METASKILLS PTY LTD v FC of TMembers:
J Block DP
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 647
J Block (Deputy President)
Part A; Introduction and general
1. The objection decision which is under review in this matter is the refusal by the Commissioner of Taxation (the ``Respondent'') of an application by Metaskills Pty Ltd (``the Applicant'') for a Personal Services Business Determination (``the PSB Determination'') in respect of the year ending 30 June 2001 (``the relevant year'').
2. At the hearing, Mr Michael Strong, a director of the Applicant represented the Applicant, while Mr Mark Moshinsky, of counsel, appeared for the Respondent.
3. The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with a number of exhibits and including in particular witness statements by Messrs. Strong, Doney, Yrure, Halka, Ashwood and Corner.
4. This application was originally heard by the Tribunal on 6 November 2002. That decision (setting aside the objection decision under review) was published on 22 November 2002; it is referred to as ``the original decision'' and that hearing is referred to as ``the original hearing''.
5. The Respondent appealed the original decision and the Applicant cross-appealed. On 23 July 2003 the Federal Court, constituted by Lindgren J, set aside the original decision and ordered that the matter be remitted to the Tribunal to be determined according to law; see
FC of T v Metaskills Pty Ltd 2003 ATC 4644; (2003) 130 FCR 248; the judgment of the
ATC 2206Federal Court is referred to as the ``appeal judgment''.
6. The Tribunal admitted as an exhibit the Appeal Book referable to the appeal. Although it was an exhibit the Appeal Book was referred to by that appellation and is referred to in these reasons as ``AB''; pages in AB are referred to as ``AB'' followed by the relevant page number. The Appeal Book includes, inter alia, the transcript of evidence in respect of the original decision.
7. At the original hearing, Mr Strong gave oral evidence on behalf of the Applicant. At this hearing Mr Strong again gave oral evidence; oral evidence was in addition given by telephone by Mr Doney of IT-Spark Pty Ltd (``IT-Spark'') and by Mr Manuel Yrure and Mr Ratnesh Halka (Exhibits A9 and A10 respectively). Mr Moshinsky did not require Mr Craig Ashwood and Mr Ian Corner (Exhibits A11 and A12 respectively) for cross- examination and their witness statements may be accepted.
8. The Respondent also furnished the Tribunal with a large folder of cases and materials, including Part 2-42 of the Income Tax Assessment Act 1997 (``the Act''), in the form which was in force during the relevant year. It may be noted that Part 2-42 was amended after the relevant year, and in some instances with retrospective effect. All references to Part 2-42 contained in these reasons relate to that Part as it applied in respect of the relevant year.
9. Each of the Applicant and the Respondent furnished the Tribunal with written submissions; the Respondent's submissions are referred to as ``RS''. It is convenient to commence by noting that the Tribunal agrees that the issues (and to be dealt with in the same order in these reasons for decision) are those set out in clauses 11 and 12 of RS, reading as follows:
``11. The first issue that arises for determination, which has been described as the `Whose income?' issue, is whether the income derived from IT Spark during the 2000-2001 year was income of Metaskills or of Mr Strong. This issue arises because, if the income was not that of Metaskills, the foundation for the making of a Personal Services Business Determination under s 87-65(1) is not present.
12. If the `Whose income?' issue is determined favourably to Metaskills (i.e. it is held that the income was that of Metaskills), the following further issues arise:
- (a) whether Metaskills satisfied the results test under s 87-18, and therefore the condition in s 87-65(3A);
- (b) whether, but for unusual circumstances, Metaskills would have met, or could reasonably have been expected to meet, the business premises test under s 87-30, and therefore the condition in s 87-65(3B);
- (c) whether, but for unusual circumstances, Metaskills would have met, or could reasonably have been expected to meet, the unrelated clients test under s 87-20, and therefore the condition in s 87-65(3B).''
As noted in RS, an overview of the relevant legislation is set out in paragraphs 30 to 35 of the appeal judgment; is not necessary to include that (most useful) overview in these reasons.
Part B; Whose income?
10. Oral evidence at considerable length was given by Mr Strong. As to whether he was giving evidence or making submissions was at times not easy to discern. But at least, in respect of this issue, a common thread emerged. His evidence was that throughout the relevant year the contracting party, who was furnishing services to IT-Spark, was the Applicant and not Mr Strong himself. This was so in particular, according to his evidence, because the other contracting party (IT-Spark) insisted that the entity furnishing those services have professional indemnity and workers compensation cover, and that it was the Applicant, and not Mr Strong, who had the required cover.
11. This aspect is vital simply because if the relevant income was properly that of Mr Strong and not that of the Applicant, a PSB Determination would not have been competent. Such a determination cannot be made in favour of the natural person whose endeavours and efforts gave rise to the relevant income. The appeal judgment indicates that there were findings in the original decision which were not consistent. In particular and in the original decision the Tribunal found that the relevant contractual relationship was between Mr Strong
ATC 2207and IT-Spark and not as between the Applicant and IT-Spark. A finding that there were then ``unusual circumstances'' in respect of the Applicant was not consistent with the fact that the contracting party was, according to the Tribunal's finding in the original decision, Mr Strong.
12. It is altogether clear that the identity of the contracting parties must be determined objectively as at the date when the contract was made and having regard to the background known to the parties at that time. The Tribunal refers in this context to paragraphs 124, 125 and 126 of the appeal judgment, and reading as follows [ATC at 4662 - and ]:
``124. The identity of the contracting parties was to be established:
- • `objectively'; and
- • as at the date of the making of each contract; and
- • by reference to any relevant background known to both parties at that time.
