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Case S87

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 22 October 1985.

K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

The references in this case which, by consent, were heard together, relate to the years of income ended 30 June 1976 to 1979, inclusive. The matters in issue may be summarised as follows:

  • (a) Whether, in the year of income ended 30 June 1976, the Commissioner was correct in including as assessable income cash sales of $1,887 which, he alleged, were received by the taxpayer and not returned as part of assessable income in that year.

    ATC 632

  • (b) Whether the average income used by the Commissioner in consequence of the adjustment made to the assessable income of the earlier year, in calculating the tax payable for the year ended 30 June 1977, was correctly calculated.
  • (c) Whether, having regard to subpara. 82AA(1)(a)(ii)(C) and para. 82AG(1)(b) of the Income Tax Assessment Act 1936, the taxpayer's claim for an investment allowance deduction of $39,902 in the year ended 30 June 1978, was allowable.
  • (d) Whether the consequential loss of $18,809 (arising out of the 1978 claim) claimed by the taxpayer in the year ended 30 June 1979, under the provisions of sec. 80 of the Act, was an allowable deduction.

As indicated, the answers to the matters arising for our consideration under (b) and (d) above are, in turn, dependent upon our determinations in relation to the substantive issues outlined in (a) and (c), respectively. The issue involved in (a) is self-explanatory; the issue involved in (c) is perhaps not so apparent, and deals with the question of whether the taxpayer had granted a right to another person to use the eligible property so as to preclude him from obtaining the investment allowance.

2. Following upon the Commissioner's disallowance of the taxpayer's objection to the assessing action taken in each year, the matters came before this Board for review. At the hearing, both parties were represented by counsel and several witnesses were called by each party to adduce evidence in support of the submissions made.

3. It appears that the taxpayer had been a professional fisherman for some 23 years. In about 1974 he commenced business on his own account, and between then and 1977 he operated several vessels in the crayfishing industry. In 1976, or thereabouts, he arranged for the construction of two fibre-glass boats, at a cost of some $100,000 each, which enabled him in due course to obtain from the requisite government authority a licence for each vessel to operate a total of 128 crayfish pots. The first of these vessels, which we will refer to as R.M., was completed in September 1977, and the second vessel, which we will refer to as C.J., was completed in January 1978. Both vessels were made ready for crayfishing activities shortly after their respective completion dates. When the C.J. became operational for fishing purposes in due course, it was skippered by the taxpayer for the remainder of the period in issue.

4. In about September/October 1977, the taxpayer entered into an agreement with a person, whom we shall refer to as F, to skipper the R.M. F was also a professional fisherman of many years' standing and was widely experienced in all matters pertaining to the crayfishing industry.

5. The agreement entered into between the taxpayer and F was not reduced to writing and was referred to by the parties as a 60/40 arrangement. It was said that this form of arrangement was the most commonly used in the crayfishing industry, although, it seems, the sharing proportions have been varied in a few instances to, e.g. a 50/50 basis. In more recent times, it seems that several lease agreements have been entered into whereby the owner of the boat leases it for a definite period of time in return for the payment in advance of an agreed sum of money.

6. Essentially, the 60/40 arrangement is an oral agreement under which the owner of the boat, such as the taxpayer, becomes entitled to 40% of the value of the gross catch and the skipper to 60% of that value. It seems that, under the agreement entered into between the taxpayer and F, and which, we understand, remained substantially the same throughout the relevant period, the taxpayer was responsible for the general supervision and administration of R.M. and for the payment of all expenses associated with its end-of-season repair and maintenance to ensure that it was in good working order at the commencement of each new season. It seems that F was required, as the occasion demanded, to assist the taxpayer in the end-of-season maintenance of the R.M. The above expenses included the costs of running the boat (with F as skipper) from its operational base to, and from, the location where the repairs and maintenance were to be effected, the costs of slippage, painting and storage and a hull survey which was apparently required to be made each year. Other end-of-season expenses included, it seems, the costs of replacing fishing gear, where necessary, which included ropes, floats and cray-pots. As owner, the taxpayer was also required to pay all expenses associated with the

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insurance of R.M., the cost of the fishing licences and harbour dues wherever incurred.

7. During the fishing season, the taxpayer was responsible for the payment of all expenses associated with major repairs, which could include, it seems, the repairing of such items as the alternator and starter motor, or the replacement of those items, and the repair or replacement of similar major items. However, it appears that, during the running-in period of the R.M., the taxpayer was responsible for the payment of most of the maintenance charges of a minor as well as a major nature which might have been incurred. It seems that, under the agreement, the taxpayer was liable for payment of the abovementioned expenses out of his 40% share of the gross proceeds received from the catch or, presumably, from any other sources of funds available to him.

8. Other responsibilities of the taxpayer during the fishing operations of R.M. would appear to have included, in general, an oversighting role to ensure that the boat was clean, that it was maintained in good working order and condition and that it did not contravene any fisheries' regulations such as operating outside specified fishing zones, using too many pots or catching undersized crayfish. To ensure that these matters were duly attended to, it appears that, when at sea, the taxpayer was often in visual contact with the R.M. and, if not, that he was in radio contact with its skipper, F. In any event, it seems that the taxpayer and F were constantly in radio contact with each other and with skippers of other fishing boats, which action, we were given to understand, was part of a team effort that was commonplace for the purposes of advising each other as to locations where crayfish might more readily be obtained. It was said to be the taxpayer's practice, when R.M. was not at sea, to physically inspect it at frequent intervals, particularly in the first 12 months or so of commencing its fishing operations, for the purposes of ensuring that it was clean, in good working order and free from major faults.

