DIXON CONSULTING PTY LTD v FC of T

Members:
RNJ Purvis DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 186

Decision date: 3 March 2006

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RNJ Purvis (Deputy President)

The application

1. This application seeks review of a decision made by a delegate of the Commissioner of Taxation ("the Respondent") on 8 November 2004. By such decision the Respondent refused to grant to Dixon Consulting Pty Ltd ("the Applicant") a personal services business determination pursuant to Division 87 of the Income Tax Assessment Act 1997 ("the Act") for the year ended 30 June 2002. The refusal was based on the ground that the Applicant did not satisfy the

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Business Premises Test in section 87-30(1) of the Act, namely that the business premises of the Applicant were physically separate from the premises that Mr Dixon, a director and shareholder of the Applicant, and his family used for private purposes.

2. During the year under consideration the Applicant employed Mr Dixon to provide business analysis consulting services to its clients. The effect of the personal services alienation provisions of the Act is to render the income generated as the personal income of Mr Dixon unless a personal services business determination is made. Such a determination could be made if the Applicant meets the Business Premises Test that is, if during the year under consideration the Applicant maintained and used business premises that were physically separate from any premises that Mr Dixon and/or his family used for private purposes.

The issue

3. The issue for determination then in this application is as to whether the business premises of the Applicant satisfy the prerequisite test as detailed in section 87-30(1) of the Act.

The hearing

4. At the hearing of the application the Applicant was represented by Mr Max Hendriks of PKF Chartered Accountants and the Respondent by Mr James Hmelnitsky of Counsel.

5. The documents lodged by the Respondent with the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were admitted into evidence and marked T1 to T10. Other written material tendered on behalf the parties was also admitted and marked accordingly:

Exhibit No.	Description
A	Certificates of registration for a 1998 Holden and a 1996 Toyota.
1	Bundle of colour photographs.

6. Mr Nicholas Dixon gave oral evidence upon which he was cross examined.

Relevant statutory provisions and the Business Premises Test

7. The relevant provisions were inserted into the income tax legislation by the Act and were designed to ensure "… that individuals cannot reduce or defer their income tax (and other liabilities) by alienating their personal services income through companies, partnerships or trusts that are not conducting personal service businesses" (section 86-10 of the Act). Division 86 of the Act operates by attributing personal services income to the individual who earned it notwithstanding the interposition of a company or trust (section 86-15(1) of the Act). Section 86-15(3) of the Act states however, that the provision does not apply where the interposed entity is conducting a "personal services business".

8. The expression "personal services business" is defined by Division 87. The Division describes the ways in which an entity may be or become a personal services business. A personal services business determination needs to be in force at a relevant time for an applicant to be taken to be a personal services business. Section 87-65(3) of the Act provides as here relevant:

"The Commissioner must not make the determination unless satisfied that, in the income year during which the determination first has effect, or is taken to have first had effect, the conditions in one or more of subsections (3A), (3B), (5) and (6) are met.

…

• (3A) The conditions in this subdivision are that:
• (a) The entity could reasonably be expected to meet, or met… the business premises test under section 87-30…"

9. The Business Premises Test is stated in section 87-30 of the Act, which so far as here relevant provides:

"(1) An individual or a personal services entity meets the business premises test in an income year if, at all times during the income year, the individual or entity maintains and uses business premises:

• (a) at which the individual or entity mainly conducts activities from which

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  personal services income is gained or produced; and
• (b) of which the individual or entity has exclusive use; and
• (c) that are physically separate from any premises that the individual or entity, or any associate of the individual or entity, uses for private purposes; and
• (d) that are physically separate from the premises of the entity to which the individual or entity provides services and from the premises of any associate of the entity to which the individual or entity provides services.

…"

10. The Applicant meets the criteria specified in section 87-30(1)(a) and (d) of the Act. The specific issue in this application is as to whether the Applicant met in the relevant year the requirements in sub-sections (b) and (c) of section 87-30(1) of the Act.

11. Some assistance in appreciating the factors relevant to a determination of this issue is provided by the explanatory memorandum that accompanied the introduction of the New Business Tax System (Alienation of Personal Services Income) Act 2000 at the time of the legislation being introduced into parliament ("the Explanatory Memorandum"). So far as here relevant the memorandum states:

"…

1.97 An individual or a personal services entity meets the business premises test for the income year if, at all times during the income year, the individual or entity maintains and uses business premises…

1.98 The business premises must be used mainly by the individual or entity to conduct activities producing personal services income. This means that the individual or entity must do more than merely have leased premises in its name to pass the test. The premises should actually be used to produce the personal services income.

…

1.99 The individual or entity must also have exclusive use of the premises. This means that the individual or entity cannot lease premises together with another individual or entity on the basis that they share the premises…

1.100 The business premises must also be physically separate from any premises used for private purposes of the individual, the entity or an associate of the individual or entity…"

12. It is noted that an example of the application of the statutory provisions is given under paragraph 1.100 of the Explanatory Memorandum. The example relates to the use of a shed in a back garden from which a business is conducted. It is noted that in the example "the shed is part of the premises used by Rose's [the Lessee] brother for private purposes". It is then stated that "Rose does not meet the business premises test". It is relevant however, to note the factual position stated in the example namely, that "the shed is part of the premises used" by the Lessee's brother for private purposes. A distinction can be drawn between this example and the factual situation pertinent to this application.

