Decision impact statement
Bartercard Australia Pty Ltd v Commissioner of Taxation
Venue: Administrative Appeals Tribunal
Venue Reference No: 2008/6172
Judge Name: Deputy President PE Hack SC
Judgment date: 23 December 2010
Appeals on foot:
No.
Impacted Advice
Relevant Rulings/Determinations:- N/a
Subject References:
Income tax
Barter exchange system
Reciprocal trade exchange program
Terminating member payments
Research and development expenditure
Meaning of 'on behalf of any other person'
Précis
Whether payments from terminating members of a barter exchange program were assessable income, and whether expenditure had been incurred for the purpose of carrying on research and development activities 'on behalf of any other person'.
Decision Outcome
Partly Adverse
Brief summary of facts
Terminating member payments
1. The taxpayer manages the reciprocal trade exchange program known as 'Bartercard' and the affairs of Bartercard Exchange Limited (Exchange), the Australian operator of the program, pursuant to a Deed of Management (the Deed) for which it receives management fees.
2. The Bartercard program allows members to make and receive payments to and from other members in 'Trade Dollars' (T$). Under the Rules of the Trading Program (the Rules), a terminating member with a debit balance in their trade account has 30 days to trade to reduce the debit balance. After this period the member is required to pay a cash amount equal to the debit balance in its trade account to Exchange.
3. The taxpayer received terminating payments from members exiting the Bartercard program totalling $711,053 in the year ended 30 June 2002 and $623,532 in the year ended 30 June 2003.
4. The Commissioner assessed the payments as income of the taxpayer on the basis that under the Deed the taxpayer was entitled to treat the monies received from terminating members as a management fee and not as monies received for the use and benefit of Exchange. Although debit entries were made to account for the monies to Exchange, the Rules did not allow for such a transaction.
5. It was the taxpayer's case that it received the monies as agent for Exchange and that it accounted to Exchange by means of debit entries in its trade account. In the alternative, if the relevant clause in the Deed had the construction which the Commissioner contended, the document did not reflect the agreement of the parties and a court of equity would rectify the agreement.
Research and Development
6. The taxpayer and Bartercard International Pty Ltd (Bartercard International) are wholly owned by two companies incorporated in the British Virgin Islands, which are in turn wholly owned by Bartercard International Limited Company (Bartercard Bermuda).
7. From 1999 Bartercard International acquired intellectual property relating to the Bartercard system from the taxpayer, and by agreement licensed the taxpayer to use that intellectual property. In 2000, that contract was assigned with the consent of the taxpayer from Bartercard International to Bartercard Bermuda.
8. In 2002, an agreement was executed between the taxpayer and Bartercard Bermuda which provided that the taxpayer would develop technology owned by Bartercard Bermuda. Applications were made by both the taxpayer and Bartercard International for research and development tax concessions.
9. The Commissioner refused to allow a concessional deduction under section 73B of the Income Tax Assessment Act 1936 (ITAA 1936), for 125% of the research and development expenditure, on the basis that the purpose of the expenditure was to carry on the associated research and development activities on behalf of another person, namely, Bartercard Bermuda. However, a deduction for 100% of this expenditure was allowed under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Issues decided by the court or tribunal
1. Whether the terminating member payments received by the taxpayer were part of the management fee payable to the taxpayer under clause 6 of the Deed and thus were assessable income under section 6-5 of the ITAA 1997 in the 2002 and 2003 income years?
The Tribunal considered that the issue did not turn upon any complicated notion of what constitutes income according to ordinary concepts, but, rather, the arguments raised a factual enquiry about the party that received the benefit of the payments.
Construed literally and without reference to the wider context the words of clause 6.1 of the Deed had the effect contended by the Commissioner. However, the meaning of words in a contract are to be determined by what a reasonable person would have understood them to mean, and this requires consideration not only of the text, but also the surrounding circumstances known to the parties and the purpose and object of the transaction.
Although the relevant clause was found by the Tribunal to be poorly worded, the surrounding circumstances including that the Rules prevail over the Deed, that the parties are engaged in the conduct of a barter exchange, and that until members terminate, the total of outstanding debit balances ought to be matched by the total of outstanding credit balances, led to the conclusion that the proper construction of clause 6.1 of the Deed does not include terminating members payments. Consequently, the payments were not assessable income of the taxpayer.
The Tribunal noted that even if that view was wrong, the taxpayer's alternative submission relying on rectification answered the Commissioner's contention. On the evidence, the parties had conducted themselves on the basis that the taxpayer was obliged to account to Exchange for the terminating member payments.
2. Whether expenditure incurred by the taxpayer on research and development activities was deductible under the concessional deduction rules in section 73B of the ITAA 1936?
The Tribunal found that the taxpayer had not satisfied the burden of proving that the assessment was excessive, under paragraph 14ZZK(b) of the Taxation Administration Act 1953. The Tribunal considered that the evidence from the taxpayer on this aspect was unsatisfactory and it could not conclude that subsection 73B(9) of the ITAA 1936 does not operate to deny the concessional deduction. The taxpayer had not affirmed the accuracy of material or explained matters raised by the Commissioner that the expenditure on research and development activities was for the benefit of Bartercard Bermuda, and had not led evidence to show how it expected to make profits or gains from commercial exploitation of the results of the research and development activities to which the expenditure related. Consequently, the Tribunal was unable to find on whose behalf the research and development activities were undertaken, and that part of the objection decision rejecting the claim for a concessional deduction was affirmed.
Tax Office view of Decision
In relation to the terminating member payments, the decision was open to the Tribunal on the particular facts of the case, given the construction of the terms of the Deed, the operation of the Rules, and the context of barter exchange. The decision confirms that the meaning of words in a contract requires consideration of the text, surrounding circumstances known to the parties and the purpose and object of the transaction.
On the issue of research and development, it followed from the Tribunal's findings on the evidence of the taxpayer that the burden of proving that the assessment was excessive had not been discharged, and a concessional deduction was accordingly denied.
The ATO maintains the view set out in the Guide to the R&D Tax Concession in respect of subsections 73B(1) and 73B(9) of the ITAA 1936 and the 'on own behalf' rules.
Administrative Treatment
Implications on Precedential ATO View Documents (eg. public rulings, ATO IDs)
None.
Implications on Law Administration Practice Statements
None.
Court citation:
[2010] AATA 1058
2010 ATC 10-167
Legislative References:
Income Tax Assessment Act 1936
73B
Income Tax Assessment Act 1997
6-5
8-1
Taxation Administration Act 1953
14ZZK(b)
Case References:
Bartercard Limited v Myallhurst Pty Ltd
[2000] QCA 445
Federal Commissioner of Taxation v Dalco
[1990] HCA 3
168 CLR 614
20 ATR 1370
90 ATC 4088
Gaspet Ltd v Elliss (Inspector of Taxes
)[1985] 1 WLR 1214
Gaspet Ltd v Elliss (Inspector of Taxes
)[1987] 1 WLR 769 (C.A.)
Gauci v Federal Commissioner of Taxation
[1975] HCA 54
135 CLR 81
5 ATR 672
75 ATC 4257
Industry Research and Development Board v Phai See Investments Pty Ltd
[2001] FCA 532
112 FCR 24
McCormack v Federal Commissioner of Taxation
[1979] HCA 18
(1979) 143 CLR 284
9 ATR 610
79 ATC 4111
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd
[2004] HCA 52
219 CLR 165
Other References:
Guide to the Research and Development Tax Concession