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FC of T v WHITE

Judges:
Gordon J

Court:
Federal Court, Melbourne

MEDIA NEUTRAL CITATION: [2010] FCA 730

Judgment date: 14 July 2010

Gordon J

Introduction

1. The Commissioner of Taxation (the Commissioner ) appeals pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act ) from a decision of the Administrative Appeals Tribunal (the AAT ) of 11 November 2009 which:

  • 1. affirmed the Commissioner's assessment of the Respondent's ( Mr White ) assessable income for the tax year ended 30 June 1999 (the 1999 year );
  • 2. varied the Commissioner's assessment for the tax year ended 30 June 2000 (the 2000 year ); and
  • 3. varied the penalty payable for both years.

Mr White cross-appeals. The appeal and the cross-appeal concern the Income Tax Assessment Act 1936 (Cth) (the 1936 Act ) and the Income Tax Assessment Act 1997 (Cth) (the 1997 Act ).

2. Troy White Engineering Pty Ltd ( Engineering ) was incorporated in 1988 and carried on a tooling engineering business. At all relevant times, Mr White was a shareholder and the sole director of Engineering. Engineering went into liquidation on 22 May 2005.

1999 year

3. In May or June 1999, Mr White met with a representative of Ruskin Financial Services Pty Ltd to discuss the establishment of an employee incentive share trust plan (the ESTIP ) constituted by a trust. The ESTIP was designed to operate so that Mr White would become a consultant to Engineering through a new company, Kalix Pty Ltd ( Kalix ).

4. Kalix would be paid a management fee from Engineering for Mr White's services. Kalix would then make contributions to the ESTIP. The ESTIP would then lend money to Mr White to purchase units in the trust.

5. Kalix was incorporated on 30 June 1999. Mr White was its sole director. The shareholders were Engineering and Mailboat Pty Ltd ( Mailboat ), the trustee for the ESTIP. The shareholders and directors of Mailboat were Mr White and his son. In a letter dated 1 July 1999, Mr White was confirmed as an employee of Kalix with effect from 30 June 1999. That letter provided that Mr White's gross remuneration would include amounts to be contributed to the ESTIP.

6. On 30 June 1999, Engineering paid $22,000 to Mailboat to form part of Mr White's remuneration for the 1999 year. Although the payment should have been forwarded by Engineering to Kalix and then from Kalix to Mailboat, the AAT concluded that in fact the $22,000 was transferred from Engineering directly to Mailboat. Also on 30 June 1999, 22,000 employee shares at $1.00 were issued from Kalix to Mailboat. The AAT concluded that it was "fanciful to suggest" that Mr White, in his capacity as an employee of Kalix, provided any services to Engineering in the 1999 tax year. The AAT characterised the payment as one "directed in [Mr White's] capacity as a director of Engineering to him in his capacity as an employee in return for services rendered as an employee". The AAT further concluded:

"It may be a gratuitous payment in that it was not one made on a regular basis or in recognition of any particular service rendered by [Mr White] qua employee. Such payments nevertheless can form part of a taxpayer's income … As such it is ordinary income and assessable under s 6-5 of the [1997 Act] … In turn in his capacity as an employee [Mr White] has directed the payment be applied to Mailboat. There is no evidence which supports the payment being made to him as a distribution to him as a shareholder by way of a dividend."

(Emphasis added, citations omitted).

7. The AAT affirmed the Commissioner's assessment of Mr White's assessable income in the 1999 year.

2000 year

8. In February 2000, Kalix obtained a remuneration report from the Kenneths Group. The report recommended Mr White be paid $180,000 with incentive remuneration of $84,000, a total of $264,000, for his services in the 2000 year. The Kenneths Group also recommended that a further $94,000 be set aside by Kalix as a form of long term incentive payment over a five year period. The advice was not followed.

