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DIXON CONSULTING PTY LTD v FC of T

Members:
RNJ Purvis DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2007] AATA 1786

Decision date: 21 September 2007

The Hon RNJ Purvis, AM QC (Deputy President)

The application

1. On 3 March 2006, the Tribunal handed down a decision in this matter, setting aside the decision under review, and determining that the subject business premises comprising the two storey structure of office premises and garage satisfied the test prescribed by section 87-30(1) of the Income Tax Assessment Act 1997 ("the Assessment Act"). The application was remitted to the Commissioner of Taxation ("the Respondent") for further consideration.

2. The Respondent appealed the Tribunal's decision to the Federal Court. Both the application for review to the Tribunal, and the appeal to the Federal Court were concerned with personal services income within the meaning of Part 2-42 of the Assessment Act involving Dixon Consulting Pty Ltd ("the Applicant"), and Mr Dixon as a Director of the Applicant. As identified in the appeal, the questions that arose for consideration before the Tribunal and by the Federal Court were:

  • • Whether the Applicant had exclusive use of a two storey building consisting of a garage, storeroom, workshop and office area ("the Garage") situated on land at 4 Taylors Road, Dural NSW; and
  • • Whether the Garage was physically separate from premises that Mr Dixon and his family used for their own private purposes.

3. Under date 15 December 2006, the Federal Court upheld the appeal, setting aside the decision of the Tribunal, and remitting the matter back to the Tribunal for further consideration according to law.

4. Both the reasons for the initial decision of the Tribunal, and the judgement of the Federal Court, detailed the relevant legislative provisions and the factual situation as it then appeared from the evidence tendered before the Tribunal. The relevant statutory provisions and the business purposes test were outlined by the Federal Court in
Commissioner of Taxation v Dixon Consulting Pty Ltd 2006 ATC 2113; (2006) 65 ATR 290 at 292 as follows:

…

  • [3] Part 2-42 of the ITAA 1997 deals with personal services income. The object of Div 86 of the ITAA 1997, which is within Pt 2-42 and deals with the alienation of personal services income, is to ensure that individuals cannot reduce or defer their income tax by alienating their personal services income through companies, partnerships or trusts that are not conducting personal services businesses. It is designed to have the effect of attributing, to the individual who performed personal services, the income of a personal services entity from those personal services. A personal services entity is a company, partnership or trust whose income includes the personal services income of one or more individuals.
  • [4] The provisions do not apply if the entity is a personal services entity conducting a personal services business. Under s 87-15(1)(c), a personal services entity conducts a personal services business if the entity meets at least one of the personal services business tests. One of the personal services business tests is the business premises test.
  • [5] Under s 87-30(1), a personal services entity meets the business premises test in an income year if, at all times during the income year, the entity maintains and uses business premises:
    • (a) at which the entity mainly conducts activities from which personal services income is gained or produced; and
    • (b) of which the entity has exclusive use; and
    • (c) that are physically separate from any premises that the entity, or any associate of the entity, uses for private purposes; and
    • (d) that are physically separate from the premises of the entity to which the entity provides services and from the premises of any associate of the entity to which the entity provides services.

      …

      ATC 2553

5. The Court re-iterated the findings of fact made by the Tribunal at 292 to 293:

…

  • [6] It is common ground that the company is a personal services entity for the purposes of Div 87. It is also common ground that each of requirements (a) and (d) above were satisfied in relation to the company in the relevant year of income, being the year ended 30 June 2002.
  • [7] During the 2002 income year, Mr Dixon was a director and shareholder of the company. Accordingly, he was an associate of the company. During that year, the company provided business analyst consulting services to its clients. For the purposes of carrying on its business, Mr Dixon provided personal services to the company, from which it derived income. The personal services provided by Mr Dixon were used exclusively by the company. The majority of the services provided by Mr Dixon to the company were provided from the upper part of the garage, although Mr Dixon spends some time at the office of IBM, a principal client of the company.

    The garage and its use

  • [8] During the 2002 income year, the Dural property was owned by Mr Dixon and his wife. The Dural property is rectangular and is approximately 4,000 square metres in area. Two main buildings are erected on it. One is a dwelling-house occupied by Mr Dixon and his family for private purposes. The other is the garage. The dwelling-house and the garage are 15 metres apart at the narrowest point between them. The dwelling-house is close to the boundary on one side and the garage is close to the boundary on the other side.
  • [9] Vehicular access to the Dural property is provided by a driveway from an entrance in Taylors Road, which provides access both to the dwelling-house and the garage. Parking space is provided adjacent to the driveway close to the garage. The balance of the Dural property consists of gardens and grassed open space.
  • [10] The garage is a 2-storey structure with 3 separate vehicular entrance doorways. There is accommodation for 3 motor vehicles on the ground level and office facilities and office space on the upper level. There is separate external access to the upper level. The location of the office part of the garage is notified by a sign post and wording on the side of the garage. It is common ground that the upper level was used exclusively by the company in the 2002 income year.
  • [11] There are no plumbing or toilet facilities in or attached to the garage, although there are such facilities in the dwelling-house. A mailbox at the entrance to the Dural property is used for domestic mail as well as mail relating to the company's business.
  • [12] The space in the ground level of the garage was used for only 2 vehicles in the 2002 income year. The remainder of that space was used for storage of material belonging to the company and some few items belonging to Mr Dixon's family. Each of the 2 vehicles that used the space in the 2002 income year was registered in the name of the company.

