FOWLER v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 808

Decision date: 21 September 2006

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J Block (Deputy President)

Part A - Introduction and background

1. The objection decision under review is the disallowance by the Respondent of an objection by the Applicant against amended assessments in respect of the years ending 30 June 2001 and 30 June 2002 and an assessment in respect of the year ending 30 June 2003. Those three years are collectively referred to in this decision as the "relevant years".

2. The Applicant was represented by Mr T. Galvin, of Hayes Knight, accountants, while the Respondent was represented by Mr A. G. Diethelm, of counsel instructed by Mr Colin Little of the Australian Government Solicitor.

3. The Tribunal had before it the T-Documents and the supplementary T-Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. Because the T-documents and supplementary T-Documents are numbered sequentially a reference to the page number prefaced by "T" suffices for both the T-Documents and the supplementary T-Documents. It should be noted that in respect of the supplementary T-Documents an amended index together with a number of amended pages were filed in April 2006. The documents referred to in this clause 3 comprise some 400 pages.

4. When the matter commenced, Mr Galvin who represented the Applicant, advised the Tribunal that he had never appeared in the Tribunal previously. A question arose at the commencement of the hearing as to oral evidence by the Applicant, and having regard to the fact that he had not submitted a statement of the evidence which he intended to give before the Tribunal. Although it was suggested that the documents referred to in clause 3 together with a large number of very lengthy letters addressed by the Applicant to, amongst others, members of the Respondent's staff, might constitute a statement, there was in fact nothing which could aptly be described as a witness statement by the Applicant. Mr. Diethelm indicated that he would object to the Applicant giving evidence in these circumstances. In the result and after a brief adjournment it became unnecessary for the Applicant to give evidence at all, because the parties reached agreement as to the facts. The agreed facts are set out in Part B.

5. The fact the parties were so quickly able to reach agreement as to the facts renders it surprising that the documentation before the Tribunal should be so large. It comprised the documents referred to in clause 3, and in particular as regards the T documents T1 and T9, numerous (lengthy) letters by the Applicant (much of the content repetitive) and in addition written submissions and statements of facts and contentions.

Part B - The agreed facts

6. In this Part B I refer to those extracts from the Respondent's written submissions and the Respondent's statement of facts and contentions (in the latter case amended as agreed by the parties) and also appendix D to the Respondent's statement of facts and contentions which was agreed by the Applicant as correct, but conditionally on his failure in respect of the primary issue.

7. Clauses 3 to 12 both inclusive under the heading "Facts" contained in the Respondents written submissions (and those clauses were agreed without amendment) read as follows: --

"FACTS

• 3. The Applicant is a computer consultant and is the sole director and shareholder of D K Consulting Pty Ltd (' the Company '). During the years of income ending 30 June 2001, 2002 and 2003 (' the relevant years ') the Company derived income from contracts entered into with parties referred to as 'labour hire firms' which provided for the Company to provide the services of the Applicant to specified 'end users', in consideration for which the Company would be paid at an hourly rate for the

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  ATC 2478

  hours of services rendered by the Applicant.
• 4. Of these contracts only one, that between the Company and Icon Recruitment Pty Ltd dated 13 February 2003, is in the T documents and this can be found at T19-288/289.
• 5. The Icon contract refers to the Applicant as the Company's 'Representative'. It provides that the Applicant will report to a named officer of the end-user on a particular date 'and thereafter shall attend those premises and provide consulting services in consultation with the Client.' The Company is to be paid at an hourly rate 'for the provision of the consulting services.' The contract provides that 'the hours worked by your Representative are to be recorded on an Icon, or Client-approved timesheet.' and 'upon receipt of invoice your Company will be paid by direct credit …'
• 6. The Company declared amounts of income derived from these contracts in its income tax returns for the relevant years. The amounts may be found in Appendix B to the Respondent's Statement of Facts Issues and Contentions herein (' Respondent's SFIC ').
• 7. The Applicant declared amounts of salary or wages paid to him by the Company in his income tax returns for the relevant years. These amounts may be found in Appendix A to the Respondent's SFIC.

• For the 2001 year , the Company claimed total salary and wage expenses of $86,624: see T4-83. The Applicant declared this amount as income: see T3-55.

