CAMERON v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2011] AATA 386

Decision date: 6 June 2011

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J Block (Deputy President)

Part A - Preliminary and Background

1. The objection decision which is under review in this matter is the disallowance by the Respondent of objections by the Applicant lodged on 22 January 2008, against notices of amended assessment issued against the Applicant for the tax years ending 30 June 2004 and 30 June 2005, and an assessment for the year ended 30 June 2006. The three tax years aforesaid are collectively referred to as "the relevant years"; each relevant year is referred to in these reasons by reference to the actual year; for example the term "2004 year" refers to the relevant year which is the year ending 30 June 2004. The year ending 30 June 2003 is marginally relevant in respect of these reasons although it is not a relevant year, and it is referred to in these reasons as the "2003 year".

2. The Applicant was represented by Mr Alan Sandbach of counsel instructed by AJH Lawyers, while the Respondent was represented by Ms Chloe Burnett of counsel instructed by ATO Legal Services.

3. The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975; in addition, it admitted into evidence the following exhibits:

• • Exhibit A1 is a witness statement by the Applicant dated 11 October 2010. It is relevant to note that Exhibit A1 is a lengthy document; its length results in part from exhibits to it numbered 1 to 13 both inclusive; Exhibit 1 to Exhibit A1 is a written statement by the Applicant dated 15 September 2009 and it is separately referred to in these reasons as "Exhibit 1"; it should be appreciated that the Applicant furnished two witnesses statements, where the earlier statement is an exhibit to the later statement. Both statements are referred to in these reasons and notwithstanding the fact that Exhibit 1 is in fact an exhibit to Exhibit A1.
• • Exhibit A2 is a lease referable to certain leased premises at 22 Maitland Road, Islington ("the premises").
• • Exhibit A3 is a witness statement dated 21 March 2011 by the Applicant's son, Michael Timothy Cameron.
• • Exhibit A4 is a witness statement dated 23 March 2011 by Mr Joel Matthew Curry; (he is and was the tax agent to the Applicant and Aus-Phil Pacific Pty Limited which is referred to in these reasons as "the company".)
• • Exhibit R1 is a document prepared by PricewaterhouseCoopers ("PWC") and dealing in particular with certain measurements in respect of the premises.
• • Exhibit R2 is a business name extract.

4. It is convenient at least by way of commencement to include the content of the Respondent's statement of facts and contentions ("RSFC"), filed in the Tribunal on 22 September 2010, but confined to its content under the head of "Facts" as follows:

• 3. The taxpayer is a draft person who supplies services through Aus-Phil Pacific Pty Ltd (the Company) (T2-17).
• 4. The Company's income from drafting services, is produced through the personal services of the taxpayer
• 5. The Company has been deriving income from the taxpayer's drafting activities since at least 1997.
• 6. The Company was also deriving income from ship provedoring activities.
• 7. The taxpayer and his wife are shareholders and directors of the Company. The taxpayer's wife ceased being a director in May 2007.
• 8. Following an audit adjustments were made the taxpayer's 2004 and 2005 personal income tax returns.
• 9. The audit conclusion was that the taxpayer was the subject of Division 86 of the ITAA 1997 and that none of the tests in Division 87 of the ITAA 1997 had been satisfied.
• 10. The 2004 notice of amended assessment issued to the taxpayer on 22 October 2007.
• 11. The 2004 notice of amended assessment resulted in a tax shortfall amount of $17,841.10.
• 12. The 2005 notice of amended assessment resulted in a tax shortfall of $49,888.65.
• 13. A penalty of 25% for lack of reasonable care was imposed on the shortfall amounts relating to the personal services income not being declared in the taxpayer's returns for both the 2004 and 2005 income years.
• 14. The penalty amounts imposed for the 2004 and 2005 years was in the amount of $4,826.55 for the 2004 income year. $9,247.60 for the 2005 income year.
• 15. A penalty of 50% for recklessness was also imposed on the tax shortfall associated with travel expenses disallowed in the 2005 income year.
• 16. The Commissioner had refused the taxpayer an extension of time to object against an assessment for an earlier year in relation to travel expenses.
• 17. The penalty imposed was $6,165.60
• 18. The taxpayer's 2006 notice of assessment was issued on 7 November 2007.
• 19. For the 2006 income year, the taxpayer was assessed on an amount of $134,389 which resulted in a tax liability of $50,166.47.
• 20. On the 22 January 2008 the taxpayer lodged an objection against his 2004 and 2005 amended assessments and 2006 amended assessment.
• 21. The taxpayer in his objections lodged on 22 January 2008 made the following arguments: For the 2004 year the Company met the business premises test and the results test. In 2005 it met the results test. In 2006 it met the unrelated clients test and results test. The penalties and interest should be remitted as it has a reasonably arguable position for each of the years and submitted the original assessments in good faith.
• 22. The Company's income from the Taxpayer's drafting services was from the following sources:
  

  2004 income year:	$
  • Connect Personnel	24,673.30
  • Esp Personnel	40,617.70
  • Frank Soto & Associates	5.296.00
  	70,296.00
  2005 income year:
  • Esp Personnel	23,913.40
  • Workscan	72,559.00
  • Unknown	2,090.91
  • Hayes Personnel	25,694.50
  	124,257.81
  2006 income year
  • Hays Personnel	19,558.50
  • CQPA	83,967.00
  • Swan	13,114.00
  • Designtech Dampier	2,550.00
  • Kelly Resources	33,516.00
  	152,705.50

• 23. The Taxpayer has provided copies of only two of the contracts, with Workscan and with Kelly Resources, but asserts that his other contracts were similar.
• 24. Both of those contracts provided for payment weekly upon completion of an authorised timesheet. Both contracts could be terminated by either party on one day's notice.
• 25. Both contacts [sic] provided that, where the client considered that the taxpayer's work was unsatisfactory, the defects would be rectified at no cost to the client or to the agency.
• 26. During the 2004 income year the Company leased business premises. From 11 December 2002 to 28 September 2003 22B Maitland Road was leased and from 29 September 2003 to 30 June 2004 18 Maitland Road was leased. The Taxpayer asserts that 22B Maitland Road was used solely for the drafting activity and that 18 Maitland Road was used for both the drafting activity and the ship provedoring business. A part of the premises at 18 Maitland Road was used for recreational purposes.
• 27. The Taxpayer does not advertise his services in any publication. Rather, he obtains his clients by 'word of mouth referrals' and by directly approaching potential clients.
• 27\8. In relation to the 2006 income year, the contract with Designtech Dampier arose from a direct approach to the client following a referral from a former colleague. The contract with Central Queensland Port Authority was obtained following a referral from a former colleague.