Although it is said in discussions of the law of contract that the aim is to ascertain the parties' intention, it is not subjective intention that, generally speaking, matters. Rather, what counts is that common intention which is to be attributed to the parties on the basis of objective matters known to both.
125. The Overarching Agreement set out terms of engagement which were to be attracted if and when IT-Spark offered Mr Strong, and Mr Strong accepted, engagements for particular projects (cf the analysis by Barwick CJ in
Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1978) 139 CLR 231 at 244).
126. Metaskills's submission must be that there was evidence, which the AAT erroneously failed to consider, that in entering into the Overarching Agreement and accepting (apparently by performance) the seven individual offers of engagement, Mr Strong was acting as agent for, or organ of, Metaskills. The existence of Metaskills as Mr Strong's principal was not disclosed in the document. The doctrine of the undisclosed principal cannot operate if it would be inconsistent with the terms of the agreement for it to do so; see, for example, GE Dal Pont, Law of Agency (Butterworths, Sydney, 2001) (2001) at [19.32] - [19.40] and cases there referred to.
13. The Tribunal refers also to the important restatement of the principle set out in the preceding clause by the High Court in
Ermogenous v Greek Orthodox Community (2002) 209 CLR 95 at pages 105 and 106 as follows:
``Because the search for the `intention to create contractual relations' requires an objective assessment of the state of affairs between the parties (49) (as distinct from the identification of any uncommunicated subjective reservation or intention that either may harbour) the circumstances which might properly be taken into account in deciding whether there was the relevant intention are so varied as to preclude the formation of any prescriptive rules. Although the word `intention' is used in this context, it is used in the same sense as it is used in other contractual contexts. It describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened (50). It is not a search for the uncommunicated subjective motives or intentions of the parties...''
14. The Tribunal refers also and in the same context to
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 79 ALJR 129; in paragraphs 35 and 36 the High Court said:
``35. A striking feature of the evidence at trial, and of the reasoning of the learned primary judge, is the attention that was given to largely irrelevant information about the subjective understanding of the individual participants in the dealings between the parties. Written statements of witnesses, no doubt prepared by lawyers, were received as evidence in chief. Those statements contained a deal of inadmissible material that was received without objection. The uncritical reception of inadmissible evidence, often in written form and prepared in advance of the hearing is to be strongly discouraged. It tends to distract attention from the real issues, give rise to pointless cross-examination and cause problems on
ATC 2208appeal where it may be difficult to know the extent to which the inadmissible material influenced the judgment at first instance.
36. In Codelfa Construction Pty Ltd v State Rail Authority of NSW [(1982) 149 CLR 337], Mason J observed:
`We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.'''
And in paragraph 42 the High Court said:
``42. Consistent with this objective approach to the determination of the rights and liabilities of contracting parties is the significance which the law attaches to the signature (or execution) of a contractual document. In Parker v South Eastern Railway Company [(1877) 2 CPD 416 at 421], Mellish LJ drew a significant distinction as follows:
`In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents. The parties may, however, reduce their agreement into writing, so that the writing constitutes the sole evidence of the agreement, without signing it; but in that case there must be evidence independently of the agreement itself to prove that the defendant has assented to it.'''
And (just as relevantly) the High Court said in paragraph 38:
``38. It is not in dispute that Mr Gardiner- Garden was authorised by Richard Thomson to sign the Application for Credit, and that when he signed that document he did so intending that it would affect the legal relations between Richard Thomson and Finemores. So much was acknowledged in the course of argument in this Court. Counsel for Richard Thomson said that there was no suggestion that the document that was signed was not intended to create legal relations.''
The High Court then went on to cite Ermogenous (supra) and the passage from Ermogenous included previously in these reasons, and noted ``that the point at issue on this appeal concerns not the creation of legal relations but the nature of the legal relations created''.
15. The relevant written contract in this matter is the contract or agreement (referred to in the appeal judgment and also in these reasons as the ``Overarching Agreement'') constituted by a letter written on an IT-Spark letterhead on 30 November 1999 addressed to Mr Mike Strong and accepted by him on 17 December 1999 (AB204 to 206). The Overarching Agreement is of such importance that it is set out in full in these reasons as follows:
``IT-Spark Pty Ltd
30 November, 1999
Mr Mike Strong
Further to your discussion with Chris Doney, I am pleased to offer you an invitation to join the IT-Spark Pty Ltd (IT- Spark) panel of Professionals. Set out below are the basic terms of the arrangement between IT-Spark and yourself should we offer you engagements in the future.
The intention is that this document contains the general terms which will apply to our business relationship on each occasion on which you are engaged to provide services to IT-Spark. The details of each particular engagement will be offered separately to you in writing.
After reading the contents of this letter please sign the extra copy enclosed and return it to me as your acknowledgment that you are prepared to accept offers of engagements to provide services under the general terms set out in this letter.
Each time you are given an assignment. an appropriate fee will be offered. A working day is regarded as seven (7) hours, excluding meal breaks, a half day is three and a half (3.5) hours. If an assignment
ATC 2209occupies less than half a day you will be advised specifically of the fee for that assignment.
On teaching assignments, to ensure success, it is your responsibility to check all facilities relating to the course on the day prior to course commencement. Unless by prior agreement, no extra fee will be paid for any preparation time in advance of an assignment, or for travelling time to and from an assignment, or for any time required to check facilities prior to commencement of a course.
