RYAN v FC of T
Members:Downes J
Tribunal:
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
[2004] AATA 753
Downes J (President)
Michael Ryan is an information analyst. He has a PhD in astrophysics. He is married to Maria. She has a BA majoring in science and a Dip Ed. In 1994 Dr Ryan caused Marjsp Pty Limited to be incorporated. Dr and Mrs Ryan own 50 shares each of the 100 shares allotted in the company. They are the directors of the company. Marjsp is the trustee of the Marjsp Superannuation Fund. Dr and Mrs Ryan are members of the fund.
2. These appeals relate to the tax years ending 30 June 1995, 1996 and 1997. In each of those years Marjsp earned income. The income was largely earned from fees paid pursuant to contracts to provide information technology services to clients such as carrying out ``data and statistical analysis'' and furnishing ``reports and projections''. Dr Ryan provided the skills and expertise which lay behind the work. Mrs Ryan provided some secretarial assistance.
ATC 2183
3. The following table shows the income of Marjsp from the provision of its consulting services, the salary and some director's fees paid by Marjsp to Dr and Mrs Ryan and the contributions made by Marjsp to an external superannuation fund (in 1995) and to the Marjsp Superannuation Fund (in 1996 and 1997) on behalf of Dr and Mrs Ryan.
Marjsp Dr Ryan Dr Ryan Mrs Ryan Dr Ryan Mrs Ryan
Income Income Director's Income Superannuation Superannuation
Fees
1995 $87,897.60 $54,526.00 -- $6,300.00 $5,000.00 $11,500.00
1996 $117,695.00 $37,541.00 -- $6,000.00 $20,000.00 $50,000.00
1997 $50,532.50 $26,000.00 $1,500.00 $2,500.00 $12,000.00 $8,000.00
4. On 23 June 1999 the Commissioner of Taxation made determinations under s 177F of the Income Tax Assessment Act 1936 adding the amounts of $33,371, $80,154 and $23,032 to the assessable income of Dr Ryan for the years 1995, 1996 and 1997. Amended assessments were issued. The additional amounts represent the difference between the fees received by Marjsp and the income disclosed for Dr Ryan. The Commissioner also determined that the amounts of $2,443, $3,279 and $3,352 which had been claimed as expenses of the company should be deemed to be allowable deductions against Dr Ryan's income in each of the years. The amounts were paid by the company for items such as accountancy, bank charges, insurance, telephone and training.
5. In making the determination the Commissioner acted under Part IVA of the Act dealing with ``Schemes to Reduce Income Tax''. The Commissioner contends that there was a scheme which comprised or included the following steps:
- (i) the provision of the taxpayer's services to Marjsp for a salary and superannuation benefits substantially less than the costs of the services provided by the applicant to outside companies and other entities;
- (ii) the employment of the applicant's wife by Marjsp and the payment of a salary and superannuation benefits on her behalf, the total of such salary and benefits being substantially greater than the value, if any, of those services to Marjsp or the cost of those services if the services had been provided by someone other than the applicant's wife;
- (iii) retaining the remainder of the income generated by the applicant's services in the company to be taxed at corporate rates.
6. The scheme contended for does not include the agreements between Marjsp and its clients. It is not part of the Commissioner's case to assert that the amounts received by Marjsp pursuant to those agreements would have been included, or might reasonably be expected to have been included, in the assessable income of Dr Ryan, as part of the dealings with the clients. These proceedings relate to how the income admitted to have been received by Marjsp would or might reasonably be expected to have been dealt with after its receipt and to the dealings between Dr and Mrs Ryan and Marjsp.
7. It follows that no issue as to why Dr Ryan did not contract directly with the clients arises in these proceedings. However, I find that Marjsp was incorporated and the agreements were made with Marjsp because Dr Ryan believed that companies such as his clients insisted upon dealing with corporations and because he was concerned to reduce his personal exposure to potential negligence claims. I base these findings on the written and oral evidence of Dr and Mrs Ryan.
8. Although Part IVA is concerned more with objective determinations of what might have happened and the purpose for what did happen, rather than the states of mind of the actors involved, it is nevertheless appropriate to consider these matters in their context and to make some relevant findings of fact.