5. There is no question as to the fact that the income in question constituted personal services income ("PSI") in accordance with part 2-42 of the Income Tax Assessment Act 1997 ("ITAA 1997"). As appears from clause 20 of RSFC, the Applicant originally contended that he was entitled to the benefit of the results test provided by Division 87 of ITAA 1997 in respect of all three relevant years. He also claimed that he was entitled to the benefit of the business premises test for the 2004 year and the unrelated clients test for the 2006 year.

6. It will be noted then that in respect of all three relevant years the Applicant relied in his objections on the results test and in fact relied on it and on no other test in respect of the 2005 year. The Applicant at the hearing sought to rely on the business premises test for the 2004 year and on the unrelated clients test in respect of all three relevant years. An application for an amendment of the objections was made by the Applicant so as to expand the relevant grounds and that application (to which the Respondent neither consented nor objected) was granted.

7. There is also an issue as to penalties which will be dealt with separately later in these reasons.

8. When the hearing commenced Mr Sandbach, on behalf of the Applicant, advised the Tribunal that the Applicant himself would be the only witness called by the Applicant. In the result, the Applicant was the only person who gave oral evidence during the first hearing day (14 February 2010). Towards the end of the first hearing day, Mr Sandbach advised the Tribunal that the Applicant wished to call other oral evidence and in particular Mr Joel Curry, who was and is the tax agent to the Applicant and the company. That statement was made towards the end of the first hearing day and towards the end of the Applicant's oral evidence, and Mr Curry was present while most of the oral evidence of the Applicant was given. If it had been intended that Mr Curry would be a witness he would not have been allowed to be present in the hearing room while the Applicant gave evidence. It is clear of course, that the evidence of Mr Curry must for these reasons be treated with some considerable reserve. Mr. Sandbach indicated that he might also want to call the Applicant's wife. In the result, the hearing resumed on 24 March 2011 ("second hearing day") and when Mr Curry did give evidence, as did one of the Applicant's sons, but not the Applicant's wife. (Witness statements by Mr Curry and the Applicant's son were served late).

9. References to the transcript as contained in these reasons are confined to the relevant page number and thus without reference to the relevant hearing day, simply because the transcript is numbered sequentially in respect of the two hearing days.

10. At the end of the hearing of the second hearing day a timetable was arranged in respect of written submissions; as a result the Tribunal received the Applicant's submissions dated 14 April 2011 ("AS"); the Respondent's submissions dated 5 May 2011 ("RS") and the Applicant's submissions in reply dated 12 May 2011 ("ASR") in accordance with the time periods allowed by the Tribunal. ASR was accompanied by certain documents referable to the judgment in
Commissioner of Taxation v Yalos Engineering Pty Ltd [2009] FCA 1569 which is referred to in more detail later in these reasons. The Tribunal considers that RS in particular deals with the evidence in detail and for this reason has drawn to some extent on it.

Part B - Unrelated Clients Test: This Test Is Referable To All Three Relevant Years

11. The unrelated clients test is set out in section 87-20 of ITAA 1997 as follows:

• "87-20 The unrelated clients test for a personal services business
  • (1) An individual or a personal services entity meets the unrelated clients test in an income year if:
    • (a) during the year, the individual or *personal services entity gains or produces income from providing services to 2 or more entities that are not associate of each other, and are not *associates of the individual or of the personal services entity; and
    • (b) the services are provided as a direct result of the individual or personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.

      Note: Sections 87-35 and 87-40 affect the operation of paragraph (1)(a) in relation to Australian government agencies and certain agents.

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

12. The Applicant in respect of the unrelated clients test contended that the requirements of section 87-20(1)(b) of ITAA 1997 were satisfied, because his drafting services were provided as a direct result of offers to the public at large or to a section of the public.

13. The evidence before the Tribunal indicates in clear terms that the drafting services were provided either:

• "(a) in consequence of a phone call or an email message to a particular individual known to the Applicant; those communications were made to Frank Soto and later Jason Williams in the 2004 year, to Mark Edmonds in the 2005 year and Taz Bhatti in the 2006 year; (see in particular Exhibit A1 paragraphs 2, 11, 13, 21 and 32 and Exhibit 1 page 10 and 11); or
• (b) in consequence of a recommendation by a particular individual who knew the Applicant; those persons were Joe Fernandez in the 2005 and 2006 years and Bill Perrie in the 2005 year; (see Exhibit A1 paragraphs 25 and 33 and Exhibit 1 paragraphs 11 and 13)."

14. In his oral evidence before the Tribunal the Applicant said that he obtained the relevant work in consequence of his contacting or being contacted by the individuals referred to; (see in particular TS at 40 to TS at 45).

15. The Applicant was asked (TS at 45)

"So essentially, from what we have discussed, there were about six or seven individuals who either you contacted directly or who recommended you for a job, and as a result of those six or seven individuals you got the contracts in question; yes?"

The Applicant replied to that question in the affirmative.

16. The Applicant admitted that none of the relevant contacts arose from advertisements in any publication or on any website or through any other similar means. (Exhibit A1 paragraph 2 and Exhibit 1 paragraph 5; see also TS at 12). He said also that there was not any notification or advertisement in the Yellow Pages, or any other publication. (Exhibit A1 paragraph 5; see also TS at 30). The Applicant said that there was a website in 2006 but none of the contacts which are relevant for the purposes of this matter arose from that website (TS at 45).

17. The Respondent contends (correctly in my view) that one-off approaches to or from six individuals in a large industry cannot be construed as "offers or invitations to the public at large or a section of the public" within section 87-20 of ITAA 1997. The Tribunal endorses the Respondent's submissions as contained in clauses 20, 21 and 22 of RS as follows:

• "20. Obtaining work as a direct result of making one-off approaches to, or being approached by, a total of six individual contacts in the industry does not involve making 'offers or invitations to the public at large or a section of the public' within the meaning of s 87-20.
• 21. The applicant contends that the particular individual who he contacted in each case, while not the public at large, represents a 'section of the public' for the purposes of the test. But one person is clearly not a section of the public, nor is a handful of people each of whom were individually contacted. The 'section of the public' proviso in s 87-20 contemplates, for example, marketing to a group of potential clients or advertising in trade publication (which would not be read by 'the public at large').
• 22. To make an offer or invitation to the general public (or a section thereof) is to hold oneself out as ready, willing and able to perform services if any of those members of the public requests them. Any interested member of the public must be capable of accepting the offer. Making one-on-one offers is not the same as this."