Until further notice the only person authorised to offer you assignments is Chris Doney.
It is not intended that you be regarded as an employee of IT-Spark, or IT-Spark's client, but that you are a contractor engaged to provide specific services from time to time. You should therefore be aware that you are responsible for your own insurance for protection of your income, and for the professional responsibilities and any liabilities. including taxation liabilities, you may incur. IT-Spark does not, consequently, pay workers' compensation insurance in respect to your engagements nor are you entitled to holiday pay or long service leave.
Neither the signing by you of this letter guarantees that any offer(s) of engagement will be made to you nor the offer of engagements which may be made from time to time implies that you have any right entitling you to further or any other engagements by IT-Spark.
From time to time details of computer hardware, software, intellectual property, confidential information or `know-how' of a commercial nature belonging to IT-Spark or clients and companies with whom IT-Spark has working arrangements may be made available to you. It is the express condition of these terms and conditions of engagement that you shall keep confidential and not publish or disclose to any person any matter or thing which compromises or could have a tendency to compromise intellectual property, including matter which may be confidential information or the subject of copyright, or `know-how' of IT-Spark or its clients and business partners. It is further expressly agreed that the obligations hereby imposed on you in respect to non-disclosure shall continue for seven (7) years after the signing by you of this agreement or of your last engagement with IT-Spark, whichever shall be later.
LIAISON WITH IT-Spark's CLIENTS
As a member of the IT-Spark professional panel you are expected at all times to maintain good and cordial business relations with IT-Spark's clients. All administrative and financial arrangements with regard to engagement will be made between IT-Spark and its clients and not directly between you and IT-Spark's client. It is accordingly, an express term of each agreement under which you provide your services as a member of IT-Spark's professional panel that you will not, for a period of one (1) year, after the completion of your last engagement by IT- Spark, be engaged directly to provide consulting, teaching or associated services to any client of IT-Spark for whom you have been engaged to provide any such services in the period of one (1) year prior to the completion of your last engagement by IT- Spark.
Should you be offered, and accept engagements from IT-Spark's clients directly you will be regarded as having breached this agreement and legal consequences will result.
It is not intended that you be restricted unreasonably in a business sense in pursuing your professional career but it is expected that if you become aware of business opportunities other than from IT-Spark's clients you will let IT-Spark know.
IT-Spark aims to achieve the highest possible quality in the courses presented by members of the IT-Spark professional panel. Course quality will be judged by evaluations provided by course participants.
Courses may be cancelled on very short notice. Your IT-Spark manager will inform you of cancellation as soon as possible. IT- Spark will endeavour to provide ten (10)
ATC 2210working days notice of cancellation but this may not always be possible. Where your manager, in conjunction with a Director of IT-Spark, considers the period of notice of cancellation unreasonable then IT-Spark will negotiate with you an amount to cover costs incurred and for your inconvenience. Where IT-Spark agrees to pay you a fee for course cancellation, you are expected to contribute professional effort for a time equivalent to that payment.
Property for use in IT-Spark assignments is the property of IT-Spark and should be handed back to IT-Spark as soon as practicable after each assignment. Copyright in data and materials, including course materials, shall be the property of IT-Spark unless otherwise agreed and confirmed in writing by IT-Spark.
For assignments where expenses will be paid these will be confirmed in writing before expenses are incurred. IT-Spark will not be responsible for the reimbursement of any amount unless agreed in writing.
The arrangements between IT-Spark and yourself under which you are prepared to make yourself available from time to time and under which IT-Spark is prepared to engage your services from time to time can be terminated by either you or IT-Spark by the giving of seven (7) day's notice by the one to the other.
I look forward to a long and happy association between you and IT-Spark.
I, MICHAEL JAMES STRONG, agree that, should I be offered assignment(s) by IT- Spark it will be on the terms set out above or as varied from time to time by any particular assignment offer by IT-Spark.
Dated this [17th] day of [December] 1999''
16. In respect of the Overarching Agreement the Tribunal draws particular attention to its content under the head of ``Status'' and also its content under the head of ``Liaison with IT- Spark's Clients.'' It is relevant also to note that the Overarching Agreement makes no reference whatsoever to the Applicant and that, as the Respondent contends, it makes sense only if the contracting party was Mr Strong.
17. The Tribunal considers also that the Overarching Agreement is couched in terms which suggest that it was drafted by a lawyer or that a lawyer had some input into it. Mr Strong said that Mr Doney might have drawn the Overarching Agreement himself and by reference to a precedent or precedents and might not have needed outside assistance. This may be so; if it is so it suggests that Mr Doney is competent indeed.
18. There were seven engagements by IT- Spark of Mr Strong, the first two of which relate to the relevant year; they appear at AB 23 to 30 (inclusive); as one example, the (first) engagement for the period 1 May 2000 to 27 October 2000 (AB 23) which also makes no mention whatsoever of the Applicant, reads as follows;
``IT-Spark Pty Ltd
13 Grandview Drive Coolum Beach QLD 4573
14 June 2001
Instructor::- Mike Strong
Project Number C1520.
I am pleased to offer you the following assignment. This assignment is offered to you under the general terms of contract which you have signed with IT-Spark.
You are asked to deliver the following:-
Client - One.Tel Pty Ltd
Assignment - Unix Systems Architect - 6 months consulting at One.Tel
Location - One.Tel - onsite Castlereagh St Sydney
Start Date 1/5/2000 - Finish date 27th October 2000
Fees - $800 per day.
