Case U58

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 4 March 1987.

---

P.M. Roach (Senior Member)

In these references it is common ground that the applicant derived taxable income amounting to $9,149, $9,655, $9,973 and $1,650 in the years of income ended 30 June 1981, 1983, 1984 and 1985 respectively and it is also common ground that, with the exception of $1,040 in the 1981 year and $400 in the 1985 year, that taxable income was all derived from the conduct of a business.

2. When this hearing commenced the file relating to the year of income ended 30 June 1985 had not come under notice within the registry, but at the request of the applicant readily assented to by the Commissioner because no new issues were to arise, the registry file was obtained and the hearing thereafter conducted in relation to all four years.

3. However, no objection was before the Tribunal in relation to the year of income ended 30 June 1982 because the applicant, following disallowance of her objection by the Commissioner, had failed within the 60 days allowed for the purpose to request the Commissioner to refer his decision for review. That was due to some oversight such as is likely to occur from time to time in the affairs of even the most reasonable of persons. The applicant requested that that omission be excused. That could easily have been achieved by extending time for lodging the request for reference because, as I understand it, the issues in relation to the 1982 year could have been as readily and easily added as were the issues of the 1985 year. The justice of the case clearly required that it should be done and no harm would have been done to the public interest had it been allowed.

4. Unfortunately for the applicant, and in my view to the shame of this community, her 1982 objection cannot be considered. If any relief is due to the applicant in relation to other years, it will be denied her in relation to the 1982 year. Fortunately, as a result of the passage of the Taxation Boards of Review (Transfer of Jurisdiction) Act, in future it will be possible to avoid such injustices, but only if the last day for requesting reference fell on or after 1 July 1986. Why Parliament should have denied extensions of time in circumstances such as this and in other comparable situations remains unexplained - probably for the good reason that no reasonable explanation can be offered.

5. Nor does the matter stop there. The applicant requested on 20 September 1982 that the Commissioner's decision disallowing her objection to the assessment for 30 June 1981 be referred on for review. It was thereon the statutory duty of the Commissioner to refer on the objection. Had he discharged his statutory duty with reasonable promptitude, instead of waiting until 1 May 1986, it could easily have been that that objection would have been determined well within three years from the date of assessment in relation to the year of income ended 30 June 1982. In that case, even if the applicant had not objected within due time to the 1982 assessment, she would still have been within time to request a reduced amended assessment for 1982 to accord with the determination in relation to 1981. Because of the Commissioner's delay that came to be impossible because the Parliament has provided that the Commissioner may only issue such a reduced amended assessment within a three year period from the time of the original assessment.

---

ATC 378

6. The fact that the applicant derived assessable income from business arises from the circumstance that on 1 October 1980 she commenced business as a retail trader. To finance the undertaking she initially borrowed $6,000 from a trading bank and $32,500 from a family company. She traded from premises shared with a registered pharmacist and she traded in items commonly marketed from retail pharmacy premises. It was not necessary that they be sold by a registered pharmacist. She purchased stock and employed staff. There was a suggestion that she leased portion of the initial premises and of the premises which succeeded them, in both cases shared with the pharmacist, but no lease was produced. The "shop" was registered under the Factories, Shops and Industries Act; a business name was registered; and at some stage at least the business was recognised by the Australian Tax Office as a group employer. At inception a trading bank account was opened in the name of the applicant and at all times she remained the sole signatory on that account. In the years that followed from time to time the applicant was able to avail herself of overdraft facilities, although how that came to pass was not explained. Her evidence was that at all times she employed a manageress to conduct the day to day operations of the business on her behalf. That "manageress" happened at most times to be the only sales girl employed in the shop. The applicant attended at the premises from time to time and, when other commitments allowed her to do so, she worked alongside her manageress in the shop, affixing prices to articles; stocking shelves; attending to banking; and so on.

7. That might all have been rather unremarkable but for the fact that when the applicant embarked on those ventures she was a 10-year-old schoolgirl attending a leading private girls' school. The pharmacist was her father and the landlady was her mother.