18. The Applicant said that he had broad skills suitable to a variety of potential clients and tasks. He said in particular in evidence in chief that (TS at 29)

"I did an engineering/drafting certificate and then just went and worked for companies until I become[sic] experienced and then I have learned how to do four different areas of my profession, which is structural drafting, mechanical drafting, civil drafting and a little bit of pipe drafting."

19. The Applicant also said in evidence in chief (TS at 30) that

"I targeted those people because I knew they had long contracts that I could provide the drafting for, and coincidentally, because there was a shortage of people with my skills, I could charge a better rate, because I had the four skills. Most draftsmen only have one skill. I had the four."

20. The Applicant's pool of clients is large. He has worked according to his evidence for mining, infrastructure, manufacturing and construction companies amongst other industries. (See TS at 37, 39, 40, 54 and also his Curriculum Vitae which is an exhibit to Exhibit A1).

21. In
Metaskills Pty Ltd and Federal Commissioner of Taxation [2005] AATA 647, I held at paragraph 55 that : "' word-of-mouth' advertising and direct offers" did not satisfy s 87-20(1)(b).

22. In
The Engineering Company v Commissioner of Taxation [2008] AATA 934, Member Frost (as he then was) said at paragraph 53:

"One single company does not constitute 'the public at large' or 'a section of the public'. The services provided to Client A have not been provided as a direct result of the Applicant's offers or invitations to the public at large or to a section of the public, but as a result of the Applicant's offers to Client A alone."

23. Member Frost went on to say at paragraph 55:

"I conclude from this evidence that the Applicant had two broad approaches to obtaining work - one was to respond to advertisements; and the other was to make 'direct approaches' - also referred to as 'cold calling' (Transcript P-22, 9 April 2008) - to companies that the Applicant thought might be able to use Mr Engineer's or Mr O's skills. Neither kind of approach amounts to making offers or invitations to the public at large or to a section of the public."

24. In
BRMJCQ Pty and Commissioner of Taxation [2010] AATA 311 I held at paragraph 94:

"The Applicant obtained the contract with Paxus to provide services to the ATO by responding to a vacancy advertised by Paxus. The Commissioner has been advised that the contract with Icon to provide services to the DVA was obtained through a similar process. These contracts were not obtained by competitive tender as asserted by the Applicant. Rather, the contracts were obtained as a result of responding to advertised vacancies (T12-240-245). This is the manner in which employees often obtain their work. The purpose of the provision is to distinguish between genuine businesses actively promoting their services to the public from businesses and those which are simply arrangements for dealing with personal services income. Obtaining work by applying to fill advertised vacancies does not satisfy the requirement that the services are provided as a direct result of offers or invitations to the public, or a section of the public: see generally
Re Engineering Co and Federal Commissioner of Taxation [2008] AATA 934; 74 ATR 272, 281 [50] - [56] (Member Frost).

The contract to provide services to the DVA through Paxus, which commenced in 2006, arose not from offers or invitations to the public (or a section of the public), but as a result of the prior relationship when the services were provided through Icon. Alternatively, if the Applicant is considered to have offered its services to the DVA then it was an offer made to a single entity and not to a section of the public as required by the provision."

25. The Applicant relied to a very considerable extent on the judgment of the Federal Court in Yalos. Each of AS and ASR deals extensively with Yalos I include by way of one example only clauses 2 to 4 of ASR as follows:

• "2. Further, in the Yalos case, the Commissioner contended (see attached submissions) that the phrase 'offers or invitations (for example, by advertising), to the public at large or to a section of the public' under s 87-20(1)(b)[of ITAA 1997] requires action to be taken to bring services to the notice of the public generally, or a section thereof. That is, it requires more than private communications between Yalos' single employee ('Mr Koundouras'), and his ex-colleagues then working for potential clients. The Commissioner made extensive and exhaustive submissions before the AAT and before the Federal Court, which included, amongst many other things, submissions in respect to syntax, policy and surrounding legislative context in support of this proposition. It also relied on judicial consideration of similar phrases to 'the public at large or a section of the public' in other areas of law in support of this proposition.
• 3. The Commissioner contended that 'making offers or invitations (for example, by advertising)' requires more than speaking with current or former work colleagues seeking work - that it requires that there be a public element to the offer or invitation and that such a public element does not exist where the offers or invitations are only made to the private contacts of one person. It further contended that to meet the requirement of offers or invitations, Yalos would have had to take some action designed to bring its services to public notice - but that it had not taken such action given that it had no internet site, no telephone listing, did not undertake advertising and had never responded to a public tender from a newspaper.
• 4. Those contentions by the respondent, amongst others, were squarely rejected by the Federal Court.

26. It is in these circumstances that the judgment in Yalos requires careful consideration. Yalos came before the Federal Court on appeal from a decision of this Tribunal and in consequence of an application for a "personal services business determination".

27. The Federal Court in Yalos dealt with various aspects of the relevant legislation; it dealt in particular with the "unusual circumstances" provisions of the division and as to which see in particular clauses 7 to 17 of the judgment but which need not be included in this decision.

28. The Federal Court then dealt with the different question of offers to the public or a section of the public; I refer to clauses 23 to 25 of the judgment in Yalos reading as follows:

• "23. The first series of grounds related to a question of law expressed as follows:
  • (iii) Under what circumstances are services provided as a direct result of a 'personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public' for the purposes of s 87-20(1)(b) and whether such circumstances exist in the present case.

