CHRISTIE (AS TRUSTEE FOR THE MORETON BAY TRADING COMPANY) v FC of T

Members:
BJ McCabe SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 1396

Decision date: 24 December 2004

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BJ McCabe (Senior Member)

Introduction

1. The Commissioner of Taxation decided Mr Christie (the applicant) failed to make sufficient superannuation contributions on behalf of his employees during the 1999, 2000 and 2001 financial years. The respondent issued superannuation guarantee charge (SGC) default assessments in respect of each year and imposed the general interest charge (GIC) and penalties. The applicant objected to the assessments. The Commissioner disallowed the objection in respect of the 1999 year but issued

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ATC 2010

amended assessments in respect of the 2000 and 2001 financial years. The applicant was still dissatisfied and he has asked the Tribunal to consider his claim in relation to all three years.

The material before the Tribunal

2. The Tribunal was provided with the documents compiled pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (the T-documents). Two sets of supplementary T- documents were also filed. The applicant agreed to make available some financial data to the respondent, but the material was not filed with the Tribunal.

3. At the initial hearing, it became apparent the respondent had not been provided with the financial data it required to make a proper assessment of the taxpayer's liability with respect to the 1999 financial year in particular. I adjourned the matter after hearing some of the evidence to allow the respondent an opportunity to consider the material. The Commissioner notified the applicant by letter dated 16 September 2004 that he had reduced the amount of the SGC, the GIC and penalty in light of the additional information Mr Christie had provided at the Tribunal's request (see par 10 below).

4. The hearing resumed and I heard submissions. I also asked for written submissions from the parties in relation to the Commissioner's contention that the applicant had failed to make superannuation contributions in respect of himself and his wife. Mr and Mrs Christie were both trustees for the Moreton Bay Trading Company, and carried on a retail shop on Moreton Island for the benefit of the beneficiaries of the trust. The Commissioner said the applicant and his wife were employees of the business.

5. The applicant represented himself at the hearing. The respondent was represented by Ms Hopton, an ATO advocate.

Factual background

6. David and Kay Christie were both trustees of the Moreton Bay Trading Company. The Moreton Bay Trading Company is not incorporated, despite the name. The trustees carried on a retail business during the relevant period. Both of the trustees worked in the business. The Commissioner asserted (and the applicant did not deny) the trustees both derived salary or wages during the relevant period and issued group certificates to themselves in 2000 and 2001. The trustees did not sign a contract of employment.

7. The trustees employed a number of other people to work in the business during the relevant period. Most of those individuals were employed on a casual basis over the busy period of the year.

8. The Commissioner sent the trustees a Superannuation Guarantee Audit Questionnaire on 16 August 2001. The trustees were unable to complete the questionnaire and an audit was conducted without the benefit of the information. The Commissioner relied on group certificates and some pay records. He identified a number of instances in which the trustees had failed to pay the appropriate level of superannuation support in respect of employees. Default assessments for each year in question were issued on 31 December 2002. The applicant objected to the assessments.

9. Ms Hopton wrote to the applicant on 2 April 2004 after the objections were disallowed. She explained the Commissioner had reviewed some additional information that was provided by the applicant and agreed the shortfall in the 2000 financial year was $5408.93, but did not make any changes to the 1999 or 2001 assessments.

10. In a letter dated 16 September 2004 the Commissioner subsequently amended the 1999 assessment in the following way:

• • The total shortfall was reduced from $6751.71 to $1,603.63.
• • The nominal interest component was reduced from $758.41 to $180.13.
• • The Administration Charge was reduced from $440.00 to $320.00.
• • The SGC was reduced from $7950.12 to $2103.76.
• • The Part 7 Penalty (levied at a rate of 10%) was reduced from $795.01 to $210.37.

