TANEJA v FC of TMembers:
GD Walker DP
SE Frost M
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
 AATA 87
Professor GD Walker, SE Frost (Deputy President, Member)
1. Raj Taneja, the taxpayer, is a computer systems analyst. He is also one of the directors of RS Consulting Group Pty Ltd ("the Company").
2. During each of the 2002, 2003, 2004 and 2005 income years, the Company earned income through the provision of the taxpayer's personal efforts or skills to third party clients. For taxation purposes that income of the Company is the "personal services income" of the taxpayer. As a result, unless the Company conducted a "personal services business" during the relevant income years:
- • income tax will be payable by the taxpayer, rather than by the Company; and
- • certain deductions will not be allowable.
3. The relevant law is found in Part 2-42 of the Income Tax Assessment Act 1997 ("the Act"), introduced in 2000 following recommendations of a committee, headed by Mr John Ralph, and commonly referred to as the "Ralph Report" or the "Ralph Review". The committee's recommendations were contained in its July 1999 report entitled Review of Business Taxation: A Tax System Redesigned.
4. For the reasons that follow, we have concluded that the Company did not conduct a "personal services business" during the relevant years. It follows that the income of the Company (to the extent that it results from the personal efforts or skills of the taxpayer) is included in the assessable income of the taxpayer. We have also concluded that the taxpayer's income cannot be reduced by amounts relating to wages paid to his wife, or to superannuation contributions made on behalf of his wife.
5. There are, however, some additional issues that are best dealt with by further consideration by the Commissioner. Now that we have reached our conclusions and published our reasons for them, we consider that the preferable course is to remit the matter to the Commissioner for reconsideration, within 42 days, in accordance with our reasons.
The "personal services business" tests
6. There are four personal services business tests in Part 2-42 of the Act, but the taxpayer has based his case on only one of them, the results test in s 87-18. The relevant parts of s 87-18 are subsections (3) and (4), which provide 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
ATC 2841(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.
- (4) For the purposes of paragraph ... (3)(a), (b) or (c), regard is to be had to whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee:
- (a) for the *personal services income from the work to be for producing a result; and
- (b) for the entity to be required to supply the *plant and equipment, or tools of trade, needed to perform the work; and
- (c) for the entity to be liable for the cost of rectifying any defect in the work performed;
- as the case requires."
7. It is clear that the criteria in paragraphs (3)(a), (b) and (c) are cumulative. They must all be satisfied for the results test to be met.
8. Ultimately, this case turns on the question whether the Company earns income "for producing a result", so as to satisfy the criterion in paragraph (3)(a). If it can surmount this "result" hurdle, then paragraph (3)(b) will also be satisfied, there being no issue in relation to the Company's supply of any necessary plant and equipment or tools of trade. Paragraph (3)(c) will also be satisfied, because the Commissioner has already accepted that, under the contracts that the Company has made with its clients, the Company is liable for the cost of rectifying defects.
9. The taxpayer made extensive submissions in support of the contention that the Company met the results test in the relevant years. We will deal with each of the taxpayer's submissions in turn, and explain why we are not persuaded by them.
Paragraph (3)(a) satisfied by implication
10. The taxpayer's submission is that, if the Commissioner accepts for the purposes of paragraph (3)(c) that the Company is liable for the cost of rectifying defects, then by implication "the contract must be for producing a result": Applicant's Submissions, C.11.c. We do not agree. Each paragraph in s 87-18(3) has independent operation: see
IRG Technical Services Pty Ltd v Deputy Commissioner of Taxation 2007 ATC 5326;  FCA 1867 ("IRG"), especially at .
The relevance of the treasurer's doorstop interview
11. The then Treasurer of the Commonwealth, Hon Peter Costello MP, gave a doorstop interview on 9 July 2001, at the Ministerial Entrance Foyer to Parliament House, to announce proposed amendments to Part 2-42 of the Act that would "significantly ease the compliance burden under the alienation of personal service income provisions". The amendments would allow some taxpayers to self-assess their liability under Part 2-42, whereas before the amendments it was necessary to get a determination from the Commissioner. Among other things, the Treasurer said:
"This has always been a very unclear area of the law, since the last two centuries of court decisions. What is the difference between somebody who is on a salary and somebody who is business where they don't have tools of trade, where they don't have an office, where they only really work for one person, how do you recognise that they're actually in a business. The principal way you recognise it is if you are [a] contractor you are liable for rectification, you do the job badly you have got to go and make it good, if you're an employee you are not liable for rectification, you might get in trouble with the boss, but you don't have to go back and rectify the work and you are not liable for the damages if you do. So we maintain the legal distinction between the contractor and the employee, but we dramatically reduce the compliance burden, you no longer have to get a determination, you are able to self assessed as you've been self assessing in the past."