    The Commissioner's principal attack upon this area of the Tribunal's decision was concerned with the connotation of the expression 'to the public at large or to a section of the public' in para (b) of s 87-20(1) of the 1997 Act. The Commissioner's submissions were based upon an assumed factual scenario whereby the contracts engaged in by the respondent for the provision of the services to a third party, such as Manpower, arose from the 'personal contacts' of Mr Koundouras himself. It was said that these personal contacts, or the businesses (such as, apparently, Manpower) which were put in touch with the respondent by reason of them, could not be regarded as 'a section of the public' within the meaning of s 87-20(1)(b). It was submitted that the section should be construed as though 'public' were the opposite of 'private', and with a particular view to achieving the objectives referred to in s 87-10.

• 24. The reasons of the Tribunal do not disclose any specific attention being given to the construction of s 87-20(1)(b) of the 1997 Act. It is apparent that the Tribunal approached the provision as though 'a section of the public' was apt to include, within the context of an industry which had a 'limited number of players', those players. While recognising the objects of Div 87 of the 1997 Act set out in s 87-10, I think it unlikely that the legislature would have intended that s 87-20(1)(b) would be unavailable to an entity which had offered the services of its employee to the major corporations operating within the narrow area of industrial activity for which that employee's skills and experience were suited. In my opinion, this is amply within the connotation of 'section of the public' in the provision. Such a view of the legal position appears to have been implicit in the reasoning of the Tribunal in the present case. For these reasons, I am not persuaded that the Tribunal erred in law in these respects
• 25. The other aspect of this series of grounds relates to the requirement of part (b) of the unrelated clients test that the services in question were provided as a direct result of the entity 'making offers or invitations (for example, by advertising)'. The Commissioner submitted that it was insufficient for the services to have been provided as a result of a person-to-person referral or of personal contacts within the industry concerned. Just how the Tribunal approached this aspect of the unrelated clients test is of itself problematic, for the reasons I have given above. It is not entirely clear whether the Tribunal was operating pursuant to what it perceived to be offers or invitations by the respondent. If not, it would have made an error of law. These are, however, matters to be considered by the Tribunal on remitter, and there would be little utility in my further dealing with them on a hypothetical basis at this stage."

29. It is relevant to note that in respect of the issue referred to in the preceding clause the Federal Court did not refer to any case law and in particular did not refer to any of the decisions of this Tribunal and to which I have referred; there was indeed no reference to Metaskills or The Engineering Company. The decision in BRMJCQ was handed down in point of time after the judgment in Yalos.

30. The evidence before the Tribunal indicates that the Applicant obtained the relevant work by relying on a small number of personal contacts and relationships in the industry. The Tribunal does not accept that the contracts were obtained through offers or invitations to the public at large or to any section of the public within the meaning of section 87-20(1)(b) of ITAA 1997.

31. The extensive range of large industries for which the Applicant has performed work must be contrasted with the highly specific niche industry in Yalos. Yalos related to the offshore undersea gas pipeline industry. In that case, the Federal Court acknowledged the Tribunal's earlier finding that a niche industry may have a "'limited number of players'". In this matter, however, the Applicant can according to his evidence provide drafting services to companies within large industries in Australia and in particular mining, manufacturing, infrastructure and construction. The few individuals for whom the Applicant's services were obtained are not of course the only "players" in those large and diverse industries.

32. It is clear that Yalos turned on its own particular facts and being the "narrow area of industrial activity" involved in the offshore undersea gas pipeline industry. Neither the Tribunal nor the Federal Court in Yalos sought to determine any general proposition whereby a word-of-mouth referral will invariably satisfy the offer or the invitation to the public test in the relevant section. Were this the case, Metaskills and The Engineering Company would have been referred to and (presumably) overturned; this in fact did not occur; as set out previously neither of these two decisions was referred to in Yalos.

33. The Applicant contended that he did not want to advertise because advertisements would result in his receiving unwanted communications. (TS at 30 to 31). That explanation however does not have the effect that the unrelated clients test can apply in circumstances where one of its mandatory provisions (section 87-20(1)(b)) is not met.

34. My finding then is that Yalos turns on its particular facts and must be distinguished. It does not constitute authority for the propositions advanced on the part of the Applicant and as contained in AS and ASR.

35. It follows that the unrelated client test was not satisfied in respect of any of the relevant years.

Part C - Business Premises Test; This Test Applies Only To The 2004 Year

36. The business premises test is set out in section 87-30 of ITAA 1997 as follows:

• "87-30 The business premises test for a personal services business
  • (1) An individual or a *personal services entity meets the business premises test in an income year if, at all times during the income year, the individual or entity maintains and uses business premises:
    • (a) at which the individual or entity mainly conducts activities from which *personal services income is gained or produced; and
    • (b) of which the individual or entity has exclusive use; and
    • (c) that are physically separate from any premises that the individual or entity, or any *associate of the individual or entity, uses for private purposes; and
    • (d) that are physically separate from the premises of the entity to which the individual or entity provides services and from the premises of any associate of the entity to which the individual or entity provides services.
  • (2) The individual or entity need not maintain and use the same business premises throughout the income year."

37. The Applicant seeks to rely on the business premises test only in respect of the 2004 year. The Applicant contends that in the 2004 year the premises were used mainly for the purposes of drafting.

38. The evidence before the Tribunal indicates that in the 2004 year drafting services provided by the Applicant were performed most usually at the premises of the clients. The Tribunal accepts that some drafting services may in the 2004 year have been provided at the premises, but considers that this would have occurred by way of exception and not as a rule. Even more to the point is the fact that another business (ship stevedoring and sales) was in the 2004 year conducted from the premises. The evidence by the Applicant as to the nature and extent of that business was in many respects confused and contradictory. On the second hearing day the Applicant called Mr Curry and in addition his son, Michael Timothy Cameron, who was at the relevant time 12 years old. The evidence of the son must be treated with some considerable caution more particular because his witness statement was plainly prepared by professional advisers and at a time which is many years later. It may be accepted though that during week days and during some part of the 2004 year the Applicant's two sons spent about three hours each day at the premises.

39. During the 2004 year the Applicant's major client was Frank Soto and Associates. The Applicant spoke at length of taking work from Frank Soto and then carrying it out at the premises. However the evidence indicates that in the 2004 year the Applicant performed work for Frank Soto for only about six weeks, with time off for Christmas. (See in particular TS at 55, 56 and 58).

40. During all of the remainder of the 2004 year, the Applicant's drafting work was effected at the places of business of the client. In that year, and apart from Frank Soto, the Applicant performed work for UGL Rail (formerly known as United Goninen) and ADI (Australian Defence Industry). That other work was performed at the offices of the clients and not at the premises.

