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COOPER v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2010] AATA 215

Decision date: 29 March 2010

J Block (Deputy President)

Part A - Preliminary and background

1. The objection decisions which are under review are the disallowance of objections by the Applicant dated 15 October 2007 and 17 November 2008 against amended assessments dated 24 August 2007 made against him in respect of the years ending 30 June 2003 and 30 June 2004 (collectively "the relevant years").

2. The Applicant was represented by Mr M Comer, an agent who was previously an accountant; the Respondent was represented by Mr B Kasep of counsel instructed by the ATO Legal Services Branch.

3. The Tribunal had before it two sets of T documents and also supplementary T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975; as was arranged at the hearing, references to the T documents in respect of matter number 2009/590-591 are denoted by "T"; references to the T documents in respect of matter number

ATC 3327

2009/4095-4096 are denoted by "4095 T". The supplementary T documents are referred to either in that fashion or by "S". The fact that there were two sets of T documents arises, so the Tribunal was informed, from the fact that the Applicant made two separate objections.

4. In addition to the documents referred to in the preceding clause, the Tribunal admitted into evidence exhibits as follows:

  • Exhibit A1 is a witness statement by the Applicant which does not bear a date; the Applicant said in evidence that it was executed about a year ago.
  • Exhibit A2 is an invoice by Allianz issued to Coopers Consulting Associates Pty Limited (referred to in these reasons as "the Company" or as "Coopers Consulting") dated 25 August 2005 together with annexures thereto and including a schedule entitled "Confirmation of Insurance Schedule" (and which is referred to in these reasons as "the Insurance Schedule").
  • Exhibit A3 is a blank ATO Personal services income schedule for the 2009 year.
  • Exhibit A4 consists of two sets of e-mail messages between the Applicant and Mr Comer and in addition other persons; it is unnecessary to detail the messages included in Exhibit A4 because this exhibit was never again referred to during the hearing.
  • Exhibit A5 consists of e-mail messages between Tony Gale and the Applicant and other persons; here too there is no need to detail the messages because this exhibit also was never again referred to during the hearing.
  • Exhibit A6 is a Purchase Order numbered 50212614 addressed by Telstra Corporation Limited ("Telstra") to Ajilon (CATS).
  • Exhibit A7 is a witness statement by Mr Ross John Tavener dated 10 March 2010; it may be noted that Mr Tavener was a subcontractor to Ajilon and is named in the relevant agreement (as defined later if these reasons).

5. Exhibits A2 to A6 were tendered at the commencement of the hearing by Mr Comer and were admitted by the Tribunal after Mr Kasep indicated that he had no objection.

6. (a) It is convenient in the first place to draw on the Respondent's Statement of Facts, Issues and Contentions ("RSFIC") dated 21 January 2010 in order to include most of its content under the head of "Relevant Facts" and contained in clauses 3 to 27 as follows:

  • "3. The Applicant, Peter Cooper, is an IT consultant and project manager (see T7-29).
  • 4. Coopers Consulting Associates Pty Ltd ('Coopers Consulting'), ACN 088 492 237, was a Company incorporated in the State of New South Wales on 7 July 1999. This Company was deregistered on 14 October 2007.
  • 5. At all relevant times, the directors and shareholders of Coopers Consulting were Peter Cooper and Linda Cooper (the Applicant's spouse).
  • 6. Ajilon Australia Pty Ltd ('Ajilon'), ACN 076 517 354, is a labour hire firm.
  • 7. On or about 5 August 2002, Coopers Consulting entered into an agreement with Ajilon. A copy of the agreement is in folio T14-69 to T14-81.
  • 8. Another agreement dated 4 February 2003 was signed by the Applicant on 11 February 2003. A copy of that agreement is in folio T8-61 to T8-69 of a supplementary matter 20[0]9/4095.
  • Terms of the Agreements between Ajilon and Coopers Consulting
  • 9. Clause 1.1 of the agreement provided that the Company (Coopers Consulting) will engage Peter Cooper (the Applicant) to provide professional business services to Ajilon and clients of Ajilon.
  • 10. Clause 1.3 specified that on the start date (being 5 August 2002 and 5 February 2003 respectively), the Company Representative (i.e the Applicant) will report to the Consulting Manager or the appointed nominee of Ajilon at the specified address and the Company Representative (the Applicant) shall thereafter attend the sites to which the Company Representative is directed by Ajilon and shall provide professional business services for Ajilon.
  • 11. Clause 2.1 the agreement specified that Coopers Consulting must engage the Company representative named in Schedule 1. Schedule 1 identified Peter Cooper as being the sole Company Representative. A copy of Schedule 1 is at T14-77.

  • ATC 3328

    12. The term of the agreement was from the Agreement Start Date (5 August 2002 and 5 February 2003 respectively) to the Agreement End Date (4 February 2003 and 4 August 2003 respectively) as specified in Schedule 1. There was also provision under clause 3.2 of the agreement allowing the parties to extend the agreement beyond the Agreement End Date.
  • 13. Clause 4 sets out the remuneration under the agreement. Relevantly, clause 4.1 specified as follows:

    'For each day that the Company Representative (Peter Cooper) provides professional business services to a client of Ajilon, the Company (Coopers Consulting) will be paid at the Practitioner Daily Rate identified in Schedule 1 (and amended from time to time). All relevant statutory payments with regard to payroll tax and workers compensation will be made by Ajilon on behalf of the Company,'

  • 14. Clause 4.3 required Coopers Consulting to invoice on a fortnightly basis.
  • 15. Clause 4.4 of the agreement required the hours worked by Peter Cooper to be recorded on an Ajilon or client approved timesheet and signed by an appropriate Ajilon or client official.
  • 16. On a fortnightly basis, Coopers Consulting would issue a tax invoice to Ajilon based on the number of days the Applicant worked during that period. A sample of tax invoices issued by Coopers Consulting to Ajilon is located at T15-82 to T15-101.
  • 17. Clause 7 dealt with termination of the agreement. The agreement specified that Ajilon may immediately terminate the Agreement at its absolute discretion without prior notice or payment in lieu of notice under certain circumstances. In the event of termination Cooper Consulting was entitled to payment for work performed by the Applicant up to the effective date of termination.
  • 18. No specific task or series of tasks are identified in the agreements between Coopers Consulting and Ajilon.
  • 19. During the relevant period, being 2003 and 2004 financial years, Coopers Consulting provided the services of the Applicant through Ajilon to only one of Ajilon's clients: Telstra.
  • Income received by Coopers Consulting pursuant to the Ajilon Agreement
  • 20. During the income year ended 30 June 2003, Coopers Consulting received an amount of $146,475.00 from Ajilon under the Ajilon Agreements.
  • 21. During the income year ended 30 June 2004, Coopers Consulting received an amount of $153,900.00 from Ajilon under the Ajilon Agreements.
  • Income received by Coopers Consulting from other sources:
  • 22. During the relevant income years, Coopers Consulting also received ordinary or statutory income from its courier business, which was run by Linda Cooper and Tony Cooper, the Applicant's son (see T12-57). The Respondent submits and the Applicant agreed that the income from sources other than Ajilon is not personal services income of the Applicant and therefore should not be included in the Applicant's income under section 86-15 of the Income Tax Assessment Act 1997 (the ITAA 1997) during the relevant years.
  • 23. The income of Cooper Consulting for the income year ended 30 June 2003 included income from the following sources:
    Income from Amount Received
    Ajilon $146,475.00
    Hunter Transport $6,613.99
    Snap Express $10,229.71
    PJC $3,181.82
    APM $7,626.66
    Clidells $318.18
    Motor vehicle reimbursement $4,000.00
    Total $178,483.36