The law

11. The parliament has established a legislative scheme designed to ensure employers make appropriate superannuation contributions on behalf of all employees. Employers ordinarily pay the contribution into a superannuation fund or retirement savings account or superannuation holding accounts reserve (SHAR). If there is a shortfall, the employer must lodge a superannuation guarantee statement (s 33), failing which the

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Commissioner may make an assessment based on his estimate of the amount of the shortfall (s 36). Where there is a shortfall - comprised of the amounts referred to in s 17 of the Act - the Commonwealth imposes a charge (s 5 of the Superannuation Guarantee Charge Act 1992 (the SGCA)) equal to the amount of the shortfall (s 6 of the SGCA). The charge is payable by the employer (s 16 of the Act).

12. Section 46 of the Act explains when the superannuation guarantee charge becomes payable. If payment is not made by the due date, the general interest charge is imposed (s 49). If the employer fails to provide information as required, the employer may also be liable to penalties under Part 7 of the Act. The Tribunal has no jurisdiction to consider the imposition of the GIC: see
Pye v FC of T 2004 ATC 2029; [2004] AATA 143.

13. Sadly for Mr Christie, the application of the legislation is straightforward enough - although there is one difficult issue. I will deal with that first. Mr Christie agrees he and his wife worked in the business they conducted as trustees on behalf of the beneficiaries of a trust. He agrees they drew money from the business on a regular basis and prepared group certificates for themselves. But Mr Christie says his accountant told him he would not be required to make superannuation contributions on his own behalf or on behalf of his wife because they were not employees. As trustees, they were the employers. This argument warrants careful attention. I asked Ms Hopton to consider the issue and make further submissions in writing. I also gave Mr Christie the opportunity to make further submissions.

The position of trustees under the legislation

14. Section 12(1) of the Act says the expressions employer and employee have their usual meaning when used in the Act. The section goes on in sub-sections (2)-(11) to ``expand the meaning of those terms'' and make express provision for particular situations where there is doubt. None of the sub-sections appear to apply here. I note there is nothing in the section that suggests an employer and an employee may be the same person. The Act does not disturb the usual expectation that there will be at least two parties to a contract.

15. There is no difficulty where a trustee is incorporated and an officer of the trustee company works in the business conducted by that company. It has long been accepted that a company may enter into a contract with an officer. That is so even where the officer concerned is the only director and shareholder and negotiates the contract on the company's behalf: see
Lee v Lee's Air Farming Ltd [1961] AC 12; see also
Andar Transport Pty Ltd v Brambles Limited (2004) Aust Torts Reports ¶ 81-752 at 65,838-65,839 [45-47]; [2004] HCA 28 at par 45-47 per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ. As Lord Morris explained in Lee (at 25-26), a contract is possible in those circumstances because the company and the officer are separate legal entities with the capacity to enter into contractual relations. His Lordship noted (at 25):

``A contractual relationship could only exist on the basis that there was consensus between two contracting parties.''

16. The decision in Lee concerned a company registered under the general incorporation laws. The same result would follow where the parliament created a corporation comprised of an individual or group of individuals. A good example of this process is found in the Roman Catholic Church (Incorporation of Church Entities) Act 1994 (Qld). Section 5 incorporates the bishops of the church in Queensland. The Corporation of the Roman Catholic Bishops of Queensland enjoys perpetual succession and the power to sue (s 7) which includes the power to sue one or more of the individuals who hold the office of bishop from time to time. That is because an individual who holds office as a bishop has two legal personalities: his own, and the personality recognised under the legislation which he has by virtue of his office.

17. The trustees of the Moreton Bay Trading Company are not incorporated. They are natural persons, and both of them worked in the business they conducted. The Commissioner insists these individuals are employees and argues the trustees failed to make appropriate superannuation contributions.

18. This issue would not necessarily arise under the income tax legislation as s 960-100(1) of the Income Tax Assessment Act 1997 defines the expression entity to include a trust. Section 960-100(2) says:

``The trustee of a trust or of a superannuation fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.''

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19. Section 960-100(3) goes on to say:

``A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity .''

20. If that definition applied in this case, there would be no difficulty accepting the applicant could enter into or enforce contracts with himself. But the income tax legislation does not apply here. Instead I am required to have regard to the Superannuation Guarantee (Administration) Act 1992.

