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NGUYEN & ANOR v FC of T

Members:
S Webb M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 15

Decision date: 9 September 2005

S Webb (Member)

By these applications Thanh Liem Nguyen and Vivi PC Supplies and IT Consultants Pty Ltd (``Vivi'') are seeking review of the decision by the Commissioner of Taxation (``the Commissioner'') to reject objections to Mr Nguyen's amended income tax assessments for the years ending 30 June 2002 and 30 June 2003 (``the income years''). The Commissioner's decision was that Mr Nguyen earned personal services income during the income years that was not income from conducting a personal services business and is attributable to him, therefore, for income tax assessment purposes.

2. The matter came on for hearing on 1 September 2005. Mr Nguyen was represented by his accountant, Mr Duc Mo Van. Ms Tania Gorman represented the Commissioner. Mr Nguyen gave sworn evidence. The Tribunal made available an interpreter in the Vietnamese language. The Tribunal had before it documents prepared by the Commissioner pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (``T'' documents). Mr Mo Van tendered Exhibit A1.

3. The Applicants are limited to the grounds stated in the taxation objection in issue unless the Tribunal orders otherwise (s 14ZZK, Taxation Administration Act 1953 (``the TA Act'')). Being mindful of issues of procedural fairness and natural justice I am satisfied that it is not necessary to broaden the grounds of this review in order to properly and fairly address the issues raised by these applications. The Tribunal's review is confined to the ambit of the taxpayer's objection (
Leidig v FC of T 94 ATC 4269 at 4272; (1994) 50 FCR 461 at 465).

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Factual context

4. The background facts are not in dispute. I find as follows.

5. Mr Nguyen and his wife are directors and sole shareholders of Vivi. That company was formed by Mr Nguyen and his wife on the advice of their accountant, Mr Mo Van, for the purposes of Mr Nguyen's work as a computer consultant.

6. On 28 July 1998 Vivi entered into a contractual agreement with Icon Recruitment Pty Ltd (``Icon'') for the provision of Mr Nguyen's services as a consultant (T1 folios 13 to 15).

7. Under the contract Mr Nguyen worked as a contractor in the Australian Taxation Office (``ATO'').

8. The contract was subsequently extended by agreement and continued until 14 March 2003 (see T3, T4, T9 and T10 for example). On 15 March 2003 Mr Nguyen was engaged as an employee of the ATO.

9. During the period of the contract fees were paid by the ATO to Icon, and Icon paid fees under the contract to Vivi.

10. During the 2002 income year Vivi was contracted to provide the services of specified individuals (Mr Nguyen, Mr Vinh Le, Mrs Thi Ngo and Mrs Kim Pham) to four separate firms: Icon, DMA Australia and Candle Australia Ltd. Vivi derived fees income of $545,206 from those contracts and paid amounts to the individuals concerned as salary and wages. Those amounts are set out in the Vivi 2002 Tax Return (T7 folio 151). Mr Nguyen was paid an amount of $61,930 (gross) and Mrs Thi Tran (Mr Nguyen's wife) was paid an amount of $14,950 in wages as an administrative officer.

11. On 4 June 2003 the ATO issued Mr Nguyen a Notice of Amended Assessment, specifying taxable income for the year ending 30 June 2002 in the amount of $83,209 (T14; see Mr Nguyen's 2002 Tax Return at T8).

12. During the 2003 income year Vivi was contracted to provide the services of specified individuals (Mr Nguyen, Mr Vinh Le, Mrs Thi Ngo and Mrs Kim Pham) to three separate firms: Icon, Compas Pty Ltd and Candle Australia Ltd. Vivi derived fees income from those contracts in the amount of $432,273 and paid amounts to the individuals concerned in the form of salary and wages. Those amounts are set out in the Vivi 2003 Tax Return (T15 folio 167). Mr Nguyen was paid an amount of $79,702 (gross) in salary and wages and Mrs Tran was paid an amount of $14,950 in wages as an administrative officer.

13. On 19 December 2003 the ATO issued Mr Nguyen with a Notice of Assessment, specifying taxable income for the year ending 30 June 2003 in the amount of $96,595 (T18; see Mr Nguyen's 2003 Tax Return at T16).