9. A further responsibility of the taxpayer was to arrange for the sale of R.M.'s catch. This he did for the relevant period, and F agreed in his evidence that he was bound to comply with those arrangements, although other sales outlets were available in the location where the catch was landed. Both the taxpayer and F, in compliance with the purchasing company's requirements, advised it with details concerning the 60/40 agreement, their names and, presumably, their addresses and the name of the boat which each operated. These details were no doubt required to enable the company to obtain an awareness of its legal position in relation to the taxpayer and F and for identification purposes so as to ensure that each would be credited in the company's records with his correct share of the value of each catch and that each relevant account would be correctly debited in respect of expenses incurred by each in the purchase from the company of ropes, bait and such like items. It seems that there was no written agreement between the parties in relation to these matters.

10. As already indicated, F was an experienced fisherman of many years standing. In our understanding (and certainly the inferences to be drawn from the evidence support this conclusion), F was regarded by the taxpayer and others in the industry as being a competent seaman and generally well able to control and manage the R.M. in accordance with local harbour and other shipping requirements and in all weather conditions without guidance or assistance. He was also a skilled fisherman who could, and in fact did, it seems, undertake his tasks in that capacity in charge of the boat and a crew of two, in a professional and competent manner and without assistance or direction. While it is true that he was bound to comply with the taxpayer's directions concerning such matters as the general areas in which fishing could take place and to keep the boat in a clean and workmanlike condition, his position was, it seems, little different (if at all) from that of any other skipper (including the taxpayer) in charge of a fishing vessel while at sea who, whilst complying with fisheries' regulations, was intent on pursuing his tasks diligently and in a professional-like manner. While it is also true that the taxpayer had ultimate control of the vessel in the sense that he could dismiss F for wrongful acts or negligence, the reality was that no such acts or negligence happened in fact in the relevant period. The evidence also indicates that F made the decisions when to put to sea and when to return and that, while at sea, he was primarily responsible for the conduct and welfare of the R.M. and its fishing operations. F did not use the R.M. for private purposes.

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11. Under the 60/40 agreement with the taxpayer, F was responsible for keeping the R.M. clean and in good working order and for the payment of all expenses incurred by him in that connection. The evidence indicates that F discharged the various obligations imposed upon him under the agreement and that he paid all expenses incurred by him. Whilst the evidence indicates that the taxpayer paid for most of the major and minor running-in costs incurred by the R.M. in the first year or so of its operations, the evidence also indicates that F paid various maintenance and running costs in the relevant period in connection with such items as fuel, oil changes, filters, cleaning materials, fan belt, and for the replacement of lost or damaged gear which included wire, rope, floats, aprons, gloves, boots, echo sounder paper, pots, etc. F cut the ropes into appropriate lengths and fixed the pots into the various locations as required.

12. F was also responsible for providing a dinghy at his own cost and for the hiring and firing of the crew, subject to the overall prohibition by the taxpayer that he should not employ undesirables. It seems that on one occasion F agreed not to hire a crew member whom the taxpayer regarded as not suitable. However, it appears that, once hired, a crew member could not, under the agreement, be dismissed by the taxpayer, or, if he sought to do so, he would run the risk of also losing the services of F. It seems that, in fact, no such problems arose. F paid the crew their wages and apparently provided a standard insurance cover against liabilities arising out of accidents sustained by the crew. It seems that the crew were specifically excluded as employees for the purposes of the relevant Workers Compensation Act.

13. F's responsibilities included the landing of the catch and transporting it to the factory premises of the purchasing company. Usually the catch was transported to the factory in F's own vehicle at his own cost. However, where the catch was too large for this to be practicable, a company-owned vehicle was also used for that purpose.

14. On reaching the factory, the catch was weighed and a daily docket, known as a ``crayfish docket'', was made out in triplicate in the names of the skipper (F) and the boat (R.M.). This docket also recorded the gross weight of the catch and its net weight. Under the recording procedures followed, F retained the original docket, whilst the duplicate and triplicate copies were passed on to the company office where the details were extracted and recorded on a fortnightly statement in the joint names of F and his wife, to which were also added details of F's 60% share of the value of the catch expressed in dollar terms. Similar records were also kept in respect of the taxpayer's 40% share of the catch.

15. Where appropriate, separate dockets recording F's purchases from the factory of bait, fuel, etc. were also made out and taken into account on the fortnightly statement in arriving at the net fortnightly amount payable to him. At the end of each fortnight, a cheque for the net amount, together with the original of the fortnightly statement, were forwarded to F. Similar procedures were apparently followed in payment of the taxpayer's 40% share. Two comments need to be made in connection with these matters. First, while the fortnightly statements apparently indicated that the proceeds were payable to F and his wife, the taxpayer was not aware of those arrangements which did not, in any event, form part of the sharing agreement which had been entered into between him and F. For present purposes, it is not necessary for us to refer to that matter further. Secondly, evidence given by a company representative called as a witness indicates that the company regarded F (and not the taxpayer) as being personally liable for payment of the expenses incurred by him in the purchase of bait, etc.