  • ATC 3329

    24. The income of Cooper Consulting for the income year ended 30 June 2004 included income from the following sources:
    Income from Amount Received
    Ajilon $153,900.00
    Hunter Transport $14,735.86
    Total $168,635.86
  • Attributable income calculated under section 86-15 ITAA 1997
  • 25. Based on the further information received from the Applicant on 17 December 2009 and on 11 January 2010, the Respondent re-calculated the income attributable to the Applicant under section 86-15 of the ITAA 1997 as reduced by section 86-20 for the income years ended 30 June 2003 and 30 June 2004.
  • 26. The income attributed to the Applicant by section 86-15 of the Income Tax Assessment Act 1997 for the income year ended 30 June 2003 is calculated as follows:
    Gross PSI [personal services income] $146,475
    Less salary promptly paid to Peter Cooper (pursuant to s 86-15(4) ITAA 1997) $33,162
    Less amount of reduction per method statement $33,620
    Attributed income $79,693
  • 27. The income attributed to the Applicant by section 86-15 of the Income Tax Assessment Act 1997 for the income year ended 30 June 2004 is calculated as follows:
    Gross PSI $153,900
    Less salary promptly paid to Peter Cooper (pursuant to s 86-15(4) ITAA 1997) $37,494
    Less amount of reduction per method statement $27,988
    Attributed income $88,418"

(b) the content of RSFIC cited in subclause (a) above appears to the Tribunal, and having regard to all of the evidence taken at the hearing, to be accurate but with one proviso in respect of clause 19 of RSFIC; during the relevant years Cooper Consulting provided the Applicant's services to only one of Ajilon's clients, and being Telstra, but it also, on occasion, provided the Applicant's services to Ajilon itself.

7. In the interests of balance I include the whole of the content of the Applicant's Statement of Facts, Issues and Contentions ("ASFIC") (undated but date-stamped in the Tribunal on 1 December 2009) as follows:

"In relation to the facts of this matter, the following is applicable:

Mr. Peter Cooper was a director and shareholder of a company (Coopers Consulting Pty Ltd), the company was incorporated on the 7th July 1999.

Mr. Cooper obtained contracts with several companies to do some specialized work, in the computer industry. It is accepted that under the definition of personal services income, that Mr. Cooper would fall under this category, however the issue at hand is whether or not Mr. Cooper's Company is in fact classified as being a personal services business income entity.

The act changed on the 1st July 2000, and under the changes in the act the existing trading entities, needed to comply with at least one of the tests described in the commissioner of taxations brochure, named Alienation of Personal Services Income: contractors and consultants.

There were 5 tests, THE RESULTS TEST, THE 80% RULE, UNRELATED CLIENTS TEST, THE EMPLOYMENT TEST and the BUSINESS PREMISES TEST.

Mr. Cooper only had to comply with any one of these tests, to be exempt from the changes in the act and was not required to change his income tax obligations and was

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not required to contact the Taxation Department.

It is our contention that Mr. Cooper successfully met conditions of at least 3 of the tests in the year ended 2001 and 2002 which resulted in him complying with the new changes in the act, and therefore was not obligated to change the manner in which he reported to the Taxation Department.

In the year ended 30th June 2002, Mr. Cooper complied with the results test, the unrelated clients test and the 80% rule. Evidence had been provided to the commissioner of taxation that would substantiate that there were at least 2 providers of income, Ajilon and E Serv Glabal, which satisfied the unrelated clients test and the 80% Rule. In respect of the results test, we say that we have complied from the beginning but it is this test which is the subject of the Commissioner of taxation's grounds for their case.

It is our contention that, despite the commissioner's views on the results test within the years of their audit (2003-2004) that the company complied with at least 2 of the tests in previous years which is not in dispute, and so therefore the applicant was where exempt from the changes in the act. At that point. There is nowhere in the act which demands that a company needs to comply with the changes in the act each and every year.

It is therefore our contention that once the company has complied it is forever exempt.

Not withstanding, this point, the company has always complied with the results test throughout all of its trading years. It is our contention that the results test which requires a company to produce a specific result, the provision of tools and equipment, and the rectification of defects.

It is the contention of the commissioner that Mr. Cooper does not produce a result on the payment to him, of works done. In so far as responding to this claim Mr. Cooper receives an order from the company Ajilon Pty Ltd who in turn received a purchase order from Telstra for a specific job with specific guidelines. The applicant provided evidence of these purchase orders which described each job, and had allocated the amount of time required to complete the job, and also a monetary value attached to the job. Sometimes these jobs could take up to 6-9 months to complete. The applicant had an arrangement in place with Ajilon Pty Ltd to invoice them of a fortnightly basis.

It is our contention, that this is an acceptable form of payment, as a progress payment which is the normal method of being paid, on jobs which take a long period of time to complete. This form of payment is a commercially accepted format which applies to any commercial project. The respondent claims that because Mr. Cooper gets paid progress payments, this does not constitute a payment for a result. The applicant contends that these payments are merely progress payments which eventually always provide a result.

The applicant, has provided evidence of using his own tools, this had been accepted by the commissioner in the allowance of depreciation of these tools and equipment and the applicant has provided evidence of an insurance policy which clearly is established to protect him from any claims that may arise from any defaults of his work.

The applicant has also provided evidence of a mathematical error in the calculation of the re assessments of the tax year ended 30th June 2003 and the applicant is disputing some of the refusal of the respondent of income tax deductions in the years 2003 and 2004. It is the applicants contention that despite the decision on hand, that these deductions should be allowed anyway.

In conclusion, the applicant says that Coopers Consulting Pty Ltd is in fact a personal services business income entity, given its compliance with the tests in the years prior to the audit, years of 2003 and 2004 and the results tests in subsequent years.

The applicant seeks a decision that Coopers Consulting Pty Ltd, is a personal services business income entity and that the re assessment by the respondent for the year

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2003, 2004 and 2005 be reversed in its entirety.

The applicant also seeks, that if the decision of the tribunal in respect of the companies compliance is not upheld that the re assessment should be adjusted to reflect the true income tax liability."

8. It will be noted having regard to ASFIC that:

  • (a) the Applicant contended that because there was an entitlement to an exemption for the 2002 tax year the Company was forever exempt thereafter. That contention was at first and during the hearing pursued, but by the time of closing submissions was abandoned.
  • (b) the Applicant also raised certain contentions as to mathematical error (and the Tribunal refers in this context to the fourth-last clause of ASFIC). However, the Applicant did not at any time during the hearing raise any contention or give any evidence as to the amounts involved either in the amended assessments or as amended thereafter and in particular in the manner set out in the S documents.
  • (c) the Applicant contended (and I refer in this context to the fifth-last clause of ASFIC) that he, the Applicant, supplied tools and equipment. During the course of the hearing there was evidence as to the fact that work was performed on occasions from a room in the Applicant's home unit set aside for this purpose and items which were contained in it. Mr Comer in closing submissions advised the Tribunal that the equipment was supplied by the Company and not the Applicant and that it was the Company which claimed depreciation in respect of those items. (The Tribunal was referred in this context to T18-111.) The Applicant's evidence was that in respect of work for Telstra, Telstra supplied a computer at its premises and which could be accessed only in its premises and that the relevant work was of necessity for the most part performed on that computer.