8. Those circumstances, and the fact that she alone appeared before the Tribunal to give evidence and in doing so appeared to be accompanied only by her present accountant, go a long way towards explaining why she could not detail anything about negotiating the leases of premises; or how the bank loan was initially arranged; or as to how overdraft facilities were arranged from time to time; and why her evidence was vague about the recruitment of staff and the terms of their employment; about practices as to drawings; as to how to maintain basic books of accounts; and how to avoid drawing cheques for excessive amounts or drawing cheques which might be dishonoured on presentation; and many other matters. One can only wonder as to what might have been the state of her evidence had her request for reference of September 1982 been complied with with reasonable promptitude so that she would have been giving evidence as a 13-year-old about these commercial transactions.

9. I must say of the applicant that I thought she was honest in her evidence but obviously troubled about the need to avoid doing more than affirm propositions about her power and control over the business; her employment of a manageress to protect her interests; the taking of drawing in sums mentioned in profit and loss accounts annexed to income tax returns; and in attributing only a guiding, advisory role to her parents in all of these matters.

10. Her honesty - worth more than anything money can buy - was demonstrated in the matter of the deed of loan. In the course of her evidence-in-chief she was asked to identify, and she did identify, a loan agreement the typescript of which identified it as a document of the year 1980 and which by hand was completed as to date on the first sheet "1st October". On the second sheet there appeared a photocopied reproduction of the seal of the lending company attested as affixed in the presence of two directors who purported to have signed. Opposite the attestation clause stating that the document had been "signed, sealed and delivered" by the applicant, appeared in handwriting what appeared to be the signature of the applicant. Cursory examination of the document showed that it was assessed for stamp duty in October 1986, after this Tribunal had given notice that the application had been listed for "call-over". (If, as seems probable, there had been a reluctance in 1980 to pay stamp duty upon the document, I am certainly persuaded that that circumstance is in no way attributable to the applicant.) At the stage at which the applicant identified the document she was not explicitly asked to identify whether the signature appearing as that of the borrower was hers, and she did not say that it was. For a number of reasons I was troubled about the signature on the document and loath to believe that this young lady would

---

ATC 379

be consciously trying to deceive the Tribunal in the matter. The form of the signature was in sharp contrast to the several signatures of the applicant which appeared in whole or in part on the photocopies of income tax returns tendered by the Commissioner. (His representative did not tender the originals which might have shown the totality of each signature.) Even so the copy income tax returns showed slowly developing signature forms from those of a child of pre-teen years to those of a child progressing through teenage. Even by the hearing date the signature she exhibited that day lacked the flowing style of the signature appearing on the first tendered exhibit as if hers.

11. When asked whether the signature appearing on the document in evidence was hers she denied it without hesitation or equivocation. There was then produced another version of the document. It was unstamped. It was also in the form of a photocopy. It was a product of the same strike of a typewriter, but probably was a photocopy from a clear carbon copy rather than from the original. It too was dated by hand "1st October" and in my judgment the first exhibit, which was also so dated, was so dated by the same persons - although in that regard it was not a photocopy of the first document. I also observe that the signatures accompanying the common seal which appeared on the first-presented document are not like those appearing on the second document. Further, the signature of the borrower on the second document was consistent with it having been signed by this young lady as a child of 10 years, but by that stage of the evidence she was too concerned to do more than identify the signature as her own. She would not assert when she had placed it there. None the less, I am satisfied that it was signed in or about 1980.

12. I repeat my conviction that the applicant is fundamentally honest but I am even more sure that she was under a pressure to express her evidence in terms devised by others. I am not persuaded that as a young lady of 17 years, let alone as a child of 10 years, in any of the significant matters canvassed before me she was the controlling influence in relation to the business activities considered: whether in acquisition of the business; its conduct during the years; the application of income generated by it; or the prosecution to a hearing of this application. In that regard I observe that her borrowings from the bank - at least as to the initial loan, and probably later as to overdraft facilities - were the subject of "indemnities" (not guarantees despite sec. 47 of the Minors (Property and Contracts) Act 1970 (N.S.W.) from her parents); that her parents might have had no remedy in law had they been held liable to the bank in relation to that indebtedness; that neither the bank nor the family company could have enforced their claims for principal or interest against the will of the applicant; that the shareholders in the family company - persons who are unidentified but who were alleged to hold 98% of the shares in the company in trust for the applicant - were in breach of their duty as trustees in lending in such circumstances (cf.
Fouche v. The Superannuation Fund Board (1951-1952) 88 C.L.R. 609).