9. It was the skill and expertise of Dr Ryan which lay behind the making of the agreements with Marjsp. The agreements were for the provision of professional services. Mrs Ryan assisted Dr Ryan. I accept that the income paid to her was not excessive but was fair and reasonable. I accept the evidence of Dr Ryan that it was based on estimates of the level of skill involved and the amount of time taken.
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10. The focus in this case is upon the circumstances surrounding the decisions as to how much of the income earned by Marjsp was to be superannuation contributions and how the amounts were to be divided between Dr and Mrs Ryan.
11. It is significant to note that prior to 1 July 1994 that part of the Act relating to superannuation contributions limited deductions, first, by reference to a percentage of salary and, then, by complex formulas addressing reasonable benefits limits (Subdiv AA of Div 3). From 1 July 1994 and throughout the period under consideration deductions were governed solely by age based upper limits. The limit for an employee aged 35 to 39 was $25,000 and the limit for an employee aged 50 and over was $62,000. The superannuation claims in the present case are all within those limits.
12. It is also significant to note that the Commissioner accepts that if the facts had been as they are in the present matter and all the superannuation contributions made here had been applied to Dr Ryan, instead of to both Dr Ryan and Mrs Ryan, then although in the 1996 year the limit for superannuation deductions would have been exceeded there would have been no Part IVA scheme (Transcript p 235).
13. Dr Ryan has the burden of satisfying me that Part IVA does not apply (s 14ZZK of the Taxation Administration Act 1953).
14. The relevant elements of Part IVA which must be negatived sufficiently to show that the Part does not apply are as follows:
- 1. The taxpayer has obtained a tax benefit in connection with a scheme because:
- (a) an amount has not been included in the income of the taxpayer; and
- (b) that amount:
- (i) would have been included; or
- (ii) might reasonably be expected to have been included
if the scheme had not been entered into or carried out (subs 177C(1)(a)).
Provided that no tax benefit is obtained where the non inclusion of an amount is attributable to a declaration, election or selection the giving of a notice or the exercise of an option expressly provided for by the Act (subs 177C(2)).
- 2. Having regard to the matters specified in subs 177D(b) it would be concluded that:
- (a) the person or one of the persons who entered into or carried out any part of the scheme;
- (b) did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.
The elements set out above represent a convenient note of the relevant parts of the legislation. In what follows I have worked from the provisions themselves.
An amount has not been included in the income of the taxpayer
15. It is necessary to start with the proposition that the amounts received by Marjsp from its clients could not go to make up the amount alleged not to have been included in the income of the taxpayer which would or might reasonably be expected to have been included (``the amount not included''). It cannot be said that that money would or might have been received by Dr Ryan. This is because there were binding agreements under which the money was paid to Marjsp and because the Commissioner does not assert that those agreements are any part of the scheme.
16. The amount not included must be an amount which would or might have been paid by Marjsp to Dr Ryan. The Commissioner says that it is all, or perhaps most, of the whole amount of fees received by Marjsp because all of the visible services provided under the agreements were the product of the efforts or personal exertion of Dr Ryan. It is not, however, immediately apparent to me that where work is done by a company pursuant to an agreement it is appropriate to conclude, even where the agreement is one for the provision of professional services, that the amount received for the services is to be identified with, and treated as wholly payable to, the person employed by the company who is the principal provider of those services.
17. On one view, once one accepts that the transaction with the clients is not part of any relevant scheme, the income from the agreements is the income of Marjsp which, like any other company, will pay as little of it as possible to its employees consistently with being able to continue to carry on a profitable business.
ATC 2185
18. Where it is difficult to isolate an amount as the amount not included it seems to me to be appropriate to approach with care the proposition that some such amount might have been included in the taxpayer's assessable income.