ATC 2842The taxpayer's submission, as we understood it, was very similar to that dealt with in  above. His representative asked us "how can you be liable for rectification if there was no result to be produced?" This was said to follow from the Treasurer's statement that focused on liability for rectification as a factor distinguishing an employee from an independent contractor.
13. There are a number of responses to that submission.
14. First, it is unwise to place too much reliance on what a Minister says in a doorstop interview, particularly one undertaken shortly after a decision to amend the law, but some seven and a half weeks before the amending legislation is introduced into the House of Representatives (Hansard, 30 August 2001, p. 30634-30635). Although the Treasurer would no doubt have been well prepared to undertake the interview, his statements were nevertheless made "on the run". It is unrealistic to expect absolute clarity and precision of language, even from a senior Minister, in such circumstances. The taxpayer's attempt to elevate the contents of the interview to a status equivalent to, or perhaps even above, that of the Explanatory Memorandum is rejected.
15. Second, what the Treasurer said cannot fairly be read, in any event, in a way that supports the taxpayer's position. The liability to rectify was stated to be the principal way, but not the only way, to differentiate between an employee and an independent contractor.
16. Third, the Treasurer had also said this, earlier in the interview:
"And the change which the Government is announcing today is that independent contractors can self assess. If you are an independent contractor who contracts for a result, and is liable for rectification, if you bring your own tools of trade if they are required then you can self assess as a personal services business. You don't have to apply for a determination."
That was a clear statement of the three criteria for the results test. The liability to rectify alone is not enough. You also have to contract for a result, and bring your tools of trade if they are required. This brief but accurate summary set the scene for the Treasurer's later statement to the effect that the liability to rectify was the "principal way" to identify an independent contractor.
17. The taxpayer's submissions also focused on the following statement that was made later in the doorstop interview:
"What the Government introduced [in 2000] was significantly less rigorous than was recommended by Ralph. And the Labor Party condemned the measures that the Government introduced for being too weak. The Australian Democrats moved amendments to toughen the test and the Labor Party moved a Second Reading amendment condemning us for such weak legislation."
18. This statement was the foundation for a claim on behalf of the taxpayer that the Commissioner had "misled" Allsop J in the Federal Court in IRG by failing to point out to his Honour that not all of the Ralph recommendations had been enacted. That claim has no substance, and we reject it.
The relevance of s 87-18(4)
19. The taxpayer's submission is that "s 87-18(3)(a) is subject to s 87-18(4) and thus it mandates 'custom and practice' of the industry to be taken into account": Applicant's Submissions, C.13.
20. The taxpayer says that one of the main reasons why the Commissioner does not accept that the Company meets the criterion in s 87-18(3)(a) is that it is paid on a time basis. In response the taxpayer says that it is common in the industry to be paid that way. Therefore, so the argument goes, because it is the "custom and practice" in the industry that consultants are paid on a time basis, it must be that the Company satisfies s 87-18(3)(a).
21. That reasoning is not sound.
22. We agree with the Commissioner that the main purpose of s 87-18(4) is to act as a safety net for those individuals or entities who cannot point to a written agreement to establish that they have been paid "for producing a result": if the industry custom or practice is that people are engaged to produce a result, then that fact may support a conclusion that the particular individual or entity was paid for producing a result.
ATC 2843On the other hand, industry custom and practice (where, for example, it is uncommon for people's income to be for producing a result) cannot come to a person's aid where there is a written agreement specifying that the person is entitled to payment for doing something that does not amount to producing a result. To hold otherwise would remove, for an entire industry, the criterion in s 87-18(3)(a) as a necessary step in meeting the results test. That cannot have been the intention of the legislature.
24. We also note that in the context of s 87-18(3)(a) it is not how your fee is calculated, but what you are paid for, that is important. It is possible for a person who is contracted to produce a result to choose to charge hourly rates as the means of remuneration, without altering the fact that payment is made for producing a result. In saying this, we are mindful of the comment of Allsop J in IRG at  that the method of payment may be important - but there is nothing in what his Honour said to suggest that a fee based on time spent will necessarily exclude the possibility of being paid "for producing a result".