16. We turn now to consider the evidence which concerns the matter of cash sales allegedly made by the taxpayer in the year of income ended 30 June 1976. In his evidence, given under oath, the taxpayer stated that, whilst it was possible for him in practical terms to have made sales of crayfish for cash in that period, he did not in fact do so. He did not do so, it seems, because of his concern at that particular time to have reliable records available which would satisfy his bankers of his sound financial position which, in turn, would enable him to borrow further funds for income-producing purposes should the need arise. He also stated that, where cash sales were in fact made by him in more recent times, the details were recorded by him in a cash docket book which he kept at his home. Those sales were, he added, returned as income for

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tax purposes. He did not indicate, however, whether those documents would be regarded as reliable for banking purposes.

17. In further evidence concerned with cash sales, the taxpayer intimated that, in his experience, the purchasing company had in past years made as many as three errors in the one year, which had resulted in the incorrect registration of crayfish in names other than in his name; similar errors were also said to have been made in the raising of debits in respect of expenses incurred for bait, gear, etc. Evidence was adduced in connection with one such instance where, in 1978, the taxpayer was not credited with 16 bags of crayfish which had been incorrectly credited to another person. Following the taxpayer's enquiries, correcting action was taken by the purchasing company to credit the taxpayer with the missing 16 bags.

18. In his evidence the taxpayer recalled being interviewed some four years back, in company with his accountant, by an officer of the Taxation Office in connection with the issues now before us. It appears that the interview lasted some 15-30 minutes and was concerned principally with cash sales. The taxpayer recalled being shown a docket (not in evidence) by the officer which showed either his surname preceded by the letter G, or his surname only followed by the word ``industries''. It seems further that, whilst the taxpayer acknowledged at the interview that the docket originated with his purchasing company and that it recorded details of cash sales allegedly in respect of a catch or catches made by him in the location where he normally fished, he advised the officer that no such sales were made by him.

19. In this connection the administration manager of the purchasing company gave evidence to the effect that, where cash sales were made at the point of weighing the catch (but not elsewhere), the practice was to omit the name of the vendor and to record only the docket number, the net weight and the amount of money that was paid out. He went on to assert that it would not have been possible for an appropriate officer of the company to check through the 1976 records to see whether the cash payment of $1,887 in issue was made to the taxpayer or to anyone else.

20. The evidence of the taxpayer's accountant does not assist us greatly. He recalled being present with the taxpayer at the interview with the taxation officer, but could not recall the exact questions put to the taxpayer by the officer nor the replies which the taxpayer gave. However, having been assured by the taxpayer at the time of preparing the relevant return of income that all income had been accounted for, he thought that the taxpayer's replies to the officer would have been to the effect that no cash sales had been made by him. The accountant stated that he had not made any notes concerning the interview.

21. In his evidence, the interviewing taxation officer advised that he recalled the interview with the taxpayer and his agent. He also advised that the document (not in evidence) upon which his interview was based had been prepared by another officer who, it seemed to be suggested, would have had access to cash sales dockets in the name of the taxpayer (not in evidence) which had been prepared by the purchasing company referred to earlier. However, the witness was not able to recall whether the document used at the interview was shown to the taxpayer and whether he identified the cash sales apparently recorded on it as having been attributed to him. Whatever the true position might have been, the witness gave us to understand that, in his recollection, the taxpayer appeared to accept that the cash sales were correctly recorded in his name. It was the taxpayer's apparent acceptance of this position that gave rise, it seems, to the action to include the amount of $1,887 as part of the taxpayer's assessable income. However, in his cross-examination, the witness conceded that his recollection of the events was somewhat vague and that it was possible (whether or not the interview document was shown to the taxpayer) that the taxpayer had advised him that he had not made cash sales in the relevant period.

22. In our opinion the evidence concerning the cash sales matter is unsatisfactory and, in some respects, it appears to be misleading. However, the taxpayer's evidence was unshaken. Therefore, having regard also to the possibility of errors having been made in the records of the company and by the Taxation Office, it seems to us that, on the balance of probabilities, the taxpayer did not make cash sales in the relevant period and that, in terms of sec. 190(b) of the Assessment Act, he has discharged the onus of proving that his

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assessment in respect of the year of income ended 30 June 1976 was excessive.

23. We turn now to consider the principal question in issue of whether the taxpayer's claims for an investment allowance deduction are well founded. For this purpose, it is convenient to set out, to the extent considered relevant for present purposes, the provisions of sec. 82AA(1)(a)(ii)(C) and 82AG(1)(b) as follows:

``82AA(1) Subject to the following provisions of this Subdivision [B], this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -

  • (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
    • (i) in Australia; and
    • (ii) for the purpose of producing assessable income otherwise than by -
      • ...
      • (C) the granting to other persons of rights to use the eligible property...''