9. On 30 June 2000, Engineering paid $399,000 to Kalix for Mr White's services. Kalix contributed that sum to Mailboat as trustee for the ESTIP. The AAT stated:

  • "[34] … The payment made was significantly greater than that recommended in the remuneration report obtained by Kalix from the Kenneths [G]roup. To the extent that it exceeds the recommended amount payable the [AAT] is satisfied it should be deemed a dividend paid by Engineering to [Mr White]. The Kenneths report recommended payment of $264,000 by way of salary. That is the amount reasonably payable to Kalix by Engineering for [Mr White's] services. The [AAT] is satisfied that the additional amount recommended to be set aside for [Mr White's] long term incentive payment is based on a misunderstanding by the Kenneths [G]roup and should not be included in the salary reasonably payable. As determined earlier in these reasons the [AAT] does not accept that any incentive was justified to maintain the continuing services of [Mr White] to Engineering. Accordingly, the [AAT] does not accept this aspect of the recommendation of the Kenneths [G]roup in as far as it extends to payments reasonably payable from Engineering to Kalix for [Mr White's] services.
  • [35] The [AAT] is satisfied that [Mr White] is an 'associate' as that term is defined in s 26AAC(14) of the 1936 Act. Since [Mr White] is the sole director of Engineering and was at the time a joint director with his son of Mailboat and both of Engineering and Mailboat were the joint owners of Kalix, it follows that Kalix was obliged to act under the direction of [Mr White]. The [AAT] is satisfied that [Mr White] directed the payment of $135,000, which is correctly classified as either remuneration or excessive remuneration and therefore a dividend. As such it is assessable to [Mr White]."

10. The AAT then varied the Commissioner's assessment of the 2000 year by reducing the amount assessed by $264,000. In light of the determination, the AAT did not consider it necessary to consider the applicability of other provisions or of Pt IVA of the 1936 Act.

Penalties

11. Finally, the AAT varied the penalty payable for the 1999 year and the 2000 year to 20%. At the hearing on 27 May 2010, the parties agreed to defer consideration of the question of penalties until after the other questions raised by the appeal and cross-appeal were determined.

Issues on appeal and by way of cross-appeal

12. The Commissioner's appeal was limited to the variation of the assessment in the 2000 year, the penalty payable in the 1999 year and the penalty payable in the 2000 year. Mr White's cross-appeal concerned both the 1999 and 2000 years. (The AAT's review of Mr White's assessment in the 1999 year and the assessment in the 2000 year was made without reference to the decision in
Essenbourne Pty Ltd v Federal Commissioner of Taxation (2002) 51 ATR 629. No appeal ground raised the application of Essenbourne 51 ATR 629).

13. In his amended Notice of Appeal, the Commissioner raised a number of questions for determination:

  • "2.1 Whether, given the findings of fact made by the [AAT] and the admissions made by [Mr White], the [AAT] erred in law by not finding that the payment of $264,000 by [Kalix] to [Mailboat] as trustee of the [ESTIP] constituted assessable income of [Mr White] pursuant to s 6-5(1) and (4) of the [1997 Act], alternatively s 26(e) of the [1936 Act] and s 6-10(3) [of the 1997 Act], in the 2000 year. [ APPEAL GROUND 1 ]
  • 2.2 Whether the [AAT] erred in law by failing to address in its reasons for decision the submission made by the Commissioner that the payment of $264,000 by [Engineering] to Kalix, alternatively the payment of $264,000 from Kalix to the ESTIP, constituted assessable income of the Respondent pursuant to s 44(1) [of the 1936 Act] and s 6-10(3) [of the 1997 Act], alternatively pursuant to s 6-5(1) and (4) [of the 1997 Act], in the 2000 year. [ APPEAL GROUND 2 ]
  • 2.3 Whether the [AAT] erred in law by failing to address in its reasons for decision the submission made by the Commissioner that the payment of $264,000 by Kalix to the ESTIP constituted assessable income of [Mr White] pursuant to s 6-5(1) and (4) [of the 1997 Act], alternatively pursuant to s 26(e) [of the 1936 Act] and s 6-10(3) [of the 1997 Act], in the 2000 year. [ APPEAL GROUND 3 ]
  • 2.4 Whether the [AAT] erred in law by finding that it was not necessary to consider the applicability of Part IVA [of the 1936 Act] to the payments of $264,000 by [Engineering] to Kalix and by Kalix to the ESTIP. [ APPEAL GROUND 4 ]"

14. At the hearing on 27 May 2010, the Commissioner informed the Court that in relation to Appeal Grounds 1, 2 and 3 concerning the 2000 year, it no longer relied on ss 26(e) and 44 of the 1936 Act or s 6-10(3) of the 1997 Act. Further, the Commissioner submitted that Appeal Grounds 2, 3 and 4 (see [13] above) were only necessary to be addressed if the Commissioner was unsuccessful in relation to the Appeal Ground 1.