25. In the language of s 87-18(3)(a), the question is: What is the income for? And the answer to that question will depend on the income-earner's responsibilities to its clients; or, put another way, what does he have to do to satisfy the obligations he has under the agreement with the client, and to justify payment? Those questions, in relation to the taxpayer and the Company, will be explored later.
The relevance of the general law tests
26. The taxpayer maintains that under the general law the Company is an independent contractor. That, he says, supports his argument that Part 2-42 of the Act cannot apply to his or the Company's circumstances.
27. That argument has no merit. The Parliament has chosen, as the yardstick by which to measure whether Part 2-42 applies, four statutory tests, one of which is the results test. While the results test is based on the general law tests (see IRG at  and ), the only criteria that are important now are the three criteria in s 87-18(3). The fact that an entity might, by taking into account different or additional criteria, satisfy the description "independent contractor" is irrelevant to the enquiry under Part 2-42 of the Act.
28. Also irrelevant to that enquiry is the decision of the Full Court of the Federal Court in
ACT Visiting Medical Officers Association v Australian Industrial Relations Commission  FCAFC 109, to which the taxpayer's submissions directed us. That was a case dealing with the question whether Visiting Medical Officers (VMOs) were employees of the hospitals in which they worked. The factors in favour of their being employees were set out at  of the Full Court's reasons:
- • the hospitals' control over the performance of the VMOs' work;
- • the discipline imposed by the hospitals;
- • the VMOs' inability to delegate without the approval of the hospital;
- • the VMOs had no share of any profit and no risk of loss;
- • they made no capital investment;
- • the hospitals provided their "tools", equipment and staff.
29. The factors against an employment relationship were (as set out at  and  of the Full Court's reasons):
- • the VMOs' work was work involving a profession, trade or distinct calling;
- • the VMOs performed work for others;
- • the work could be delegated (subject to the approval of the hospital);
- • PAYG tax was not deducted from the payments to the VMOs;
- • the VMOs were not provided with paid holidays or sick leave.
30. With one exception, those factors are not present in the results test. The exception is the factor dealing with tools and equipment. This factor could be relevant to s 87-18(3)(b), but as we mentioned in  above, there is no controversy between the taxpayer and the Commissioner on the question of the provision of tools and equipment.
31. Ultimately, given the fine balance between the competing factors, the Full Court decided not to disturb the decision of the AIRC that, where some ambiguity existed as to the nature of the relationship, that ambiguity could
ATC 2844be removed by a provision in the agreement between the parties to the effect that the agreement did not give rise to a relationship of employment.
32. From this position the taxpayer made two submissions - first, that for common law purposes all of the Company's contracts would at worst be "ambiguous"; and second, that the taxpayer "would be a contractor at common law based upon the principles enunciated" in that case.
33. In our view, both submissions are irrelevant.
34. The only relevant question in s 87-18(3) is whether the Company earned income "for producing a result".
Did the company earn income for producing a result?
35. In the taxpayer's case, the evidence relating to the Company's responsibilities to its clients is to be found in the agreements entered into with those clients. There were four clients in the relevant years - EDS (Australia) Pty Limited ("EDS"), Icon Recruitment Pty Ltd ("Icon"), Hudson Global Resources (Aust) Pty Limited ("Hudson") and Ambit Group Pty Ltd ("Ambit").
36. Under the agreement with EDS (T7 pp 117-120), the Company was obliged to perform services "as agreed between EDS Management and Contractor Personnel". The fee payable was a set rate per hour, including GST.
37. Under the agreement with Icon, which took the form of a letter from Icon to "The Director, RS Consulting Group Pty Ltd" (T8 pp 121-123), the Company was obliged to provide its services (which were not further detailed) for a period of three months. The Company's representative (the taxpayer) was required to report to a nominated person on the contract commencement date, and thereafter to "provide consulting services in consultation with the Client". The hours worked by the Company's representative were to be recorded on an "Icon, or Client-approved time sheet, and signed by an appropriate Client official". The fee payable was a set rate per hour, plus GST.
38. The agreement with Hudson also took the form of a letter. It was addressed to "Raj Taneja, RS Consulting Group Pty Ltd" (T10 pp 132-135). The letter commenced "Dear Raj", and referred to "your assignment as Powerbuilder Programmer" with the NSW Department of Health. There was no further reference to the services that were to be provided to the client. The agreement included a requirement to "have your time sheet authorised" every Friday, by the person "responsible for the management of this assignment". The timesheet was in a form provided to the taxpayer by Hudson. The fee payable was a set rate per hour, plus GST.