41. Excluding the brief work for Frank Soto, the other drafting activities performed by the Applicant in 2004 year at the premises constituted rectification work relating to a prior contract. The Applicant said the majority of this work was performed in the 2003 year (TS at 61). The Applicant said also that this work was done after hours and on weekends, because he was working full time at clients' sites for the vast majority of the 2004 year (TS at 61).

42. The Tribunal agrees with the submission of the Respondent that any drafting work which was performed at the premises in the 2004 year was ancillary in nature, and can be compared to the situation of an employee taking home work to be done of an evening or during a weekend. It was not, however, sufficient to convert the premises into "business premises" for the purposes of section 87-30 of ITAA 1997.

43. It is moreover probable that the Applicant's oral evidence as to the rectification work referred to in the preceding clause was exaggerated. He emphasised that activity in his oral evidence. However, he did not make any mention of it in the relevant objections or in either of his written statements.

44. There was considerable evidence before the Tribunal as to the use of the premises in the 2004 year for the purpose of a ship stevedoring business conducted by the Applicant and his wife (although there was no such disclosure in the relevant objections). The Applicant contended that 52 per cent of the floor space was utilised in respect of drafting and the remainder in respect of other activities. The PWC report (Exhibit R1) indicates that this calculation was made on the basis of an exclusion of part of the premises. Assuming that the excluded part is taken into account, (as in my view it should) the correct calculation would have been 48 per cent. This assumes however that the relative floor space calculation is determinative as to the predominant activity; the Tribunal cannot perceive any basis on which it can be said that in accordance with the legislation such a test is in any way determinative. It can at most be a factor which is relevant.

45. The stevedoring business (if the calculation is based on income and turnover) was clearly predominant. In the 2004 year the stevedoring business income was $109,926 (T9 at 61) and this amount is greatly in excess of the aggregate drafting income for the 2004 year of $70,296.88. It was moreover much greater still in relation to the Frank Soto drafting income of $5,296, and which apparently related to the drafting activity conducted during the 2004 year on the premises. (It will be remembered that work for Frank Soto may have been performed on the premises for only about six weeks in the 2004 year).

46. T9 at 61 is a trading account of the company for the 2004 year and it is reproduced in full in these reasons as follows:

47. The Applicant's evidence as to the stevedoring business was inconsistent and confusing. He contended that it involved the sale of "`meat, soft drinks, rice" and souvenirs to ships (TS at 27). He later in cross examination stated that liquor was also sold to the ships. A consideration of the trading account (T9 at 61) indicates that the largest single item in it is $62,124.74 included as "cost of goods sold - liquor"; information as to the liquor aspect, (so clearly important constituting as it did the largest single amount in the account) had not been furnished previously.

48. Mr Curry informed the Australian Taxation Office that the company was conducting a commercial retail shop from the premises (T9 at 56). This is consistent with Exhibit R2 which is an application by the company for the business name "Kabayan Newcastle" as a "Ship Provider & Souvenir Shop" with its principal place of business at "18 Maitland Road Islington NSW 2296" and which is the premises.

49. The company's activities in relation to the ship stevedoring business were never explained. As to what is meant by the Kabayan income and ship sales was not clarified (T9 at 61, 134 and 135). Mr Curry said that Kabayan income could relate to retail sale from the premises but he was not sure if that was so (TS at 134 and 135).

50. The Applicant's son in his evidence said that he did not notice and would not have known what customers came to the premises.

51. Other persons who had direct knowledge of the relevant accounts, and in particular Beverley Holden and Matthew Pietraszek, may have known about the business, but they did not give evidence. The Applicant's wife was a partner in the business but she too did not give evidence, and although and as set out previously mention was made towards the end of the first hearing day of this latter possibility.

52. As I have indicated Mr Curry was present on the first hearing day during nearly all of the period during which the Applicant gave evidence and inter alia as to the activities of the company. The nature of his evidence in this context can be gauged from the following extract from the middle of TS at 134 to the top of TS at 137 as follows:

"MS BURNETT: Mr Curry, you prepared the financial statements of the company in question, Ausphil Pacific Proprietary Limited; is that right?---Yes.

Those accounts are contained in the T-documents, if I could ask you to be shown them, for the year ended 30 June 2004; they start at T9, 57; do you have them?---Yes. I do.

Thank you. Now, if you can go through to the trading account, which is at T9, 61. In that trading account, the company received, under the heading of Trading Income, Kabayan income of $50,836.13; do you see that?---Yes. I do.

And ship sales income of $59,090.72; do you see that?---Yes.

And this Kabayan income was the shop income, wasn't it?---I'm uncertain of that.

I suggest to you that Kabayan income was income from selling products from 18 Maitland Road?---I'm uncertain of that.

…

MS BURNETT: And this heading of income being Ship Sales, which is the largest item of income at 59,000-odd, do you understand that to be the alcohol, food, cigarettes and such things sold to sailors on the ships?---That is my understanding, yes.

Now, it's - and would it not make sense then, that the other separate item of income, Kabayan income, were items not sold on the ships but instead sold on the shop at 18 Maitland Road?---I'm uncertain of that.

But it is a possible explanation?---It's possible, yes.

…

MS BURNETT: But you do believe the ship sales income represented food, alcohol and souvenirs sold to the sailors on the ships?---Yes. I do.

Now, under the Cost of Sales heading, the second item there is described as costs of goods sold: liquor. And that item is $62,124.74; do you see that?---Yes. I do.

Now, is it not right that even if all of the 60,000-odd of ship sales income was alcohol, this company was still making a substantial loss on the alcohol alone?---Sorry. Could you repeat that question?

Sure. Sorry, there are a few - see, it's sort of a mathematical question, but we've said that ship sales income of 60,000-odd encompasses food, alcohol and souvenirs sold to the sailors, and if all - if that alcohol is what is described as the cost of goods sold: liquor cost item, then even if all of the ship sales were just alcohol, we still have a $12,000 loss on the alcohol?---Yes. We do.

And I suggest to you that making a loss on taking deliveries and onselling alcohol is extremely rare as a business matter; do you agree?---On the surface that would appear to be the case, yes. I'm not - - -

Another - pardon me. Another explanation for it is that part of this 50,000-odd Kabayan income in the top line of the trading account represents alcohol sold from 18 Maitland Road?---I'm uncertain of that.