13. Further, reference may be made to a taxation ruling, TR2001/8, that also relates to the construction of the statutory provisions. TR2001/8 relevantly provides that:

"81. In deciding whether business premises are disqualified premises, the issue to be determined is whether the physical impression or character of the business premises causes those premises to be seen as physically distinct from any adjoining or surrounding premises…

82. Where business premises are within a larger building, the implication is that the business premises are not physically separate. This will also be the case where the business premises are within the curtilage of private premises. However, in both cases, this implication is not necessarily determinative and in situations where other factors sufficiently influence the overall impression, an alternative conclusion may be reached…

83. The factors listed below are to be considered in combination to reach a conclusion regarding the physical impression (or character) of the business premises as physically separate from any

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adjoining or surrounding premises and curtilage:

• • The extent of physical separation of the premises;
• • Whether the physical appearance of the business premises makes them distinct and separate from adjoining or surrounding premises and curtilage;
• • Whether the business premises are detached from other building structures on the land and are not within the curtilage of those other premises;
• • Whether the business premises have discrete access for the individual and clients;
• • Whether the business premises are incorporated functionally into the surrounding premises, including the extent to which facilities and staff are shared with occupants of adjoining or surrounding premises."

14. Not all of the above considerations are relevant to the present application. However, some of them are. The physical impression or character of the business premises is relevant. The subject garage and office accommodation is not within a large building and cannot be said to be within the "curtilage of private premises". As will be seen, the buildings are separate in a physical sense, a distance of some 15 metres at the narrowest point separating them. As abovementioned the physical appearance is a relevant consideration but this does not necessarily require the buildings to be of different styles, structure or decoration. Again, it is clear that the business premises can be situated on the same land as dwelling premises. The business premises need to be detached from other building structures "on the land". The question of access for clients to the business premises is again a relevant consideration. The factor as to whether the business premises are "incorporated functionally into the surrounding premises" is also a relevant consideration.

The business premises

15. A resolution of the issue before the tribunal as aforementioned requires a determination of two questions:

• 1. What were the business premises that were maintained and used by the Applicant in the 2002 income tax year.
• 2. Did such business premises satisfy the Test specified in section 87-30(1) of the Act.

16. During the year ended 30 June 2002 the Applicant provided business analysis services. Mr Dixon was and still is a Director and shareholder of the Applicant. For the purpose of the Applicant carrying on its business Mr Dixon provided personal services to it. A significant proportion of the services so provided were performed at premises situated on land at 4 Taylors Road, Dural. The land was owned by Mr and Mrs Dixon. The personal services provided by Mr Dixon were used exclusively by the Applicant.

17. There are two main buildings erected upon the land at Dural. One is a domestic dwelling house used by Mr Dixon and his family for private purposes. The other, the subject of these proceedings, is a two-storey structure with accommodation for three motor vehicles on the ground level, office facilities and office space on the second level. There is separate external access to the upper level.

18. Whilst the garage portion of the building provides space for three vehicles, only two vehicles, a Holden sedan and a Toyota Land Cruiser use the area. The remainder of the space is used for storage of material belonging to the Applicant and some few family items. Each vehicle is registered in the name of the Applicant, even be it the Holden is used by Mrs Dixon for private and family as well as the Applicant's purposes, and the Toyota by Mr Dixon "well in the 90 percent" for the Applicant's usage. All motor vehicle expenses are said to be paid by the company as well as fringe benefits tax being paid on account of their limited private use. Mrs Dixon, with her husband, is a Director of the Applicant and is paid a salary by it.

19. The vehicle entrance to the property is by a driveway that provides access to both the dwelling home and the business premises, the location of the latter being notified by a signpost and wording on the side of the subject building. There is exterior access to the office space. Client parking is available. The office space is above the garage. However, there are

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no plumbing or toilet facilities in or attached to the garage office premises. Facilities in the dwelling house are to be used. This is said to be on account of a concern by the local council as to possible dual occupancy.

20. The registered office of the Applicant is 4 Taylor Road, Dural as is the Applicant's principal place of business. There is a mailbox common to domestic mail as well as that relating to the business.

21. Whilst the business premises are physically separate from the business premises of the Applicant's clients, the services provided by Mr Dixon to the Applicant are, as to a majority of them, provided from the subject premises. Mr Dixon does however spend some time at the office of IBM, a principal client of the Applicant and "other retailers".

22. It is on the above factual basis that it is contended on behalf of the Respondent that the business premises were not at the relevant time physically separate from any premises that Mr Dixon or any member of his family uses for private purposes.