• For the 2002 year , the Company claimed total salary and wage expenses of $60,000: see T4-89. The Applicant declared this amount as income: see T3-64.

• For the 2002 year , the Company also claimed total expenses of $161,195: see T4-87. This amount included an amount of $32,000 being director's fees: see T14-254. The Applicant did not declare this amount in his 2002 return.

• For the 2003 year , the Company claimed total salary and wage expenses of $6,000: see T4-93. The Applicant declared this amount as income: see T3-71.

• 8. The Respondent issued amended assessments to the Applicant for the 2001 and 2002 income years and an original assessment for the 2003 year. Each of these assessments assessed the Applicant to amounts of PSI derived by the Company, adjusted by the deductions provided for by s 86-20 of the Act. In addition the amended assessment for the 2002 year included the amount of $32,000 which was claimed by the Company as a deduction for director's fees but which was not declared by the Applicant in his 2002 return.
• 9. Appendix D to the Respondent's SFIC shows the calculation of the amounts of net PSI attributed to the Applicant for the relevant years included in the amended assessments (and the 2003 original assessment).
• 10. Following review the Respondent has now prepared an Amended Appendix D , which is attached hereto. This takes into account information provided in the Applicant's objection and supporting material.
• 11. For each of the relevant years, Amended Appendix D shows income of the Company divided (in the two columns for each year) between PSI and other income. It then applies the methodology in s 86-20 as follows.

• The EM deductions are first applied against 'Other' income, and only to the extent that they are not exhausted, are they then applied against PSI, in accordance with the Method Statement in s 86-20.

• In the 2001 year , there were EM deductions of $1,932, and Other income of $152. Thus the balance of $1,780 is deducted against PSI.

• In the 2002 year , there were EM deductions of $1,438, and Other income

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  ATC 2479

  of $6,343. Thus there is a nil amount which may be set against PSI.

• In the 2003 year , there were EM deductions of $2,681, and Other income of $1,661. Thus the balance of $1,020 is deducted against PSI.

• 12. The remainder of Amended Appendix D shows amounts which are to be deducted against the PSI in accordance with the legislation, in order to calculate the net amount of PSI which is attributed to the Applicant."

8. The Tribunal was asked to treat the following provisions as agreed (and as if incorporated in the Respondent's written submissions as clauses 13 and 14) as follows: --

• "13. The Applicant agrees that the amended appendix D correctly shows the amount by which the personal service income is reduced before being attributed in accordance with the legislation if the Applicant's primary argument fails.
• 14. The Applicant agrees that neither the Company nor the Applicant was conducting a personal services business within the meaning of division 87 of the Act."

9. Clauses 3 to 24 both inclusive of the Respondent's statement of facts and contentions are to some extent repetitive of the content of clause 7. However those clauses (amended as agreed between the parties, and including the deletion of clause 21) formed part of the agreed facts and are included (precisely because they were so agreed, and notwithstanding repeated content) as follows:

"FACTS

Background

• 3. An audit of the applicant and his company, DK Consulting Pty Ltd ( the Company ) was conducted as part of a project into the verification of personal services income received through labour hire firms.
• 4. Appendix A contains a summary of the applicant's tax returns for the income years ended 30 June 2001, 30 June 2002 and 30 June 2003 ( the relevant years ). As a result of the audit, the applicant's taxable income for the relevant years was increased by an amount of net personal services income in each year^[1] The expression ‘net personal services income’, although not used in the Act, is here used to refer to the income of the personal services entity that constitutes personal services income of an individual under section 86-15 of the ITAA 1997, reduced by the amount of certain deductions to which the personal services entity is entitled under s 86-20. .
• 5. Notices of Amended Assessment were issued on 14 December 2004 in relation to the 2001 and 2002 income years and a Notice of Assessment was issued in relation to the 2003 income year. (see T6-98 - T6-100)
• 6. The applicant lodged objections against the amended assessments on 9 February 2005 to the increase in taxable income for the relevant years by an amount of attributed personal services income, an amount of director's fees of $32,000 for the 2002 income year, to the impost of interest charges and the increased medicare levy. (see T9-125)
• 7. The applicant, by letter dated 16 November 2005 gave notice under s14ZYA(2) of the TAA requiring the Commissioner to determine the objection against the assessment lodged on 9 February 2005 (see T11-155), the requisite period of 60 days expired on 15 January 2006, thereby giving rise to a deemed disallowed taxation objection under s14ZYA(3) of the TAA. The present proceeding is an application for review of the deemed disallowed objection decision.
• 8. No personal services business determination has been made by the Commissioner either under s 87-60 in relation to the applicant or under s 87-65 in relation to the Company.