19. This matter is not to be approached on the basis that payments the clients might have made direct to Dr Ryan were directed to Marjsp. That is not the scheme asserted by the Commissioner. Accordingly, issues associated with the question of whether a scheme can be made out under Part IVA when one element is the diversion of income from an individual to a company do not arise (see
Peate v FC of T (1964) 13 ATD 346; (1964) 111 CLR 443;
Tupicoff v FC of T 84 ATC 4851; (1984) 4 FCR 505; AAT Case W58,
89 ATC 524;
Egan v FC of T 2001 ATC 2185; and
FC of T v Mochkin 2003 ATC 4272; (2003) 127 FCR 185).
20. Notwithstanding this the Commissioner's submissions did place emphasis on the circumstances surrounding the agreement with Marjsp. It was submitted, for example, ``that Marjsp was incorporated as the mere conduit or vehicle through which Dr Ryan, the applicant, could secure contracts for his personal services'' (Respondent's Written Submissions, para 3). These submissions are of limited value.
21. The final submission of the Commissioner as to the amount which might reasonably be expected to be included in Dr Ryan's assessable income was ``the difference between... the salary and superannuation paid to the applicant by Marjsp... and... the net amount Marjsp received for the provision of the applicant's services'' (Respondent's Written Submissions, para 25).
22. I pause here to note that this is not how the Commissioner treated the matter when he made the s 177F determinations as appears from the adjustment sheet (T47-338) and paras 3 and 4 of these reasons. The amounts added to the income of Dr Ryan were the difference between the fees received by Marjsp and the income paid to Dr Ryan. No allowance was made for the superannuation contributed by Marjsp on his behalf. The Commissioner's final attitude seems to be inconsistent with the amended assessments. This matter further highlights the problem in the present case of identifying the amount not included. Because I was not informed that the Commissioner had formally departed from the s 177F determination I will hereafter address the figures in that document. However, I will not determine the matter against the Commissioner if the Commissioner's present position would lead to a different result.
The amount would or might reasonably be expected to have been included
23. The Commissioner calculated the amount not included as the difference between the income of Marjsp and the salary and director's fees (1997) paid to Dr Ryan. This assumes no income was paid to Mrs Ryan and no superannuation payments were made to either Dr or Mrs Ryan. I cannot see how, on any view, it could be said that the whole amount for Marjsp for each year might reasonably be expected to have been included in Dr Ryan's income. There is no doubt in my mind that at least some of the amount claimed to make up the amount not included would have been contributed to superannuation for Dr Ryan, at least the amount actually contributed. That amount must be excluded from the amount claimed not to have been included. So must the remuneration paid to Mrs Ryan which I have found to be reasonable.
24. By treating the whole of the difference between the income of Marjsp and the income paid to Dr Ryan as the amount not included the Commissioner also picked up the ordinary outgoings of the company. Such an approach might have been sustainable if the scheme involved the diverting of income from Dr Ryan to Marjsp. However, once it is accepted that the income was earned by Marjsp, outgoings such as accountancy charges are the outgoings of Marjsp and cannot be treated as if they might have been met by Dr Ryan out of income paid to him. No suggestion was made before me that these charges were private expenditure of Dr Ryan. This error is not corrected by allowing the amounts as a deduction to Dr Ryan. Since the receipt of the income by Marjsp pursuant to contracts between it and the clients is not challenged there can be no basis for imputing these outgoings to Dr Ryan rather than Marjsp.
25. The major area of contention is the superannuation contribution made on behalf of Mrs Ryan. The evidence showed that Dr and Mrs Ryan were not paid regular salaries. They drew on the company bank account for what they needed. At the end of the year the amount they considered reasonable was treated as the income of Mrs Ryan and the balance was
ATC 2186
treated as Dr Ryan's income. I accept this evidence. I do not find anything untoward in it.26. Dr Ryan said that the balance was treated as superannuation. How it was to be divided was a matter considered at the end of the income tax year. Dr Ryan said that he treated superannuation as ``a family asset, basically, that would be spent by the family'' (Transcript p 60.15). As to how the amount to be allocated to superannuation was to be dealt with he said ``it was going to be locked away until retirement when presumably we... both would spend it, so it seemed just a nominal exercise almost, whose name it was to go under'' (Transcript p 60.10). He also said ``[l]et me put it this way, we would have paid a total amount of salaries similar to what was actually paid and a similar amount of superannuation'' (Transcript p 59.25).