Submit invoices to us quickly, so we can arrange payment for you. Any problems which cause the assignment not to run as planned, need to be documented care-
ATC 2211fulIy, along with your actions to fix the situation.
Chris Doney - Managing Director''
19. It may be noted that the date of the engagement referred to in the preceding clause was (ex facie AB 23) 14 June 2001; that date however is the date on which the document was printed out by Mr Strong and not its actual date which would (presumably) have been on or about or (most probably) prior to 1 May 2000.
20. It is clear enough that the Overarching Agreement was entered into in anticipation of specific engagements and which would incorporate the terms of the Overarching Agreement; the Tribunal again refers in particular to its content under the head of ``Status''.
21. Lindgren J in the appeal judgment considered the question of whether the undisclosed principal doctrine could apply; he decided that it could not; see in this regard clauses 127 to 135 of the appeal judgment, reading as follows [ATC at 4662-4663 -[ 135]]:
``127. In the following paragraphs, I will consider the question whether the existence of Metaskills as principal can be accommodated to the Overarching Agreement.
128. In the opening paragraph of the Overarching Agreement, IT-Spark invites Mr Strong to join the IT-Spark `panel of Professionals'. It is difficult to accommodate the body corporate, Metaskills, to this language.
129. The nature of the services to be provided include `teaching', but Metaskills could contract to provide teaching services.
130. The Overarching Agreement stated: `Until further notice the only person authorised to offer you assignments is Chris Doney'. Accordingly, for the purposes of `the objective theory of contract', the distinction between a company and its directors was present to the minds of the signatories, yet there was no reference, express or implied, to Metaskills.
131. The Overarching Agreement stipulates that Mr Strong is not to be an `employee' of IT- Spark and that IT-Spark does not `pay workers' compensation insurance in respect to your engagements nor are you entitled to holiday pay or long service leave'. This shows that the Overarching Agreement was made with Mr Strong personally.
132. On the subject of `Liaison with IT- Spark's clients', the Overarching Agreement states:
`As a member of the IT-Spark professional panel you are expected at all times to maintain good and cordial business relations with IT-Spark's clients.'
I cannot, without rewriting, regard this provision as a promise by Metaskills. A similar observation applies to a later reference to `pursuing your professional career'.
133. Metaskills did not suggest that on the evidence that was before the AAT , the AAT should have found that the Overarching Agreement had been terminated or that it had ceased otherwise to apply to the individual engagements. In my opinion, the intention revealed by the text of the Overarching Agreement alone does not allow for the possibility that Mr Strong entered into it as agent for Metaskills. It is, of course, beside the point that the Overarching Agreement could easily be rewritten in order to do so, just as it is beside the point that Mr Doney might readily have agreed to such a re-writing
134. I turn now to the seven individual letters of engagement. As noted earlier, they were in a common form. In my opinion, with the exception of one sentence in them, they can be accommodated to the notion that IT-Spark was making the respective offers to Metaskills. For example, I have no difficulty in regarding the opening reference to `Instructor:- Mike Strong', as nothing more than a term that the instructor to be provided by Metaskills was Mr Strong. The exceptional sentence, however, is:
`This assignment is offered to you under the general terms of contract which you have signed with IT-Spark.'
This sentence incorporated, by reference, all the personal references to Mr Strong in the Overarching Agreement, to which I have referred above.
135. The four invoices rendered by Metaskills were discussed at - above. While they pointed in the opposite direction, they were taken into account by the Senior Member, who preferred the contractual documents, as he was entitled to do.''
22. In clause 127 of the appeal judgment Lindgren J concluded that it was open to the Tribunal (in respect of the original decision) to find in the affirmative in relation to Issue 4 and which as set out in the appeal judgment read: ``Was it open to the AAT, on the evidence before it, to conclude that Mr Strong, rather than Metaskills contracted with IT-Spark, and that the income concerned was that of Mr Strong rather than that of IT-Spark?''.
23. The written evidence before the Tribunal in respect of this particular issue was supplemented by oral evidence by Mr Strong and Mr Doney. (The evidence of the other witnesses who gave oral evidence did not bear on this issue.) That oral evidence went largely to the question of what they thought at that time when the Overarching Agreement was entered into; mention was made repeatedly of ``my intention''. That evidence was in all respects vague and general. There were according to that evidence one or more discussions as to professional indemnity and workers compensation insurance. But neither was able to say how many such discussions there were or what exactly was discussed or when; most importantly there were no notes of any of those discussions. Even more significantly, their evidence was that all of those discussions took place prior to 30 November 1999 which is the date of the Overarching Agreement, and so that the only possible inference is that the Overarching Agreement was entered into in order to record the relevant agreement and that it superseded all of those discussions. Both witnesses referred to the importance to IT- Spark of professional indemnity cover to the other party. The Overarching Agreement speaks of professional indemnity and workers compensation cover as having equal importance. On this basis it might be thought that from the point of view of IT-Spark it would be equally satisfactory if Mr Strong had the necessary cover, the important factor being that the cover existed, and not the identity of the holder of that cover. The Overarching Agreement, which in its terms required that Mr Strong have the necessary cover, makes it clear that Mr Strong was an independent contractor and not an employee. Mr Doney in particular, and although he did not have the Overarching Agreement before him when he gave evidence, said at pages 75 and 76 of the transcript:-
``MR MOSHINSKY: Mr Doney, you don't happen to have a copy of that document wit you at the moment, do you? - No, I don't, I'm sorry. I wasn't prepared for that question at all.