``82AG(1) This Subdivision does not apply, and shall be deemed never to have applied, in relation to sub-section 82AA(1) property acquired or constructed by a taxpayer, not being property that, in the case of a taxpayer being a leasing company, the taxpayer has leased to another person, if, before the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer -

  • ...
  • (b) the taxpayer leased the property... or otherwise granted a right to another person to use the property...''

(As no argument was led to the contrary, it can be taken that the crayfishing operation was undertaken in Australia; see
W. Smith v. F.C. of T. 82 ATC 4073 at p. 4079.)

24. Having regard to the evidence before us, and the submissions made, the fine question for our determination is whether, in terms of those provisions, the taxpayer granted to F a right to use the R.M. within the first 12 months of its commencing its fishing operations. It appeared to be common ground between the parties that, in practical terms, the question requiring our decision is the same in relation to both provisions and that, for those purposes, the R.M. was ``eligible property'' as defined (sec. 82AQ(1)). It also appeared to be common ground that the R.M. was not leased to F by the taxpayer in the relevant period and that there was no formal or informal partnership agreement between them or a partnership in the broader sense as defined in sec. 6 of the Act.

25. Further, it appeared to be accepted by the parties that, even if it could be said in the circumstances of the instant case that a partnership in the wider sense existed, the R.M. was not used by the partnership for the purposes of producing assessable income. However, if, contrary to our understanding of the position, it should be inferred from the submissions that it was intended to be argued that the R.M. was so used, it would appear that, in the light of the decision of the Federal Court in
W.A. Hughes Pty. Ltd. v. F.C. of T. 81 ATC 4317 (see later at para. 41), the taxpayer's claim in that event must fail.

26. For present purposes it is only necessary to refer to two of the submissions made by taxpayer's counsel in connection with the claims made. The essential elements of these submissions may be summarised as follows:

  • (a) At all material times the relationship which existed between the taxpayer and F was one of employer and employee, with the consequence that the taxpayer retained the effective control and exclusive possession of the R.M. In support of that submission it was said that that relationship was not diminished by the considerable degree of control which F had over the work which he carried out on the R.M., by the prima facie independent manner in which he carried out that work, or by the fact that he had delegated to him certain rights such as selecting staff.
  • (b) If, on the other hand, the proper character of the relationship between the taxpayer and F was something less than that of employer/employee and entailed the grant by the taxpayer to F of a licence to occupy and carry out work on R.M., but without the taxpayer at any time relinquishing his right to exclusive possession of the vessel, then the proper conclusion to be drawn, it was said, was that the taxpayer, as licensor,

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    had not granted the right to F to use R.M. for the purposes of the provisions under consideration.

27. Counsel for the taxpayer did not refer us to any specific authority in support of his proposition that a relationship of employer/employee existed between the taxpayer and F. However, counsel alluded to several administrative rulings issued by the Commissioner which, he contended, provided sound reasons in law for acceptance of that proposition in the circumstances of the instant case. Whilst we do not accept that the rulings are in any way binding upon us as precedents which must be followed, we make reference to two of them in the interests of brevity in stating what we understand to be counsel's contentions in relation to the issues raised. However, we would make the comment that, whilst we are in substantial agreement with the general propositions put forth in the rulings, we are nevertheless bound, in our opinion, to apply the law as we would understand it to the particular facts in evidence before us.

28. Taxation Ruling IT 93 was cited by counsel in support of the contention that control and directions exercisable, or being exercised, or which are capable of being exercised by the alleged employer, are critical factors to be taken into account in determining the relationship that existed between the taxpayer and F. Taxation Ruling IT 2129 was cited in similar vein and also in support of the further contention that, where the ``control test'' is inconclusive, the ``integration (or organisational) test'' may be used as an adjunct for determining whether an individual is an employee as such. The Ruling states that the primary purpose of the latter test is to establish whether the individual is performing the relevant services as an individual carrying on business on his own account or is, in his activities, part and parcel of the principal's business organisation.

29. Counsel urged us to conclude, in the circumstances of the instant case, that the application of those tests supported the taxpayer's claims because, first, in counsel's submission, the taxpayer had an overriding control of the R.M. and had, in essence, the right to control how, when and where its fishing operations were to be carried out, subject, however, to clearly delegated powers which were available to F, as skipper of the vessel. Secondly, it was submitted that the evidence indicated that most, if not all, of the persons engaged in the particular activities of the fishing industry with which we are concerned, including F and his crew, were paid on ``a share of the catch'' basis, with the consequence that F, who was said to be essentially under the direction and control of the taxpayer, should also be regarded, in terms of Ruling 2129, as an employee of the taxpayer. We would respectfully agree with counsel that it is of little consequence for present purposes that neither the taxpayer nor F were obliged to make workers' compensation payments in respect of the relevant period.

30. Counsel for the Commissioner also referred us to the ``control'' and ``organisation'' tests in his analysis of the relationship that existed between the taxpayer and F. In the case of
Performing Right Society Ltd. v. Mitchell & Booker (Palais de Danse) Ltd. (1924) 1 K.B. 762, referred to us by counsel as an example of the control test in operation, McCardie J. had this to say at p. 767:

``The nature of the task undertaken, the freedom of action given, the magnitude of the contract amount, the manner in which it is to be paid, the powers of dismissal and the circumstances under which payment of the reward may be withheld, all these bear on the solution of the question. But it seems clear that a more guiding test must be secured.''