15. In the cross-appeal, Mr White raised the following questions:

  • "2.1 Whether it was reasonably open for the [AAT] to conclude that the payment of $22,000 made by [Engineering] to another entity was properly characterised as a payment directed in [Mr White's] capacity as a director of Engineering to him as an employee in return for services rendered as an employee and was assessable as ordinary income in the year ended 30 June 1999 under s 6-5 of the [1997 Act].
  • 2.2 Whether it was reasonably open for the [AAT] to be satisfied that the payment of $399,000 made by Engineering to another entity was, in part (to the extent of $135,000 being the excess of the actual payment of $399,000 over the recommended payment of $264,000), properly classified as either remuneration or excessive remuneration and a deemed dividend paid by Engineering to [Mr White] in the year ended 30 June 2000 under s 109(1) of the [1936 Act].
  • …
  • 2.4 Whether on the evidence before the [AAT] it was reasonably open for the [AAT] to make these findings or draw these conclusions:
  • …
    • '2.4.3 That no lease payments were ever made from Engineering to RE Finance Pty Ltd ( RE Finance ) and that the purported leasing arrangement between Engineering and RE Finance for plant and equipment was not effective in either the 1999 or the 2000 tax years.
    • …
    • 2.4.8 That [Mr White], in his capacity as [an] employee of Engineering, has directed the said payment [for Mr White's services] to be applied to Mailboat in the year ended 30 June 1999.' "

At the hearing on 27 May 2010, Mr White's Counsel informed the Court that other grounds listed in the cross-appeal were not pursued.

Appeal ground 1 - Mr White's assessable income in the 2000 year

16. Appeal Ground 1 may be simply stated - in the 2000 year, did the AAT err in law by not finding that the sum of $264,000 paid by Kalix to Mailboat (as trustee for the ESTIP) constituted assessable income of Mr White pursuant to s 6-5(1) and (4) of the 1997 Act?

17. Section 6-5 of the 1997 Act relevantly provides:

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

    (emphasis in the original).

18. The Commissioner submitted that, having concluded that $135,000 was assessable to Mr White (see [9] above), the AAT ought to have also found that the residual part of the sum of $399,000 paid by Kalix to Mailboat as trustee for the ESTIP, namely $264,000, was also remuneration of Mr White paid by Kalix to Mailboat at the direction of Mr White, or on his behalf, and thus assessable to him pursuant to ss 6-5(1) and (4) of the 1997 Act.

19. In relation to the 2000 year, the AAT made the following factual findings:

  • 1. Mr White was employed by Kalix;
  • 2. $399,000 was paid from Engineering to Kalix and was in effect a payment made for services rendered by Mr White;
  • 3. a letter dated 1 July 1999 from Kalix to Mr White set out the terms of Mr White's employment with Kalix. The letter provided that Mr White's gross remuneration included amounts to be contributed to the ESTIP;
  • 4. $399,000 was contributed by Kalix to Mailboat as the trustee for the ESTIP on behalf of Mr White;
  • 5. Kalix was obliged to act under the direction of Mr White;
  • 6. an amount of $135,000, forming a part of the $399,000, was paid by Kalix to Mailboat as the trustee for the ESTIP at the direction of Mr White; and
  • 7. the amount of $135,000 was either remuneration of Mr White or excessive remuneration of Mr White and therefore a dividend.

None of these factual findings were challenged by Mr White.

