Case V9

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 18 December 1987.

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R.K. Todd (Deputy President)

This reference, relating to a distinguished academic from the United Kingdom, involves two separate and distinct issues. The first is whether the applicant satisfied the conditions imposed by Art. 16 of the Australian/United Kingdom double tax convention and was therefore exempt from taxation in Australia in respect of his income from his employment as an academic. The second is whether the applicant is entitled to a deduction under sec. 51(1) of the Income Tax Assessment Act 1936 (``the ITAA'') for the cost of a hearing-aid purchased for use at public hearings conducted by him in his capacity as chairman of an inquiry instituted by the Commonwealth.

2. The applicant arrived in Australia from England on 5 January 1983 to serve a two-year academic appointment at an Australian university. At the end of the year of income ended 30 June 1983 (``fiscal 1983'') the applicant lodged a taxation return and received an assessment which stated that his remuneration from teaching was exempt from Australian tax. He had also written to the Commissioner in July 1983 advising of his situation, expressing an assumption that he was a non-resident of Australia and that he would be ``due for full tax remission in Australia''. The exemption upon which the assessment was based was in turn founded on Art. 16 of the ``Agreement between the Government of the Commonwealth of Australia and the Government of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains''. Article 16 states:

``A professor or teacher who visits one of the territories for a period not exceeding two years for the purpose of teaching at a university, college, school or other educational institution in that territory and who is, or was immediately before that visit, a resident of the other territory shall be exempt from tax in the first-mentioned territory on any remuneration for such teaching in respect of which he is subject to tax in the other territory.''

3. Thus armed and instructed, and having received a refund of all of the instalments of tax that had been deducted from his salary, in respect of that part of fiscal 1983 for which he had been deriving income in Australia, the applicant then wrote to the Commissioner on 9 November 1983 requesting that the Commissioner ``cancel the notice for tax deduction from my salary paid by [the university]''. The Commissioner acceded to this request on 12 December 1983, notifying the university that the applicant qualified for exemption from income tax under Art. 16. After this, deductions ceased to be made from the applicant's salary.

4. In February 1984 the applicant was offered a part-time appointment to chair a Committee of Inquiry instituted by the Commonwealth. He therefore wrote to the Commissioner setting out very clearly the situation that was proposed and requesting the Commissioner to ``please inform me how these suggested arrangements would affect my

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liability for Australian taxation''. He also stated:

``I shall be glad to be of service to the Commonwealth Government for a limited term, but can hardly do so if it would entail heavy or uncertain tax liabilities. Therefore I would be glad for clarification of my position or for any relevant suggestions. As the Commonwealth Government is anxious to conclude its arrangements for this Inquiry, I would appreciate a prompt reply.''

5. The Commissioner replied promptly, stating that any income from the appointment with the Committee would constitute assessable income and also stating:

``In the event that you decide to accept the appointment offered by the Commonwealth Government it is obvious that you would need to extend your visit to Australia beyond the original two year period. One of the consequences of this would be that you would fail one of the conditions imposed by Article 16. Accordingly your remuneration from the University would not be exempt from Australian income tax.''

6. Clarification of this was sought by the applicant and on 30 April 1984 the Commissioner's office replied in the following terms:

``Subject to the usual reservation that expressions of opinion are not in any sense binding upon the Commissioner it is confirmed that the exemption from Australian income tax in respect of your teaching remuneration from [university] will be revoked from the date you decide to remain in Australia for a period exceeding two years. This means that provided all the conditions of Article 16 of the Australian/United Kingdom double tax convention are met the exemption otherwise provided by the Article will be revoked as from the date you accept the part-time appointment with the Commonwealth Government.''

(Underlining supplied.)

7. Following further correspondence and a meeting in May 1984, the Commissioner wrote to the applicant stating:

``By virtue of Article 16 of the agreement the income from your two year academic appointment in Australia will be exempt from Australian income tax provided it is subject to tax in the United Kingdom. Having regard to the advice already given to you no action will be taken to re-open this matter for the year ended 30 June 1983. For the year ended 30 June 1984 and subsequent years, however, it will be necessary for you to establish that tax has been paid in the United Kingdom on your Australian academic salary.''