Submissions

23. It is contended on behalf of the Respondent that whilst most of the services provided for the Applicant by Mr Dixon were performed in the office space located above the garage, that other parts of the "the Dixon home" are also utilised in the Applicant's business. It is said that the family home and the business premises "share a front gate and driveway". The signage earlier identified in these reasons is "on the front gate and on a fence adjacent to the garage". It is also noted that there are not any water or sewerage facilities in the business premises. I do not consider that these facts necessarily deprive the business premises of their capacity to be physically separate and apart from the dwelling premises. It is further contended that the garage part of the business premises is "used for both business and private purposes". This is true but it is only to a limited extent. The vehicles so garaged are both owned by the Applicant. Fringe benefits tax is paid in respect of any private usage. It would seem to the Tribunal that with reference to the garage it is rather a position of the family using the business premises be it to a limited extent than the reverse. It is true that other parts of the land, the house and the garden are used solely for residential purposes but this does not disqualify the business premises including the garage from having an apposite description applied to it. It is said on behalf of the Respondent that the question for the Tribunal is "are the premises used and maintained by the Applicant physically separate from all parts of the property, which comprise premises used by the Dixon family for residential purposes?" I do not consider this as the relevant question. The inclusion of the word "all" is not apposite. The appropriate question is as to whether the premises, that is, the business premises, used and maintained by the Applicant are physically separate from "other" parts of the property. It is not as to whether they are separate from themselves. The Respondent submits that the business premises were not strictly confined to the home office and garage. The Applicant utilised, it is said, various "aspects of the residential premises in conducting its business" including the abovementioned common access. Again, it seems to the Tribunal that this fact does not disqualify the business premises from being appropriately categorised. When the Respondent states the question for determination as to "whether the business premises are separate from all parts of the block used for residential purposes" it is asking whether the business premises, that is, the garage and office accommodation are separate, that is, distinct from "other" parts of the block, such other parts being used for residential purposes.

24. The Tribunal finds as a matter of fact that the business premises consist of the garage and the office accommodation above it. Use is had by the business of the driveway and such part of the grounds as enable clients to access the office accommodation. Whilst it is a fact that the land is owned by Mr and Mrs Dixon and there is no evidence of title to any part of the land being granted to the company for its exclusive use, the evidence before the Tribunal is to the effect that the garage accommodation is mainly used by the business.

25. On behalf of the Applicant it was submitted that the Explanatory Memorandum is such as to assist the Tribunal in making a determination in this matter. Paragraph 1.98 of

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the Explanatory Memorandum provides that "the business premises must be used mainly" by, in this instance, the Applicant. It is not stated that there is to be exclusive use of the business premise by the Applicant. Again, in the sub paragraph the words "the individual or entity must do more than merely have leased" the premises, again enabling the Applicant to demonstrate that the premises are used, if not exclusively used, by the Applicant. When in paragraph 1.99 of the Explanatory Memorandum the words "exclusive use of the premises" is stated the paragraph goes on to illustrate joint occupancy precluding relevant consideration. There is no question in the subject application of joint occupancy. There is if anything a limited joint use of the garage premises. Again, the use is use of company property, namely the motor vehicles. I am satisfied that the business premises are "physically separate" from the premises used for private purposes within the meaning of paragraph 1.100 of the Explanatory Memorandum.

26. It is also relevant to look to the taxation ruling and the use there of the words "physical impression or character of the business premises". It is clearly apparent from the signage that the garage and first level of the building are where the business is situated and the area from which the Applicant conducts its business activities. There is no question of the business activities being conducted from any other place. Again, the business premises are not within "the curtilage of private premises".

27. Referring to the factors listed in paragraph 83 of the ruling the Tribunal is satisfied that there is a physical separation of the two premises and that the physical appearance of the premises by reason of the signage makes them distinct and separate from one another. They are detached from one another, even be it they are on the same land. There is discreet access to the office accommodation for Mr Dixon and clients. I am satisfied that the business premises are not incorporated functionally into the surrounding premises. The extent to which Mr Dixon and a client is required to use toilet facilities in the house is not in evidence. Even should it be it is open to the Tribunal to conclude that the use would be minimal other than for Mr Dixon.

28. It is clear on the evidence that the buildings are separate one from the other. It is clear on the evidence that a client wishing to do business with the Applicant would be directed to the appropriate location and not consider the domestic dwelling the place to visit. The buildings are largely functionally independent of one another.

29. I am satisfied that on a proper construction of the legislation there is not a requirement that there be exclusive use in the sense of the business premises being 100 per cent used for business purposes. What the legislation does provide is that for premises to be "mainly" used by the Applicant to conduct activities producing personal services income. The issue of exclusivity relates to the use of the premises being that of more than one individual or entity in the sense of shared accommodation.

Decision

30. The Tribunal is satisfied on the basis of the evidence tendered before it that the Applicant satisfies the business premises test as stated is section 87-30(1) of the Act. It is satisfied that the Applicant has "exclusive use" of the premises to the exclusion of relevant use by the Dixon family. The vehicles are the property of the company. If there is any use of the vehicles in a private sense by Mrs Dixon or Mr Dixon it is use by them of company property. I am further satisfied that the business premises are physically separate from the premises that are used by the Dixon family for private purpose.

31. Accordingly, the decision under review is set aside. The Tribunal determines that the subject business premises comprising the two-storey structure of office premises and garage satisfy the Test prescribed by s 87-30(1) of the Act. The application is remitted to the Respondent for further consideration.