That's okay? - All I've got, to be honest, is the statutory decs.
Yes. That document which you've indicated you recall, was that the essentially the culmination of the discussions that you'd had with Mr Strong, during the course of 1999? - Yes, it would have been. It was at that point we decided to proceed on a formal basis and, you know, establish an ongoing business relationship between Metaskills and IT-Spark. And the basis for that really was there was ongoing clustering opportunities for us in at One Tel, IBM were now getting somewhat nervous about the year 2000 possibilities of what would be happening around some of their highly visible and fairly risky sites. The business model was looking good before September 11.
Now, in relation to One Tel, which you've just mentioned, do you recall that in the financial year 2000/2001, there were two engagements involving Mr Strong or Metaskills to work for One Tel, do you recall that? - I don't remember that there were two, I do remember there was definitely one, but there might have been an initial one and then a subsequent one.
Yes. But the documents that are before the Tribunal show two letters of engagement? - Okay.
One deals with a period - both are concerned with One Tel, one's from 1 May 2000 to 27 October 2000 and the next one is from 30 October 2000 to 27 April 2001? - Yes, okay. Yes. That would make sense because the second one is like, is an extension of the first. Yes, okay, no, that makes sense, that's okay.
Now, those - if I can call them letters of engagement? - Yes. We call them
ATC 2213assignment letters, but letters of engagement I think are fairly - pre-arranged we'll say. We actually call them assignment letters, you call them letters of engagement, but I don't see a problem with that.
Yes. Now, in the line headed `Assignment' in the first one, in fact in both of them, it's the same, it says `Assignment - Unix System architect, six months consulting at One Tel'. Do you recall that? - That would be right, yes. That was the nature of the work we were doing at One Tel.
The engagement was for consulting work to be done for approximately six months in each case, is that right? - That's correct, yes. Well, generally, what people like One Tel will do is, after you've convinced them that you walk and talk with God, they will give you a six months assignment, or it's sometimes even more. Sometimes they may give you a one week assignment or something impossibly difficult to do and if you're successful at that, then they extend it. So in the case you're looking at, we got an initial six month assignment for Metaskills. We then - that was then successfully concluded and they came back to me and asked for an extension for another six months, that occurred and a second assignment letter was generated.''
24. Insofar as the evidence before the Tribunal consisted of documents made after the date of the Overarching Agreement that evidence must be accorded little weight. This is so in particular in respect of the invoices for work performed by Mr Strong, and issued after the date of the Overarching Agreement, and which were rendered to IT-Spark by the Applicant. The fact that payments may have been made in respect of those invoices by IT- Spark to the Applicant, and not Mr Strong, falls into the same category. The Overarching Agreement must as I have said, be taken to have superseded all prior discussions, and what happened thereafter is necessarily of little relevance.
25. At a later stage (during the closing submissions) Mr Strong submitted that the fact that the Overarching Agreement does not contain a clause to the effect that it recorded the whole agreement between the parties to it, had the effect that there were other provisions which could be treated as inserted in it. He did not specify in particular what those other provisions might be. As to whether or not the Overarching Agreement contained an ``entire agreement'' clause is, in the view of the Tribunal, irrelevant.
26. In closing submissions Mr Moshinsky submitted that if one of the invoices had not been paid and Mr Strong had consulted legal advice as to recovery action, he would have received advice that the proper plaintiff was Mr Strong, and not the Applicant. (Mr Strong contended in reply that he would have received advice that the proper plaintiff was the Applicant). Mr Moshinsky's contention was correct.
27. At page 67 of the transcript Mr Doney said:
``Well, I think the sad truth is that my documentation is inadequate in this respect, or perhaps you guys wouldn't even be sitting there today. I engage both companies and individuals to supply the services required, and internally - that is, you know, within our group, there's no doubt as to whether we're dealing with somebody who is an individual and therefore basically carries no insurance. You know, I've got to look after all those sort of aspects for an individual person on a case by case basis. I only employ individuals rarely when they and only they have the specific skills I need, and those skills aren't required very often...''
28. It is clear to me that Mr Doney was being wise after the event. Whether or not the Overarching Agreement was drawn by or with the assistance of a lawyer or other professional, it is a comprehensive document and must be treated accordingly as the agreement which governed the relevant relationship. Mr Strong in his closing submissions said that it is hardly surprising that Mr Doney's oral evidence was vague given that the relevant events occurred some years ago. That is undoubtedly true but it does not, in respect of the evidence of Mr Doney, assist the Applicant. The other oral evidence did not relate to this issue.
29. The Tribunal finds, as did the Tribunal in respect of the original decision, that it was Mr Strong who derived the relevant income (and not the Applicant) and on the basis that it was Mr Strong who was the relevant contracting party under the Overarching Agreement, and so
ATC 2214that this issue must be decided in favour of the Respondent. In these circumstances the question of whether or not there was or should have been a PSB Determination in respect of the relevant year falls away and it is not strictly necessary for the Tribunal to consider the other issues. I undertook at the hearing that I would make findings in respect of the other issues and in case this decision is appealed, but it follows that all of the remainder of these reasons is necessarily obiter.
Part C; The results test
30. The Applicant did not raise an issue as to the results test in its original objection. However it did so at the original hearing; it should be noted that the legislation in respect of the results test applying to the relevant year was passed following the relevant year.