• DK Consulting Pty Ltd (the Company)

• 9. The Company (previously named Shavia Pty Ltd) was incorporated on 7 December 1990 (see T18-284) and the applicant became a director of the Company on 20 December 1990. The Company changed its name to DK Consulting Pty Ltd on 25 October 1991 (see T18-285).
• 10. The Company's core business activity is to contract with third parties to provide computer consultancy services of the Applicant. The Company provides the skills of the Applicant in the project management and software evaluation areas.
• 11. At all material times, the applicant was the sole shareholder and sole director of the Company.

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• 12. At all material times, the applicant was also the sole employee of the Company. His services as a computer consultant were contracted out to third parties and he received wages from the Company. No written contract of employment existed between the applicant and the Company. (see T23-379 at (a)(17))

• Contracts for the provision of services

• 13. During the relevant period, the Company entered into contracts to provide computer consultancy services of the Applicant with the following labour hire firms:
  

  Income year Labour Hire Firm
  Year ended 30 June 2001	ISES
  Year ended 30 June 2002	ISES
  Year ended 30 June 2003	Icon Recruitment

• Of these contracts only one, that between the Company and Icon Recruitment Pty Ltd dated 13 February 2003, is in the T documents and this can be found at T19-288/289.

• 14. The terms of each contract provided for the provision of services of the applicant to the relevant labour hire firm for a set period (see for example T19-288 to 289). Pursuant to the contract, the Company was paid by the labour hire firm on an agreed hourly rate. The amount received by the Company was dependent on the number of hours worked by the applicant as recorded on agreed time sheets (see T21-291 to 345).
• 15. During the relevant period, the Company supplied the services of the applicant through the labour hire firms to various 'end users' as follows (see T12-161 and T23-379 to T23-384):
  

  Period Services supplied to End Users
  Jun 2000 - Oct 2001	IBM Global Services	Dept of Health
  		Dept of Finance
  Nov 2001 - Jun 2002	IBM Global Services	Westpac
  Jul 2002 - Jan 2003	Unemployed
  Feb 2003 - 30 Jun 2003	Department Of Finance	Dept of Finance

• 16. The applicant did all the work involved in providing the computer consultancy services to the 'end users' under the contracts with the labour hire firms. He normally carried out the work at the premises of the end users, using the clients' equipment and software to do the work. On occasions he did work at his home or out of short term accommodation.
• 17. Income returned by the Company in its company tax returns from the labour hire firms were as follows:
  

  2001	ISES	$156,444
  2002	ISES	$155,084
  2003	Icon Recruitment	$56,648

• Appendix B contains a summary of the income declared and expenses claimed in the Company's tax returns for the relevant years.

• Other income

• 18. Apart from the income received for the provision of services referred to above, the Company also received income from other sources. In the relevant years, the Company returned the following amounts in its income tax returns:
  

  2001	Dividends	$152
  2002	Dividends	$440
  Employee reimbursement	$5,903
  2003	Dividends	$154
  Interest	$17
  Other revenue	$261
  Employee reimbursement	$1,038
  Capital gain	$191

• Deductions

• 19. During the relevant years, the Company claimed certain expenses in its income tax returns (see Appendix B and T4-81 to T4-92). The Company's expenses are further particularised in its profit and loss statements at folios T14-254 to T14-259. Appendix C is a summary of the information shown on the profit and loss statements for the relevant years. The applicant also provided further information in relation to these deductions in a document entitled 'Report on Denied Deductions' at folio T12-157.

• Salary, wages and directors fees

• 20. During the relevant years, the Company paid the following amounts being salary and wages to the applicant.
  