9. There was at times during the hearing some confusion as to whether references to "you" and similar terms related to the Applicant or the Company. It is relevant to note that the evidence of the Applicant was that in respect of the relevant years and other periods (not relevant for the purpose of these applications) there was a series of written agreements entitled "Entity Letter of Engagement" between the Company and Ajilon Australia Pty Limited ("Ajilon"). Copies of three of these agreements are contained in T14-69 to T14-81, 4095 T8-61 to T8-69 and 4095 T12-88 to T12-100. The versions of the written agreement contained in T14-69 to T14-81 and 4095 T12-88 to T12-100 are identical, except for the fact that the version at T14-69 to T14-81 does not include the Entity Schedule 2; in these versions "Ajilon" refers to Ajilon Australia Pty Ltd. In the version contained in 4095 T8-61 to T8-69 "Ajilon" refers to Ajilon Consulting. Exhibits A1 and A7 make reference to Ajilon Pty Limited. There is no doubt that Ajilon Consulting, Ajilon Pty Limited and Ajilon Australia Pty Limited are one and the same entity. Notwithstanding the fact that the term of the agreements referred to does not encompass the whole of the period of the relevant years it was common cause between the parties that there was in existence between the Company and Ajilon an agreement ("the relevant agreement") in precisely those terms during the whole of the period of the relevant years.

Part B - The relevant agreement

10. In accordance with the relevant agreement the Company agreed to provide "professional business services" to Ajilon and to clients of Ajilon. Moreover the Company was obliged to ensure that all of the professional services were provided by the Applicant and, in accordance with an acknowledgement set out at the end of the body of the relevant agreement, the Applicant undertook that he personally would provide the relevant services.

11. During the relevant years the professional business services were provided to a considerable extent, and at Ajilon's request to Telstra; however professional business services were also at times provided to Ajilon itself. It is important to note that it was accepted that the Company contracted with Ajilon and only with Ajilon, and so that in respect of the relevant years the Company had one client and one

ATC 3332

client only. Although services were provided to Telstra in Telstra's premises, there was never any privity of contract between the Company and Telstra and it was accepted by the Applicant that the Company could claim remuneration for its services only against Ajilon and against no one else.

12.

  • (a) There was during the hearing considerable evidence and discussion as to the relevant agreement. Mr Comer contended that the relevant agreement did not contain all agreed terms and that in particular it should be read on the basis that it contained terms and provisions which are not included in it.
  • (b) The evidence and discussion during the hearing as to the relevant agreement focused in particular on clauses 1, 2, 4, 5, and 7 of the relevant agreement and also the acknowledgement by the Applicant which appears at the end of the body of the relevant agreement; all of these provisions are included in these reasons as follows:
    • " 1. Role
      • 1.1 The company will engage Peter Cooper ('the Company Representative') to provide professional services to Ajilon and clients of Ajilon.
      • 1.2 The specific professional business services which will be provided by the Company under the terms and conditions of this Agreement will be identified in the Assignment Brief given to the Company Representative by Ajilon.
      • 1.3 On the Agreement Start Date identified in Schedule 1, the Company Representative will report to the Ross Tavener or the appointed nominee of Ajilon at Level 4, 1 McLaren Street, North Sydney. The Company Representative shall thereafter attend the sites to which the Company Representative is directed by Ajilon and shall provide professional business services for Ajilon.
      • 1.4 The Company Representative shall be referred to as an ' Ajilon Practitioner '.
    • 2. Company Representative
      • 2.1 In order to provide the professional services to Ajilon and its clients, the Company must engage the Company Representative named in Schedule 1.
      • 2.2 The terms of the Company's engagement of the Company Representative must include the terms listed in the Schedule 2. The Company must obtain the Company Representative's agreement to each of the terms listed in the Schedule 2 and it must provide Ajilon with written evidence of that agreement.
    • …
    • 4. Remuneration
      • 4.1 For each day that the Company Representative provides professional business services to a client of Ajilon, the Company will be paid at the Practitioner Daily Rate identified in Schedule 1. All relevant statutory payments with regard to payroll tax and workers compensation will be made by Ajilon on behalf of the Company.
      • 4.2 The Company will be paid by direct credit to its nominated Australian business bank account one week following the period end date (as per Ajilon Payment Schedules).
      • 4.3 The Company must invoice fortnightly.
      • 4.4 The hours worked by the Company Representative must be recorded on an Ajilon or client approved timesheet and signed by an appropriate Ajilon or client official. This time sheet must be forwarded by facsimile to the Ajilon office on … The late submission of a timesheet will result in the hours recorded on the timesheet being included in the next pay period .