27. It may be that, particularly in 1996, superannuation contributions were allotted so that they did not exceed the maximum contributions but that is not part of the scheme asserted by the Commissioner and is what one would expect. Notwithstanding the respondent's attack on the evidence of Dr and Mrs Ryan on these matters, and although I have carefully considered that attack and its basis, I broadly accept the evidence of Dr and Mrs Ryan and make findings in accordance with the evidence referred to above. I found Dr and Mrs Ryan to be frank and candid. Indeed, some of the criticisms levelled at them only served, to my mind, to enhance their credibility because of their frankness and candour.
28. I find that the primary consideration of Marjsp, through its directors Dr and Mrs Ryan, was to deal with the income earned by Marjsp by dividing it between income for Dr and Mrs Ryan and superannuation contributions on their behalf. How the superannuation contributions should be divided between them was a secondary matter. In the circumstances it is not difficult to conclude that if the superannuation contributions made to Mrs Ryan were not available then they would be made to Dr Ryan rather than paid to him as income. There is really no reason to think that any of the parties would have even contemplated that the money would be paid as income. I frankly have no doubt that Dr and Mrs Ryan would have procured Marjsp to pay for the benefit of Dr Ryan the excess of the maximum superannuation that could be contributed on behalf of Mrs Ryan.
29. The ultimate question for me is whether the superannuation contributions might reasonably be expected to have been included in the assessable income of Dr Ryan if it had not been for the scheme. I am satisfied that this question must be answered in the negative. Indeed, I find that they would not have been included.
30. In coming to this conclusion I am applying the test set down in s 177C. The conclusion is the same whatever method is employed to test the issue, including prediction and reasonable hypothesis (cf.
FC of T v Peabody 94 ATC 4663; (1994) 181 CLR 359;
FC of T v Spotless Services Ltd 96 ATC 5201; (1996) 186 CLR 404; and
FC of T v Consolidated Press Holdings Limited (No 1) 99 ATC 4945 at 4968; (1999) 91 FCR 524 at 548ff (affirmed on appeal
2001 ATC 4343; (2001) 207 CLR 235)). Any approach to what might have happened absent the alleged scheme will result in the conclusion that the amount represented by superannuation would not have been included in Dr Ryan's assessable income.
31. The conclusions I have so far reached causes me to find as to the whole amount alleged not to have been included and as to each part of that amount that it is not the case that it might reasonably be expected to have been included in the assessable income of Dr Ryan and that it is the case that it would not have been so included. That is enough to dispose of the case.
Any amount not included is attributable to an election or selection expressly provided for
32. However, the applicant relies upon two further grounds in support of its claim that the Commissioner wrongly applied the provisions of Part IVA of the Act. The first is to claim that the matter falls within the provisions of subs 177C(2) of the Act which I have included above as a proviso to the first element of Part IVA. The applicant argues that no tax benefit was obtained because the alleged amount not included was attributable to a declaration, election or selection the giving of a notice or the exercise of an option expressly provided for by the Act. The provisions relied upon by Dr Ryan are subss 82AAA(2), 82AAC(1), (2) and (2A) relating to the deductibility of superannuation payments. The question which arises is whether those provisions provide for a
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relevant declaration, election or selection, notice or option.33. Hartigan J in Case W58,
89 ATC 524 described the proviso as ``the escape hatch to Part IVA'' (p 536). He went on to say, however, that for the provision to apply the Act ``must itself expressly give a choice which has the result, when taken advantage of, of producing a tax benefit'' (p 536). Although I do not have to determine whether the sections relied upon do give such a choice my inclination is to think that they do not. If they did there would rarely be a case in which a contribution under the superannuation provisions could be attacked by the Commissioner under Part IVA. Cases such as
FC of T v Gulland 85 ATC 4765; (1985) 160 CLR 55 show that there can be circumstances in which superannuation provisions can be used as part of a means of tax avoidance. Accordingly, my present view is that if I had found that the alleged amount not included fell within subs 177C(1) I would not have found that it was protected by the provision of subs 177C(2).