21. The Act makes special provision in Part 9 for partnerships and unincorporated associations that employ individuals. Section 72 says a partnership is treated as if it were a separate legal person so that one could be described (for the purpose of this legislation) as an employee of the partnership, as opposed to being an employee of the individual partners themselves. Unincorporated associations are also treated as legal persons for the purposes of the Act: s 73. It follows that an unincorporated association may be an employer even though it is not otherwise a legal entity with the capacity to enter into contracts. But the Act is silent with respect to trusts. Since the statute does not have anything relevant to say about the legal personality of the applicant, I am left to consider the position at general law.

The capacity of trustees at general law

22. A trust is not a legal person. A trust is a creature of equity. It is a relationship in which a person holding an interest in property or funds (the trustee) assumes obligations to manage or apply the property or funds for the benefit of others (the beneficiaries) or for a specific purpose: see, for example,
Suncorp Insurance and Finance v Commr of Stamp Duties 97 ATC 4826; [1997] QCA 225 per Davies JA.

23. The trust does not exist independently of the trustees or the beneficiaries who are involved in the trust relationship. Trusts do not own property, and they do not have the capacity to enter into contracts. The trustee is the legal actor. It follows it is inaccurate to say someone is ``employed by a trust''. He or she is employed by the trustee.

24. It makes even less sense to say someone is ``employed by a business''. The expression ``business'' refers to the conduct of transactions by legal persons. A business is not a legal entity. It is a course of conduct.

25. A person - including a trustee - may fulfil a variety of responsibilities, but he or she ordinarily has one legal personality. That means a trustee cannot contract with himself:
Williams v Scott [1900] AC 499 at 503; see also
Suncorp Insurance and Finance v Commr of Stamp Duties 97 ATC 4826; [1997] QCA 225 per Davies JA. It stands to reason that a trustee cannot therefore employ himself, since that would require him to enter into a contract of service with himself.

The inconsistent authorities

26. A survey of the cases reveals some anomalies, however. In
Rowley, Holmes & Co v Barber [1977] 1 WLR 371, the UK Employment Appeals Tribunal endorsed (at 374, 375) the view of Halsbury's Laws of England, 4th ed, vol 9, 1974 at 81:

``Where a person has different capacities, he may have power to contract in his representative capacity with himself as an individual.''

27. The Tribunal was dealing with a situation in which an employee of a solicitor became the personal representative of his employer at the time of the solicitor's death. Kilner Brown J (delivering the decision of the Tribunal) concluded (at 375-376):

``... the office of personal representative or administrator here could...give to the applicant sufficient separate legal personality to enable him to make an arrangement, an agreement, a contract, with himself in a different capacity.''

28. His Honour relied in part on a passage from the opinion of the Board in
Lee v Lee's Air Farming Ltd [1961] AC 12. Lord Morris of Borth-y-Gest said (at 30):

``There appears to be no greater difficulty in holding that a man acting in one capacity can give orders to himself in another capacity than there is in holding that a man acting in one capacity can make a contract with himself in another capacity... The company and the deceased were separate legal entities. The company had the right to decide what contracts for aerial top-dressing it would enter into.''

29. Kilner Brown J took that statement to support the proposition that one person could in fact enter into an employment contract between himself in his representative and individual capacities.

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30. Ms Hopton also referred me to the decision of the trial judge in
Gulland v FC of T 83 ATC 4352. The case dealt with the taxation affairs of Dr Gulland. Dr Gulland was a medical practitioner. He set up a trust on the advice of his accountant. He and another doctor were appointed trustees. The trust documents authorised the trustees to carry on the practice, and employ a medical practitioner. The trustees (including Dr Gulland) decided to employ Dr Gulland to work in the practice.