        ATC 3333

    • 5. Australian Business Number
      • 5.1 The Company:
        • (a) warrants that it has an Australian Business Number (' ABN ') and has provided it to Ajilon; and
        • (b) must:
          • (i) continue to have an ABN during the terms of this Agreement;
          • (ii) quote its ABN on any invoice it provides to Ajilon;
          • (iii) advise Ajilon in writing immediately if its ABN changes or its ABN is cancelled; and
          • (iv) indemnify Ajilon for any loss or damage suffered by Ajilon or any tax, charge, fine, penalty or other impost which Ajilon incurs or becomes liable to pay, as a result of the Company breaching any of the warranties contained in this clause.
    • …
    • 7. Termination
      • 7.1 Ajilon may immediately terminate this Agreement, at its absolute discretion, without prior notice or payment in lieu of notice, if any of the following events occur:
        • (a) A client of Ajilon gives notice that it no longer requires the services which the Company Representative is currently providing to the client on behalf of Ajilon. In these circumstances, Ajilon reserves the right to terminate this Agreement on the same terms as it has terminated its contract with the client. Ajilon may also attempt to negotiate acceptable compensation for the Company in these circumstances but Ajilon cannot be held responsible for any loss of earnings suffered by the Company as a result of the termination of this Agreement;
        • (b) Ajilon's client, to whom the Company Representative is providing professional business services, is at any time dissatisfied with the Company Representative's conduct or performance; or
        • (c) Ajilon is at any time dissatisfied with the Company Representative's conduct or performance.
      • 7.2 Upon termination of this Agreement, the Company shall be entitled to payments by Ajilon for all work performed by the Company Representative up to the effective date of termination, provided always that the Company submits an appropriate invoice to Ajilon and that such work is supported by time sheets signed and authorised by the appropriate Ajilon or client official.
      • 7.3 Clauses relating to restraint of trade, intellectual property, confidentiality and privacy shall survive the termination of this Agreement.
      • …
      • ACCEPTANCE AND ACKNOWLEDGEMENT
      • I, Peter Cooper the Director of Coopers Consulting Associates Pty Ltd, agree to provide professional business services to Ajilon Australia Pty Ltd in accordance with the terms and conditions of this Letter of Engagement."
  • (c) I do not think that it is necessary to include the whole of the relevant agreement in these reasons; suffice it to say that it is lengthy and comprehensive and suggests that at some time there was some degree of professional involvement. I include by way of example only clause 13 of the relevant agreement and which sets out the restraint provisions as follows:
    • " 13. Restraint
      • 13.1 In this clause:
        • (a) 'Restraint Period' means the period from the Agreement Start Date until;
          • (i) six months after the termination of the Agreement, unless that period is in the circumstances found to be too long to be enforceable at law or in equity, in which case;
          • (ii) three months after the termination of the Agreement, unless that period is found to be too long to be enforceable at law or in equity, in which case;
          • (iii) one month after the termination of the Agreement.
      • 13.2 In order to reasonably protect the goodwill of Ajilon's business and in consideration of the payments defined herein, the Company must not, either directly or indirectly via a third party, during the Restraint Period
        • (a) solicit, canvass, approach or accept any approach from a client of Ajilon, with a view to obtaining the custom of that client in a business that is the same as or similar to Ajilon's business;
        • (b) solicit, canvass, approach or accept any approach from a person to whom the Company has provided professional business services pursuant to its Agreement with Ajilon, where the person's business is the same or similar to Ajilon's business;
        • (c) interfere with the relationship between Ajilon and its clients, employees and practitioners; and
        • (d) induce or assist in the inducement of an employee or practitioner of Ajilon to leave an engagement with Ajilon.
      • 13.3 The Company will ensure that the Company Representative will not during the Restraint Period:
        • (a) solicit, canvass, approach or accept any approach from a client of Ajilon, with a view to obtaining the custom of that client in a business that is the same as or similar to Ajilon's business;
        • (b) solicit, canvass, approach or accept any approach from a person to whom the Company Representative has provided professional business services as an Ajilon Practitioner, where the person's business is the same or similar to Ajilon's business;
        • (c) interfere with the relationship between Ajilon and its clients, employees and practitioners; and
        • (d) induce or assist in the inducement of an employee or practitioner of Ajilon to leave an engagement with Ajilon.
      • 13.4 Ajilon may require the Company to provide evidence confirming to the satisfaction of Ajilon that the Company is not in breach of clauses 13.2 and 13.3.
      • 13.5 The Company acknowledges that each restriction specified in clauses 13.2 and 13.3 is in the circumstances reasonable and necessary to protect Ajilon's legitimate interests.
      • 13.6 Each party agrees that is:
        • (a) a court of competent jurisdiction finds that any of the provisions of clauses 13.2 and 13.3 ('Unenforceable Provision') are not enforceable at law or equity; and
        • (b) the Unenforceable Provision would be enforceable if:
          • (i) one or more of the alternate periods referred to in the definition of 'Restraint Period' were deleted,
        • the Unenforceable Provision must be made enforceable by making those deletions.
      • 13.7 This restraint may be waived with the written agreement of Ajilon."

    ATC 3334

13.

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The Applicant in his evidence said that the Company could not embark on any task unless and until it had satisfied Ajilon that it carried professional indemnity cover, product liability cover and workers compensation cover. The relevant agreement is silent as to all of these (so it was contended) important aspects excepting only that clause 4 of the relevant agreement contains a sentence which obliged Ajilon to reimburse the cost of workers compensation cover. The evidence of each of the Applicant and Mr Tavener was that there was never any such reimbursement of workers compensation payments by Ajilon. Mr Tavener; who is named in one of the written agreements as the person to whom the Applicant was to report in respect of Ajilon; expressed surprise as to the fact that this is the only mention in the relevant agreement of all of these aspects.

Part C - The insurance schedule

14. Mr Comer sought to contend that Exhibit A2 indicates that cover in respect of public liability and product liability was obtained. There are a number of difficulties in respect of that contention:

  • (a) Exhibit A2 shows the period of insurance was 1 September 2005 to 1 September 2006 and thus does not apply to the relevant period;
  • (b) as to what is meant by the words "product liability" is unclear; it could relate to injury to persons resulting from the services provided or in the alternative it could relate to damages sustained in consequence of such services being found to be inadequate or negligent. The Insurance Schedule makes it clear that another document described as the Product Disclosure Statement "sets out details of your cover in place with us"; that Product Disclosure Statement was not produced notwithstanding the fact that it is clear that its content must be relevant to and probably decisive in relation to the cover referred to. Moreover it is not possible without the Product Disclosure Statement to know what cover is provided.

15. There was no documentary evidence as to insurances of this or any other kind in respect of the relevant years.

Part D - The evidence of the applicant

16. The Tribunal had been informed prior to the hearing that the Applicant did not intend to call any witness other than Mr Tavener. When the Respondent made it clear that he wished to cross-examine the Applicant the Applicant decided to give oral evidence himself. His witness statement, Exhibit A1, was first confirmed as true and correct. Thereafter Mr Comer examined him in such manner that his evidence took up the whole of the morning of the hearing. Exhibit A1 reads as follows:

"On or around 07/07/1999 I purchased a shelf company from Patricia Holdings Pty ltd changed the company name to Coopers Consulting Associates Pty Ltd A.C.N 088492237.

Prior to this incorporation I was employed by Advantra Pty Ltd as a 'Voice and Carrier services manager' which entailed the smooth operation of private telecommunications for IBM Australia, Lend Lease and others. I had a team of skilled workers to assist me.

I was approached by Ajilon Pty Ltd who offered me contract work which specialized in my sphere of expertise.

The contract between the 2 companies was designed to complete on a job by job basis work obtained by Ajilon.

An agreement was entered into and was renewable every 6 months subject performance and or work availability.

I was advised by my accountant at the time that this was a perfectly acceptable vehicle in which to run the business.

Word of mouth recommendations saw the company grow and other clients were obtained.

In 2001/2002 financial year E-serve Global provided some 70% of the personal services business income generated by the company.

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The proposed changes in act from the 01/07/2000 led us to seek advice from our accountant who assured us that we were exempt from the changes for 3 main reasons
  • 1. that we had multiple contracts
  • 2. that the company also operated a courier business which provided more than 20% of the companies overall income
  • 3. Because we employed a driver for the Courier contract delivery.

Both Ajilon and E-serve Global gave the company specific tasks which always ended up with and end result before moving on to a new project.

The remuneration for these Jobs were based upon the negotiated terms agreed by the Head Contractor, ie if Ajilon had agreed with a billing cycle for say 2 weeks we had to bill Ajilon within the same cycle and that cycle varied from client to client.

This was acceptable way of receiving progress payments for jobs that could take up to 6 months to complete.

Through Coopers Consulting invoices were created and paid according to each contract it received.

From My recollections My Accountant Mr. Ken Nimmo of Harrison Howard and Co received notification from the ATO in respect of an audit of Coopers Consulting for the year's up to and including 30/06/2002. Mr Nimmo provided the ATO with the requested information and no further contact was received from the ATO.

We received a further notice on the 19/02/2007 from the ATO (M Dalby) which then required the Audit of the selected years ended 30/06/2003 and 2004.

From this point on we were unable to convince Mr. Dalby that we were exempt from the changes in the act. Mr. Dalby proved to be totally uncooperative and it got to a stage where we had to file an official complaint against him on the 24/09/2007.

The complaint centered on Mr. Dalby's insistence of continually changing the required documentation and when each and every document was supplied made an assessment without utilizing any of the information. Also Mr. Dalby's comment in private to me showed his dislike for people that were more successful than him.

Since that time we have had a number of "decisions" from the ATO as well as conflicting verbal and written statements and I am now thoroughly confused. Because of this I continued to ask my financial advisor Mr. Martin Comer of Sultana Investments to help me with resolving this long running and unjust dispute around the administrative penalties and interest charged on the basis of not taking reasonable care in reporting the amount of attributable income in the income tax returns."