20. Having regard to those factual findings, the question raised by the Commissioner is whether the AAT should have found that the $264,000 was also remuneration of Mr White and thus assessable to him pursuant to ss 6-5(1) and (4) of the 1997 Act. In my view, the answer is yes. The AAT failed to correctly apply the law to the facts as found. That failure was "on a question of law" (see [37] and [38] below).

21. As the Commissioner submitted, if $135,000 of the $399,000 paid by Kalix to Mailboat (as trustee for the ESTIP) at the direction of, or on behalf of Mr White, was his remuneration or excessive remuneration, how can the remainder of the $399,000 ($264,000) paid in identical circumstances not also be assessable to Mr White as remuneration? That conclusion is fortified by the finding of the AAT, by reference to the report from the Kenneths Group, that the sum of $264,000 was in fact the amount reasonably payable to Kalix by Engineering for Mr White's services: see [8] and [9] above. As noted earlier, the error was the failure of the AAT to apply the relevant tax provisions to that aspect of its factual findings - findings that $264,000 was part of the total amount payable for his services in the 2000 year and that the letter of employment between Kalix and Mr White provided that his gross remuneration included contributions to the ESTIP. Accordingly, in the 2000 year, pursuant to ss 6-5(1) and (4) of the 1997 Act, the sum of $264,000 was also assessable to Mr White.

22. Mr White's Counsel did not challenge the factual findings summarised in paragraph [19] above. Instead, he submitted that the sum of $399,000 (including the $264,000) was not ordinary income of Mr White in the 2000 year on two bases. First, he challenged the characterisation of the facts and submitted that none of the factual findings provided evidence of any benefit or gain of any kind to Mr White and, secondly, even if the payment of $264,000 was a reward for services, the reward was not derived by Mr White because the whole of the payment ($399,000) was not available to Mr White at any point in the 2000 year. I reject both those submissions.

23. The question is whether the $399,000 is "income" in the hands of Mr White. "Income" is not defined in the 1997 Act. Section 6-5 of the 1997 Act requires consideration of whether the receipt in question is income in accordance with "the ordinary concepts and usages of mankind": see s 6-5 of the 1997 Act (read with s 6(1) of the 1936 Act);
Commissioner of Taxation v McNeil (2007) 229 CLR 656 at [15], [19], [29] and [51];
Commissioner of Taxation v Stone (2005) 222 CLR 289 at [16];
Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at [67] - [68]. "Income" denotes a person's receipts and has a broad meaning: JP Hannan, A Treatise on the Principles of Income Taxation (1946) at 1-7 and the authorities cited.

24. In McNeil 229 CLR 656 at [15], the High Court described the issue in the following terms:

"As an Australian resident, the assessable income of the taxpayer included income according to ordinary concepts derived directly or indirectly from all sources; in determining the existence of a derivation and when it occurred, the taxpayer was taken by s 6-5(4) 'to have received the amount as soon as it [was] applied or dealt with in any way on [her] behalf or as [she directed]'."

25. That passage is consistent with long established principles. Although items of income are to be money or to be reckoned as money (
Federal Commissioner of Taxation v Cooke and Sherden (1980) 29 ALR 202 at 211), income does not have to be received as money. It is sufficient if it is received in the form of money's worth: Cooke 29 ALR 202 at 211 citing
Cross v London & Provincial Trust Ltd [1938] 1 All ER 428. The amount must necessarily "come in": JP Hannan, A Treatise on the Principles of Income Taxation (1946) at 36. However, it is not necessary that an item of income be paid over to the taxpayer; it is sufficient, according to ordinary concepts and usages, that the item is applied or dealt with on behalf of or at the direction of the taxpayer: see s 6-5(4) of the 1997 Act and Cooke 29 ALR 202 at 211.

26. In the present appeal, contrary to the submissions of Mr White, the whole of the sum of $399,000 is assessable as income in the hands of Mr White in the 2000 year. The whole of that sum was applied or dealt with on behalf of or at the direction of Mr White in the 2000 year: see [19] above.