  Year ended 30 June 2001	$86,624
  Year ended 30 June 2002	$60,000
  Year ended 30 June 2003	$6,000

• 21. deleted as agreed by the parties
• 22. The Company lodged tax returns for each of the relevant years which included the income and expenses identified above at paragraphs 17 - 21. A copy of these returns is located at folio T4-81 to T4-94. A summary of the information shown on the Company's returns for all three income years is located at Appendix B of this SFIC.
• 23. The applicant lodged tax returns for each of the relevant years which included an amount of salary and wages paid by the company as identified in paragraph 21 above. The applicant did not report the director's fees referred to at paragraph 22 above in the amount of $32,000 in his 2002 income tax return. A record of the Company's returns is located at folio T3-55 to T3-80. A summary of the information shown on the applicant's returns is located at Appendix A of this SFIC.
• 24. At or about 24 January 2005, the audit was completed and adjustments were made to the Company's returns and the applicant's returns (see audit finalisation letter at T8-106 and Notices of Amended Assessment and Assessment at T6-98 to T6-101). The 'adjustments to income' shown on the Amended Assessments and Assessment were calculated as follows:
  • (a) The table at folio T8-109 (reproduced at Appendix D of this SFIC) shows the calculation of the net personal services income attributed to the applicant and included into the applicant's taxable income;
  • (b) For the year ended 30 June 2002, the adjustment to the applicant's taxable income also included an amount of $32,000, being director's fees (see T6-97);
  • (c) The net personal services income was also excluded from the assessable and exempt income of the Company pursuant to s 86-30 of the ITAA 1997."

10. As appears from clause 8 the Applicant agreed that appendix D was correctly calculated and will bind the Applicant if he failed on the primary issue. As will be seen, the Applicant does fail on the primary issue, and accordingly Appendix D is correct. However it is not necessary to include it in this decision because to do so would unduly lengthen it; it is noted that the relevant Appendix is that marked D and attached to the Respondent's Statement of Facts and Contentions and where the last line of the Appendix specifies that "the Net Profit Attributed to the Applicant was $59732, $51080 and $37907" successively in respect of the respective relevant years.

11. In this decision, the "Company" means DK Consulting Pty Ltd (referred to in clause 3 of the Respondents written submissions); the "Act" means the Income Tax Assessment Act 1997; and "the 1936 Act" refers to the Income Tax Assessment Act 1936.

Part C - The legislation

12. The Respondent's written submissions contain a most helpful and comprehensive section entitled "Structure of the Legislation"; Clauses 13 to 40 inclusive are included in these reasons as follows:

"STRUCTURE OF THE LEGISLATION

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  13. Part 2- 42 of the Act (' the PSI provisions ') were inserted by New Business Tax System (Alienation of Personal Services Income) Act 2000.
• 14. The Part consists of four Divisions: Division 84 'Introduction'; Division 85 'Deductions relating to personal services income'; Division 86 'Alienation of personal services income' and Division 87 'Personal services businesses'.

Objects of the legislation

• 15. The objects of the legislation can be ascertained from the statements of objects contained within the several Divisions. Section 85-5 states, with respect to Division 85 :

• The object of this Division is to ensure that individuals who are not conducting ^* personal services businesses cannot deduct certain amounts (such as amounts that employees cannot deduct).

• 16. Section 86-10 states, with respect to Division 86 :

• The object of this Division is to ensure that individuals cannot reduce or defer their income tax (and other liabilities) by alienating their ^* personal services income through companies, partnerships or trusts that are not conducting ^* personal services businesses.

• 17. Section 87-10 states, with respect to Division 87 :

• The object of this 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.

Division 86

Subdivision 86-A

• 18. Turning first to Division 86, sub-ss 86-15(1)-(3) provide (omitting the examples and notes in the legislation):
  • (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 after the ^* PAYG payment period during which the amount became ^* ordinary income or ^* statutory income of the entity.
• 19. The expression 'personal services income' ('PSI') is defined in s 84-5 as follows (omitting examples and notes):
  • (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.
• 20. An individual or entity conducts a personal services business if the conditions and tests set out in Division 87 are satisfied.
• 21. The intention and effect of Division 86 (in particular s 86-15) is thus to 'attribute' income of a 'personal services entity' to an individual if the income of the entity is the 'personal services income', as defined, of the individual.
• 22. The expression 'attributing' is used in the legislation itself to describe the effect of the Division: see s 86-5(2). One

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  of the Rulings on the legislation, TR2003/6 'Income tax: attribution of personal services income', states at para 29:

• In this ruling the inclusion of the net personal services income in the assessable income of the test individual, and its exclusion from the assessable or exempt income of the personal services entity, is called attribution.

