxation objection, it was, as a matter of power, likewise open to the AAT to do so in reviewing the Commissioner's objection decision. (See too
FC of T v Wade (1951) 9 ATD 337 at 341; (1951) 84 CLR 105 at 112 per Dixon and Fullagar JJ, ATD 344; CLR 116-117 per Kitto J, for successful reliance by the Commissioner on appeal on a ground not referred to in the notice of assessment or the explanatory documents attached to it.)

89. In deciding whether to allow, wholly or in part, or to disallow, the taxation objection, as he was required to do by subs 14ZY(1) of the TA Act, the Commissioner, and therefore the AAT on review, was required to apply the law, including Pt 2-42 of the Act. Section 86- 15 within that Part, inter alia, defined ``personal services entity''. Metaskills was a personal services entity only if its ordinary income or statutory income included the personal services income of Mr Strong. If Metaskills did not fall within the definition, subs 87-65(1) had no scope to operate and the occasion did not arise to consider the operation of subs 87-65(3).

90. For the above reasons, the question constituting Issue 1 should be answered Yes.

Issue 2: Was the AAT required, as a matter of law, to conclude that Mr Strong's personal services income formed part of the ordinary income of Metaskills?

91. As noted at [83], it was not in dispute that it was only if Metaskills had contracted with IT- Spark, that Mr Strong's personal services income formed part of the ordinary income of Metaskills. Metaskills submits that, on the evidence before it, the AAT was required to conclude that Metaskills contracted with IT- Spark to provide the personal services of Mr Strong. Metaskills relied on the considerations listed as (a) to (i) below:

92 (a) The first consideration relied on by Metaskills is not evidence, but, according to the submission, an inconsistent finding by the AAT. It is the sentence from par 3 of the AAT's reasons which was set out at [36] above. Metaskills submits that the sentence is a finding, and that it is inconsistent with the later findings that the contractual arrangements were between Mr Strong and IT-Spark and that Metaskills did not provide any services to IT- Spark. Those findings are made in pars 14-16 of the AAT's reasons for decision, which were set out at [45] above.

93. If, however, the proper view is, as Metaskills submits, that there are two inconsistent ``findings'', it would not necessarily follow, as the submission assumes, that the earlier is to be accepted and the later disregarded.

94. The sentence on which Metaskills relies is a prefatory statement of a general kind - an aspect of the dramatis personae. I do not think it fair to read it as a conclusion in respect of the 2000-2001 year. It is not preceded by any reference to supporting evidence. Nor does it occur in that part of the reasons for decision

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where the Senior Member is applying the personal services business tests.

95. Paragraphs 14-16, on the other hand, are intended to state conclusions. Paragraphs 14 and 15 conclude the Senior Member's discussion of the results test and par 16 states the first basis for his conclusion that Metaskills did not satisfy the unrelated clients test. There is a process of reasoning towards those conclusions. In relation to the results test, the focus is on pars (b) and (c) of subs 87-18(3). The Senior Member is saying that, in terms of those paragraphs, by reason of the Overarching Agreement, it is not Metaskills but Mr Strong who ``is required to supply'' and who ``is, or would be, liable''. These concepts, particularly the former, refer to contractual arrangements.

96. In par 16, the AAT's reasoning is that because Mr Strong, rather than Metaskills, accepted contractual responsibility to IT-Spark, Mr Strong rather than Metaskills provided the services in question. This conclusion is, at least in its terms, more obviously inconsistent with par 3. The AAT proceeded, however, to give further reasons why Metaskills did not meet the unrelated clients test.

97. Paragraph 3 does not compel the conclusion contended for by Metaskills.

98. (b) The second consideration relied on by Metaskills is that when the Overarching Agreement was admitted into evidence as an exhibit, it was referred to by Mr Strong, and perhaps, repeating his words, by the Senior Member, without objection by Mr Quinn, as an agreement between Metaskills and IT-Spark.

99. Unfortunately, it is not uncommon for exhibits to be misdescribed in the course of a hearing. Significantly, by the time the document was tendered and admitted into evidence, Mr Quinn's written submissions had been prepared, and par 14 of them pointed to the Overarching Agreement as evidence that the contractual arrangement was one between Mr Strong and IT-Spark. Mr Quinn's failure to notice the oral misdescription by Mr Strong, perhaps repeated by the Senior Member, is inconsequential.