31. Kennedy J cited the decision in Rowley, Holmes & Co v Barber with approval. His Honour also argued the passage Kilner Brown J quoted from Lee was not restricted to situations where there were two legal entities: at 4366. His Honour accepted such a contract might be voidable, but held (at 4367): ``the contract of employment was a valid contract, notwithstanding the dual position of [Dr Gulland].''

32. The decision of Kennedy J was appealed to the Full Federal Court and the High Court. The appellate courts did not revisit the validity of the contract of employment. Toohey J in the Full Federal Court noted there were reservations about treating Dr Gulland as an employee. His Honour went on to say the appellate courts were obliged to proceed on the basis the agreement was valid because that conclusion had not been challenged on appeal:
Gulland v FC of T 84 ATC 4587 at 4591; (1984) 3 FCR 354 at 359; see also
FC of T v Gulland 85 ATC 4765 at 4793; (1985) 160 CLR 55 at 105 per Dawson J. I note the High Court concluded in any event that the Commissioner was entitled to disregard the contract of employment and the other arrangements Dr Gulland had entered into with the trustees.

33. I must respectfully disagree with the reasoning in Rowley, Holmes & Co v Barber. I do not think the decision of the Judicial Committee in Lee supports the proposition for which it was cited by Kilner Brown J. The decision in Lee makes sense because there were in fact two legal entities involved: Mr Lee, and the company. Mr Lee did not enter into a contract with himself even though he was, as a director acting for the company, formally negotiating with himself as an individual. The case before this Tribunal can readily be distinguished from the decision in Lee because the trust is not a separate entity. Whereas in Lee the director was negotiating with another legal person, Mr Christie is negotiating with the same legal person - himself. A trustee does not have two legal personalities.

34. It follows I must also decline to follow the reasoning of Kennedy J in Gulland to the extent that his Honour relied on Rowley, Holmes & Co v Barber. Kennedy J referred to the passage in Lee I have already quoted and explained (at 4366):

``... it does not appear that his Lordship was there restricting himself to the factual position in that case, where the contract was made between distinct parties, a company and an individual, with the company acting through that individual. His reference was to a man's making a contract with himself.''

35. With respect, I disagree with his Honour's analysis. A close examination of the passage from his Lordship's opinion in Lee suggests to me he was not making a more general point. His reference to a man making a contract and issuing orders ``to himself'' was made on the assumption there were two legal personalities.

36. I note there were two trustees in Gulland: Dr Gulland and another doctor. Does having two trustees make any difference to the analysis? It would certainly explain his Honour's conclusions.

(I) The position at common law where there are two or more trustees

37. I do not think the presence of two trustees (as in this case, and in Gulland) makes a difference to the analysis if the trustees are subject to the usual obligation to act unanimously. (The trust instrument might provide otherwise, but I was not referred to such a power in this case.) The obligation to act unanimously was considered by Street J in
Sky v Body (1970) 92 WN (NSW) 934. His Honour explained (at 935) that trustees ``do not hold several offices - they hold a single, joint, inseparable office.'' The reference to a single office does not mean the personality of each trustee is somehow merged into a single personality that is separate from the personality of the individual trustees. The trustees are simply required to act collectively, and any person dealing with the two trustees deals with a pair of personalities - albeit personalities that must work together as part of the one office. That means a trustee seeking to enter

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into an arrangement is still dealing with himself, which is impossible.

38. The decision in
Ellis v Kerr [1910] 1 Ch D 529 illustrates the point. In that case, three individuals became trustees of property and later purported to covenant with two of their number. Warrington J decided that the covenant was void and unenforceable. His Honour explained (at 534):

``... a man cannot make a contract with himself. One would have thought it only required to be stated to be self-evident that it makes no difference that he joins in that contract with himself some other person either as covenantor or covenantee, if the obligation on the one side, or, as the case may be, the right to enforce that obligation on the other side, is joint.''

39. Warrington J repeated the point the following year in the course of his decision in
Napier v Williams [1911] 1 Ch D 361 at 368.