14. On 28 July 2004 the ATO informed Mr Nguyen of the outcome of an audit into Vivi in relation to the income years, whereby:

  • (a) deductions claimed by Vivi in relation to Mrs Tran's wages and superannuation were disallowed (T19 folio 180)-
    • ``As [Vivi] passed no personal services business tests and all the income is derived by four individuals through their own efforts or skills the associate [Mrs Tran] cannot perform any principal work. [ Vivi] cannot deduct an amount of $14,950 as salary and wages paid to Mrs Hue Thi Tran because of section 85-20 of the [ITA Act] and an amount of $1,345 for superannuation paid on behalf of Mrs Hue Thi Tran because of section 85-25 of the [ITA Act].''
  • (b) 100 percent of income was to be attributed to the individuals concerned and such attributed income is assessable income of the individual (T19 folio 180)-
    • ``As each person derived 100% of their personal services income from one source and passes no personal services business tests that individual is assessable on their personal services income according to section 86-15 of the [ ITA Act]. The total amount derived from their contract will be attributed to that individual less allowable deductions... This will result in no profits to be retained in the company.''
  • (c) Additional to amounts paid to Mr Nguyen in salary and wages, the amounts to be attributed to him, after eligible deductions, were $54,241 in the 2002 income year and $44,738 in the 2003 income year (T20 folio 183), leaving no profit in Vivi; and
  • (d) penalties were imposed on the basis of a lack of reasonable care at the rate of 25 percent of the attributable amounts, however

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    the 2002 income year penalty was remitted in full.

15. On 5 August 2004 Notices of Amended Assessment were issued to Mr Nguyen, specifying taxable income for the income years in the amounts of $137,450 and $141,333 respectively (T22 and T23). Mr Nguyen was issued a tax shortfall penalty notice on 13 August 2004 (T24).

16. On 5 November 2004 Mr Nguyen lodged an objection to the amended assessments (T25) and contended:

``VIVI PC is conducting personal services as a personal services business because it passes the following PSI tests:

  • • 80% income of the company from more than one source...

The company also passes the result test...

As VIVI PC is conducting a Personal Services Business the restrictions places [ sic] on individuals and the Personal Services Entity by the Personal Service Income rules do not apply in this case.

Accordingly I content [sic] the amended assessment should have being never made [ sic] and should be cancelled.''

17. On 22 February 2005 the ATO decided to disallow Mr Nguyen's objections in full (T28), finding that (T2 folios 24 to 29):

  • (a) Vivi did not satisfy the ``results test'', and
  • (b) more than 80 percent of Mr Nguyen's personal services income was derived from one source during the income years, and
  • (c) a personal services business determin- ation was not in force during the income years, and therefore
  • (d) Mr Nguyen's personal services income is not from conducting a personal services business during the income years, and
  • (e) Mr Nguyen's personal services income is assessable income for income tax purposes.

18. On 28 March 2005 Mr Nguyen lodged an application for review of the Commissioner's decision (T1).

Issues for determination

19. The issue for determination by the Tribunal is whether the Commissioner's decision to disallow Mr Nguyen's objections to the aforementioned amended taxation assessments during the income years is the correct or preferable decision. For that purpose it is necessary to determine whether Mr Nguyen's assessable income during the income years includes income of Vivi that is his personal services income. The following questions arise to be answered in relation to the income years:

  • (a) are fees paid to Vivi by Icon under a contract for the provision of Mr Nguyen's services personal services income of Mr Nguyen? and, if so
  • (b) is 80 percent or more of Mr Nguyen's personal services income during each of the income years income from the same entity? and, if so
  • (c) does Vivi satisfies the ``results test'' during each of the income years? and, if not
  • (d) was a Personal Services Business Determination in force during the income years?

Legislation and law

20. These applications rise for determination under the ITA Act and the TA Act.

21. Under the ITA assessable income is defined at subs 995-1(1) and includes all ordinary income and statutory income that is not exempt income (ss 6-5, 6-10, 6-15).

22. Part 2-42 of the ITA, containing Divisions 84, 85, 86 and 87, sets out provisions concerning personal services income and personal services business. ``Personal services income'' is defined at s 84-5 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.''

23. Division 85 is concerned with deductions against personal services income. Considering these provisions Lindgren J observed in
FC of T

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v Metaskills Pty Ltd 2003 ATC 4644 at 4647 [ 20]; [2003] FCA 766 at [20] that Division 85 ``suggests that a more liberal legislative policy applies towards deductibility where a personal services business is carried on, than where one is not.''