100. (c) The third consideration has several aspects. Mr Quinn cross-examined Mr Strong on the Overreaching Agreement but did not put to him directly that the only contractual arrangement was one between IT-Spark and himself. Mr Strong's credit was not challenged. Mr Strong's testimony, ``The negotiations between the two organisations were carried out between me and the principal of IT-Spark specifically'', was not challenged.

101. I do not find these matters compelling. Mr Strong's testimony was given in answer to Mr Quinn's question, ``The document which contains the terms and conditions is addressed to you, is it not, Mr Mike Strong?''. Mr Strong's reply, set out above, shows that he understood the cross-examiner to be putting to him that he (Mr Strong) had contracted as principal. Moreover, Mr Quinn's next question was:

``In fact, there is no - the contractual relations of the contracting parties on the basis of this document are yourself and IT- Spark, are they not?''

In my opinion Mr Quinn adequately confronted Mr Strong with the suggestion that he, rather than Metaskills, had contracted with IT-Spark.

102. The AAT was not required to accept Mr Strong's conclusory contention that Metaskills and IT-Spark had negotiated through him and Mr Doney respectively.

103. (d) The fourth consideration is that Mr Strong testified before the AAT that the principal of IT-Spark understood that Metaskills would be doing the billing.

104. Although the AAT is not bound by the rules of evidence (AAT Act s 33(1)(c)) it was entitled to attach no weight to this assertion, not supported by evidence of the facts on which it was supposedly based, as to another person's state of mind.

105. (e) Fifthly, there were in evidence before the AAT letters dated 17, 18 and 19 December 2001 from Chris Doney of IT-Spark, Craig Ashwood of Compaq Computer Corporation, and Robert Webster of Synergy Plus, respectively, and letters dated 22 August 2002 from the same individuals and from Manuel Yrure of One.Tel, all addressed to the ATO, referring in passing, to the delivery of the services of Metaskills.

106. The passages relied on are in the nature of generalised mentions. The evidence did not establish the circumstances in which the letters came to be written in the terms in which they were written. They were not written for the purpose of addressing the present issue.

107. The AAT was not bound to accept the passing references in the letters as requiring it

ATC 4661

to answer positively the question constituting Issue 2.

108. (f) The sixth consideration consists of the four invoices rendered by Metaskills and the fact that payment was made to Metaskills.

109. While the four invoices in question were indeed rendered by Metaskills to ``Chris Doney IT-Spark Pty Ltd'' and were some evidence from which it could be inferred that Metaskills had provided the consulting services to which they related, they did not require the AAT to conclude that it had done so, at least in the face of other evidence (the Overarching Agreement and the seven individual engagements) suggesting that Mr Strong, rather than Metaskills, had done so. It was possible that Mr Strong had performed the services, and become entitled to the resulting income, but that for reasons relating to financial or taxation considerations, he had caused Metaskills to charge and be paid for his services.

110. The present consideration did not, as a matter of law, require the AAT to reach the conclusion suggested by Metaskills.

111. (g) The seventh consideration relied on by Metaskills consists of the insurances arranged by it. (I have referred earlier to the Policy Schedule that was in evidence before the AAT.) Mr Strong testified before the AAT that Metaskills had continuously carried both professional indemnity insurance and workers' compensation insurance for all of the period exceeding seven years that it had been in business.

112. This consideration did not require the AAT to conclude that the particular contractual arrangement with IT-Spark was entered into by Metaskills or that Metaskills provided the personal services in question. Identification of the contracting parties required analysis of what passed between the parties concerned in relation to the making of the respective contracts pursuant to which the services were rendered, viewed against any relevant background facts known to both parties.

113. (h) Metaskills relies, eighthly, on the Commissioner's Statement of Facts and Contentions before the AAT. I set out pars 1-7 of that document at [62] above.

114. The document was not in the nature of evidence, but was a statement of the Commissioner's forensic position before the AAT. The Commissioner's written and oral submissions showed that he did contend, after all, that the income in question was not that of Metaskills.

115. (i) Ninthly, Metaskills relied on other references in Mr Strong's testimony before the AAT to Metaskills having obtained various other contracts in the course of its business.

116. This evidence did not compel the AAT to reach the conclusion suggested by senior counsel for Metaskills.

117. I have regarded the above nine considerations, not only individually, but as a whole. Even taking into account their overall effect, they did not require the AAT, as a matter of law, to conclude that Metaskills contracted with IT-Spark and that Mr Strong's personal services income formed part of the ordinary income of Metaskills.