And at the same page, his Honour went on to say:

``It seems, however, reasonably clear that the final test, if there be a final test, and certainly the test to be generally applied, lies in the nature and degree of detailed control over the person alleged to be a servant. This circumstance is, of course, one only of several to be considered, but it is usually of vital importance.''

At p. 768, his Honour stated further that:

```... A master is one who not only prescribes to the workman the end of his work, but directs or at any moment may direct the means also, or, as it has been put, `retains the power of controlling the work': see per Crompton J. in
Sadler v. Henlock 4 E. & B. 570, 578. A servant is a person subject to the command of his master

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as to the manner in which he shall do his work: see per Bramwell L.J. in Yewens v. Noakes (1880) 6 Q.B.D. 530, 532, and the master is liable for his acts, neglects and defaults, to the extent to be specified. An independent contractor `is one who undertakes to produce a given result, but so that in the actual execution of the work he is not under the order or control of the person for whom he does it, and may use his own discretion in things not specified beforehand.'''

31. Counsel for the Commissioner appeared to accept, however, that the control test has, to some extent, been replaced (or perhaps supplemented) by what has been referred to as the organisation test. In other words, counsel appeared to accept the possibility that in some situations it is possible that a person not under and subject to the detailed control of another, may yet be properly classified as an employee if the person is nevertheless part and parcel of the organisation. However, counsel referred us to several authorities which indicate some of the practical difficulties that might be encountered in applying that test. In the case of
Ready Mixed Concrete (South East), Ltd. v. Minister of Pensions and National Insurance (1968) 1 All E.R. 433, Mackenna J., at pp. 440-441, had this to say:

``An obligation to do work subject to the other party's control is a necessary, though not always a sufficient, condition of a contract of service. If the provisions of the contract as a whole are inconsistent with its being a contract of service, it will be some other kind of contract, and the person doing the work will not be a servant. The judge's task is to classify the contract (a task like that of distinguishing a contract of sale from one of work and labour). He may, in performing it, take into account other matters besides control.''

And, at p. 445, his Honour went on to say:

``I have almost completed my review of the authorities. There is, as well, the dictum of DENNING L.J., in
Bank voor Handel en Scheepvaart N.V. v. Slatford (1952) 2 All E.R. 956 at p. 971; (1953) 1 Q.B. 248 at p. 290, repeated in his Hamlyn Lectures:

  • `In this connexion I would observe the test of being a servant does not rest nowadays on submission to orders. It depends on whether the person is part and parcel of the organisation.'

This raises more questions than I know how to answer. What is meant by being `part and parcel of an organisation'? Are all persons who answer this description servants? If only some are servants, what distinguishes them from the others if it is not their submission to orders? Though I cannot answer these questions I can at least invoke the dictum to support my opinion that control is not everything.''

32. The other authority to which we make reference, which was referred to by counsel for the Commissioner, is the text book entitled The Law of Employment by Macken, McCarry and Sappideen, 2nd ed., Ch. 1, published in 1984. Of particular relevance for present purposes, in the context of determining the proper weight to be given to the ``control'' and ``organisation'' tests, are the following comments made by the learned authors at pp. 22-23, which, after referring to the observations of Mackenna J. at pp. 440-441 in the Ready Mixed Concrete case (supra), and another authority which need not concern us here, read:

``Both the `control test' and the `organisation test' as applied in modern contract law were passed [sic] upon by the New South Wales Court of Appeal in
Albrighton v. The Royal Prince Alfred Hospital & Ors (1980) 2 N.S.W.L.R. 542. Reynolds J.A. referred [to] the difficulty of applying such tests to medical practitioners and said of the `control test', ibid, at p. 557:

  • `It is no longer acceptable in its full rigour; and, as the law stands today, the uncontrollability of the person forming part of an organisation as to the manner in which he performs his task does not preclude recovery from the organisation, and does not preclude the finding of a relationship of master and servant.'

Many of the earlier authorities were reviewed by the New South Wales Court of Appeal in that case and his Honour observed, ibid, at p. 558:

  • `The law does not use the test in order to ascertain whether in fact the employee's work to be done is susceptible of control and direction by the employer: it is in order to ascertain whether a relation exists between the two men.'

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The judgment is worthy of study for the detailed review of the indicia involved on the facts which pointed for and against the existence of a contract of service. `Whether or not this new test (i.e. the organisation test), which still involves the question of control as a factor, does more than restate the question rather than providing an answer to it may be open to doubt.'
Commissioner of Taxation of the Commonwealth of Australia v. Barrett & Ors (1973) 47 A.L.J.R. 616; 73 ATC 4147. The `control test' requires a balanced evaluation of all of the incidents of a relationship, including the extent, quality and direction of factual, or reserved, control by one party over another.

Property applied the `control test' should not be focused on any particular incident of a relationship. After all the incidents of the relationship are examined in their proper perspective and all the indicia for and against the existence of a contract of employment are appropriately weighed - one is left either with or without the necessary quality of control to decide the issue:

  • `We think, however, that it is not sufficient to point to some facts as indicating one relationship or another. The whole of the relevant facts have to be carefully examined together.'