8. In June 1984 the First Assistant Commissioner wrote, stating in part:

``I must confirm that the income from your two year academic appointment in Australia will be liable to Australian income tax for the year ended 30 June 1984 and subsequent years unless you can establish that United Kingdom tax has been paid on it. It is a matter of regret that earlier advice that the income would be exempt from Australian tax did not deal fully with the question. However, this does not enable this office to ignore the plain terms of the law.''

The words ``did not deal fully with the question'' must, it seems, be read as a euphemism for ``was quite inaccurate''.

9. On 18 December 1984 the Commissioner issued an assessment for fiscal 1984 which treated the applicant's university income as assessable. The applicant was, due to the ceasing of deductions in December 1983, faced with a substantial taxation liability in respect of which payment was demanded by 21 January 1985.

10. The applicant paid half of the outstanding amount on 21 March 1985, at which time he offered to settle the matter.

11. Correspondence continued between the parties, and on 6 September 1985, two years and eight months after the first enquiry, the Commissioner for the first time included in correspondence a reference to Art. 1 of a Protocol to the Double Taxation Agreement. In his letter the Acting Deputy Commissioner of Taxation stated:

``in view of your entitlement in the United Kingdom to a 100% deduction in relation to your Australian University income, that income is liable to Australian income tax within the terms of the double taxation agreement between Australia and the United Kingdom.

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This is provided for by Article 1 of the Protocol to the Double Taxation Agreement which was inserted into the Income Tax (International Agreements) Act 1953 as Schedule 1A by Act No. 23 of 1980, taking effect from 1 July 1980 as follows:

• `(3)(A) Where under the law in force in one of the territories an individual's remuneration from an employment is reduced in charging it to tax in consequence of a period or periods of absence by the individual from that territory, or of the place where the employment is exercised, or of the domicile of the individual, by deducting either the whole or a fixed proportion of the amount arising, then
  • (a) where under the Agreement that remuneration would otherwise be relieved from tax in the other territory, the relief shall not extend to the amount so deducted; and
  • (b) the amount so deducted shall be regarded as income in respect of which the individual is exempt from and not subject to tax in the first-mentioned territory.

  Under these provisions, the Protocol has the effect of over-riding the provisions of Article 16 of the Agreement where a deduction is allowed by the United Kingdom Government in respect of remuneration from teaching which would otherwise be exempt under the terms of Article 16.'''

12. Despite further correspondence and the preliminary procedures before the Tribunal, it was not until the hearing of this matter, four years and nine months after the first enquiry, that the Commissioner's office referred to Taxation Ruling IT 100. Had this Ruling, which was dated 29 May 1975, been referred to initially, it would have been clear that it was the Commissioner's view that, even without the Protocol, the applicant would have been liable to taxation in Australia from the time of his arrival.

13. Without setting out Taxation Ruling IT 100 in full, I make the comment that it appears to be incorrect in asserting that income is not ``subject to tax'' where a 100% deduction is allowed. Clearly, the income must be subject to tax before deductions can be taken from it to find the total assessable amount. It is clear, however, that Art. 1 of the Protocol was inserted with the intention of overcoming, and does so overcome, this deficiency and that therefore, although the amount is subject to tax, the effect of the Protocol is to make the applicant liable to Australian tax on the amounts which he earned at the university.

14. The applicant felt, understandably, greatly aggrieved by the administrative processes to which he had been subjected. He presented his submission with an eloquent clarity, seeing it as unconscionable that the Taxation Office could provide him with incorrect information over a number of years and then impose penalty tax for late payment of the balance of the taxation, a late payment into which he had been led by the Commissioner's advice. The Commissioner's representative at the hearing stated that she was instructed to submit that the Tribunal had no jurisdiction to review the penalties levied pursuant to sec. 207 (an undoubtedly correct submission) and to make no further comment.

15. The applicant submitted:

``This point is the significance of Article 16 of the Double Taxation Agreement between Australia and the U.K. If it is possible for this Article to be overriden by a subsequent protocol, the effect is to deprive the Article of almost any significance, since general provisions for the avoidance of double taxation are provided for elsewhere in the Agreement.''