31. Section 87-18(3) of the Act for the relevant year provided as follows:
``(3) A personal services entity meets the results test in an income year if, in relation to at least 75% of the personal services income of one or more individuals that is included in the personal services entity's ordinary income or statutory income during the income year:
- (a) the income is for producing a result; and
- (b) the personal services entity is required to supply the plant and equipment, or tools of trade, needed to perform the work from which the personal services entity produces the result; and
- (c) the personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.''
32. The legislation in question makes it clear that the Applicant must establish that the income is ``for producing a result''. As to whether a certain result is or is not achieved is beside the point. (See in this regard the Explanatory Memorandum to the New Business Tax System (Alienation of Personal Services Income) Bill 2000).
33. AB 23 and the other engagement letters make it clear that each engagement had a start date and an end date and provided for a daily rate of remuneration ($800 per day in the case of AB 23). Mr Strong in evidence and submissions said (repeatedly) that payment would not have been made if certain ``milestones'' had not been achieved. The Overarching Agreement and the engagement letters do not contain any suggestion that this was so and indeed make it clear that payment was being made for services and not for results. (There is no mention in any of them of ``milestones''.)
34. In the same context there was no contractual requirement that tools be provided. The fact that as a matter of practice or convenience tools were provided is not sufficient. See in this regard
Scimitar Systems Pty Ltd v DFC of T 2004 ATC 2176; (2004) 80 ALD 378, and in particular clause 18 (with which the Tribunal agrees) and which reads as follows [ATC at 2179-2180 ]:
``18. The applicant meets the results test in the year of income if, in relation to at least 75% of the PSI, the income was for producing a result; and the applicant was required to supply the plant and equipment, or tools of trade, needed to perform the work that produced the result; and the applicant was, or would be, liable for the cost of rectifying any defect in the work performed: s 87-18(3) of the Act. The Tribunal finds that, at the time the PSBD application was made, the applicant did not meet and could not reasonably be expected to meet, any of the requirements of the results test. The contracts between the applicant and PIC were for the ongoing efforts and skills of Mr Jakins and not for a result and they did not impose any obligation on the applicant to supply plant and equipment or to bear the cost of rectifying any defect in the work performed by Mr Jakins. In deciding whether the results test is satisfied regard must also be had to the custom or practice in the relevant industry when work is performed by an entity other than an employee: s 87-18(4) of the Act. There was no evidence before the Tribunal that it is customary for entities providing the services of a systems analyst to be paid for a result and to assume the obligations set out in the results test.''
35. As to section 87-18(3)(c) of the Act, the fact that if the work had been defective there might have been a claim in damages, would not suffice. There is a fundamental difference between a claim for the cost of rectifying defective work and a claim sounding in damages; apart from any other considerations a
ATC 2215claim in damages would arise in negligence only, whereas there might not be such a requirement in respect of a claim for the cost of rectifying defective work. There was no evidence of any contractual obligation on the part of the Applicant to bear any cost of work performed by Mr Strong.
36. It follows that a claim based on the results test must fail.
Part D; The test set out in clause 12(B) of RS, in respect of the business premises test and unusual circumstances in respect of the business premises test
37. It is common cause that the Applicant did not comply with the business premises test set out in section 87-30(1) of the Act during the relevant year because it did not have separate business premises until late in the relevant year.
38. This being so, the Applicant relies on three matters alleged to constitute unusual circumstances (set out in clause 32 of the Applicant's statement of facts and contentions dated 8 November 2004) and being:-
``1. pressure of work in the relevant period;
2. joint venture negotiations with other organisations that were underway, which cast doubt over the requirement for separate business premises; and
3. an additional administrative load in learning how to run GST and other aspects of the New Business Tax System.''
39. The relevant statutory provision is section 87-65(3B) of the Act which reads as follows:
``(3B). The conditions in this subsection are that:
- (a) but for unusual circumstances applying to the entity in that year, the entity could reasonably have been expected to meet, or would have met, at least one of the 4 personal services business tests; and
- (b) the individual's personal services income included in the entity's ordinary income or statutory income could reasonably be expected to be, or was, from the entity conducting activities that met one or more of those tests.''
40. The test was dealt with in clause 29 of Scimitar (supra) (although the legislative provision was at that time numbered differently) in the following terms [ATC at 2181 ]:
``29. Section 87-65(3)(ii) of the Act refers to `unusual circumstances applying to the entity'. The Tribunal has construed this requirement to refer to circumstances other than those that affected the IT industry generally and which were not regular or recurring incidents of the applicant's activities that produced the PSI. In the context of the unrelated clients test this construction is exemplified by the special provisions of s 87-65(4) of the Act referred to in paragraph 25 above. So the Tribunal finds that the prevailing economic circumstances pertaining to the IT industry in the year of income, as described by Mr Jakins, do not constitute unusual circumstances applying to the applicant in that year for the purposes of s 87-65(3)(ii) of the Act. It is therefore unnecessary for the Tribunal to consider whether but for those circumstances, the respondent ought to have been satisfied that the applicant could reasonably have been expected to meet, or would have met, the unrelated clients test in the year of income.''
41. The phrase ``unusual circumstances'' is capable of a variety of meanings. It could relate to circumstances which are outside the ordinary course of business at one end of the spectrum (but are not necessarily rare) or it could relate to circumstances which occur very rarely (and unexpectedly) at the other end of the spectrum. It appears to the Tribunal that the test for unusual circumstances contained in clause 29 of Scimitar (supra), is appropriate (although it may well be that more is required to constitute ``unusual circumstances'') and notwithstanding the fact that the legislation itself does not specify what precisely is meant by ``unusual circumstances''. The circumstances on which the Applicant seeks to rely would not in my view and on any basis constitute unusual circumstances as required by the legislation.