    Grolier Society of Aust. Pty. Ltd. v. Keir (1965) A.R. 65 at 74, and see
    Ferguson v. John Dawson & Partners (Contractors) Ltd. (1976) 1 W.L.R. at 1213.

Having done this `the decision will depend on a judgment or intuition more subtle than any articulate major premise'.
Lockner v. New York 198 U.S. (1905) 45 at 75 per Holmes J. It is a rule of common sense in the application of which precedent may be more of a hindrance than a help. It is `a principle the ambit and validity of which depends on confining it steadily to the end for which it was established, the analogies of previous instances where it has been applied are apt to be misleading'''


Kreglinger v. New Patagonia Meat Co. & Cold Storage Co. Ltd. (1914) A.C. 25 at p. 39.

33. On the evidence before us, there can be little doubt, in our opinion, that the R.M., skippered by F, was an integral part of the income-producing organisation over which the taxpayer presided in the relevant period. However, it seems to us that, in the light of the authorities, that fact of itself is not decisive of the true relationship that existed between the taxpayer and F and that, in order to determine what that relationship was, it is necessary to have regard also to the question of control which still remains a critical factor, and, in that connection, to undertake ``a balanced evaluation of all the incidents of (the) relationship, including the extent, quality and direction of factual, or reserved, control'' by the taxpayer over F.

34. Turning, therefore, to the evidence, it seems clear to us that, whilst F was bound to fish in a specified fishing zone in accordance with the taxpayer's directions, which also, it seems, were circumscribed by the fishing licences granted to the taxpayer, F, as skipper of the R.M., was not required to sail the vessel in any specified manner, which might include such matters as the minimum and maximum speeds at which the vessel should be sailed and actions to be taken in times of emergency. Therefore, whilst F was no doubt obliged as a professional mariner to sail the vessel with due regard to its safety and to observe the harbour and any other navigational requirements in force, he was, it seems to us, fully in control of the vessel as skipper when at sea.

35. As a fisherman, F was also fully in control of the vessel on a day-to-day basis. Within the fishing season, he made the decisions without reference to the taxpayer when to put to sea and when to return to port. As the crayfish came to be caught further out to sea, the boats (including the R.M.) would not fish every day, but perhaps every second or third day, and it was F who made the decision in respect of the R.M. as to whether he would go out or not go out on a particular day, without reference to the taxpayer. F was not told exactly where to put his pots in the sense that he looked to the taxpayer for direction every day as to where he went out and fished. Whilst there was some degree of liaison or co-operation between the two, there was also similar co-operation between other skippers and boats fishing in the same general area. It was said to be common knowledge (which we accept) that crayfish do not remain in precisely the same location. They move around, and

ATC 640

what might be a successful fishing spot today might be unsuccessful tomorrow and it seems to be a matter of general co-operation between skippers of boats (all of whom were either in visual or radio contact with each other, and who apparently work as a team) to indicate to each other the best locations in which to fish. This appears to be a two-way arrangement and, as between the taxpayer and F, it would indicate no more, in our opinion, than that they followed the practice commonly used in the industry. We do not consider that the taxpayer's desire to keep in close contact with the R.M. during its running-in stages was a material factor which points to the precise relationship which existed between the two. Rather, as suggested by counsel for the Commissioner, we see it as a prudent measure which was resorted to in order to monitor its performance, as distinct from that of F, in the interests of seeking, if necessary, an adjustment to, or a replacement of, the component parts of the vessel by its manufacturers or suppliers.

36. Other factors which point to the non-existence of the relationship of employer/employee between the taxpayer and F include F's responsibilities in connection with crew, gear, the provision of his own dinghy and the transport of the catch in his own vehicle to the purchasing company. Further factors which point to a similar conclusion include the liability of the purchasing company to pay F for his share of the catch and F's liability to pay the company for any purchases made from it.

37. Apart from one instance where, on the taxpayer's advice, F decided not to employ a particular person, there was no evidence that the taxpayer played any part in the hiring and firing of crew. F both hired and fired crew without reference to the taxpayer and, indeed, the evidence indicates that, if the taxpayer had advised F to fire any particular crewman, it would have had to have been for a good reason otherwise F would not have accepted the advice. Nor was F controlled by the taxpayer as regards the gear he bought or how he paid for it. The arrangement between them was simply that, if gear was broken or lost, it was to be replaced by F and that is what he did. Equally, F was at liberty to buy whatever gear he thought fit and he did so and he paid for it out of his share of the proceeds. F also ordered bait and fuel in his own name and he paid for these items, also out of his share of the proceeds. The proceeds went to him directly from the purchasing company, which regarded him (or perhaps jointly with his wife) as legally entitled to them. As indicated earlier, F was required to provide his own dinghy and to transport the catch in his own vehicle to the purchasing company. This he did. In our opinion, these responsibilities, having regard to the authorities, do not fit easily into the usual concept of what constitutes the relationship of employer/employee.

38. However, the essential fact remains that the taxpayer had the ultimate control over the R.M. in the sense that he had the right at any time to terminate the arrangement for the use of the R.M. by F. Nevertheless, and notwithstanding the presence of a similar situation in the case of