118. The question constituting Issue 2 is answered No.

Issue 3: Did the AAT err in concluding that but for unusual circumstances applying to Metaskills in the income year 2000-2001, Metaskills could reasonably have been expected to meet the business premises test?

119. The AAT's findings at par 14 that ``the contractual arrangements were between Mr Strong and IT-Spark'' and at par 16 that Metaskills ``did not provide any services as opposed to the services provided by Mike Strong'', signify that Metaskills did not satisfy the definition of ``personal services entity'' in subs 86-15(2) and therefore that it did not fall within 87-65 at all.

120. On the basis of those findings, and without regard to the question whether unusual circumstances applied to Metaskills in the income year 2000-2001, and, if so, what the position would have been if they had not, Metaskills could not have satisfied the business premises test of s 87-30.

121. That is to say, the learned Senior Member's findings at pars 14 and 16 are inconsistent with his conclusion at par 39 that, but for the application of unusual circumstances, Metaskills ``could reasonably have been expected to have met the business premises test under section 87-30 of the Act''.

122. Accordingly, error of law infected that conclusion. The question constituting Issue 3 is answered Yes.

Issue 4: Was it open to the AAT, on the evidence before it, to conclude that Mr

ATC 4662
Strong, rather than Metaskills contracted with IT-Spark, and that the income concerned was that of Mr Strong rather than that of IT-Spark?

123. The AAT's reasoning in relation to the issue of the identity of the contracting party is brief. In sum, the AAT thought that the Overarching Agreement and the seven letters of engagement concluded the matter. The only evidence pointing in the opposite direction to which the learned Senior Member referred, was the rendering of the four invoices by Metaskills. Otherwise, the AAT did not refer to the various other considerations referred to in my discussion of Issue 2 above.

124. The identity of the contracting parties was to be established:

• ``objectively''; and
• as at the date of the making of each contract; and
• by reference to any relevant background known to both parties at that time.

Although it is said in discussions of the law of contract that the aim is to ascertain the parties' intention, it is not subjective intention that, generally speaking, matters. Rather, what counts is that common intention which is to be attributed to the parties on the basis of objective matters known to both.

125. The Overarching Agreement set out terms of engagement which were to be attracted if and when IT-Spark offered Mr Strong, and Mr Strong accepted, engagements for particular projects (cf the analysis by Barwick CJ in
Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1978) 139 CLR 231 at 244).

126. Metaskills's submission must be that there was evidence, which the AAT erroneously failed to consider, that in entering into the Overarching Agreement and accepting (apparently by performance) the seven individual offers of engagement, Mr Strong was acting as agent for, or organ of, Metaskills. The existence of Metaskills as Mr Strong's principal was not disclosed in the document. The doctrine of the undisclosed principal cannot operate if it would be inconsistent with the terms of the agreement for it to do so; see, for example, GE Dal Pont, Law of Agency (Butterworths, Sydney, 2001) at [19.32]-[19.40] and cases there referred to.

127. In the following paragraphs, I will consider the question whether the existence of Metaskills as principal can be accommodated to the Overarching Agreement.

128. In the opening paragraph of the Overarching Agreement, IT-Spark invites Mr Strong to join the IT-Spark ``panel of Professionals''. It is difficult to accommodate the body corporate, Metaskills, to this language.

129. The nature of the services to be provided include ``teaching'', but Metaskills could contract to provide teaching services.

130. The Overarching Agreement stated: ``Until further notice the only person authorised to offer you assignments is Chris Doney''. Accordingly, for the purposes of ``the objective theory of contract'', the distinction between a company and its directors was present to the minds of the signatories, yet there was no reference, express or implied, to Metaskills.

131. The Overarching Agreement stipulates that Mr Strong is not to be an ``employee'' of IT-Spark and that IT-Spark does not ``pay workers' compensation insurance in respect to your engagements nor are you entitled to holiday pay or long service leave''. This shows that the Overarching Agreement was made with Mr Strong personally.

132. On the subject of ``Liaison with IT- Spark's clients'', the Overarching Agreement states:

``As a member of the IT-Spark professional panel you are expected at all times to maintain good and cordial business relations with IT-Spark's clients.''

I cannot, without re-writing, regard this provision as a promise by Metaskills. A similar observation applies to a later reference to ``pursuing your professional career''.