It would be concluded that the entering into or carrying out of any part of the scheme was done for the purpose of enabling the relevant taxpayer to obtain the tax benefit
34. Because I have concluded that there was no tax benefit I do not have to determine whether s 177D applies.
35. However, the findings I have made relating to s 177C would have been relevant to s 177D. I note that the test is an objective test. It is, however, as with s 177C, an objective test to be applied in a factual context. What Dr and Mrs Ryan say they were doing and what they say was their purpose is irrelevant. However, the objective purpose will be a purpose associated with a context. That context will involve the actions of Dr and Mrs Ryan.
36. Having found that the provisions of subs 177C(1) are not attracted it is difficult for me to address s 177D because that exercise assumes that there was an amount not included. Assuming, however, that there was a tax benefit under s 177C it seems to me that, having regard to the matters set out in s 177D of the Act, it would not be concluded that any of the persons who took part in the scheme entered into or carried out the scheme or any part of the scheme for the purpose of enabling Dr Ryan to obtain the tax benefit. The purposes were providing superannuation for Dr and Mrs Ryan, paying Mrs Ryan for her work and claiming necessary deductions. Obtaining a tax benefit was not a purpose.
Other matters
37. Although this has not been part of my reasoning it does seem to me appropriate to point out that there was evidence before me from the accountant for Dr and Mrs Ryan and Marjsp, which does not appear to have been challenged by the Commissioner, that when the taxation position of each of Marjsp and Dr and Mrs Ryan are taken into account the overall savings of tax achieved by the taxation returns as filed amount to $2,757.
38. The parties treated this matter as a test case. Counsel for the Commissioner took the unusual course, both in his opening remarks and in his closing written submissions, of drawing my attention to a speech made by the Commissioner. I was provided with a copy. I do not suggest that there was anything inappropriate about this course being followed. On the contrary, I welcome it. In this case I am sitting as an administrative decision-maker exercising administrative power and not as a judge exercising judicial power. The Commissioner of Taxation is also an administrative decision-maker whose decision is being reconsidered by me. It seems appropriate that I should have the benefit of the Commissioner's views on matters of principle and policy in exercising my function. As sometimes happens, however, notwithstanding that this matter may have originally appeared to be a suitable vehicle for a test case, upon careful examination of the facts I have not found it to be so.
39. The only issue which might give this matter test case status is the question whether the likelihood of superannuation contributions being made from funds available to be paid as income is relevant to determining whether there is an amount not included within s 177C. The effect of an employer making a contribution to a superannuation fund on behalf of a taxpayer is effectively to remove that amount from the income of the taxpayer. It is not shown as part of the taxpayer's income and then deducted. Even if it was, it would not be shown as part of the taxpayer's net income. Subsection 177C(1) addresses the fact of non-inclusion. It does not address how the amount otherwise would or might have been disposed of. Once one concludes that it would not have been included,
ATC 2188
or that it is not the case that it might have been included, how it would or might have been disposed of does not arise for consideration. It does not seem to me, therefore, that an argument can arise in the present case that I must, for example, ignore the fact that Dr Ryan would have arranged for the alleged amount not included to have been contributed to superannuation on his own behalf but rather said it must have been treated as his income. Such an approach would, in any event, be inconsistent with the Commissioner's final approach in this matter which is discussed in paras 21 and 22.40. If the facts of this case had been that neither Dr or Mrs Ryan were the beneficiaries of contributions to superannuation during the period and the income earned by the company had been paid to them as income in equal proportions different considerations would have arisen and the issues thought to lie behind this being a test case might have emerged.
Conclusion
41. On the facts before me I find that the taxpayer Dr Ryan did not receive tax benefits pursuant to subs 177C(1) of the Act in the years ended 30 June 1995, 1996 and 1997 and the determination of the Commissioner of Taxation to apply the provisions of Part IVA of the Act must be set aside and the income tax for the relevant years for Dr Ryan assessed as returned subject to any necessary adjustments not raised for consideration in these proceedings.
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