13. However, as the problem is presented before me I must accept the derivation of the taxable income cited above by this young lady even though throughout most of the years in question she might more aptly have been described as a child.

14. One factor as to "control" is much relied on. I am satisfied that the applicant had a trading bank account on which she was the sole signatory. Her evidence was that monthly she wrote out cheques and in many periods signed 50 to 75 cheques per month: I accept that she signed them. I am not persuaded that she appreciated the significance of references in questions to "writing and signing" cheques, particularly as nothing was presented in the way of primary records; and also because she clearly had no real understanding of even elementary record keeping - beyond the composition of dockets and the compilation of debtors' accounts. However, her evidence was that she wrote out and signed all cheques for the business. That was not challenged. Accordingly in all the circumstances I accept that evidence even though it must have been an onerous undertaking for her at the age of 10 years. I will return to consider other aspects of this issue in due course.

15. The cross-examination of the applicant was brief, but sufficient for its purpose. It might almost have been cruel had the applicant been pressed to explain "how" from as early as 11 years she exercised independent control of those business affairs and in doing so made

---

ATC 380

decisions such as allowed her "manageress" to lend sums ranging from $16,000 (1982) to $24,500 (1985) to pharmacies and to two persons jointly who happen to bear her own surname; and to do so interest free, all the while incurring substantial expense in borrowing; or as to how she exercised control of her drawings - drawing nothing against a profit of $8,109 (1981); nothing against profit of $12,572 to leave proprietors' funds at $20,681 (1982); $12,752 against a profit of $9,655, to leave proprietors' funds at $17,585 (1983); $1,366 against $9,910 leaving proprietors' funds at $26,126 (1984); and $5,573 against profit of $1,250 leaving proprietors' funds at $21,802 (1985); or as to how she exercised independent judgment and control over the application of the moneys so drawn.

16. Having determined the facts to be as recounted in the foregoing paragraphs I now proceed to address the issue of law arising from them. The Commissioner applied Div. 6AA: "Income of certain children" in the assessment of the applicant. If the Commissioner was correct in that the applicant will be assessed to substantially greater amount in tax than would otherwise be the case. The applicant falls within the scope of that Division by reason of being a person under the age of 18 years. She did not fall into the category of being "an excepted person" by reason of any of the classifications referred to in sec. 102AC, such as being married or being engaged in a full-time occupation. However, the income derived by her will be outside the scope of the Division to the extent to which it is "employment income or business income" (sec. 102AE(2)(a)). As there is no suggestion in the evidence that the applicant was an employee, it is only necessary to consider the question of "business income". Section 102AE(5) (so far as is material) provides that the relevant reference to the "business income" of the applicant as a minor is to be read as a reference to:

"so much of [the] business income as the Commissioner considers fair and reasonable having regard to -

• (i) the extent to which, during the year of income, the minor had the real and effective conduct and control of the business and participated in the operations and activities of the business;
• (ii) the extent to which the minor had the real and effective control over the disposal of income derived by the minor from the business during the year of income;
• (iii) the extent to which the capital of the business consisted of property contributed by the minor, being property the income from which would, in the opinion of the Commissioner, be excepted assessable income in relation to the minor; and
• (iv) such other matters (if any) as the Commissioner thinks fit;"

17. The Commissioner expressly disclaimed reliance on "other matters" (para. iv) and there was no suggestion in the evidence that the capital of the business consisted of property contributed by the minor which might have generated excepted assessable income (para. iii). That means that the questions to be considered in assessing what is reasonable are:

• 1. "real and effective conduct and control of the business"
• 2. "real and effective control over the disposal of income derived... from the business"
• 3. the participation of the applicant "in the operations and activities of the business"

18. For the applicant it was argued that because she owned the business and its assets; because she employed a manageress; and especially because she alone was signatory to the cheque account, that in all relevant senses she had "real and effective control". I am not persuaded that that was so at the age of 10 years or even at the age of 15 years. The assets of the business were as a matter of form and substance hers and the income generated by the business was derived by her. In those senses the assets and income were her property and not the property of any other person. Even if it be assumed that that was sufficient to constitute "control", that alone is not enough to enable the applicant to succeed. The question is not whether she had "control", but whether the control she had was "real and effective".

19. In my view, in order for the applicant to succeed in that, it would be necessary for her to establish that at all material times she in fact by a free exercise of judgment, made independently of the directions of any other

---

ATC 381

person in accordance with whose wishes and instructions she was accustomed to act, made all material decisions which were effective decisions as to the affairs of the business and the application of its assets and its profits. It is not necessary that I should be able to identify the persons whose actions were effective to deny her "real and effective control". I am not persuaded that she had such "control".

20. However, I have also considered whether or not she might have exercised "real and effective control" over portion of the earnings of the business. Her evidence was that throughout the period she used part of the profits to provide for her purchases of personal clothing and the cost of social activities as to which she was completely independent. Her evidence was that in the latter part of the period she spent as much as $25.00 per week on that basis. I accept the latter evidence and that during some earlier periods she would have had under her control for those purposes other, less amounts. However, I do not accept that it was always so. The evidence is that prior to 30 June 1982 nothing had been drawn which could have been so applied, and, further that in the 12 months to 30 June 1984 only $1,366 was drawn. Even so, I was minded to consider the question as to whether a finding should be made that she did have in the relevant sense "real and effective control" over some moneys. I think not. As Latham C.J. said in
Robert Coldstream Partnership v. F.C. of T. (1943-1944) 68 C.L.R. 391 at p. 394:

"A partner would be a partner who did not have the real and effective control and disposal of his share if he did not have the control and disposal of the whole of his share."

21. I am not persuaded by the evidence of the applicant that she determined how much would be available to her to provide for her social recreations or clothing purchases or that she determined to what extent, if any, drawings would be applied in payment of her school fees or income tax.

22. There remains a further question as to what amount is to be considered "fair and reasonable having regard to the extent to which the (applicant)... participated in the operations and activities of the business".

23. There was some evidence, admittedly very vague, but not challenged in its substance that as a schoolgirl she assisted in the conduct of the business: pricing articles, stocking shelves, attending to the banking, and so on. Further, her unchallenged evidence was that even from the age of 10 years she had drawn all cheques on the business bank account. On the other hand there was no evidence presented in direct form indicating the extent of those operations. In my view, the evidence is sufficient to enable a finding of fact to be made. In making it I have regard to the circumstance that the writing of cheques in substantial number must have been a most burdensome chore for this child. I would be prepared on that basis to find that a reward of the order of $3 per week, $6 per week, $10 per week, and $15 per week would be reasonable in the years of income ended 30 June 1981, 1983, 1984 and 1985 respectively. On that account I will reduce the assessment of tax by taxing at general rates only - in lieu of at 46% - $150, $300, $500 and $750 in respect of those years.

24. In addition at the hearing it was conceded that in 1981 as to $1,040 included in taxable income, the tax should only have been calculated at general rates; and that a similar allowance should have been made in the sum of $400 in the year ended 30 June 1985.

25. On that basis, while I confirm the taxable income of the applicant in sums of $9,149, $9,655, $9,973 and $1,650 for the years of income ended 30 June 1981, 1983, 1984 and 1985 respectively, I will order that the assessments in each case be varied by reducing the amount of tax levied in accordance with the foregoing reasons and that the additional tax for late return assessed for that year at $62.26 be reduced pro rata to the reduction in tax for that year.