But it is a possible explanation for where all of that $62,000 worth of alcohol went?---Once again, it's a possibility.

Because you will also see within cost of sales, the last item there is cost of goods sold: ship, 33,723.67. May I suggest to you that that is the cost of the goods that the Camerons sold to the sailors?---It makes up - I agree that it makes up part of what they sold to the sailors.

And on the face of this document, it does appear to be a comprehensive description of the items that they sold to the sailors because it's described as being a ship, wouldn't you agree?---Sorry. Could you repeat that?

I put it to you that this $33,000, cost of goods sold, ship item is a comprehensive description of the cost of the goods sold to the sailors on the ships?---I disagree.

And what is your basis for disagreeing? You've said that you don't - - -?---I believe that items in the other costs of goods sold categories are also sold to the ships.

But you said to me earlier that you couldn't explain that large $62,000 cost of goods sold liquor amount. Now, you're telling me that it might have been liquor for the ships?---I can explain where that figure came from by figures contained further in the T documents.

And this is from the QuickBooks entries that you were sent?---Yes, on the QuickBooks profit and loss, which is within the T documents.

Now, who sent you the QuickBooks files?---Beacon Account Services.

And what was the name of the person you dealt with there?---Beverley Holder.

Beverley?---Holder.

Holder?---Yes.

Thank you. Did you go back to Beverley Holder and - that's a she, is it?---She.

Was it your practice to go back to Beverley Holder and ask her questions about the QuickBooks files she sent?---It's practice if we have questions, to go back to the bookkeeper, yes.

On this occasion, do you recall going back to the bookkeeper on these items to do with cost of goods sold and income on the trading account?---I do not recall. However, I was not working on the - I had another staff member working on the initial file at that stage.

Right. What's the name of that staff member?---Matthew Pietraszek.

…

MS BURNETT: And you can't say what it is that he did by way of communication with the bookkeeper?---No, I can't.

And there isn't anything in the evidence about seeking clarification from the bookkeeper about what these items in the trading account mean?---Not that - no. Not that I recall."

53. The Respondent contended in RS that the premises were also used for child care, in that the Applicant's sons spent three hours per day during the 2004 year at the premises. I am inclined to the view that the use of the premises for this purpose might perhaps be regarded as peripheral and secondary; (it may be noted also that the child care aspect was disclosed only at a late stage).

54. Even if one ignores the child care aspect, the evidence before the Tribunal as to the stevedoring business (and including in respect of retail sales), and taking into account the fact that for the most part the drafting work in the 2004 year was performed outside the premises and at the premises of the clients, must give rise to a conclusion that the premises were not used for drafting purposes either predominantly or even to any significant extent in the 2004 year.

55. It has to be said the evidence of the Applicant as to T9 at 61 was particularly confused and inconsistent. As will be seen the evidence of Mr Curry as to this aspect was also not helpful. It will be noted that as appears from the extract from his evidence as quoted previously in these reasons the relevant trading account may actually have been prepared not by him but by one of the members of his staff.

Part D - Penalty

56. As set out previously in these reasons, the Applicant originally and in his objections claimed that he was not liable for tax under the relevant provisions for different reasons and in particular because of an entitlement (in respect of all three relevant years) to the benefits of the results test.

57. There was nothing in any of the evidence before me which would suggest that the Applicant was entitled to the benefit of the results test. The Applicant in fact abandoned his claim and changed tack so as to (belatedly) seek relief on the basis that he was entitled (set out previously) to the benefit of the unrelated clients test in respect of all three relevant years and the business premises test in respect of the 2004 year.

58. I have found that the Applicant is not entitled to succeed in respect of either of the tests referred to in the preceding clause. He has failed in respect of the business premises test because on the evidence before me, and in respect of the 2004 year it is clear that the premises were not used predominantly, or even to any significant extent, in respect of the drafting services. On the contrary, the evidence before me would suggest that they were used in respect in respect of drafting to an insignificant extent only. The unsatisfactory nature of the evidence given both by the Applicant and Mr Curry in respect of the 2004 year is indicative of the fact that each of them knew, or ought to have known, that such a claim in respect of the business premises test was opportunistic and speculative. The trading account of the company for the 2004 year (T9 at 61) indicates that no other conclusion is possible. .

59. In respect of all three relevant years the Applicant claimed that he is entitled to the benefit of the unrelated clients test, on the basis that the relevant services had been made available to the public or a section of the public. The circumstances are such that it is not possible to accept that that claim was other than opportunistic. It cannot have been made on the strength of or in reliance of the judgment in Yalos simply because the judgment in Yalos was handed down some considerable time after the objections were lodged. If the Applicant genuinely relied on the unrelated clients test for all three relevant years why did he include a reference to it in his objection for the 2006 year only?

60. In respect of the 2004 year the evidence before me indicates in clear terms that the business premises test was not properly founded and in fact had no prospect of success.

61. It is my finding then that there was a failure to take reasonable care as required by the legislation, and so the penalty of 25 per cent was appropriate.

62. The Tribunal must also deal with another administrative penalty imposed at the rate of 50 per cent in respect of the 2005 year and 25 per cent in respect of the 2004 year in respect of travel expenses claimed.

63. As regards the travel expenses claimed there was originally some confusion. That confusion is explained by clauses 62 to 66 of RS reading as follows:

• "62. The other administrative penalty imposed relates to a travel expenses deduction claimed by the applicant, but disallowed. For the 2005 year this was imposed under s 284-90 of Schedule 1 to the Taxation Administration Act 1953 at the 50% threshold, but the respondent is prepared to remit it to 25%. For the 2004 year the penalty imposed was 25%.
• 63. There was some confusion on both the applicant and respondent's part during the hearing regarding the disallowance of the travel expenses deduction and the resulting tax shortfall penalties. The Tribunal was advised that the amount of the travel allowance was excised from the applicant's return as an income item. Further the tribunal[sic] was advised that the Company's deduction for the travel allowance had been disallowed and consequently the amount of the travel allowance had been included in the attributed personal services income. Neither of those statements reflects the substance of the amendments.
• 64. The Company claimed tax deduction for travelling allowance paid to the applicant of $21 554 in the 2004 year and $31 346 in the 2005 year. Those deductions were not disallowed. Accordingly the attributed personal services income did not include the amount of the travel allowances in either of those years. The applicant included the allowances as assessable income in the 2004 year and the 2005 year and claimed income tax deductions for those amounts. The deduction was shown at D5 in the 2004 income tax return and at D2 in the 2005 income tax return.
• 65. The income was not excised from the applicant's assessable income in either year but the deductions claimed in both of those years were in substance disallowed. Tax shortfall penalties were applied in both years, a 25% penalty for lack of reasonable care applied to the total tax shortfall in the 2004 year and a 50% penalty applied to that amount of the tax shortfall that was applicable to the disallowed deduction for the travel allowance in the 2005 year[sic] The respondent is prepared to remit the penalty in relation to the shortfall in 2005 to 25%.
• 66. In his objections to the amended assessments the applicant did not contend that the deductions in relation to the travel allowances should have been allowed. Accordingly this is not an issue before the Tribunal. However the shortfall penalties that relate to the disallowed deductions are an issue before the Tribunal."

64. The manner in which the travel expenses in question were claimed can also best be demonstrated by a reference to the evidence of Mr Curry; I refer in this context to the passage which commences at the bottom of TS at 137 and end in the middle of TS at 144 as follows:

"MS BURNETT: Now, on this other topic, one of the penalty issues in this case relates to a travel allowance purportedly claimed by the company as a deductible expense in the 2005 year, the year ended 30 June 2005.

…

MS BURNETT: Yes. Now, the existence of the travel expense as an issue can be found in the reasons for decision on the objection decision currently under review and that's at T2, 16 to 17 and I just want to ask a couple of questions about this travel allowance because it's a live issue.

Now, you've said in your statement filed last night that - in paragraph 8:

In the 2005 income year, Ausphil paid a travel allowance to Mr Cameron of $31,000, 346,000, as per the profit and loss.

And you also said that the travel allowance was declared as income for Mr Cameron and claimed as a deduction for the company. Now, firstly, in relation to the supposed assessable income of Mr Cameron, you are aware, aren't you, that that income was excised from Mr Cameron's income tax assessment by the ATO?---As a result of the audit, yes.

Yes. So, ultimately - - -

THE D.PRESIDENT: That it was excised from his return as an income item?

MS BURNETT: That's right.

The ATO amended Mr Cameron's assessment to take that assessable income out and so Mr Cameron didn't actually pay tax on the travel allowance himself, did he?---On original assessment, it was assessable income.

At the end of the day, he didn't pay tax on it, did he?

THE D.PRESIDENT: Is that right?---I disagree with that because the ATO then included that 31 as part of the attributed PSI income. So at the end of the day, he did pay tax on it.

MS BURNETT: But he didn't pay tax on it as a travel allowance received, did he? I'm not talking about the operation of the PSI rules at the moment, just the travel allowance?---Sure.

It's not a controversial question. I have evidence of it being excised from his return?---As a result of the audit, yes.

So that's on Mr Cameron's side. On the company side, you've explained in this affidavit that there were two reasons for you claiming a $31,000 travel allowance as a deduction within the company and those two reasons are that: number 1, Mr Cameron emailed you and told you that he was away in remote locations for substantial periods of that year. You said he was away in Weipa and in Perth. And that was the thing, I presume, that triggered your creation of a travel allowance?

Sorry. I don't mean it to be a difficult question?---Yes.

Because travel allowance you need to have some travel?---Yes, yes.

So Mr Cameron told you that he was travelling that year?---Yes.

And so you thought he would be a candidate for a travel allowance within the company. And then in your statement - after referring to the email from Mr Cameron where he tells you that he was working interstate, at the bottom of page 2, you refer to a working paper of your office. Was that a working paper you prepared contemporaneously at the time of preparing his return? - At the same time, you mean?

Well, just beforehand, in the process of - - -?---No

Is it something you created later?---Yes.

In order to justify the earlier travel allowance?---Yes, yes.

Now, that working paper, which we now know is a later document, that was based on Mr Cameron's evidence of how many days he was interstate working, on the one hand?---Yes.

And on the other hand, it was based on the maximum allowable travel allowance amount that a company can claim without having to be able to substantiate it?---Yes.

And you multiplied the number of days by the daily maximum travel allowance expense?---Yes.

And got to the result of 31-odd thousand?---37, being the maximum.

Right. 37, being the maximum. And 37 was in a working paper and the actual allowance amount of 31, you don't have a working paper calculation document to substantiate how that was arrived at, do you?---No. Not one that was created at the time, no.

And that wasn't based on any receipts that you saw of Mr Cameron's expenditure on food and accommodation while interstate?---The working paper I have now?

Or any working papers that are before us, to understand where this 31,000 came from?---I have no original receipts.

And so it was only based on your awareness that Cameron was interstate for large periods of that year?---Per that email in the exhibit, yes.

So you don't actually know whether Mr Cameron had to spend any money on food and accommodation when he was interstate, do you?---I have no evidence to show that, no.

And it's entirely possible that his employers in these remote locations were actually providing him with food and accommodation while he was interstate, isn't it?---That is possible, yes.

And if that's the case, it's not right to be claiming a travel allowance within the company as a deduction, is it?---I disagree with your premise.

Why is that?---Just because I can't - I'm not saying that he didn't spend money on accommodation and expenses. I just have no evidence to this point in time to show you.

I agree with you. But you can't also positively state that you believe that he did spend money on these things. You just don't know, do you?---We base things on representations from our client and we rely on those for the deductions that we claim.

I accept that. But the only representations we have from Mr Cameron here are merely the dates that he was interstate?---Before the tribunal, yes.

And are you telling me there's something else that's not before the tribunal?---Not that I can provide in documentary form, no.

So are you saying there's something Mr Cameron told you about the travel expenses?---I don't recall any conversation, not that - - -

On a process of deduction, I'm running out of ways by which you could have got this information?---It's the expense that we have claimed in prior year as well as - no, in prior years for Mr Cameron.

And you understand it was disallowed for the 2000 year?---It wasn't disallowed. There was no disallowance in 2000. We just were not allowed an extension of time to - -

To try to claim it?---To try to claim it.

Sure.

…

Now, do you remember when it was that you tried to go back and amend the 2000 year return to claim the travel expenses as a deduction in the company? It was some time later, obviously, because you needed an extension of time?---If you can give me a minute to look through the T documents?