133. Metaskills did not suggest that on the evidence that was before the AAT , the AAT should have found that the Overarching Agreement had been terminated or that it had ceased otherwise to apply to the individual engagements. In my opinion, the intention revealed by the text of the Overarching Agreement alone does not allow for the possibility that Mr Strong entered into it as agent for Metaskills. It is, of course, beside the point that the Overarching Agreement could easily be rewritten in order to do so, just as it is beside the point that Mr Doney might readily have agreed to such a re-writing.

ATC 4663

134. I turn now to the seven individual letters of engagement. As noted earlier, they were in a common form. In my opinion, with the exception of one sentence in them, they can be accommodated to the notion that IT-Spark was making the respective offers to Metaskills. For example, I have no difficulty in regarding the opening reference to ``Instructor:- Mike Strong'', as nothing more than a term that the instructor to be provided by Metaskills was Mr Strong. The exceptional sentence, however, is:

``This assignment is offered to you under the general terms of contract which you have signed with IT-Spark.''

This sentence incorporated, by reference, all the personal references to Mr Strong in the Overarching Agreement, to which I have referred above.

135. The four invoices rendered by Metaskills were discussed at [108]-[110] above. While they pointed in the opposite direction, they were taken into account by the Senior Member, who preferred the contractual documents, as he was entitled to do.

136. The only clear evidence of relevant circumstances known to all parties as at the time of the making of the seven individual contracts which was before the AAT, consisted of the Overarching Agreement and the seven individual letters of engagement.

137. The question constituting Issue 4 is answered Yes.

Issue 5: Was Metaskills denied procedural fairness?

138. I have set out above at [55]-[73] above the background to the arising of the ``Whose income?'' issue before the AAT.

139. It is common ground that the AAT was bound to accord to Metaskills the benefit of the natural justice hearing rule or procedural fairness. Notwithstanding the absence of a régime of pleadings, procedural fairness required that the parties know the nature of the case they had to meet before the AAT: cf
Bailey & Ors v FC of T 77 ATC 4069 at 4103-4104; (1977) 136 CLR 214 at 227 per Aickin J.

140. As noted earlier, the ATO advised Metaskills early in the afternoon of 5 November 2002 that the Commissioner may advance the argument that the Overarching Agreement did not represent an agreement between Metaskills and IT-Spark as it was expressed to be an agreement with Mr Strong personally. It was not announced at the commencement of the hearing the following morning that the Commissioner had decided to advance that argument. Indeed, that argument was not one of the contentions stated in the Commissioner's Statement of Facts and Contentions which Mr Quinn handed up to the Senior Member at the start of the hearing.

141. Mr Strong was entitled to assume from Mr Quinn's silence that the argument was not to be advanced. It was in the course of cross- examination that Mr Quinn put to Mr Strong that he (Mr Strong) rather than Metaskills had contracted with IT-Spark to provide the services in question. That also seems to have been the first time that the Senior Member would have become aware of the point (neither he nor Mr Strong would have had an opportunity to read par 14 of Mr Quinn's written submissions prior to the luncheon adjournment, and the Senior Member would not even have had a copy of the ATO's letter to Mr Strong of the previous day). The evidence was concluded and Mr Quinn commenced his submissions. In the course of them, he referred to the present point (see [70] above). Then the AAT took the luncheon adjournment.

142. After the resumption of the hearing, Mr Strong did not seek an adjournment to enable him to adduce further evidence on the ``Whose income?'' issue. Notwithstanding Mr Strong's mild protest (see [72] above), neither Mr Quinn nor the Senior Member said anything to alert Mr Strong to the possibility of his doing so. Mr Strong has testified before me that he did not know that he was entitled to seek an adjournment, and that if he had known he was entitled to do so, he would have sought one.

143. In Rajski v Scitec Corporation Pty Ltd (unreported, Supreme Court of NSW, Court of Appeal, 16 June 1986) Mahoney JA stated (at 27):

``... the court will, I think, be careful to examine what is put to it by a party in person to ensure that he has not, because of lack of legal skill, failed to claim rights or put forward arguments which otherwise he might have done.''

This comment has been quoted with approval in subsequent cases, including by a Full Court of this Court in
Minogue v Human Rights and Equal Opportunities Commission (1999) 166 ALR 129 at [28].