16. What must be noted, however, is that Art. 16 reverses the general rule. Pursuant to Art. 11 and 12 most remuneration is taxed in the country in which it is derived whereas Art. 16 provides that the remuneration from academic positions is taxed in the country from which the taxpayer came. The operation of Art. 16 in respect of academics coming from the United Kingdom to Australia is, however, severely limited by the Protocol which could be expected to operate in most cases.

17. While the Commissioner's final substantive decision was clearly correct, and while I accept that the Tribunal cannot review the imposition of the penalties, I find it disturbing indeed that an arm of the Commonwealth Government should:

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• (a) take four years and nine months to produce and provide a copy of a departmental policy (the Ruling) on the precise point involved in the initial query;
• (b) provide incorrect advice in response to a query knowing that reliance would be placed upon that advice;
• (c) take two years and eight months to provide correct advice; and
• (d) then maintain the imposition of penalties against the person who has suffered the consequences of such defective administration.

18. What the whole case throws into sharp relief is the Commissioner's practice of giving advice. No doubt that practice has overall down the years been of benefit to taxpayers, and it would on the whole be unfortunate if it were to cease. Of course it is true that there can be no estoppel against the Commissioner on a point of substance: see
F.C. of T. v. Wade (1951) 84 C.L.R. 105. But the ultimate point here is not one of substance, but is rather a question whether, as a matter of undoubted discretion, a penalty should be remitted. Viewing the matter from the outside, it seems to me to be totally incontestable that, in the circumstances, it should be remitted. Had the applicant not received a string of incorrect advices, the tax would have been deducted from his salary and no question would have arisen. Because of the advice, he was suddenly faced with payment of a substantial amount of tax. No person or body, the Administrative Appeals Tribunal included, is exempt from the capacity to make a mistake, but where a means is at hand properly to alleviate the consequences of that mistake that means should surely be seized. It is clear that in the present case only the Commissioner can bring about such alleviation, but despite my making my view on this point clear at the hearing there seems, so far as appears, to have been no change of heart.

19. As it is clear that the objection decision was, in this respect, correct and that the Tribunal is without power to vary the penalties, I will take the substantive matter no further.

20. As forecast by me at the hearing, I have considered whether I should directly refer this matter to the Ombudsman, whose concern is with defective administration. On balance however I consider that it would be more appropriate to leave to the applicant any decision as to whether to draw the Ombudsman's attention to the matter.

21. In fiscal 1985 the applicant purchased a hearing-aid in respect of which he claimed a deduction of $1,000 pursuant to sec. 51(1). Evidence was given by the applicant that he needed the hearing-aid for public hearings that were held by the Committee of Inquiry of which he was Chairman. He explained that, while the hearing-aid was useful at large gatherings, he did not use it for normal conversation in his private life.

22. The Commissioner's representative referred the Tribunal to Case U83,
87 ATC 481, Case Q17,
83 ATC 62 and Case U124,
87 ATC 741. In a written submission the applicant sought to distinguish Case U83 and Case Q17. He referred to Case U124 and stated:

``This case is somewhat comparable to mine in that glasses were prescribed and were necessary for a particular kind of work, and on that basis the objection was allowed. I would say that this description applies fairly to my purchase of a hearing-aid, which was essential for the particular occupation I undertook. It is true that, unlike Case U124, there was no specific medical prescription, but I cannot see why such a prescription should affect the issue, inasmuch as the real question is whether evidence is available that there was a specific work requirement for which a particular form of equipment was necessary. I have supplied such evidence.''

23. I agree that the absence of a prescription is of no importance. However, as in Case Q17, I ``see the hearing-aid as a means of ameliorating his disability in the earning of his assessable income''. Case U124 is inapplicable as in that case ``The applicant had no need to wear glasses other than to protect her eyes when at work. That being so, the glasses cannot be equated with conventional clothing, or with glasses intended to correct defective vision: they are protective equipment''.

24. Although the hearing-aid in the immediate case is mainly used during employment, the need for it arises from a personal disability of the applicant. The expense is therefore of a private nature and consequently excluded from sec. 51(1).

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25. This whole case has had an unfortunate history, which is worsened by the fact that the applicant's problems arose due to assistance he gave to the Australian people through chairing a public inquiry. It is to be hoped that future visitors to this country do not have the same experience. If they should hear of what happened in this case, they may decide not to come at all.

26. I have no choice but to affirm the objection decisions under review.