17. It must be said that the Applicant's oral evidence went far beyond the rather sparse detail of Exhibit A1. It must also be noted that in examination in chief many questions were leading in nature. Mr Kasep did not think it necessary to object and Mr Comer was permitted to proceed on this basis.

18. I do not think it necessary to go into great detail as regards the Applicant's oral evidence and accordingly this Part D is confined to some of the more salient aspects.

19. The Applicant said that the Company was incorporated in July 1999; prior to that date he was employed as a PAYG earner. It was at about that time that he first became involved with Ajilon.

20. The Applicant said that the original project for Telstra related to the building of a single bill system and designed to enable a customer of Telstra to receive one bill for a variety of services. He said that it was necessary to report to Telstra's management on a weekly basis as to the number of bills produced and also to report on expectations going forwards, and in addition as to ongoing costs. He said that it was also necessary to report to Ajilon through Mr Tavener.

21. The Applicant said that he had to complete timesheets which had to be signed off by Telstra and which were then forwarded to Ajilon.

22.

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Invoices were rendered to Ajilon on a fortnightly basis and Ajilon, after checking the invoices against the timesheets which had been produced, made payments of the invoices generally after about eight days.

23. The Applicant said that it was necessary that WorkCover costs be incurred and that it was also necessary to have professional indemnity and public liability cover. The Applicant was referred to item 7 of the table forming part of the Insurance Schedule contained in Exhibit A2; he said the product liability cover was required in respect of work to be performed by him on behalf of Coopers Consulting. He said also that the insurance was taken by Coopers Consulting which paid the relevant premium.

24. When referred to clause 4.1 of the relevant agreement the Applicant said that Ajilon did not ever compensate the workers compensation costs incurred by Coopers Consulting.

25. The Applicant said that, while Telstra work was generally performed at Telstra's offices on a Telstra-supplied computer, testing could be conducted on his home office computer, but using dummy information. Real information could not be accessed outside Telstra's premises.

26. The Applicant said that he worked on a daily rate which amounted to between $750 and $1,000 per day; he said also that he often worked long hours and hours which were longer than that of a normal working day.

27. The Applicant was referred to T11-40; which is the first page of a document ("the Fact Sheet") prepared by the Australian Taxation Office entitled "Alienation of personal services income: contractors and consultants". T11-40 and the following page T11-41 were referred to so often that it is desirable to include them in these reasons are as follows (only the flow chart on T11-41 is reproduced):

Alienation of personal services income: contractors and consultants

Changes to the tax law that affect contractors and consultants

On 1 July 2000 the New Business Tax System (Alienation of Personal Services Income) Act 2000 introduced changes to the tax treatment of personal services income earned by contractors and consultants. The changes to the law apply only to personal services income.

> WORK OUT WHETHER YOU ARE AFFECTED BY THESE CHANGES
Follow the steps outlined in the following flowchart and use the following notes to work out whether your personal services income is affect by the changes to the tax law. If the personal services income is paid to a company, partnership or trust, the words 'you' and 'your' refer to that entity.
If you had a prescribed payments system (PPS) declaration in force at 13 April 2000, the changes to the tax law apply from 1 July 2002.
If you are a commission agent, special rules apply. Contact us for more information.		 > UNSURE?

If you are not sure about any step in the flowchart or checklist, or whether the changes to the tax law apply to you, you can:
• Phone 13 28 66
• Speak to your tax adviser, or
• Apply to us for a determination.
You can get a copy of the Alienation of personal services income: application for determination - personal services business - form (NAT 3360) and Alienation of personal services income: application for determination - personal services business - instructions (NAT 3363) from our website at www.ato.gov.au or by phoning 1300 720 092		 

Flowchart

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28. The Applicant was then examined in some detail, but as to the 2002 tax year and which is not one of the relevant years. In that year services were provide by Coopers Consulting to Ajilon and to another company in New Zealand. Income from Ajilon constituted a little less than 30% of all of the relevant income. The Applicant said that the two companies were not associated; in answer to questions from Mr Comer he confirmed that they had no directors in common, that they had no shareholders in common, and in general terms that they were not associated in any way whatever. The Applicant, having considered the Fact Sheet in respect of the 2002 year was satisfied that it was not necessary for him to make contact with the Australian Tax Office and that an exemption was available; he said moreover in categoric terms that the Company was exempt and that it was a personal services entity.

29. The remainder of this Part D relates in the main to the cross-examination of the Applicant.

30. The Applicant agreed that the single bill project for Telstra commenced in 1999 and ended in 2000.

31. The Applicant agreed that the first page of Exhibit A2 related to the period from 2005 to 2006 and was thus not referable to the relevant years. In respect of the Insurance Schedule his attention was drawn to its content as regards the Product Disclosure Statement. He said that he had nothing other than Exhibit A2. It was put to the Applicant that without the Product Disclosure Statement it was not possible to ascertain what the policy covered. The Applicant said that he did not agree, however, the Applicant agreed that, in any event, item 7 in the table on the Insurance Schedule contained in Exhibit A2 makes no reference to professional indemnity cover.

32. The Applicant was referred to Exhibit A6 which is a purchase order raised by Telstra in relation to Ajilon and which refers to "Project Manager"; the Applicant said that he was not a project manager; he went on to say that he was a business support person whose services included project manager elements.

33.

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Referred to clause 1.1 of the relevant agreement the Applicant agreed that it related to the provision of professional business services.

34. The Applicant agreed that the relevant agreement did not make any provision for a result.

35. Referred to clause 4.1 of the relevant agreement, the Applicant agreed that he received a daily rate and that the payment of the daily rate was in no way contingent on the achievement of any identifiable result.

36. The Applicant agreed that for every day worked the daily rate was paid. When it was put to him that payment up to date of termination would have to be made in the case of termination, the Applicant answered "it may be - it may not be". He went on to say that "if I work and the client doesn't sign off I wouldn't be paid".

37. The Applicant agreed that in respect of the relevant years work was performed only for Telstra and for Ajilon. It was in this context that he sought to refer to courier work performed by the Company, but made no further mention of this aspect after he was reminded that the courier work was taxed in the hands of the Company and was not in issue.

38. The Applicant said that there was an obligation under the relevant agreement to rectify defective work and referred in this context to clause 5.1(b)(iv) of the relevant agreement. His attention was drawn to the fact that it relates to an indemnity and not to rectification and his answer was that indemnity and rectification are the same thing. When this was queried he said that this was so in New Zealand, and he thought that it would be the same in Australia.

39. The Applicant was referred in some detail to a number of tax invoices and the fact that in terms they referred to Ajilon. While I do not think it necessary to go into detail as regards the examination of the Applicant in respect of the invoices (T15), I do note that it was put to the Applicant, and he agreed, that not one of the invoices related to or indicated that payment was for a result or could be described as a progress payment. The Applicant agreed that payment was made for a specified number of days and for the activities set out in the invoice.

40. Before leaving the evidence of the Applicant I note that clause 5.1(b)(iv) of the relevant agreement is a clause of narrow import in that it provides for an indemnity against damage or loss arising from breach of the warranties contained in the clause and that by no stretch of the imagination could it be construed to relate to rectification of defective work; the evidence of the Applicant in this particular context was clearly incorrect. Bearing in mind the limited nature of the warranties contained in clause 5 of the relevant agreement, and having regard to the fact that the indemnity applied only in respect of breach of them its value to Ajilon would appear to have been minimal.