39. The agreement with Ambit was also in the form of a letter (T9 124-131). It identified the Company as the "Contractor". The letter confirmed "the appointment of the Contractor as an incorporated independent contractor of Ambit Group Pty Limited", and specified that the Contractor was to provide the "Key Person", the taxpayer, to perform the "Role" for the Client. The Role was defined simply as "Consultant". The Key Person was required to record all time spent performing the Role "on a timesheet in a form approved by the Client", and to have that timesheet authorised by a Client representative. The fee payable was a set rate per hour, plus GST.
40. There is nothing in any of those agreements to suggest that the Company was being paid "for producing a result". On the contrary, it is clear in each case that the Company was being paid for the time that it spent, through the taxpayer, doing what the client asked of it. Not only was the Company charging its fee based on time spent, it was charging its fee for the time spent. In this respect its circumstances are to be distinguished from the theoretical example given in  above.
41. Since the Company's income was not "for producing a result", the Company has failed to meet the criterion in s 87-18(3)(a), and it follows that it has failed to meet the results test.
The other "personal services business" tests
42. The results test was the only one of the four personal services business tests on which the taxpayer relied. Failure to meet the results test is sufficient to dispose of the taxpayer's argument that the Company was a "personal services business". However, for the sake of
ATC 2845completeness, the Commissioner's submissions also canvassed the other three tests in s 87-15(2) in relation to the 2003 income year. (It was not necessary to canvass these other tests in relation to the other years because the Company failed the "80% rule" in those years - see s 87-15(3) and paragraph 54 of the Commissioner's Outline of Submissions ("RS").)
43. The first alternative test is the unrelated clients test in s 87-20. That test is not met because there is no evidence that the Company provided services "as a direct result" of making offers or invitations, to the public at large or to a section of the public, to provide the services.
44. The second alternative test is the employment test in s 87-25. That test is also not met, but not for the reasons put forward by the Commissioner in paragraph 57 of RS. The Commissioner's focus in his submissions was on s 87-25(1), but that is misplaced, because that subsection deals with individuals who seek to meet the test. This is a case where a personal services entity - the Company - is seeking to meet the test, and therefore it is s 87-25(2) that must be considered. That provision is in the following terms:
"A *personal services entity meets the employment test in an income year if:
- (a) the entity engages one or more other entities to perform work, other than:
- (i) individuals whose *personal services income is included in the entity's *ordinary income or *statutory income; or
- (ii) *associates of the entity that are not individuals; and
- (b) that other entity performs, or those other entities together perform, at least 20% (by *market value) of the entity's principal work for that year."
45. Paragraph (a) is satisfied because the Company engaged "one or more other entities to perform work" - the taxpayer and his wife. The taxpayer himself is excluded from consideration (by subparagraph (i)), but his wife is not. That is because she is not an individual whose personal services income is included in the Company's ordinary or statutory income (subparagraph (i)), and she is not within the category "associates of the [Company] that are not individuals" (subparagraph (ii)). However, she did not perform at least 20% (by market value) of the Company's principal work for the 2003 year. It is doubtful, in fact, whether she performed any of the Company's principal work, because she seems to have performed only administrative and management duties, and they do not form part of the Company's "principal work": see The Engineering Company and Commissioner of Taxation  AATA 934, at . In any event, the taxpayer's claim is that in 2003 his wife was paid $15,600 (RS, paragraph 65), while the Company's total income was $109,210 (RS, paragraph 19). That is less than 20% of the total.
46. The final alternative test is the business premises test in s 87-30. A necessary requirement of this test is the maintenance and use of business premises where the Company conducts its activities. The evidence in this case is that the Company, through the taxpayer, conducted its activities at the premises of its clients, and therefore the business premises test has not been met.
Conclusion on the "personal services business" question
47. The company has failed to establish that it conducted a "personal services business" in any of the relevant years.
What follows from that conclusion?
48. The major consequence is that, under s 86-15(1) of the Act, the income of the Company (to the extent that it results from the personal efforts or skills of the taxpayer) is included in the assessable income of the taxpayer. Section 86-30 provides specifically that it is neither assessable income nor exempt income of the Company.