27. As the summary of findings of fact by the AAT disclose (see [19] above), the amounts received by Mr White as an employee of Kalix were applied or dealt with on behalf, or at the direction, of Mr White, including the contribution of amounts to the ESTIP and the purchase of units in the ESTIP. As a result, the amounts received by Mr White as an employee of Kalix are assessable income of Mr White.

28. Mr White further submitted that the amount contributed to the purchase of units in the ESTIP was not assessable income of Mr White as it did not confer on him a benefit because he paid for the units using borrowed moneys, thereby incurring a debt. I reject that submission. The factual findings by the AAT establish that, as an employee of Kalix, Mr White derived income as a reward for services and, by agreement with Kalix, directed the manner in which that reward (income) was to be dealt with on his behalf. If Kalix had paid the whole of the amount to Mr White directly (rather than through the ESTIP), it would be income according to ordinary concepts and usages. It was and remains a reward for his services. The fact that at Mr White's direction he incurred a liability is a decision made by him after the income had "come in": see [24] and [25] above. Put another way, in the 2000 year the purchase of units in the ESTIP was a step taken after Mr White's management fee for his services ($399,000) was derived by him. As noted earlier (see [25] above), it is not necessary that a taxpayer must personally gain some benefit from a payment for it to be income.

29. That analysis is also a complete answer to Mr White's second submission that he did not "derive" the sum of $399,000 in the 2000 year. Mr White's submission was that because $399,000 was contributed to the ESTIP and was subject to a vesting period (cl 5.1 of the Trust Deed), that amount was not available to him in the 2000 year and therefore was not "derived" by him in that year. As explained in paragraph [28] above, the factual findings by the AAT establish that the sum of $399,000 was "derived" as income when it was paid by Kalix into the ESTIP at the direction of and on behalf of Mr White. What the ESTIP then decides, or is bound, to do with that sum is not relevant to the issue of whether Mr White derived that amount as income: McNeil 229 CLR 656 at [15], [18] and [20].

30. For those reasons, the AAT made an error of law. I would allow the Commissioner's Appeal Ground 1. The additional sum of $264,000 was income assessable to Mr White in the 2000 year.

31. Before disposing of the 2000 year, it is necessary to address paragraph 2.2 of Mr White's cross-appeal (see [15] above). That cross-appeal ground stated:

"Whether it was reasonably open for the [AAT] to be satisfied that the payment of $399,000 made by Engineering to another entity was, in part (to the extent of $135,000 being the excess of the actual payment of $399,000 over the recommended payment of $264,000), properly classified as either remuneration or excessive remuneration and a deemed dividend paid by Engineering to [Mr White] in the year ended 30 June 2000 under s 109(1) of the [1936 Act]."

32. As will be apparent, having regard to the factual findings made by the AAT (see [19] above), the finding of the AAT that the payment of $399,999 made by Engineering "to another entity" (namely, Kalix who then contributed the amount to the ESTIP) was a payment made for services rendered by Mr White was not only open but inevitable: see [34] of the AAT's reasons for decision cited in paragraph [9] above. The AAT went on to consider that part of the payment (namely $135,000) which exceeded the amount recommended in the remuneration report prepared by the Kenneths Group. The AAT concluded that the additional amount ($135,000) was either remuneration (which it was) or excessive remuneration and therefore a dividend pursuant to s 109(1) of the 1936 Act. Having regard to the contents of report prepared by the Kenneths Group, I consider that the AAT was correct to conclude that the excess was remuneration (which it was) or excessive remuneration and therefore a dividend pursuant to s 109(1) of the 1936 Act. They are alternative findings and are not inconsistent. On any view, the "excess" was remuneration and assessable on either of the two bases.

Appeal grounds 2, 3 and 4

33. In light of my findings that the Commissioner should succeed on his first appeal ground, it is unnecessary to address Appeal Grounds 2, 3 and 4.

The cross-appeal

Commissioner's appeal an abuse of process or otherwise incompetent?