Part E - The evidence of Mr Tavener

41. Mr. Tavener commenced by confirming the content of his witness statement, Exhibit A7, which reads as follows:

"I Mr. Ross John Tavener of 11 Tamar Place Wharoonga Sydney NSW, State as follows:-

I have been self employed through my company Tavener management services since 1995.

I was introduced to Mr. Cooper around 1999 via a referral from Icon Recruitment a recruitment company employed by Ajilon Pty Ltd to source specialists in the field of programming and project management particularly in the field of information Technology.

At the time I was a subcontractor to Ajilon in Sydney and my role was to complete certain projects given to me by Ajilon and to also source new business from Ajilon's existing client base and create new contacts.

I was also responsible to oversee the jobs which I had won for the company to ensure the smooth operation of the project.

Ajilon was a Melbourne based company with some 80-90 subcontractors employed and was just branching out into Sydney, at this time there were only around 4 subcontractors employed of which Mr. Cooper was one.

On occasion I would gain a job for Ajilon and would select the subcontractor to do the

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Job. One job in particular was the 'pensioner discount programme' for Telstra. This Job was allocated to Mr. Cooper and I oversaw the job to its successful conclusion. The process of initially getting the job was to firstly get a purchase order raised by the client to Ajilon Pty Ltd which would specify the specific Job requested the time frame to complete the works and a budgeted costing on the works. Then that, job would be allocated to a contractor either by me or a dedicated employee of Ajilon.

As a contractor to Ajilon and working closely with Ajilon personnel I am aware that all subcontractors must have Public Liability Insurance, professional indemnity insurance and workers compensation insurance without which they could not work for the company.

The company paid all of its contractor's progress payments @ a daily rate invoiced for time periods agreed to by both parries that could be either weekly fortnightly or monthly.

I am aware that all jobs allocated to the contractors were for a specific result. There were occasions when the client would cease the job before its conclusion or a Contractor was taken off the job because of poor workmanship but that never happened to my knowledge with Mr. Cooper.

Ajilon never provided any equipment or plant to do the work it was a requirement for the contractor to provide his or her plant and equipment"

42. Mr Tavener said that he was aware of the terms of the relevant agreement. When asked whether there were any conditions which had to be fulfilled before a task could commence he said that cover in respect of workers compensation, professional indemnity and public liability were needed and evidence that they had been procured had to be provided.

43. Mr Tavener said invoices were to be rendered fortnightly and in accordance with the daily rate. He said that he himself did not sign off as to payments but that there was an officer in Ajilon's service whose task it was to check invoices against timesheets. He said also that no one from Telstra could sign off on them.

44. Mr Tavener said that as between Telstra and Ajilon there were milestones and progress payments but that the Company was not involved.

45. Mr Tavener said that Ajilon never had occasion to sue the Company for damages nor was it ever necessary to require rectification of defects. He went on to say that if their work caused problems contractors could be penalised; he referred in this context to the termination provisions of the relevant agreement.

46. When asked whether there were any other possible consequences to a contractor who performed defective work he said that that contractor would be given no further work and that "sometimes there is a negotiated financial settlement involving financial loss [to the contractor]."

47. The remainder of this Part E relates in the main to the cross-examination of Mr Tavener.

48. Mr Tavener said that Exhibit A7 was prepared by Mr Comer after he. verbalised it and that Exhibit A7 reflects what he had verbalised. (It may be noted that as was the case with the Applicant, Mr Tavener's evidence before the Tribunal was considerably more extensive than that contained in his witness statement.)

49. Mr. Taverner was surprised that the relevant agreement contained no obligation as to insurance cover of any kind.

50. It was put to Mr Tavener that the manner in which payment was made to the Company might differ from the manner in which payments were made by Telstra to Ajilon; he agreed that this was correct in that Telstra would have a progress payment relationship with Ajilon while the Company received payment fortnightly and calculated in accordance with a daily rate.

51. It was also put to Mr Tavener that if the Applicant worked for a number of days the Company would receive payment from Ajilon even if Ajilon could not recover from Telstra. Mr Tavener agreed that the Company received a daily rate not in anyway conditional on results.

52.

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Mr Tavener was shown the relevant agreement and asked whether it was the standard Ajilon contract. He said that "it looks like one". It was put to him that he would be familiar with it and he answered "I should be shouldn't I". He agreed that the relevant agreement is not conditional on results.

53. It was put to Mr Tavener that there is a reference in Exhibit A7 to progress payments and that in fact the Company received a daily fee. He answered that that is what is in the relevant agreement.

54. As to clause 7.2 of the relevant agreement Mr Tavener agreed that the Company would be entitled to payment of up to termination in case of termination, but pointed out that this was subject to the proviso that the invoice must be supported by timesheets approved by Ajilon.

Part F - The forever exempt claim

55. The "forever exempt claim" was abandoned at a late stage, but before that it was pursued with some considerable force.

56. Mr Comer referred to the Fact Sheet on a number of occasions in terms which were highly critical of it. It was pointed out to him that even if that Fact Sheet might have been worded with rather more precision there could not be an estoppel against the operation of the statute.

57. In essence, the "forever exempt" claim was made on the basis that because the Company was entitled to the exemption in the 2002 year it was forever exempt thereafter. The manner in which the Applicant was examined in chief indicated in clear terms that the 2002 exemption arose in the specific circumstances applicable to that tax year because the Company's income was derived from two separate and unconnected sources and that neither source contributed 80 per cent or more of the aggregate income. The examination of the Applicant in this context went to some pains to draw out the fact that the two companies were unconnected in all respects. In the relevant years, the position changed in that all of the relevant income was derived from one source and one source only. The Applicant was aware, or should have been aware, of the fact that the Company's position had become altogether different. The legislation makes it clear that the system operates on a year by year basis; that this is so is altogether logical in that the position of a company might vary from one year to another and this indeed is exactly what happened in the case of the Company; it was entitled to an exemption for the 2002 year (when it had two unrelated clients, but not during the relevant years and when it had only one client. If the Applicant was in any way uncertain, a simple enquiry of any tax agent or lawyer would have furnished him with advice as to the correct position. It must be remembered that the Applicant is an intelligent and educated person; on the balance of probabilities the fact that the Applicant did not make any such enquiry suggests that his failure may not have been inadvertent. The Tribunal considers it unlikely that he was misled by the Fact Sheet. These aspects are relevant in particular to the question of penalty referred to later in these reasons.

58. As ASFIC demonstrates the Applicant relied for the purposes of this matter on a number of grounds and by no means only on the "forever exempt" claim.

59. By the afternoon of the hearing and at the time of closing submissions the Applicant had abandoned the "forever exempt" claim and relied only on the results exemption. Mr Comer contended that even if the relevant agreements made no mention of results or milestones or progress payments these aspects remained relevant and the relevant agreement had to be construed accordingly. His difficulty was that he had not produced any evidence in support of these contentions and moreover each of the Applicant and Mr Tavener had in his oral evidence and in cross examination made admissions to the contrary.

60. It is important to note that during the whole of the hearing Mr Comer did not make any mention of the tax amounts claimed by the Respondent under the amended assessments as subsequently amended. He also did not address the question of penalties.