Queensland Stations Pty. Ltd. v. F.C. of T. (1945) 70 C.L.R. 539, the High Court concluded in that case that there was not sufficient control to lead to the conclusion that there was a relationship of employer and employee. That was a case of a drover who agreed with the owner of cattle to serve in the capacity of a drover and take cattle from A to B. He was to be paid a fixed sum per head of cattle delivered, and it was he who had the responsibility for hiring men and for providing plant and equipment. It was held that the drover was not an employee but was, in effect, an independent contractor. Of particular relevance for present purposes are the following comments of Dixon J. (as he then was) at p. 552 (70 C.L.R.):

``There is, of course, nothing to prevent a drover and his client forming the relation of employee and employer: See, for example,
Turnbull v. Wieland (1916) 33 T.L.R. 143. But whether they do so must depend on the facts. In considering the facts it is a mistake to treat as decisive a reservation of control over the manner in which the droving is performed and the cattle are handled. For instance, in the present case the circumstance that the drover agrees to obey and carry out all lawful instructions cannot outweigh the countervailing considerations which are found in the employment by him of servants of his own, the provision of horses, equipment, plant, rations, and a remuneration at a rate per head delivered. That a reservation of a right to direct or superintend the performance of the task cannot transform into a contract of service

ATC 641

what in essence is an independent contract appears from
Reedie v. London and North Western Railway Co. (1849) 4 Ex. 244; 154 E.R. 1201;
Steel v. South-Eastern Railway Co. (1855) 16 C.B. 550; 139 E.R. 875;
Hardaker v. Idle District Council (1896) 1 Q.B. 335, per Lindley L.J., at p. 343; per A.L. Smith L.J., at p. 340. See the observations of McCardie J. in
Performing Right Society Ltd. v. Mitchell and Booker (Palais de Danse) Ltd. (1924) 1 K.B. 762, at p. 767, and the passage there quoted from Smith's Law of Master and Servant (1922), 7th ed., p. 238.''

39. Therefore, accepting for present purposes that the taxpayer did have ultimate control of the R.M. in the sense explained earlier, and that he also had some degree of day-to-day control in its running-in stages for the purposes also mentioned earlier, the Queensland Stations case is authority for the proposition, in our opinion, that those levels of control are not decisive of a conclusion that there was a relationship of employer and employee. Having regard to the evidence overall, in particular F's responsibilities as a skipper in charge of the boat and crew and his other responsibilities as a fisherman in relation to actual fishing operations, gear, bait, fuel, etc., we are of the opinion that he was not an employee of the taxpayer and that he was in fact an independent contractor. It seems to us that, without that independence being vested in F or in some other suitably qualified person, it would not have been a practical proposition for the taxpayer, because of the nature of the fishing operations carried on, to have used the R.M. as part of his organisational structure in the production of assessable income.

40. We turn now to consider the alternate submission made in support of the taxpayer's claims for an investment allowance. It seemed to be common ground that it is not necessary to have a formal agreement between parties before the right to an investment allowance might be lost. In any event, it will be recalled that, under those parts of the provisions of sec. 82AA and 82AG with which we are concerned, all that is required before the investment allowance is lost is that it be shown that the taxpayer granted to F a right to use the R.M.

41. The case of W.A. Hughes Pty. Ltd. (supra) is a good example of an informal arrangement, as in the instant case, which had the consequence that the investment allowance was lost. That was a case of a company which claimed an investment allowance deduction in respect of equipment which it purchased. Although the company was the entity which purchased the equipment, it did not operate it, that being done by two subsidiary companies which carried on a coal haulage business in partnership. It was held, inter alia, by the Full Court of the Federal Court in that case (and here we quote from the headnote at p. 4318) as follows:

``The taxpayer used the truck for the purpose of producing assessable income by granting `rights to use it' to the partnership and accordingly sec. 82AA(1)(a)(ii)(C) operated to exclude an investment allowance deduction. There will be the granting of rights to use where there is an authority to do something which would otherwise be wrongful or illegal or inoperative. There is no need for the rights to be both formally defined and capable of being legally enforced.''

42. Both counsel referred us to the case of
Tourapark Pty. Ltd. v. F.C. of T. 82 ATC 4105 in connection with the meaning of the phrase ``right to use''. Counsel for the taxpayer sought to distinguish that case on its facts from those to be found in the instant case, basically because, in his submission, of the close relationship that existed between the taxpayer and F which, even if there were not a relationship of employer and employee, was nevertheless of such a nature that it could not be concluded that F was essentially an independent contractor. Therefore, in counsel's submission, the principles relied upon by the Court in that case could not have application in the circumstances of the instant case. Not unexpectedly, counsel for the Commissioner, whilst accepting that the facts in the two cases differ, nevertheless relied upon the principles established in that case for the proposition that F, whatever the exact nature of his relationship with the taxpayer might have been, and however his authority to use the R.M. might be described, had in fact the right to use the boat (which he did) as judicially interpreted in terms of sec. 82AA and 82AG.

43. The headnote in the Tourapark Pty. Ltd. case (82 ATC) reads:

``The taxpayer company carried on the business of a tourist caravan and camping

ATC 642