ATC 4664

144. With some hesitation, I have come to the conclusion that Metaskills was not accorded procedural fairness, because it was not informed that in view of the lateness of the raising of the ``Whose income?'' issue, Metaskills could, if it considered itself disadvantaged, apply for an adjournment. Counsel came into the case on Monday 4 November 2002, the letter advising Metaskills that the Commissioner may advance the argument in question was sent by facsimile transmission early the following afternoon, 5 November, and it was only during cross- examination the following day, 6 November, that it was suggested for the first time that the Commissioner definitely would be raising the ``Whose income?'' issue. In the circumstances, it is to set the standard too high to require that, at its peril, Metaskills must, through Mr Strong, appreciate the significance of what was happening and take the initiative of seeking an adjournment.

145. In cross-examination before me, Mr Strong conceded that he knew, on the basis of an objection taken by Mr Quinn, that the AAT could disallow an issue being raised if inadequate notice had been given of it. His cross-examination continued as follows:

``You understood then that the Tribunal could stop an issue being raised if adequate notice hadn't been given? - It became apparent with regard to that issue, yes.

In fact you were very keen to have the matter concluded in one hearing day and as soon as possible, were you not? - I felt that at that time I had been dealing with the tax office on the matter for some 18 months and to have another delay of months in an area where potentially significant company money was tied up would have been disadvantageous to me, yes.

So you didn't wish to have the matter adjourned? - I wished to reach a resolution quickly and if - but I guess I had understood that there was a possibility that I was disadvantaging myself by not seeking an adjournment, I would have sought an adjournment had I understood I was able to seek an adjournment, I would have sought an adjournment.

Well, you certainly understood that the Tribunal could stop an issue being raised because of inadequate notice, you have just agreed with me a few minutes ago about that? - That was with regard to what was admissible evidence on the day, yes.

And the Tribunal could stop that document being admitted because it raised fresh issues that the tax office should have had time they said, to investigate? - Well, yes I understood that then.''

Notwithstanding this passage, I think Metaskills was entitled to have it pointed out to its representative, Mr Strong, that if it wished to adduce evidence or make submissions in relation to the new issue raised by the Commissioner in the course of the hearing, it could ask for an adjournment.

146. If Mr Strong had been so advised, the course of events may have been different. He may well have sought an adjournment and one may well have been granted. In that case, apparently, Metaskills would, at least, have led some evidence from Mr Doney.

147. The AAT may have concluded that the relevant contract was to be found, not simply in the Overarching Agreement and the seven letters of engagement, but in conversations, or in a mixture of conversations and those documents or parts of them. I do not know what the effect of Mr Doney's testimony would have been. It may be that his testimony and any other additional evidence led on behalf of Metaskills would have made no difference whatever. It suffices, however, that it cannot be positively concluded that it ``could not possibly have produced a different result'': cf
Stead v State Government Insurance Commission (1986) Aust Torts Reports ¶80-054 at 67,980; (1986) 161 CLR 141 at 145 per Mason, Wilson, Brennan, Deane and Dawson JJ;
Re Refugee Review Tribunal; ex parte Aala (2000) 204 CLR 82 at 88 per Gleeson CJ, 116-117 per Gaudron and Gummow JJ, 122 per McHugh J, 130-131 per Kirby J, 154 per Callinan J.

148. I place no weight on the terms of Mr Doney's statement, and do not imply that all or any part of it should be regarded as persuasive.

149. I answer the question constituting Issue 5, Yes.

Conclusion

150. For the above reasons, the AAT's decision should be set aside and the matter should be remitted to the AAT to be determined according to law.

ATC 4665

151. It is not necessary for me to address another ground of appeal raised by the Commissioner. This was:

• that it was not open to the AAT, on the findings it made, to conclude that there were unusual circumstances applying to Metaskills in the year ended 30 June 2001, and that but for them, Metaskills could reasonably have been expected to meet the business premises test under s 87-30 of the Act; or, in the alternative,
• that the AAT failed to give adequate reasons for, or failed to make findings of fact in support of, that conclusion.

152. The parties have informed the Court that the Commissioner has agreed to fund Metaskills's costs of the appeal and does not seek an order for costs against Metaskills. In the circumstances, I will publish these reasons and invite the parties to bring in short minutes of the orders to be made, including orders as to costs.

THE COURT ORDERS THAT:

1. The proceeding be listed on Tuesday 29 July 2003 at 9.30 am for the making of orders including orders as to costs.

2. The parties supply to the Associate to Lindgren J by 5.30 pm on Monday 28 July 2003 agreed short minutes of the orders to be made, and if agreement has not by then been reached, copies of the short minutes of orders for which they will respectively contend.

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