Part G - Legislation and case law

61. The Tribunal notes that it was furnished with helpful written submissions by the Respondent on which it has drawn to some considerable extent for the purposes of this Part G.

62.

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Part 2-42 of the Income Tax Assessment Act 1997 (Cth) contains the personal services income regime. The background and purpose behind the statutory provisions which comprise the regime were extensively considered by Senior Member Sweidan in
Re Skiba and Federal Commissioner of Taxation 2007 ATC 2467; (2007) 67 ATR 682 at [35] - [51]. They were also considered by Lindgren J in
Federal Commissioner of Taxation v Metaskills Pty Ltd 2003 ATC 4644; (2003) 130 FCR 248.

63. The starting point of the regime is s 84-5(1) which defines "personal services income" in the following manner:

  • "84-5 Meaning of personal services income
    • (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)."

64. The parties agreed that the remuneration received by Coopers Consulting from Ajilon during the relevant years is personal services income for the purpose of s 84-5(1) because it was received as a reward for the "personal efforts or skills" of Mr Cooper. That agreement readily accords with the conclusions reached in
Re Dibarr Pty Ltd v Federal Commissioner of Taxation 2004 ATC 2277; (2004) 57 ATR 1183 at [22] (Senior Member Beddoe and Member Fisher) and
Fowler v Federal Commissioner of Taxation 2008 ATC 20-022; (2008) 167 FCR 425 at [24] (Lindgren J).

65. In accordance with s 86-15(1), the personal services income received by Coopers Consulting is treated as the assessable income of Mr Cooper unless the exception contained in s 86-15(3) can be relied on:

"Exception: personal services businesses

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

66. On the basis that Coopers Consulting is a "personal services entity" as defined by s 86-15(2), the issue to be determined is whether Coopers Consulting was conducting a personal services business.

67. Coopers Consulting did not ever apply for a personal services business determination for either of the relevant years: see s 87-15(1)(b). Accordingly, Coopers Consulting will only have conducted a personal services business if the "results test" is satisfied: s 87-15(2)(a). (It is unnecessary in this context to consider the 80% income test because it was not relevant for the relevant years.)

68. In accordance with s 87-18(3):

  • "(3) A *personal services entity meets the results test in an income year if, in relation to at least 75% of the *personal services income of one or more individuals that is included in the personal services entity's *ordinary income or *statutory income during the income year:
    • (a) the income is for producing a result; and
    • (b) the personal services entity is required to supply the *plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and
    • (c) the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed."

69. The results test in s 87-18(3) has been said to embrace the defining characteristics of an "independent contractor" at common law: see Metaskills 130 FCR 248 at [28]. While such common law principles are useful in interpreting s 87-18(3), it is the text of the section itself which controls the outcome: see
IRG Technical Services Pty Ltd v Federal Commissioner of Taxation 2007 ATC 5326; (2007) 165 FCR 57 at [37] and [47] (Allsop J);
Re Taneja and Commissioner of Taxation 2009 ATC 10-078 at [27] (Deputy President Professor Walker and Member Frost).

70. Having regard to the observations of Sheller JA in
World Book (Australia) Pty Ltd v Federal Commissioner of Taxation 92 ATC 4327; (1992) 27 NSWLR 377 at 386, the Commissioner in TR 2001/8: Income tax: what is a personal services business, at [114] defines

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the phrase "producing a result" in s 87-18(3)(a) to mean:

"[T]he performance of a service by one party for another where the first-mentioned party is free to employ his/her own means (i.e., third party labour, plant and equipment etc) to achieve the contractually specified outcome. As the cases show, the essence of the contract has to be to achieve a result and not to do work." [Footnote omitted]

71. Similarly, in Skiba 67 ATR 682 at [62] - [64] Senior Member Sweidan said:

  • " [62] The phrase 'for producing a result' in s 87-18(3)(a) is not defined. However case law makes it clear that the essence of producing a result is performing a service that achieves a specified outcome and not doing work: 'An independent contractor undertakes to produce a given result, but is not, in the actual execution of the work, under the order or control of the person for whom he does it':
    Queensland Stations Pty Ltd v FCT (1945) 70 CLR 539 at 545, [1945] ALR 273 at 274. What is involved in the concept is 'the performance of a service by one party to another who is to employ men and plant for the purpose and is to be paid according to the result':
    Queensland Stations Pty Ltd v FCT (1945) 70 CLR 539 at 551, [1945] ALR 273 at 277; also see
    World Book (Aust) Pty Ltd v FCT (1992) 27 NSWLR 377 at 381-382, 23 ATR 412 at 416, 92 ATC 4327 at 4331, 108 ALR 510 at 514-515;
    Zuijs v Wirth Brothers Pty Ltd (1955) 93 CLR 561 at 571-573, [1956] ALR 123 at 127-129;
    Neale v Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419, [1955] ALR 426.
  • [63] A result based contract usually has a negotiated contract price for the result achieved and not merely an hourly rate for hours worked: see
    Hollis v Vabu Pty Ltd (2001) 207 CLR 21, 47 ATR 559, 75 ALJR 1356, 2001 ATC 4508, 181 ALR 263;
    Vabu Pty Ltd v FCT (1996) 33 ATR 537, 96 ATC 4898 (courier paid on successful courier deliveries made);
    Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16, 60 ALJR 194, 63 ALR 513 (trucker paid on volume of timber delivered);
    Queensland Stations Pty Ltd v FCT (1945) 70 CLR 539, [1945] ALR 273 (drover paid per head of cattle delivered);
    Humberstone v Northern Timber Mills (1949) 79 CLR 389, [1950] VLR 44, [1949] ALR 985 (carrier paid on weight mileage).
  • [64] The words 'producing a result' require something more than obtaining a payment reward for providing ongoing personal skills and efforts to enable another party (the CESPs [Contract Engineering Service Providers]) to produce a contracted for result to their clients. Consistent with the recognised indicia of the independent contractor, the words 'for producing a result' require that the personal services income of the individual (Mr Skiba) was paid to him as the contract quid pro quo for producing a result and was not paid until and unless the result was produced."

72. In considering whether income is "for producing a result" courts and tribunals have had regard to aspects of the nature of the work and the contracts under which that work has been undertaken such as:

  • (a) the effect of early termination of the agreement. See for example, Skiba 67 ATR 682 at [79]:

    " [79] Under the contracts, upon termination, Marketcroft was entitled to payment for work performed prior to termination, whether or not the service period under the contracts had been completed. That is the applicant could walk away from the contract without the completion of any specified contractual result and still be paid."

  • (b) when payment is made and for what, particularly, whether it is on the achievement of a "milestone". See for example,
    Re Metaskills Pty Ltd and Federal Commissioner of Taxation (2005) 60 ATR 1055 where this Tribunal stated:

    " [33] AB 23 and the other engagement letters make it clear that each engagement had a start date and an end date and provided for a daily rate of remuneration ($800 per day in the case of AB 23). Mr Strong in evidence and submissions said (repeatedly) that payment would not have been made if certain 'milestones' had not been achieved. The overarching agreement and the engagement letters do not contain any suggestion that this was so and indeed make it clear that payment was being made for services and not for results. (There is no mention in any of them of 'milestones'.)"