• 23. Putting it another way, the income is 'deemed' to be that of the individual.
• 24. The inquiry is a two stage exercise:

• Was the income in question 'personal services income' of the individual, applying for that purpose the definition in s 84-5: namely, was the income 'mainly a reward for [the] personal efforts or skills' of the individual'?

• Was the income derived by a 'personal services entity' ('PS entity'), applying for that purpose the definition in s 86-15(3): namely was the entity 'a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals'?

• 25. If the answer to both questions is yes, then the income is included in the assessable income of the individual by force of s 86-15, unless the income is 'from the personal services entity conducting a personal services business', as provided in s 86-15(3).
• 26. Section 86-20 contains a computation rule for determining the amount of PSI to be included in the individual's assessable income. The PSI (i.e. the PSI derived by the PS entity) is reduced by the amount of certain deductions to which the PS entity is entitled, as set out in the method statement in the section. The PSI included in the individual's assessable income by force of s 86-15 is thus a net amount , after taking into account the deductions for which s 86-20 provides.
• 27. Section 86-30 provides in effect that PSI which is included in an individual's assessable income under s 86-15 (which will be the net amount computed in accordance with s 86-20) is neither assessable income nor exempt income of the PS entity. Section 86-30 thus expresses the corollary of the attribution of the PSI to the individual, by removing the amount so attributed from the income of the entity in order to prevent double taxation of that amount.
• 28. As referred to above, the attribution of PSI from a PS entity to the individual whose PSI it is, does not apply if the income is income from the PS entity conducting a personal services business: s 86-15(3).

Subdivision 86-B

• 29. Section 86-60 restricts the deductions available to a PS entity. If the deduction 'relates to gaining or producing an individual's personal services income', then the PS entity cannot deduct the amount unless the individual could have deducted the amount 'if the circumstances giving rise to the entity's entitlement to deduct the amount had applied to the individual', or the entity receives the individual's PSI in the course of conducting a personal services business.
• 30. The first of those two limbs is a reference back to Division 85 of the Act (see below). It provides in effect that the entity is only allowed the deduction if the individual would have been allowed the deduction under Division 85.

Division 85

• 31. Division 85 applies to PSI which is derived by individuals. It does not (of its own force) apply to the PSI of an individual which is derived by a PS entity (that situation being covered by Subdivision 86-B).
• 32. Section 85-10(1) provides in effect that an individual cannot deduct an amount 'to the extent that it relates to gaining or producing' PSI unless the individual would be able to deduct the amount if the income were paid to the individual as an employee.
• 33. Other sections in Division 85 contain further rules for the deductibility of amounts from PSI income.

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Division 87

• 34. Division 87 sets out several tests which will determine whether an individual or a PS entity is conducting a ' personal services business ' (' PS business ').
• 35. If an individual is conducting a PS business, then the restrictions on deductibility of expenses in Division 85 do not apply (s 85-30).
• 36. Where a PS entity is conducting a PS business, the PSI derived by the PS entity is not attributed to individuals under s 86-15 (s 86-15(3)), and the restrictions on deductibility of expenses which would otherwise be imposed by Subdivision 86-B do not apply (s 86-60(b)).
• 37. The four 'personal services business tests' are stated in s 87-15(2).
• 38. Division 87 also makes provision for the Commissioner to make a 'personal services business determination', either is respect of an individual (s 87-60) or in respect of a PS entity (s 87-65).
• 39. In the present case it is common ground that no personal services business determination was made either in respect of the Applicant or of the Company.
• 40. The Respondent does not understand the Applicant to be asserting that either he or the Company was conducting a PS business. Accordingly the four tests contained in Division 87 do not require consideration for present purposes."

13. As will be noted the Applicant referred to certain other provisions of the Act (and also the 1936 Act). Those other provisions are referred to later in these reasons.

14. As regards division 87 of the Act the Respondent correctly contends that the Applicant did not assert that he or the Company was conducting a PS business and the four tests contained in division 87 do not require consideration.