40. I think an analogy can be drawn with the cases dealing with partners negotiating to employ a member of the partnership, although I readily acknowledge the important conceptual differences between partnerships and trusts. (For a more thorough discussion of these differences, see the excellent work of Professor Ong, Trusts Law in Australia, 2nd ed, Federation Press, Sydney, 2003 at pp 4-71.)

41. Partners are both principals and agents, which is why a partner who contracts on behalf of the firm binds himself and the other members of the partnership. In
Ellis v Joseph Ellis & Co[1905] 1 KB 324, the English Court of Appeal concluded a partner could not enter into a contract of employment with the partnership of which he was a member. Collins MR explained (at 328) that the proposition ``would appear to involve that he, as one of the partners, must be looked upon as occupying the position of being one of his own employers.'' The Master of the Rolls added (at 328):

``... a partner cannot put himself in the position of not being a partner when he is one, or of being a workman employed, when that position would involve that he would be both employer and employee.''

42. The Court concluded the payments received in respect of salary or wages were actually drawings: at 328. See also
Scott & Ors v FC of T 2002 ATC 2158; [2002] AATA 778.

43. I think the rule applied in Ellis was really no more than a specific application of the more general principle I have referred to previously: at common law, one cannot contract with one's self.

The position where there are two or more trustees following changes in the legislation

44. I was referred to s 59 of the Trusts Act 1973 (Qld). Section 59 permits the trustee to sue himself or herself (or itself, in the case of an incorporated trustee) in certain circumstances. That has occurred in a handful of cases: see, for example,
Re Cavill Hotels Pty Ltd [1998] 1 Qd R 396. In Ford and Lee, Principles of the Law of Trusts, looseleaf, Lawbook Co, Sydney, 2004, [1590] the learned authors suggest s 59 is a procedural provision that allows the trustee to overcome the usual rule that the same person may not be both plaintiff and defendant. Ford and Lee suggest (at [1580]) that might be useful where legislation recognises a person might convey property to himself: see, for example, s 14 of the Property Law Act 1974 (Qld). Professor Ong suggests the provision might also be useful where a trustee is a beneficiary under the trust: Trusts Law in Australia, 2nd ed, Federation Press, Sydney, 2003 at p 272. I do not think s 59 assists in the analysis of this case.

45. The Trusts Act 1973 is not the only legislation that must be considered. Each state has now introduced legislation affecting the enforcement of covenants and agreements. In Queensland, s 50 of the Property Law Act 1974 permits individuals to enforce covenants or agreements entered into between an individual and himself and one or more others. Section 50(1) provides:

``Any covenant, whether express or implied, or agreement entered into by a person with the person and 1 or more other persons shall be construed and be capable of being enforced in like manner as if the covenant or agreement had been entered into with the other person or persons alone.''

46. That provision appears to impact on the situation in this case. Mr Christie has purportedly entered into an agreement with himself and another (his wife). The provision enables the agreement to be enforced by Mr Christie against his wife, and enforced by his wife against Mr Christie. In other words, the statute permits the agreement to be treated as an agreement between two separate persons: Mr

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ATC 2015

Christie on the one hand and his wife on the other.

47. On that basis I am satisfied the applicant was legally capable of entering into a contract with his wife as the other trustee as a result of s 50(1). (His wife is presumably capable of entering into a contract with Mr Christie on the same basis.) It remains to be seen whether an employer-employee relationship was in fact established.

Was there an employment relationship?

48. Kennedy J noted in the course of his decision in Gulland that there was doubt over whether an individual who contracts to work for himself and another trustee could truly be said to be in an employment relationship: at 4367-4368. The criteria for distinguishing a contract of employment from some other arrangement are loose. It is no longer appropriate to focus exclusively on the extent to which the person standing in the position of employer exercises (or has authority to exercise) control over the work of the alleged employee: see
Hollis v Vabu Pty Ltd (t/a Crisis Couriers) 2001 ATC 4508 at 4519 [45]; [2001] HCA 44 at paragraph 45 per Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ. One must have regard to all the facts and circumstances with a view to determining whether or not a person is acting as the servant for another or on his own account: see
Stevens v Brodribb Sawmilling Company Pty Ltd (1986) Aust Torts Reports ¶80-000 at 67,453; (1985-1986) 160 CLR 16 at 37 per Wilson and Dawson JJ; see also
Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41 at 48 per Dixon J.