24. Division 86 concerns the alienation of personal services income. Section 86-15 provides that:

``(1) Your assessable income includes an amount of ordinary income or statutory income of a personal services entity that is your personal services income.

(2) A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals.

(3) This section does not apply if that amount is income from the personal services entity conducting a personal services business.

(4) This section does not apply to the extent that:

  • (a) the personal services entity pays that amount to you, as an employee, as salary or wages; and
  • (b) the payment is made before the end of the 14th day of the PAYG payment period during which the amount became ordinary income or statutory income of the entity.

(5) This section only applies to the extent that that amount would be assessable income of the personal services entity if this Division did not apply.''

25. The amount of personal services income that is assessable income may be reduced by certain allowable deductions of the personal services entity (s 86-20).

26. Divisions 85 and 86 do not apply to personal services income that is from conducting a personal services business (ss 85-30, 86-1, 86-15, 87-1).

27. Division 87 is concerned with personal services business. An individual or a personal services entity may conduct a personal services business if a personal services business determination is in force (see s 87-65) or if one of four tests are met during the income year in question (subs 87-15(1)): the results test (s 87-18); the unrelated clients test (s 87-20); the employment test (s 87-25); or the business premises test (s 87-30). Subsection 87-15(3) makes the following exclusion:

``(3) However, if 80% or more of an individual's personal services income... during an income year is income from the same entity..., and

  • ...
  • (b) the individual's personal services income is included in a personal services entity's ordinary income or statutory income during an income year, and the entity does not, in relation to the individual, meet the results test under section 87-17 in that income year;

the individual's personal services income is not taken to be from conducting a personal services business unless:

  • (c) when the personal services income is gained or produced, a personal services business determination is in force relating to the individual's personal services income; and
  • (d) if the determination was made on the application of a personal services entity - the individual's personal services income is income from the entity conducting the personal services business.''

28. The purpose of s 87-15 and the intention of Division 87 are explained in the general terms of s 87-1, which it is convenient to set out in full:

``Divisions 85 and 86 do not apply to personal services income that is income from conducting a personal services business.

It is not intended that the Divisions apply to independent contractors.

A personal services business exists if there is a personal services business determination or if one or more of 4 tests for what is a personal services business are met.

Regardless of how much of your personal services income is paid from one source, you can self-assess against the results test to determine whether you are an independent contractor. The results test is based on the traditional tests for determining independent contractors and it is intended that it apply accordingly.

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However, you cannot `self-assess' whether you meet any of the other 3 tests if 80% or more of your personal services income is from one source. In these cases, you need a personal services business determination in order to be treated as conducting a personal services business.''

29. The process for determining whether personal services income is from carrying on a personal services business is shown diagrammatically at s 87-5.

30. As can be seen from the foregoing, the legislation places a limit upon the scope of self assessment whether personal services income is from carrying on a personal services business in the absence of a personal services business determination by the Commissioner. In the absence of such a determination factual circumstances may pertain whereby an individual's personal services income is not taken to be from carrying on a personal services business. In such circumstances subs 86-15(1) applies and the individual's personal services income is included in his or her assessable income. Lindgren J considered the construction of these provisions in FC of T v Metaskills Pty Ltd (supra) and said at ATC 4648 [26]; FCA [ 26]:

``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.''

Findings on material questions of fact and consideration

31. Making this decision I have carefully considered all of the evidence, the submissions of the parties, the relevant legislation and caselaw.

32. Mr Mo Van asserted at the outset that it is necessary for the Tribunal to determine whether Vivi was conducting a personal services business during the income years. As I understand it, that assertion was on the basis that if Vivi was conducting a personal services business then any personal services income of Mr Nguyen in relation to Vivi during those years would not form part of his assessable income as, pursuant to s 87-1, Divisions 85 and 86 would not then apply. As will appear, if that is the position contended for, I do not agree. Even if Vivi was found to be conducting a personal services business during the income years, it does not follow that Mr Nguyen's personal services income in relation to Vivi is not part of his assessable income.

33. Division 87 sets out the steps that must be followed when assessing whether a personal services business exists in the absence of a personal services business determination by the Commissioner. Subsection 87-1 and 87-15(3) clearly express the procedure to be applied in such circumstances if the individual concerned earns 80 percent or more of his or her personal services income during the income year in question from one source. In such circumstances, if the personal services entity or the individual concerned satisfies the results test then the personal services income is income from a personal services business. The contrary holds unless there was in force a personal services business determination by the Commissioner pursuant to s 87-65.