42. Mr Strong said at the original hearing in relation to the pressure of work allegation (at AB 140):
``Mr Quinn: if I could take you to the document, the application at T 3-8 which is the application for the determination. Do you have a copy of that? - T3-8. Yes.
Now, at T3-16 in particular, down the bottom, for the five years prior to the commencement of 2001, you had operated your business from an office in your
ATC 2216residential premises effectively and efficiently and the nature of the contracts I was executing the intensity of work required meant that there was no suitable time to take the focus off the contract work for long enough to find and establish new premises and, in fact, the 2000 year was - 2001 year was a very busy year was it not? - 2000 up until April 2001, yes.
2001. In fact, you were very busy for the five year period prior to that? - That is, in fact, true.
43. There was never any relevant nexus between the question of joint venture negotiations and separate business premises. Apart from any other considerations Mr Strong said that the move to separate business premises was made late in the relevant year, specifically to bring the Applicant within the legislation and after he became aware of it (after the commencement of the relevant year).
44. The evidence before the Tribunal was that joint venture negotiations with I&TC Solutions did not commence until February 2001. (See in this regard exhibit A12 and being the witness statement of Mr Corner.) Mr Strong confirmed that this was so (at page 37 of the transcript).
45. As to a possible joint venture with IT- Spark, Mr Doney said that any such possibility was abandoned after September 11. (This was of course a reference to 11 September 2001.) Mr Strong said (at page 82 of the transcript) that negotiations were put on hold in April 2001 at or about the time of the collapse of One Tel, which was an important and probably the most important client of IT-Spark. In fact One Tel was taken over (and see
TelePacific Pty Ltd v FC of T 2005 ATC 4107;  FCA 158) although it is possible that there were aspects of the One Tel business which were liquidated. I accept that the workflow from One Tel which was important, might well have fallen off. In respect of RNZ, Mr Halka said that negotiations started well before the commencement of the relevant year, while Mr Strong said that any such negotiations lost impetus in April 2001. As I have said, there was no relevant nexus (or for that matter any nexus) between joint venture negotiations (and as to which the evidence was nebulous and vague) and the fact that the Applicant did not move to separate business premises until late in the relevant year. On the contrary, the move occurred, according to the evidence, for one simple reason, and that was to bring the Applicant within the legislation.
46. In relation to clause 38(c) above, the additional administrative load occasioned by the introduction of the GST cannot constitute ``unusual circumstances applying to the entity'' within the meaning of the provision. This was something which affected the entire business community and including of course the industry in which the Applicant was engaged; see again Scimitar (supra) at clause 29.
47. The Applicant did not have separate business premises during the preceding five years and there was no evidence that there were any such plans which were put on hold. Mr Strong could not recall when estate agents were instructed; see pages 34 and 35 of the transcript as follows:
``Yes. Do you recall when you first, for example, consulted real estate agents about finding separate business premises? - Again, I couldn't give you a date. It would - it couldn't have been more than probably a few months before I actually took the premises, because I just wouldn't have had the time, you know, the style of work with One Tel, meant that there was a lot of planning to do and a lot of after hours work because, you know, being a 24 by 7 operation, if we needed to interrupt their machine services, it could usually only be done like between 2 am and 4 am, or midnight and 6 am. Those were the sorts of constraints we had to work within and so in addition, they could call at any time, you know, essentially we had to handle problems with the projects that we were delivering, at any time of the day or night.
Yes. And one of the reasons you say that it took you a while to take out separate premises is because of pressure of work, is that right? - That's correct, yes.
And in terms of when you sort of outgrew the space in the office at the residential premises and needed more space because of the four different operating systems, are you able to put an approximate date on that, when that occurred? - Not a specific date. It's one of those things that sort of builds up over time and pressure mounts to get the stuff out of the house, so to speak.''
48. There was no evidence that steps were taken to obtain separate business premises in the period leading up to the commencement of the relevant year; on the contrary the evidence was that separate business premises were, as I have said, taken late in the relevant year in order to bring the Applicant within the legislation and of which it was not aware when the relevant year commenced.
49. This issue must then be decided against the Applicant.
Part E; The test in clause 12(C) of RS; the unrelated clients test and unusual circumstances referable to that test
50. Sections 87-15(3), 87-20, and 87-40(2) of the Act are the sections which are most relevant; they provided during the relevant year as follows:
``87-15(3): However, if 80% or more of an individual's personal services income (not including income referred to in subsection (4)) during an income year is income from the same entity (or one entity and its associates), and:
- (a) the individual's personal services income is not included in a personal services entity's ordinary income or statutory income during an income year, and the individual does not meet the results test under section 87-18 in that income year; or
- (b) the individual's personal services income is included in a personal services entity's ordinary income or statutory income during an income year, and the entity does not, in relation to the individual, meet the results test under section 87-18 in that income year;
the individual's personal services income is not taken to be from conducting a personal services business unless:
- (c) when the personal services income is gained or produced, a personal services business determination is in force relating to the individual's personal services income; and
- (d) if the determination was made on the application of a personal services entity - the individual's personal services income is income from the entity conducting the personal services business.
87-20(1): An individual or a personal services entity meets the unrelated clients test in an income year if:
- (a) during the year, the individual or personal services entity gains or produces income from providing services to 2 or more entities that are not associates of each other, and are not associates of the individual or of the personal services entity; and
- (b) the services are provided as a direct result of the individual or personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.