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    (c) whether the work can be delegated and who bears the risk of costs arising from defective work. See for example, IRG Technical Services Pty Ltd 165 FCR 57 at [44]:

    " [44] The capacity of work to be delegated or subcontracted, if present, is a significant factor weighing in favour of a conclusion of an independent contractor. So is the question of risk of costs for defective work."

73. Having regard to the authorities the remuneration Coopers Consulting received from Ajilon during the relevant years was not for producing a result within the meaning of s 87-18(3)(a) because:

  • (a) the relevant agreement does not identify any result; Coopers Consulting was simply contracted to provide "professional business services" for the duration of the agreements;
  • (b) Coopers Consulting was not remunerated for producing any result; it was simply remunerated for the days that the Applicant provided professional business services: clause 4.1 of the relevant agreement;
  • (c) The remuneration Coopers Consulting received under the terms of the relevant agreement was not in any way dependent on producing a result;
  • (d) On early termination of the relevant agreement, Coopers Consulting was entitled to "payments … for all worked performed by the Applicant up to the date of termination" (clause 7.2 of the relevant agreement) - which supports the contention that Coopers Consulting was simply being remunerated for the provision of professional business services by the Applicant;
  • (e) The relevant agreement did not confer any freedom on Coopers Consulting to delegate or subcontract the "professional business services", it was obligated to engage the Applicant: clauses 1.1 and 2.1 of the relevant agreement.

74. Having regard to the preceding provisions, Coopers Consulting cannot be said to have conducted a personal services business because the remuneration it received was not for producing a result within the meaning of s 87-18(3)(a). The conclusions reached in: IRG Technical Services Pty Ltd 165 FCR 57 at [110]; Dibarr Pty Ltd 57 ATR 1183 at [43] - [44];
Re Nguyen and Commissioner of Taxation [2005] AATA 876; 2005 ATC 2304 at [38] - [41] (Member Webb) and Taneja 2009 ATC ¶10-078 at [35] - [41] are entirely apposite to the circumstances in these proceedings. In particular, the conclusion in Skiba 67 ATR 682 at [65] - [66] is particularly apt:

  • " [65] Here, the evidence shows that the personal services income derived by the applicant was not paid upon producing a result but was a fortnightly or monthly payment based on the number of hours logged onto a weekly timesheet while working under the ultimate control of the CESPs and applying skill and effort to assist the CESPs complete the projects for their clients.
  • [66] The ongoing skilled work provided by the applicant to the CESPs is not converted into "producing a result" within the meaning of s 87-18(3) by applying the label "deliverables" where the actuality of what occurred was the performance of ongoing work by the applicant (a skilled professional selected by the CESPs and/or their clients as suitable for their needs) under the ultimate control of the CESPs during the term of the contracts."

75. The failure on the part of Coopers Consulting to satisfy the requirements of "producing a result" under s 87-18(3)(a) is fatal in relation to the results test overall. It is not necessary for the Tribunal to consider the elements in s 87-18(3)(b) and (c) because the three elements in s 87-18(3) which comprise the results test are conjunctive: see IRG Services Pty Ltd 165 FCR 57 at [111]; Dibarr Pty Ltd 57 ATR 1183 at [45] and; Nguyen 2005 ATC 2304 at [45]. Nevertheless, for the reasons set out in RSFIC [53] - [57], the Tribunal notes that Coopers Consulting has not satisfied the

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requirements of s 87-18(3)(c), but there is evidence (of academic relevance only) which would suggest that the requirements of s 87-18(b) may have been satisfied; as set out previously the Tribunal was referred in this context to a tax return by the Company; (see also
Re Dibarr Pty Ltd and Federal Commissioner of Taxation 2004 ATC 2277; 57 ATR 1183 at [46]).

76. Since all of the Applicant's personal services income which Coopers Consulting received in the relevant years came from one source, Ajilon, Coopers Consulting was not entitled to self assess the "unrelated clients test" (s 87-20); the "employment test" (s 87-25) or the "business premises test" (s 87-30): see s 87-15(3); Metaskills Pty Ltd 130 FCR 248 at [26]. Accordingly, these tests do not call for consideration and Coopers Consulting cannot be said to have conducted a personal services business during the relevant years or either of them.

Part H - The income attributable to the applicant

77. The Respondent in the S documents has set out in detail his calculations as to the income attributable and has also set out the methodology employed by him.

78. The end calculations differ from those set out in the amended assessments because of material obtained by the Respondent after the audit. The end calculations are, so the Tribunal was informed by Mr Kasep, more favourable to the Applicant than those set out in the amended assessments. In any event the Applicant has made no attempt to query any of such calculations. The Applicant has accordingly failed, in this regard, to discharge the onus which he bears under s 14ZZK of the Tax Administration Act 1953 (Cth) and it follows that the amounts calculated by the Respondent as the income attributable to the Applicant pursuant to s 86-15(1) for the 2003 year is $79,693.00 and for the 2004 year is $88,418.00.

Part I - Penalties

79. Having regard to
Re Confidential and Commissioner of Taxation (Case 3/2008) 2008 ATC 1-002; (2008) 72 ATR 252 as to the concept of reasonable care, the Tribunal finds that the Applicant's failure to report the personal services income amounted to failure to take reasonable care. The Applicant has not called any evidence which calls in question the correctness of the penalty imposed. The Tribunal refers in this particular context in particular to clause 57 above.

80. As the calculations in relation to the income attributable to the Applicant under s 86-15(1) have changed since the amended assessments were issued, the penalty must be re-calculated on the basis of the correct shortfall amount. Accordingly, the decisions under review must be varied to reflect that for the purposes of calculating the "base penalty amount" under item 3 in the table in s 284-90(1) of Sch 1 to the Tax Administration Act 1953 (Cth) the shortfall amount for the 1993 year is $30,804 and for the 2004 year is $34,682.

81. Administrative penalties are intended to emphasise the proper operation of the tax system:
Re Hutson and Commissioner of Taxation 2009 ATC 10-099 at [122] (Senior Member Sweidan). While "special circumstances" need not exist before the discretion to remit a penalty can be exercised (
Dixon v Federal Commissioner of Taxation 2008 ATC 20-015; (2008) 167 FCR 287 at [21] (Spender, Ryan and Emmett JJ)) there must be proper grounds calling for remission.

82. The Applicant has not adduced any evidence which would justify remission of the penalties imposed. He has not demonstrated "the Commissioner's decision 'should' have been different and in that sense is not an appropriate result of the exercise of the statutory power or discretion":
Re Sharkey and Commissioner of Taxation 2007 ATC 2218; (2007) 66 ATR 878 at [22] (Senior Member Taylor SC).

Part J - Conclusion

83. The Tribunal determines accordingly that the objection decisions under review be varied in the following manner:

  • (a) The income attributable to the Applicant pursuant to s 86-15(1) of the Income Tax Assessment Act 1997 (Cth) is:
    • (i) $79,693.00 for the 2003 year; and
    • (ii) $88,418.00 for the 2004 year.

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  • (b) In calculating the penalties payable by the Applicant pursuant to s 284-75 of Sch 1 to the Taxation Administration Act 1953 (Cth) the shortfall amount for the purpose of item 3 of the table in s 284-90(1) of Sch 1 to that Act be:
    • (i) $30,804 for the 2003 year; and
    • (ii) $34,682 for the 2004 year.

And that the objection decisions under review otherwise and as varied as aforesaid be affirmed.


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