Part D - The applicant's submissions and comments in respect of those submissions

15. It became clear as Mr Galvin addressed the Tribunal that it was he who produced all of the documentation on which the Applicant relies. After agreement was reached as to the facts there was no need for oral evidence, and Mr Galvin proceeded to address the Tribunal for a period which in the result exceeded two hours. During that period he referred the Tribunal repeatedly and at length to the Applicant's objection to the assessment and amended assessments in respect of the relevant years. (T page 125 to T page 152). He made it clear that the Applicant's case is centred on the objection and indeed it is also clear that it is the content of that objection which figured largely in the preparation of the Applicant's application for review (Tp 1 to Tp 49); he also prepared a number of (very) lengthy letters addressed to staff of the Respondent and (in some cases) staff of the Tribunal, and also a document entitled "Address to Julian Block" which was handed to the Tribunal towards the end of the hearing. Of the documentation on which the Applicant relies it might be said that the objection and the application (T1 and T9) for review are perhaps the most relevant, although the degree of repetition is such that much the same content often appears in more than one of such documents.

16. The documentation furnished on behalf of the Applicant is very lengthy indeed. It contains a wealth of detail (most of it irrelevant), references to a vast number of decided cases (mostly irrelevant) and one issue over which the Tribunal has no jurisdiction; I refer in this latter context to the general interest charge, about which the Applicant complained, at some length, in his objection.

17. Having dealt at least with the Applicant's objection, Mr Galvin then went on to deal with the Applicant's application for review. As I have said, that application for review is reminiscent of and in some respects repetitive of some of the content of the objection. Much the same can be said of the letters to which I have referred. By way of one example only, a letter dated 19th of July 2006 runs, inclusive of additions, to 47 pages. It would seem then that on the same material was often recycled.

18. As I have noted, Mr Galvin also submitted a document entitled "Address to Julian Block"; this too is a lengthy document; some idea of the flavour of the documentation prepared on behalf of the Applicant can be obtained from a consideration of a part of that

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ATC 2485

document and the first three pages only have been included in these reasons [extract of document omitted].

19. The facts are very simple. During the relevant years, the Applicant owned all of the issued shares in the Company; he was the only director and he was also the only employee. The Applicant's services were furnished to end users through labour hire firms. In consideration of the Applicant's services the Company received payment at the agreed hourly rate for the services rendered.

20. It was not always easy to understand the precise nature of the Applicant's contentions. It can be said that in essence those contentions, at least to some extent constituted an attack on provisions in the Act, and in particular but not only Part 2-42.

21. One of the contentions which was repeated on several occasions is that the relevant income could never be the income of the Applicant simply because he was never the owner of the trade debts or for that matter any other property of the Company; put another way it was the Company which entered into contracts for the supply of the Applicant's services; it was the Company which in consequence was entitled to the trade debts which arose from the provision of the Applicant's services and no person other the Company could thus have derived the income in question. In support of this contention Mr Galvin cited
Commissioner of Taxation NSW v Lawford 1937 HCA 40. (The relevance of that decision to the provisions of the Act with which this decision is concerned and which were enacted so long thereafter is unclear.) Just as unclear is the relevance of
South Australia v Commonwealth 92 ATC 4066; (1992) 174 CLR 235 which was cited by Mr. Galvin on a number of occasions, and as a case of particular importance. (As will be noted later in this decision the Respondent contended that as a constitutional case it was of no relevance at all).

22. As previously noted neither the Applicant nor the Company sought a PSI determination; it is likely that this is so because such an application would not have succeeded. That this is so is borne out by the agreement between the parties as to the facts; see clause 8 above and in particular the clause numbered 14 contained within it, Put in other words, the Applicant is caught squarely by the legislation to which I have referred. The income in question arose simply and only in consequence of the provision by the Applicant's services. It is in these circumstances that the Respondent treated that income as the income of the Applicant and not that of the Company. Nor, as I have indicated, is it necessary for me to deal with the question of deductions simply because Appendix D has been agreed.