Note: Sections 87-35 and 87-40 affect the operation of paragraph (1)(a) in relation to Australian government agencies and certain agents.
(2) The individual or personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity.
87-40(2): Subsection 87-15(3) and section 87-20 apply, in the manner specified in this section, to an individual or personal services entity if:
- (a) the individual or personal services entity is an agent of another entity (the principal ) but not the principal's employee; and
- (b) the agent receives income from the principal that is for services that the agent provides to other entities ( customers ) on the principal's behalf; and
- (c) at least 75% of that income is commissions, or fees, based on the agent's performance in providing services to the customers on the principal's behalf; and
- (d) the agent actively seeks other entities to whom the agent could provide services on the principal's behalf; and
- (e) the agent does not provide any services to the customers, on the principal's behalf, using premises:
- (i) that the principal or an associate of the principal owns; or
- (ii) in which the principal or an associate of the principal has a leasehold interest;
unless the agent uses the premises under an arrangement entered into at arm's length.''
51. To satisfy this test the Applicant must satisfy all of the paragraphs in section 87-40 (2) of the Act.
52. The Applicant contended that it was the agent of IT-Spark. The evidence before the Tribunal indicated that the Applicant or Mr Strong was authorised to look out for possible new clients who could be introduced to IT- Spark but that it would be for IT-Spark to decide whether or not to contract with a new client and if it did so, that new client would be the client of IT-Spark alone. Mr Doney's evidence was firm as to the fact that no interference would be tolerated. The introduction of a new client would entitle the introducer to a share of the revenue so derived. See page 38 of the transcript (and the evidence of Mr Strong) as follows:-
``Yes. And the structure of the relationship was such that either you or your company, Metaskills, did not have authority to enter into contracts on behalf of IT-Spark. Correct? - Enter into contracts on their behalf. No, I did not have that authority.
And, in fact, if I could ask you to look at clause 5.3 of this document, the terms of engagement? - Yes, that confirms that point.
Yes, it's 5.3, `No consultant has power to bind IT-Spark or to agree to vary these terms of engagement'. Do you see that? - Mm.
Yes. And Metaskills, or yourself as an individual, didn't have authority to enter into contracts otherwise on behalf of IT- Spark. Correct? - That's correct.
53. The Tribunal was referred to paragraph 1.2 at page 1 of GE Dal Pont, Law of Agency, Butterworths, 2001, as follows:
``[1.2] The narrowest legal definition of `agent' connotes `an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties'.8 A broader conception of agency covers `a person who is able, by virtue of the authority conferred upon him, to create or affect legal rights and duties as between another person, who is called his principal, and third parties'.9 Wider again is the characterisation of an agent as `a person who has authority to act on behalf of a principal, either generally or in respect of some particular act or matter'.10 Each of these definitions recognise agency as giving effect to the maxim qui facit per alium facit per se - a person who acts through another is deemed to act in person. They also demonstrate the fact that agency must be defined in terms of its consequences.11 The definitions differ in so far as the act - perhaps more correctly, the scope of the authority12 - in question is concerned.''
54. Whichever of the possibilities referred to in paragraph 1.2 of Dal Pont may have been appropriate, it was not in any event appropriate to describe the relationship between IT-Spark and the Applicant or Mr Strong as the case may be, as that of principal and agent. This is so because the Applicant or Mr Strong (as the case may be) did not have the power to conclude a contract with a new client or to affect the rights which would be created; the Applicant was able only to introduce a potential new client and with whom IT-Spark might or might not contract and if it did so contract would do so on its own terms.
55. Even if (notwithstanding the provisions of the preceding clause) it could be said that there was in fact a relationship of principal and agent, the Applicant could not satisfy section 87-20(1) (b) of the Act in that it was not advertising to the public or a section of the public at large. The Applicant relied, according to the evidence, on ``word-of-mouth'' advertising and direct offers; its advertising of a general nature was confined to its sponsorship of a local sporting team and the appearance of the Applicant's name on that team's shirts.
56. Mr Strong contended that although in the relevant year the Applicant had one client only (IT-Spark), it had two in the preceding year, and being IT-Spark and Technology Solutions. However, the Applicant's evidence (and see
ATC 2219clause 31 of Mr Strong's witness statement included as an attachment to exhibit A2) was that both clients were obtained through ``word- of-mouth'' and direct offers, and so that section 87-20(1)(b) could not be satisfied. The availability of the Applicant to take appointments was not sufficient.
57. This issue too must be decided against the Applicant.
Part F; Conclusion
58. It must be said that Mr Strong, although a layman, argued the Applicant's case competently and, it may also be said, with considerable tenacity. The Applicant's written closing submissions indicated in the clearest possible terms that Mr Strong is a man of considerable intelligence who dealt with an area which was unfamiliar to him, with ability. His research of the law was in the circumstances remarkable. Equally, Mr Doney is a man of very considerable ability. It does not seem at all likely to the Tribunal that these two gentlemen would have treated legal documents of the nature referred to in this decision as cavalierly and carelessly as was suggested. On the contrary, the probabilities are that each of them was attempting (for the benefit of the Applicant and having regard to the continuing and on- going relationship between Mr Doney and Mr Strong), to furnish evidence which would assist the Applicant's case but after the event. The Tribunal considers that the Overarching Agreement did indeed reflect the true contract between IT-Spark and Mr Strong and that the engagements which incorporated the terms of the Overarching Agreement likewise recorded the terms of engagements.
59. In the circumstances the objection decision under review must be affirmed.