49. The applicant in this case is - by reason of the operation of s 50 of the Property Law Act 1974 - formally subject to the control and supervision of his wife, with whom he is deemed to have contracted. (Of course, his wife apparently works in the business under a similar arrangement that takes effect because of s 50, so she in turn is formally subject to the applicant's control and supervision.) That control is largely theoretical and will almost certainly never be exercised. But that is no longer unusual in employment relationships: see
Articulate Restorations and Development Pty Ltd v Crawford (1994) 57 IR 371 at 375-376 per Kirby P. What of the other indicia?

50. It is true the applicant drew salary or wages and was issued with a group certificate, which is consistent with him being an employee. However I note he did not make superannuation contributions on his own behalf expressly because he had been told it was unnecessary to do so because he was not an employee.

51. It seems to me that Mr Christie behaved precisely as one would expect a sole trader to behave. He worked in the business that he ran with his wife. He did the hiring and the firing and exercised control over the other employees. He kept the books and ordered the stock and paid the bills. He was not accountable to anyone (apart, of course, from the obligations that he owed to the beneficiaries as trustee). He drew money from the business in the form of a regular periodic payment, just like many other sole proprietors, and he paid tax on that amount. He behaved like a principal in the business, rather than a servant. His wife was in the same position as he was. His conduct tends to suggest he is not in an employment relationship.

52. There is one further factor that needs to be taken into account. I think it is decisive. I have already noted the applicant and his wife received regular payments from the business. The Commissioner says the payments were made under the terms of a contract of employment. If the Commissioner were wrong about that, the payments must have been received by the trustees as remuneration. That is a problem. I was not provided with a copy of the trust instrument, so I am unable to determine definitively whether or not the instrument included a clause that permitted the trustees to receive remuneration. I assume there was no clause to this effect, as the respondent would undoubtedly have pointed me to it if it existed. In the absence of an appropriately worded clause in the instrument, the trustees would only be entitled to remuneration if they had obtained authorisation from the court: s 101(1) of the Trusts Act 1973 (Qld). (I do not think s 101(2) is relevant in this case.) There was no evidence of any authority from the court. I assume the respondents did not intend to contravene s 101. In those circumstances, I think the payments can only be characterised as wages that were paid pursuant to a contract of employment.

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Conclusions with respect to employment relationship

53. It follows I am satisfied there was an employment relationship between the applicant and his wife and the trustees. In those circumstances, there was an obligation on the trustees to make superannuation contributions in respect of Mr Christie and his wife.

The taxpayer's other contentions

54. It is clear the respondent's amended assessment in respect of the 2001 financial year must stand. I am unable to fault the reasoning or calculations contained in the objection decision. The assessment in respect of the 1999 tax year should be amended to reflect the changes contained in the letter to the applicant from Ms Hopton dated 16 September 2004. The letter was written following analysis of information provided by the applicant. It includes working papers. I am unable to detect any error in the Commissioner's reasoning contained in the letter, so that decision (as amended) must stand. The assessment in respect of the 2000 year of income should be amended in accordance with the letter to the applicant from Ms Hopton dated 2 April 2004 which provides for a superannuation guarantee shortfall of $5408.93. The Commissioner is directed to recalculate the amount of the other components of the superannuation guarantee charge and the part 7 penalty.

Conclusion

55. The objection decision in relation to the 2001 year of income is affirmed. The objection decision in relation to the 1999 year of income is varied in accordance with the terms of the letter from the Commissioner dated 16 September 2004. The objection decision in relation to the 2000 year of income is varied in accordance with the letter from the Commissioner dated 2 April 2004 and the decision is remitted to the Commissioner for calculation of the amount of the other components of the superannuation guarantee charge and the part 7 penalty.