23. It is in fact difficult to deal with the Applicant's lengthy contentions simply because so many of them were irrelevant. In preparing the Applicant's documentation (and I refer in the context to his objection, his application for review and the other documents and letters previously referred to) Mr Galvin has focused on numerous concepts and then referred to them at length and generally accompanied by numerous case citations. I refer in this context to one example only although there are many. Mr Galvin focused on the concept of "reward", and At T page 39 he cited numerous authorities as to what is meant by the concept of "reward". This is, as I have said, just one of numerous such examples. I do not think it necessary to refer to (confused) references (of little or no relevance) to other taxes and in particular GST and FBT.

24. The relevant legislation is designed in its terms to tax income in the hands of the person whose exertion caused its receipt and even though in contractual terms another person (in this case the Company) derived it. Mr Galvin cited
Salomon v Salomon (1897) AC 22 in support of the proposition that a company is a separate entity and in particular that it is an entity separate from its shareholders and directors (and in this case of course the Applicant alone); this is so obvious that it hardly requires citation. But it is equally obvious that the legislation in certain circumstances treats income ostensibly derived by an entity, as derived by the person whose services gave rise to its derivation. As I have noted, the Applicant was the sole employee of the Company. The legislation in its terms provides for determinations in certain circumstances; such a determination is obtainable if a test set out in Division 87 is satisfied. The fact that a determination is not sought does not have the result that the tax

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ATC 2486

burden automatically falls upon the person whose exertions gave rise to that income, if it can be shown that one of the relevant tests is satisfied. But there was no suggestion whatever during the hearing that any of the division 87 tests was either relevant or satisfied, and in fact and as set out previously (and see clause8) the parties agreed that they were not..

25. Mr Galvin attacked aspects of the Act. As I have noted, he contended on numerous occasions that if the assets in question belonged to the Company (and his reference to assets was a reference to the book debts arising from the provision of the services), the income in question could not be the income of anyone other that the owner of those assets. Or put another way, his case was that if the Company entered into the contracts, it derived the income, and that income could not be the income of anyone other the Company.

26. Mr Galvin of drew attention to the provisions of section 6 -- 5 (and other sections) of the Act and in particular the use of the words "you" and "your" which in his view resulted in uncertainty as to which of the Applicant and the Company was meant by the term. Section 6 -- 5 of the Act (as one example) reads as follows:

"INCOME TAX ASSESSMENT ACT 1997 - SECT 6.5

Income according to ordinary concepts (ordinary income)

• (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

• (2) If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
• (3) If you are a foreign resident, your assessable income includes:
  • (a) the * ordinary income you * derived directly or indirectly from all * Australian sources during the income year; and
  • (b) other * ordinary income that a provision includes in your assessable income for the income year on some basis other than having an * Australian source.
• (4) In working out whether you have derived an amount of * ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

27. In fairness to him Mr Galvin did refer in this context to section 1-3 of the Act reading as follows: --

"INCOME TAX ASSESSMENT ACT 1997 - SECT 1.3

Differences in style not to affect meaning

• (1) This Act contains provisions of the Income Tax Assessment Act 1936 in a rewritten form.
• (2) If:
  • (a) that Act expressed an idea in a particular form of words; and
  • (b) this Act appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style;
  the ideas are not to be taken to be different just because different forms of words were used.

28. Reverting to section 6-5 of the Act Mr Galvin referred in specific terms to its provisions as to source. He contended that there is no relevant reference in part 2-42 to the concept of source and that (although I may have misunderstood the thrust of his contention) the relevant income could not be said to have the requisite source, and being the source set out in the legislation. Since the relevant services were provided in Australia to end-users in Australia, and by the Applicant who was then resident in Australia, the income was clearly sourced in Australia. Contentions by Mr. Galvin as to distinctions between ordinary income and statutory income were equally without foundation, and it is unnecessary to deal with them specifically. If one has regard to the objection and the application for review one is struck by the simply enormous number of references to cases which are not in any way relevant to the application before the Tribunal.

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ATC 2487

A very few only of the numerous cases cited appear in the catchwords not in many cases because they are relevant but simply because either they were referred to repeatedly or the Respondent referred to them in order to demonstrate just how irrelevant they are.

29. There were numerous other contentions of an equally irrelevant nature and with which it is altogether unnecessary be to deal. Suffice to say that Mr Galvin clearly went to enormous pains to produce vast volumes of (irrelevant) material. The effort (and presumably the cost) was probably considerable.