34. Mr Mo Van contended that it was open for the Tribunal to make a retrospective determination in relation to Mr Nguyen's personal services income that Vivi was conducting a Personal Services Business during the income years. I do not agree. There is no evidence that the Applicants applied to the Commissioner for a personal services business determination in respect of the income years and there is no decision of the Commissioner in that regard before this Tribunal. Such matters were not within the terms of the objection raised by the Applicants. It is not open, therefore, for the Tribunal to make such a

ATC 2310

determination. To do so would be contrary to the intention of subs 87-18(3) as stated by s 87-1 and pictorially represented in s 87-5 and outside the power of the Tribunal in these proceedings (Leidig v FC of T (supra)).

35. I now turn to the material questions that must be answered in order to properly resolve these applications.

36. In Mr Mo Van's submission Vivi satisfies the requirements of the results test. For reasons that will appear I do not agree. In the alternative Mr Mo Van contended that Vivi satisfies the unrelated clients test. It is not necessary for me to address that submission as that matter is not properly before me. However, on the evidence before me I am reasonably satisfied that Vivi did not provide services as a direct result of offers or invitations to the public in the manner contemplated by subs 87-20. Nonetheless, even if that was the case, and I make no such finding, it does not assist Mr Nguyen's case.

37. During the income years income earned by Vivi under the terms of a contract with Icon to provide Mr Nguyen's personal services, is Mr Nguyen's personal services income pursuant to subs 84-5(1). I find that Mr Nguyen was specified to provide the services under the Icon contract and did all of the work to provide services under that contract. He used the ATO's equipment and software in the ATO's premises. I am reasonably satisfied that the contract income was mainly a reward for his personal efforts and skills. If follows that the income to Vivi from the Icon contract for Mr Nguyen's services is his personal services income. It also follows that Vivi is a personal services entity.

38. I am reasonably satisfied that Vivi did not satisfy the results test during the income years pursuant to s87-18. Vivi engaged in personal services contracts with four separate firms in the 2002 income year and with three separate firms during the 2003 income year. In order for Vivi to satisfy the results test it must satisfy each of the conjunctive subparagraphs of subs 87-17(3). It will do so if more than 75 percent of the income generated by these contracts was for producing a result and Vivi supplied the plant and equipment, or tools of trade, required to produce the result, and Vivi was liable for the cost of rectifying any defect in the work performed. There is no evidence before me that it is customary for entities providing the services of information technology personnel to be paid on the basis of a result or that it is customary for such entities to supply the tools of trade needed to perform the work or to be liable for the cost of rectifying any defect in the work performed (subs 87-18(4)).

39. I find that the contracts between Vivi and Icon (T27 folios 207 to 212) which were in effect during the income years do not specify any result that is to be produced by the nominated 'representatives' of Vivi, Mr Nguyen and Mr Vinh Le. The contracts specify that those individuals are to report to persons nominated in the ATO and in Centrelink, respectively, to provide ``consulting services in consultation with the client''. Fees under the contracts were payable at a specified hourly rate on the basis of fortnightly timesheets signed off by the client. Both contracts were for a fixed 12 month term and were subject to extension. Termination was on completion of the term or in the case of unsatisfactory ``conduct or performance''. On Mr Nguyen's evidence the work he performed on a day to day basis was at the direction of his supervisor, to whom he reported, and he had little discretion in that regard. Attendance was required and in practice there was no scope for substitution or delegation. Mr Nguyen described an annual performance evaluation process that applied equally to him, as a purported independent contractor, and to ATO employees. I note Mr Nguyen's testimony that these arrangements concerning the supervision, direction and nature of work he carried out did not change when he ceased working as a contractor and commenced working as an employee.

40. The relationship between Icon and Vivi was described by Robert Ning, Icon Recruitment in the following terms (T25, folio 199):

``... the nature of the relationship we have with our contractors [Vivi] is to provide the services of the specified personnel ie. Thanh Nguyen or Vinh Le to our client. The relationship we have with the entity companies is to facilitate the provision of the services of the specified personnel and there is no implied obligation/opportunity to replace the specified personnel if they were no longer available.