    …

Grounds of appeal

6. The grounds of appeal relied upon by the Commissioner were that:

  • • In concluding that the Applicant had exclusive use of the premises, notwithstanding its finding that Mr and Mrs Dixon and their family also used the ground floor of the Garage for their own private purposes, the Tribunal misinterpreted the requirement for exclusive use.
  • • The Tribunal considered only the physical separation between the dwelling house and the Garage, rather than considering the question of physical separation of the Garage from the garden, driveway and curtilage comprising the open space around the dwelling house and the Garage.

    ATC 2554

Analysis by the federal court of the reasons for decision of the tribunal and statement of relevant principles

Analysis

7. The Court made relevant observations upon some of the findings of the Tribunal at 296 to 300:

  • [28]… The tribunal found that the garage is not "incorporated functionally into the surrounding premises". The tribunal did not indicate whether the reference to "the surrounding premises" was to the dwelling-house or to the open space adjacent to the 2 buildings.
  • [29]… A fortiori, the tribunal made no finding as to the arrangements, if any, that were in place between Mr and Mrs Dixon as owners of the Dural property, on the one hand, and the company, on the other hand, in relation to the use of the ground level of the garage.

    …

  • [39] The tribunal's findings, that the fact that the garage was used to a limited extent for private purposes and was only mainly used by the company, led to the tribunal's conclusion that the company has exclusive use of the garage to the exclusion of relevant use by the Dixon family. It may well be that a private use that could be fairly characterised as de minimis would not detract from a finding that the company had exclusive use. However, the tribunal made no such finding. Use "to a limited extent" is far from a finding that the use is so slight that it should be ignored.

    …

  • [41] However, the tribunal did not direct attention to the basis upon which the vehicles were garaged in the ground floor of the garage. That is to say, the tribunal made no finding as to the arrangements between the company and the Dixon family concerning the garaging of the vehicles. It may be that the vehicles were garaged in the garage because the company required that its vehicles be garaged there. On the other hand, if the vehicles were garaged there by Mr and Mrs Dixon by reason of their ownership of the Dural property, of which the garage formed part, and not under some arrangement with the company, it could not be said that that gave rise to any exclusive use by the company of that part of the garage.

    …

  • [43] … The mere fact that the vehicles were owned by the company cannot of itself lead to the conclusion that the company had exclusive use of the place where the vehicles were normally garaged. There is no indication that the company had any right to the use of the ground floor of the garage. Indeed, there was some evidence that some of the ground floor was used for the storage of family property.

    …

  • [45] The requirement of para (c) is that the business premises used and maintained by the company were physically separate from any premises that members of the Dixon family used for private purposes. The difference between the company and the Commissioner, in this regard, turns on the construction of the word "premises".

    …

  • [48] There is no reason why the word "premises" should not be understood according to its ordinary English usage…The Dural property is owned by Mr and Mrs Dixon…The Dural property could be described as the premises known as 4 Taylors Road, Dural. There is one entrance to those premises, which is used by the Dixon family for private purposes. The garage is part of the Dural property. As I have said, the tribunal found that the garage was not incorporated functionally into the surrounding premises. However, the tribunal found that the company uses the driveway and part of the surrounding open space to enable clients to gain access to the upper level of the garage. Thus, there was a sharing of the driveway by the company and by the Dixon family. It may have been possible for the tribunal to make a finding, on the evidence before it, that there are premises that are exclusively used by the company that can be shown to be physically separate from the dwelling-house, open space and driveway that constitute the premises of the Dixon family.

    …

    ATC 2555

Relevant principles

8. The Court at 298 also outlined relevant principles applicable to the implementation of the statutory provisions, stating that in order to satisfy section 87-30(1)(b):

"The Applicant must show that it had it an exclusive use of the whole of the Garage. There are at least two possible meanings for that requirement. First, it may mean that, as a matter of fact, the Company was the only person that used the Garage. Alternatively, it may mean that the Company had a legal right to the exclusive use of the Garage, whether or not it in fact enforced that right. In the present case, there was no evidence whatsoever as to any legal right. As to the former meaning, a factual finding must be made by the Tribunal."

Additional evidence adduced at the hearing

9. Mr Dixon, in his evidence, further described the use to which the Garage was put. He said that the store area at the rear of the ground floor of the Garage was "used for longer term storage of items owned by the Company such as computer cases, spare monitors and other computer peripherals." He also said that the workshop area was used to repair and upgrade computers on behalf of the Applicant. Mr Dixon said the areas were not used for any other activities. No member of his family, other than himself, used the store or workshop and did not have any reason to, or did go, into the store or workshop areas. No personal items were kept in either area.