30. At the commencement of the hearing (and as noted previously), Mr Galvin said that is the first time that he had ever appeared before the Tribunal and asked for the Tribunal's assistance. Mr Galvin may be inexperienced in the procedures of the Tribunal but he is not inexperienced in matters of taxation law. He has a master's degree and the documentation indicates an ability to find and cite quantities of the law. He referred to "Taxation in Australia" by Professor Parsons and the various propositions as to income noted by Professor Parsons. The purpose of those references was equally unclear.

31. When Mr Diethelm came to furnish his submissions in reply there was, as will be appreciated, very little for him to say. He furnished the Tribunal with a further set of brief submissions as to the law and in which he cited authority in support of the proposition that it is necessary when construing legislation to have regard to the purpose of the legislation. He referred to section 15AA of the Acts Interpretation Act 1901 which provides that an interpretation which promotes the underlying object of the legislation is to be preferred. He cited
Malika Holdings Pty Ltd v Stretton [2001] HCA 14 in support of the proposition that a presumption that a statute does not intend to abolish or alter common law rights, is weak; in the same context he referred to
Gifford v Strang Patrick Stevedoring Pty Ltd 2003 ASH ¶54-061; [2003] HCA 33 and in particular the judgment of McHugh J at 36, and also
Regie National des Usines Renault SA v Zhang (2002) AIPC ¶91-786; [2002] HCA 10 and in particular Kirby J at 143 -147.

32. Mr Diethelm drew attention to the fact that
South Australia v 92 ATC 4066; Commonwealth (1992) 174 CLR 235, cited by the Applicant repeatedly, is a case on constitutional law and of no relevance to this case. Importantly he drew attention that there is no doctrine of law which would suggest that the taxation of income depends on ownership; none of the numerous cases cited by the Applicant supported that proposition. Moreover Parliament has the power to attribute income of one entity to another; he cited the controlled corporations regime (Part X of the 1936 Act) as an example. And perhaps most importantly of all the language of section 86-15 is effective to achieve the attribution of PSI from the PS entity to an individual, this being the expressly declared object of Division 86 as stated in Section 86-10, and the declared effect of the Division as stated in section 86-5(2). Mr Galvin had contended that the Respondent was seeking to "pierce the corporate veil"; Mr Diethelm asserted (correctly) that there is no such issue arising from the PSI legislation.

33. In clause 9 of the Respondent's submissions on the law the Respondent referred to a (very few) of the cases cited by the Applicant in order to demonstrate just how irrelevant they are; those cases were referred to in the following terms: --

• "(a) South Australia v Commonwealth (1992) 174 CLR 235: the High Court held that s 114 of the Constitution, which prohibited the imposition by the Commonwealth of any tax on property of any kind belonging to a State, prohibited the imposition of tax on capital gains derived by a State on the disposal of an asset, but did not prohibit the imposition of tax on interest derived on money lent by a State.
• (b) G P International Pipecoaters v Commissioner of Taxation (1990) 170 CLR 124: a sum received on account of 'establishment costs' equal to the cost of constructing a plant was received as part of the remuneration earned for the performance of a contract, and was part of assessable income.
• (c) Commissioner of Taxation v Stone [2005] HCA 21: receipts of prizemoney and government grants and sponsorship were part of the assessable income of an athlete who was conducting a 'business of deriving

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  ATC 2488

  financial reward from competing and winning in the athletics arena.'
• (d) Read v Commonwealth (1988) 167 CLR 57: a distribution of units in a unit trust representing capital gains on the assets of the trust was not within the definition of 'income' contained in s 18 of the Social Security Act 1947: the bonus units were not 'valuable consideration earned derived or received' because the taxpayer's proportionate beneficial interest in the trust had not increased after the distribution, and they were not 'profit' because they represented a mere unrealized increase in the value of the assets."

Part E - Conclusion

34. Although the submissions by the Respondent referred to in the preceding clause were useful and welcome they were not in reality necessary. At the risk of labouring the point, the Applicant provided personal exertion services in exactly the situation contemplated by the legislation. None of the attacks on the legislation by Mr. Galvin were in any way competent or correct.

35. The objection decision under review must in the circumstances be affirmed.