Sure. No, I'm trying to find it as well. It seems to have been in 2007. And I'm just trying to find a reference to that?---We received the reply on 15 March 2007.

So probably it was - it might have been in 2005. And it was only the 2000 year and the 2005 year in which the company claimed travel allowances as deductions, is that right, or attempted to claim? Because Mr Cameron was sometimes in Newcastle for most of his work, but there were some years where he was working in remote locations in Australia and it seems to me that it was only the 2000 year and the 2005 year - - -?---Without having anything here, I believe there were other years where he has claimed travel allowance.

Right?---And his 2004 return, which is in these T documents, should show that. Electronic copy - T3, 26, I believe, shows a travel allowance claim for the 2004 year.

…

MS BURNETT: Now, you've said to the tribunal today that you don't have knowledge of whether Mr Cameron spent the travel allowance money on his board and accommodation or whether those things were provided for him by the companies he worked for; that's right?---That is correct.

And you also don't have knowledge of whether the company actually paid this 31,000-odd to Mr Cameron, do you?---I believe the QuickBooks file will show - would show payments to Mr Cameron.

I suggest that all - - -

THE D.PRESIDENT: Sorry. You say - do you know whether the company actually paid that 31,000?---The company - my belief is the company physically paid money to Mr Cameron to cover travel expenses.

MS BURNETT: But the only basis for that belief is the accounting entry in the QuickBooks file, isn't it?---The accounting entries, yes.

Yes, but that is just an accounting entry. It's not a receipt, is it?---It's based on the bookkeeper's observations of the bank statements.

But it could also, could it not, be based on the bookkeeper's understanding that there is such a thing as a travel allowance deduction, which reduces the assessable income of the company?---That's correct, yes - which is a legitimate claim.

Right.

THE D.PRESIDENT: And you say the bookkeeper may have seen bank statements?---The bookkeeper's role was to - - -

But did you see any bank statements?---Not personally, no.

No. Or Mathew?---I can't speak for that, I - it's practice that he would have some bank statements, but I can't positively say that.

MS BURNETT: Well, I suggest to you that for the 2005 year, this amount of 31 thousand-odd travel expense was never paid by the company to Mr Cameron?---No, I disagree with that.

And I also suggest that in that year, Mr Cameron's - - -

…

MS BURNETT: And you also don't know whether Mr Cameron's travel expenses of food and lodging were paid for by his employers when he was in these remote locations in '05 - or whether he paid for them himself?---I don't know.

Now, you referred to the 2004 year as an example of another year in which a travel allowance was claimed and apparently not disturbed, but I think that needs to be corrected. That document was T3, page 26. In T3, 26 was the 2004 tax return; you prepared this return?---Yes.

And in the top half of the page we have deductions, and D2, second line, "Work related travel expenses," but you will see there is no expense in the right hand column there, it's just blank?---D2 - D2 is blank, yes.

D2 is blank.

…

MS BURNETT: There were no travel allowance deductions in that year, were there?

…

MS BURNETT: "Other work related expenses" - but there is a specific item for work related travel expenses, surely they would have been in that one?---Technically, they should have been in D2, it appears we have put them erroneously in D5.

But there's nothing to prove that this amount under "other expenses" is travel expenses, it could be anything?---Nothing - I will just - at T62 - sorry, yes, you are correct. In the 2004 individual return there's nothing before the tribunal to say what that is.

THE D.PRESIDENT: Sorry, I'm not quite - are we talking about the company or Mr Cameron?---Mr Cameron is at T26.

Yes, that's quite true. And you've already said that you think that the travel expenses might perhaps have been in D6, when they should have been in D2. I'm not quite clear that I've - - -?---In D5, sir.

I beg your pardon, D5. Well, did your firm prepare this return?---Yes, we did.

Well, why would it be in D5 instead of D2? You wouldn't make an error like that?---It appears we may have, sir."

65. The statutory threshold for a failure to take reasonable care is 25%. As the Applicant has not contended that the deductions are allowable it must follow that he accepts that they were not. The Applicant and his tax agent Mr Curry did not exhibit reasonable care in claiming a deduction for travel expenses; the relevant claims were clearly formulated on a purely arithmetical and formulaic basis and without regard to the question of whether such expenditure was in fact incurred. The Respondent contends (correctly) that travel expenses are only deductible to an employee under section 8-1 of the ITAA97 if the travel expenses are incurred in the course of the employee performing his duties of employment.

66. The Applicant performed his employment services for clients of the company at a number of locations; Weipa, Perth, Dampier and Gladstone during the 2004 and 2005 years. However there is no evidence that he was required to travel in the course of providing his services. His work location in relation to each of those clients of the company was fixed. He performed his work on the client's premises and it is likely that he did not travel in the course of performing that work.

67. The Respondent has agreed to reduce the 50 per cent penalty in respect of the 2005 year to 25 per cent; a penalty of 25 per cent in respect of each of the 2004 and 2005 year is in my view reasonable and should not be further reduced.

Part E - Summary And Conclusion

68. The evidence of the Applicant was in my view unreliable and in particular in relation to the business activities of the company in the 2004 year. Neither the Applicant nor Mr Curry was able or willing to answer questions about the stevedoring/retail business in any manner which made sense. T9 at 61 indicates in clear terms that the company ran a stevedoring and/or retail business, and which was at least as important as the drafting service, and which was in any event carried out for the most part in the premises of clients and not in the premises themselves. T9 at 61 demonstrates how unsatisfactory that evidence was. Apart from any other considerations, and even assuming that there was at times drafting activity taking place in the premises, that activity would not have taken either the whole or even the major part of the premises; moreover drafting took place in the premises to some extent only for a part of the 2004 year only.

69. The preceding clause relates to the 2004 year. In all three years the evidence demonstrates in the clearest possible terms that work was obtained through contacts with individuals; the claim as to the public or a section of the public was never tenable and Yalos is distinguishable. I have not forgotten that the Applicant did refer to this test in respect of the 2006 year but and as I have said he cannot have done so in reliance on Yalos and moreover if he did seriously seek to contend that it was available to him it would have been claimed in respect of all three relevant years.

70. Excepting only that the travelling costs penalty for the 2005 year is, as conceded by the Respondent, reduced from 50% to 25% the objection decision under review is affirmed.