park on land in Canberra. On the land it provided caravans and motel units which were available to members of the public wishing to occupy them and for which they paid a charge. The caravans were mounted on concrete blocks but retained their wheels and were capable of being moved from site to site. They were connected to an electricity supply and water supply. Customers paid a stated amount per day and were provided with a key to a particular caravan. Each customer was granted a licence to occupy a caravan and to make use of the communal facilities provided on the site.

The taxpayer claimed the investment allowance in respect of certain new caravans it had acquired during the 1977 income year. The Federal Court held that the caravans were excluded from the investment allowance by virtue of sec. 82AA(1)(a)(ii)(C) and sec. 82AG(1)(b) because the taxpayer had granted its customers `rights to use' the caravans. The taxpayer appealed to the High Court, arguing that those provisions were concerned only with rights to use which deprived the taxpayer of the use of the property as plant.''

44. The High Court unanimously dismissed the taxpayer's appeal and considered that the taxpayer's use of the caravans fell precisely within the ordinary and natural meaning of the words of sec. 82AA(1)(a)(ii)(C) and 82AG(1)(b) and that there was no sound basis for departing from the ordinary meaning of the words. Although the taxpayer company itself used the caravans as plant for the purpose of producing assessable income, it, nevertheless, granted to each customer a right to use the caravans and therefore the excluding provisions applied.

45. The leading judgment was delivered by his Honour Gibbs C.J. Mason, Murphy and Wilson JJ. agreed with the Chief Justice. His Honour considered that the taxpayer granted a licence to each customer of the caravan park and that that licence carried with it a right to occupy the particular caravan and use the communal facilities provided in the park. His Honour concluded that the caravans qualified for the investment allowance ``unless they were acquired by the taxpayer for the purpose of producing assessable income by the granting to other persons of rights to use the eligible property (sec. 82AA(1)(a)(ii)(C)) or unless, even if not so acquired, within twelve months after their first use or installation ready for use the taxpayer granted a right to other persons to use them (sec. 82AG(1)(b))'' (pp. 4106 and 4107).

46. Plainly, the questions that arose under sec. 82AA and 82AG were the same - that is, in the circumstances mentioned, did the taxpayer, by allowing a customer to occupy a caravan pursuant to the licence, grant to that customer a right to use the caravan within the meaning of the sections?

47. Counsel for the taxpayer in that case conceded that the customer was given a right to use the caravan in one sense of the words. However, counsel also submitted that the taxpayer company nevertheless itself continued to use the caravans for the purpose of producing assessable income. In other words, counsel submitted that the further words ``thus depriving the taxpayer of the active use of it'' should be added, or read into sec. 82AA(1)(a)(ii), or alternatively, the words ``otherwise than by'' used in the section applied only to cases where the letting, leasing or granting of a right to use the property was the only use made of it by the taxpayer.

48. The Court rejected those submissions as it considered they required a departure from the ordinary and natural meaning of the words of the section. The taxpayer company granted to each customer a right to occupy and use the caravans for the period of the licence. The modification to the section sought by the taxpayer was found to be a gloss which could not be put on the words of the section.

49. The following comments by Aickin J. at pp. 4111-4112 are, in our opinion, important for present purposes in that they demonstrate just how widely the Court was prepared to take the plain meaning of the relevant provisions:

``I do not think that the fact that the section would involve the loss of the investment allowance in many cases of the ordinary but occasional use of articles and machinery falling within the definition of `eligible' property is a consideration which would warrant ignoring the plain meaning of the words used. It is true that the lending of eligible plant without any charge to a friend or business acquaintance for one day, or

ATC 643

permitting such person to use such plant on the owner's premises for a day without charge, would appear to destroy the investment allowance. There would in such cases be a `right' to use, though the licence would be revocable. The making of a nominal charge on such an occasion would undoubtedly destroy the deduction. Likewise the use of eligible plant by the owner on some isolated occasion for a purpose which was not the derivation of assessable income would destroy the deduction. However the fact that these provisions pose risks for hobbyists and farmers, and may well induce an attitude of apparent selfishness is not a sound basis for departing from the plain meaning of the words; they are clear and unambiguous.''

50. Therefore, having regard to the clear and unambiguous terms as used in the relevant provisions, we have little hesitation in concluding on the facts that F, as an independent contractor or in some capacity other than that of employee, used the R.M. for fishing operations in accordance with a right to use it which was granted to him by the taxpayer. We can only conclude, therefore, that the right so granted falls squarely within the meaning of the term ``right to use'' as judicially interpreted by the High Court. The taxpayer's claim for an investment allowance deduction must accordingly fail.

51. For the reasons detailed in para. 16-22, we would allow the taxpayer's objection in respect of the year of income ended 30 June 1976, and would order that the assessment in issue for that year be amended to excise the cash sales of $1,887 from assessable income. We would also allow the taxpayer's objection in respect of the subsequent year, and would order that the tax payable in respect of that year be amended to give effect to the consequential variation to the average income of that year which flows from our decision in relation to the preceding year of income. However, as regards the taxpayer's claim for deduction of the investment allowance, we would uphold the Commissioner's decisions on the objections in respect of the years of income ended 30 June 1978 and 1979, and confirm the assessments in issue for both years.

Claims allowed in part


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