49. The amount included in the taxpayer's assessable income may be reduced by the amount of certain deductions to which the Company is entitled: s 86-20(1) of the Act. The Commissioner says that there are some categories of expenses that may be deductible, and suggests that, with two exceptions, the questions of entitlement to, and quantum of, deductions should be remitted to the Commissioner for further consideration. We agree with that as an appropriate course.
ATC 2846The two exceptions are wages paid to the taxpayer's wife, and superannuation contributions made on behalf of the taxpayer's wife, both of which the Commissioner says should be disallowed.
51. Before we consider these two categories, we need to explain how Part 2-42 operates to limit deductions.
52. The first port of call is Division 85. The general purpose of Division 85 is, as explained in s 85-1, to ensure that deductions that are unavailable to an employee are similarly unavailable to an individual who has personal services income and who is not an employee, unless, broadly, the individual is conducting a personal services business. However, Division 85 has no direct impact on deductions where a "personal services entity", such as the Company, has been interposed between the individual (the taxpayer) and the clients. Rather, the impact is indirect, through certain provisions in Division 86. The main ones are s 86-20(1) and s 86-60.
53. The first of those, s 86-20(1), has already been briefly referred to, in  above. This is the provision that allows a reduction in the individual taxpayer's assessable income to take account of deductions to which the personal services entity (in this case, the Company) is entitled.
54. The second provision, s 86-60, is the provision that controls the entitlement to deductions for personal services entities. That section is in the following terms:
"A *personal services entity cannot deduct under this Act an amount to the extent that it relates to gaining or producing an individual's *personal services income, unless:
- (a) the individual could have deducted the amount under this Act if the circumstances giving rise to the entity's entitlement to deduct the amount had applied instead to the individual; or
- Note: In particular, Division 85 specifies limits on an individual's entitlements to deductions relating to the individual's personal services income.
- (b) the entity receives the individual's *personal services income in the course of conducting a *personal services business."
55. It will immediately be apparent that paragraph (b) cannot apply because of our conclusion that the Company was not conducting a personal services business.
56. So the issue becomes, in relation to paragraph (a), whether an individual would be entitled to deductions in respect of the wages expenses and the contributions to superannuation, or whether Division 85 (or some other provision) would preclude those deductions.
57. As far as wages are concerned, s 85-20 of the Act provides, as far as relevant:
- "(1) You cannot deduct under this Act:
- (a) any payment you make to your *associate; or
- (b) any amount you incur arising from an obligation you have to your associate;
- to the extent that the payment or amount relates to gaining or producing your *personal services income.
- (2) Subsection (1) does not stop you deducting a payment or amount to the extent that it relates to engaging your *associate to perform work that forms part of the principal work for which you gain or produce your *personal services income."
58. The taxpayer's wife is his "associate": s 995-1 of the Act, and s 318(1)(a) of the Income Tax Assessment Act 1936 ("the 1936 Act"). Therefore, a payment to her would not be deductible unless subsection (2) applied. The question, then, is whether the wife was engaged to perform work "that forms part of the principal work for which you gain or produce your personal services income". Since she performed work of an administrative or management kind, that provision does not apply, and so the payment would not be deductible. That means that the payment is not deductible to the Company, and therefore the taxpayer's assessable income cannot be reduced by the amount of the payment under s 86-20(1) of the Act.
ATC 2847As for the contributions to superannuation, s 85-25 of the Act provides relevantly:
- "(1) You cannot deduct under this Act a contribution you make to a fund [...] to provide for *superannuation benefits payable for your *associate, to the extent that the associate's work for you relates to gaining or producing your *personal services income.
- (2) Subsection (1) does not stop you deducting a contribution to the extent that your *associate's performance of work forms part of the principal work for which you gain or produce your *personal services income."
60. For the same reasons as apply in relation to the wages expenses, the taxpayer's assessable income cannot be reduced by the amounts of superannuation contributions.
61. There remain for determination two questions: one as to the deductibility of some further categories of expenditure by the Company, including superannuation payments, telephone charges and travel expenses; and one as to additional tax. As we have already indicated, we think the appropriate course is for these questions to be remitted to the Commissioner for further consideration.
62. The Commissioner has said that he will allow further time to the taxpayer to provide material to support the claimed deductions.
63. In that event we think the appropriate course for the Tribunal is, in relation to the outstanding issues, to remit the objection decision to the Commissioner for reconsideration, within 42 days, in accordance with these reasons.