10. With reference to the use of the garage area, Mr Dixon agreed in cross-examination that one or more of his three children would enter the garage area "when going by car somewhere", such as to sport or the shops. Mrs Dixon would also go into the garage space when she was about to use the Holden vehicle which was driven by her. Mr Dixon himself would enter the garage area when he was about to drive the Toyota vehicle on a non business occasion.

11. As already noted at the earlier hearing, the garage area was also used as the repository for some personal items of the children.

Consideration of the issues

12. The Tribunal is now required to apply the law as expounded by the Federal Court to the factual situation as it was found at the first hearing, supplemented by the evidence placed before it in the present hearing.

13. In order for the exclusive use prerequisite to be found in favour of the Applicant, it is necessary for the Applicant to show that it had exclusive use of the Garage, which includes the office, storeroom, garage and the workshop areas. The Court stated at 298 that, "There are at least two possible meanings for that requirement" namely that "as a matter of fact, the company was the only person that used the Garage" or that the "company had a legal right to the exclusive use of the Garage, whether or not it in fact enforced that right." There was not any evidence as to the latter.

14. Thus a factual finding is to be made by the Tribunal as to whether there was, or was not, exclusive use by the Applicant of the Garage; that is, whether or not the Applicant was the only person that used the Garage.

15. The Tribunal is satisfied, and finds that the Applicant was the only person that used the office, storeroom and workshop areas. Use of the garage area, however, calls for further consideration.

16. Consistent with the reasons for judgement, exclusive use of the Garage generally, and the garage area specifically, can be found even if there is a de minimis private use; that is, a private use that "is so slight that it should be ignored."

17. The Tribunal has found, and does find, that there was a private use. This use is comprised of the following:

  • (i) The storage of some items used by the children in the garage including bicycles, a boogie board and a light. Considered alone, this would entail a de minimis use.
  • (ii) Whilst the Applicant owns both vehicles, it does permit Mr and Mrs Dixon unrestricted use of each vehicle for his or her own purposes. Mrs Dixon uses the vehicle for transporting the children to various of their social and school activities. She also uses it for shopping and community involvement. Mr Dixon uses the other vehicle for a similar purpose.

  • ATC 2556

    (iii) The vehicles were thus used for family purposes with the family entering and exiting the garage for this use. Mr Dixon's use of the Toyota was "well in the 90 per cent" work related, and Mrs Dixon's use of the Holden for non-work related activities exceeded that of her husband. She worked only two and a half days a week for the Applicant.
  • (iv) The personal use of the cars is reflected in the Applicant paying fringe benefits tax on account of the use for personal reasons.

18. The exclusive use test is directed to exclusive use by the Applicant; that is, free of a use, other than possibly a de minimis use, by any other person or entity. There was not an issue as to the Applicant using the garage. The Applicant's cars were parked there and some furniture, property of the Applicant, was stored there. Mr and Mrs Dixon, when on the Applicant's business, would enter and alight the vehicles when they were stationary in the garage. However, attention is to be directed to the use made of the garage by others than the Applicant (and Mr and Mrs Dixon when engaged on company business), and a decision made as to whether this use was so slight that it should be ignored; that is, it is not the use by the Applicant, so much as the use by others (including Mr and Mrs Dixon when they were not on company business) that is to be the subject of the factual finding that the Applicant was or was not the only person that used the garage area.

19. The Tribunal is satisfied on the basis of the evidence before it, and particularly that set forth in paragraph 17, that the use made by others then the Applicant and Mr and Mrs Dixon in their employee capacity, was not de minimis and was not "so slight that it should be ignored." The Tribunal is satisfied that the Applicant did not have exclusive use of the garage area in the sense expounded by the Federal Court, and as a consequence of this finding did not have exclusive use of the Garage. It was submitted on behalf of the Applicant that when taken as a whole, the non-Applicant use of the garage area comprised only a small area of the whole Garage. The Tribunal does not accept this submission. The non-Applicant use could not be described as de minimis, even when looking at the whole of the Garage, and was not such as should be ignored.

20. In light of the Tribunal's finding as to non exclusive use, it is not necessary for it to consider the physically separate issue. However, as it was the subject of consideration by the Court and this hearing, the following observations are made.

21. The office, store and workshop areas were exclusively used by the Applicant. The garage area was not. Even be it, the Federal Court stated at 300 that, "it may have been possible for the Tribunal to make the finding, on the evidence before it, that there are premises that are exclusively used by the company that can be shown to be physically separate from the dwelling-house, open space and driveway that constitutes the premises of the Dixon family", whether the office, store and workshop areas can be considered as premises physically separate from the remainder of the Dural family, is an issue not specifically addressed by the Applicant. It is doubtful. Given the evidence before the Tribunal, I am not satisfied that a finding like that above referred to, is open to the Tribunal to make. There is not a physical separation between the office, store and workshop areas and the rest of the Dural Property, and more especially the garage area.

Decision

22. For the reasons set forth above, the decision under review is affirmed.


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