34. Mr White submitted the Commissioner's appeal should be dismissed as an abuse of process because "the Commissioner was successful in relation to both years of income in issue" and because in the AAT proceedings the Commissioner sought and was granted leave to rely on s 109 of the 1936 Act as a further ground of disallowance. According to Mr White, as a result of the Commissioner being granted leave to rely on s 109 of the 1936 Act, the original hearing before the AAT had to be vacated and had "exposed [Mr White] to significant non-recoverable costs and delay in the resolution of the dispute". I reject Mr White's submissions.

35. First, it was not correct for Mr White to assert that "the Commissioner was successful in relation to both years of income in issue". He was not. In the 1999 year, the Commissioner was successful in relation to Mr White's substantive tax liability but was unsuccessful in relation to the question of penalties. In the 2000 year, the Commissioner was successful only to the extent of $135,000. He was unsuccessful to the extent that the AAT varied the objection decision by reducing Mr White's assessable income by $264,000. The Commissioner was also unsuccessful on the question of penalties in the 2000 year.

36. This Court retains the ability to control its own process and to prevent misuse of it:
Sea Culture International Pty Ltd v Scoles (1991) 32 FCR 275 at 279 and
Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 623 and 624. That power must be sparingly exercised and only used in exceptional cases: Scoles 32 FCR 275 at 279. This is not one of those exceptional cases. The Commissioner was not wholly successful. Section 44 of the AAT Act entitles the Commissioner to appeal on questions of law (see [37] and [38] below). He exercised that right and was successful. If there were delays in the earlier stages of the proceedings before the AAT and if as result of those delays, additional costs were incurred by Mr White, I do not consider that in the circumstances of this case, the institution of this appeal by the Commissioner constitutes an abuse of process.

37. Next, Mr White submitted that the Commissioner's appeal was incompetent "for want of a question of law". That submission is rejected. Section 44(1) of the AAT Act provides for an appeal to the Federal Court from any decision of the AAT "on a question of law". What is "on a question of law" for the purposes of s 44 of the AAT Act has been analysed in many cases and includes:

  • 1. Whether the AAT has identified the relevant legal test:
    Scicluna v New South Wales Land and Housing Corporation (2008) 72 NSWLR 674 at [68] and
    Collins v Administrative Appeals Tribunal (2007) 163 FCR 35 at [55];
  • 2. Whether the AAT has applied the correct test:
    Repatriation Commission v Hill (2002) 69 ALD 581 at [59];
    Commissioner of Taxation v Zoffanies Pty Ltd (2003) 132 FCR 523 at [25];
    Tax Agents' Board v Bray (2004) 58 ATR 118 at [19]; Collins 163 FCR 35 at [55];
  • 3. Whether there is any evidence to support a finding of a particular fact:
    Minister for Immigration and Multicultural Affairs v Al Miahi (2001) 65 ALD 141 at [34]; and
  • 4. Whether facts found fall within a statute properly construed:
    Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287;
    Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 243 ALR 728 at [39].

That list is by no means exhaustive: see, by way of example, Pozzolanic 43 FCR 280 at 287.

38. The Commissioner's Appeal Grounds raised questions of law of the kinds identified in paragraph [37] above. For example, Appeal Ground 1 directly raises the question whether the facts found by the AAT (see [19] above) fall within s 6-5(1) and (4): see [20] and [21] above. As Allsop J said in Collins 163 FCR 35 at [55], a question of law "directing the Court's attention to the manner in which the AAT failed to discharge its obligations according to law" is a "legitimate subject of an 'appeal' " under s 44(1) of the AAT Act and nothing in the cases "limits the reach of s 44 to questions of law divorced from the need to look at facts". Each of the Commissioner's Appeal Grounds in paragraph [13] above was "on a question of law" and was properly the subject of appeal under s 44 of the AAT Act.