Contractors can choose to contract as `PAYG' contractors or through another entity. In both yours and Vinh's case the choice was to use a management company. The primary relationship is still between

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Icon and the specified personnel, however, there is an obligation and expectation for both the specified personnel and the entity company to honour the contract until its completion.''

41. Taxation Ruling TR 2001/8 addresses the alienation of personal services income measures and the results test. Having carefully considered that Ruling and the factors set out therein at paragraph 110, and consistent with the approach adopted in recent Tribunal decisions (
Scimitar Systems Pty Ltd v DFC of T 2004 ATC 2176 at 2179-2180 [18]; (2004) 80 ALD 378 at [18];
Dibarr Pty Ltd v FC of T 2004 ATC 2277 at 2286-2289 [30]-[44]; [2004] AATA 1030 at [30]-[44]), I am not satisfied that the Icon contracts were results-based contracts. I do not accept that the terms of the contracts are consistent with those that could reasonably be expected in the case of an independent contractor. I am satisfied that the aforementioned Icon contracts were contracts for work and not for producing a result during the income years and so find.

42. The Icon contracts generated 42.68 percent of Vivi's income in the 2002 income year and 32.06 percent of Vivi's income in the 2003 income year. It follows that more than 75 percent of Vivi's income during the income years was not for producing a result. I so find.

43. Furthermore, I am reasonably satisfied that the contract between Candle Australia Ltd and Vivi (T1) is of a substantively similar character to the Icon contracts, albeit with minor variations in drafting and construction. I note however, that schedules to that contract are not in evidence. Nonetheless, the Recitals make clear its nature and purpose (T1, folio 11). On that basis it would appear that at least 70 percent of Vivi's income during the income years was not from producing a result.

44. I am satisfied that Mr Nguyen does not satisfy the results test on his own account for similar reasons. Mr Nguyen has not adduced any evidence that persuades me that at least 75 percent of his personal services income during the income years was for producing a result pursuant to subs 87-18(1). I so find.

45. It is not strictly necessary for me to consider whether Mr Nguyen or Vivi satisfy any other results test criteria during the income years. The essential criteria set out in subparagraphs 87-18(1) (a), (b) and (c), in relation to an individual, and 87-18(3)(a), (b) and (c), in relation to a personal services entity, are conjunctive. It is necessary to satisfy them all in relation to an individual or in relation to a personal services entity in order to satisfy the results test. Vivi does not. Nor does Mr Nguyen on his own account.

46. I find that Mr Nguyen earned 100 percent of his personal services income from one source during the income years: Icon. That income was included in Vivi's ordinary or statutory income for those years. No personal services business determination was in force at the time that Mr Nguyen's personal services income was produced.

47. It follows that Mr Nguyen's personal services income during the income years is not taken to be from conducting a personal services business and must, therefore, be included in his assessable income for those years pursuant to subs 86-15(1). I so find.

48. I note in passing that the Commissioner's decision does not address matters relating to the disallowed deduction of associated payments in the form of salary and superannuation to Mrs Tran. The Tribunal exercises all of the powers conferred upon the original decision maker and is not confined on review of the Commissioner's decision in relation to a taxpayer's objection to the reasons set out therein (
Fletcher & Ors v FC of T 88 ATC 4834; (1988) 19 FCR 442). Nonetheless, the terms of the objection are not clear on this point. The objection is set out in the documents at T25. It appears in the form of a letter citing Vivi's tax file number and is headed ``NOTICE OF OBJECTION AGAINST AMENDED ASSESSMENTS 2002, 2003''. The amended assessments that are before me are those in relation to Mr Nguyen for the 2002 and 2003 income years (T14 and T23). No reference is made, directly, in the terms of the objection to Mrs Tran or related payments. That being so, it is not necessary to deal further with that issue. It appears, however, that in the circumstances I have found, neither Mr Nguyen nor Vivi would be entitled to any such deduction from his personal services income during the income years pursuant to s 85-10 and s86-20, respectively.

49. No submissions were made by either party concerning the correctness or otherwise of the amounts set out in the amended assessments. Such matters were not raised in the objection that is at the heart of this matter.

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In those circumstances I accept the amounts of the amended assessments are correct and, in conclusion, find that the Commissioner's decision to disallow the objections in full was the correct and preferable decision.

Decision

50. That being so, it follows that the decision under review is affirmed.


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