The 1999 year

39. Mr White's cross-appeal in relation to 1999 year raised the following issues:

  • "2.1 Whether it was reasonably open for the [AAT] to conclude that the payment of $22,000 made by [Engineering] to another entity was properly characterised as a payment directed in [Mr White's] capacity as a director of [Engineering] to him as an employee in return for services rendered as an employee and was assessable as ordinary income in the year ended 30 June 1999 under s 6-5 of the [1997 Act].
  • …
  • 2.4 Whether on the evidence before the [AAT] it was reasonably open for the [AAT] to make these findings or draw these conclusions:
  • …
    • '2.4.3 That no lease payments were ever made from [Engineering] to RE Finance Pty Ltd ( RE Finance ) and that the purported leasing arrangement between [Engineering] and RE Finance for plant and equipment was not effective in either the 1999 or the 2000 tax years.
    • …
    • 2.4.8 That [Mr White], in his capacity as [an] employee of [Engineering], has directed the said payment [for Mr White's services] to be applied to Mailboat in the year ended 30 June 1999.
    • …' "

40. Paragraph 2.1 of the cross-appeal raises two separate issues. First, Mr White sought to challenge the AAT's finding that the payment of $22,000 by Engineering to Mailboat as trustee for the ESTIP (see [6] above) was "properly characterised" as a payment directed in Mr White's capacity as a director of Engineering to him as an employee in return for services rendered by him as an employee and, secondly, whether that payment was assessable income of Mr White under s 6-5 of the 1997 Act.

41. This ground of cross-appeal fails. Mr White made no submissions in relation to the challenge to the AAT's characterisation of the facts and at the hearing abandoned his direct challenge to related factual findings raised in paragraphs 2.4.1, 2.4.2 and 2.4.7 of the cross-appeal. However, Mr White did not abandon paragraph 2.4.8 of the cross-appeal which sought to challenge the "findings of fact" made by the AAT that Mr White, in his capacity as an employee of Engineering, directed the payment of $22,000 to be applied to Mailboat in the 1999 year. In the 1999 year, Mr White was the sole director of, the sole shareholder in, and an employee of Engineering. Those findings were not challenged by Mr White. The AAT also found that as the sole director and shareholder of Engineering, Mr White was in a position to decide what remuneration he would receive and to direct the payment of that remuneration. As the Commissioner submitted, which "hat" he wore when he directed Engineering to make the payment to the ESTIP is irrelevant. Section 6-5(4) of the 1997 Act applies when, as a matter of fact, the payment is applied or dealt with as the taxpayer directs or on his or her behalf. That is what occurred here.

42. The next limb of paragraph 2.1 of the cross-appeal seeks to raise the same argument as that put forward by Mr White in response to the Commissioner's Appeal Ground 1 - namely, that the payment of $22,000 was not assessable as ordinary income of Mr White in the 1999 year under s 6-5 of the 1997 Act. Contrary to Mr White's submissions, on the proper application of the law to the facts as found by the AAT, the payment of $22,000 by Engineering to Mailboat (as trustee for the ESTIP) was assessable income of Mr White which was paid at the direction of or on behalf of Mr White to ESTIP in the 1999 year: see [23] to [30] and [41] above.

43. Before turning to consider the remaining grounds of cross-appeal still pursued by Mr White, it is important to note that although it has been necessary to consider and resolve the substance of the submissions made by Mr White, I do not accept that paragraph 2.1 of the cross-appeal is "on a question of law" within the meaning of s 44 of the AAT Act: see [37] and [38] above.

44. Paragraph 2.4 of the cross-appeal sought to challenge two "findings of fact" made by the AAT. The first (concerning lease payments) is dismissed. Contrary to the submissions of Mr White, there was evidence to support the factual finding that no lease payments were made by Engineering to RE Finance. In the AAT proceedings, Mr White not only admitted that no lease payments were made but the documentary evidence produced by Mr White in relation to RE Finance disclosed that no lease payments were made. Secondly, the issue is irrelevant because the fact that no lease payments were made was not an element, consideration or factor taken into account by the AAT in determining whether the amounts were assessable in the 1999 year or assessable in the 2000 year.

45. The second challenge to the factual findings (that Mr White in his capacity as an employee of Engineering directed the payment [for Mr White's services] to be applied to Mailboat in the 1999 year) is also dismissed: see [41] above.

Conclusion

46. For those reasons, I would allow the Commissioner's appeal in relation to the 2000 year and dismiss the cross-appeal. The parties will be given seven days to submit a timetable for the resolution of the question of penalties.


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