RUSSELL v FC of T

Judges:
Logan J

Court:
Federal Court, Brisbane

MEDIA NEUTRAL CITATION: [2009] FCA 1224

Judgment date: 30 October 2009

Logan J

1. Mr Russell by training, although not professional registration in Australia, is an accountant.

2. Mr Russell also professes to be a "naturist" - "A person who practises or advocates a natural way of life, esp. as characterized by the practice of communal nudity": Oxford University Press 2009, Oxford English Dictionary (Oxford University Press, Oxford, 2009) http://dictionary.oed.com viewed 20 June 2009.

3. According to his evidence, Mr Russell's ambitions for his premises, which are situated in the hinterland near Sarina in Central Queensland, extend to affording those of like mind to him in relation to naturism the use of those premises. It is not intended that that use be gratuitous. In furtherance, he says, of that ambition, a variety of trees have been planted at the premises. Their purpose, according to him, is not only ambience and the provision of a privacy screen but also, through selective harvesting, the derivation of income from forestry operations.

4. Mr Russell's work as an accountant and his ambitions for his premises have given rise both to income tax and to goods and services tax controversies. These have come to manifest themselves in appeals under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA). In an interlocutory judgement delivered last year I concluded that it was both lawfully possible for him to join his appeals in the one application and that the overlap in the underlying facts was such that it was in the interests of justice that his income tax and goods and services tax (GST) appeals be heard together:
Russell v Commissioner of Taxation 2008 ATC ¶20-010; (2008) 168 FCR 330.

5. Mr Russell appeared on his own behalf on the hearing of the appeals whereas the respondent Commissioner of Taxation (the Commissioner) was represented by senior and junior counsel. It is no reflection on counsel, who provided valuable assistance, to observe that both in oral and written submissions Mr Russell argued his case with marked and memorable skill. This included the ability, not always found in litigants in person, for the most part to distinguish between his distinct roles as advocate and as witness. While I respect his skill and ability, it does not, as will be seen, follow that I accept all of his evidence.

6. The taxation assessments, including the related assessments of penalty, each of which was affirmed upon objection by the Commissioner and which underpin the respective income tax and GST appeals are as follows.

Income tax assessments

7. On 9 February 2007, the Commissioner issued the following notices of assessment in respect of income tax to Mr Russell:

(a) notice of assessment for the financial year ended 30 June 2001 by which the Commissioner notified his assessment of Mr Russell's taxable income to be $43,186 with the amount due for payment being specified as $9,983.59;
(b) notice of assessment for the financial year ended 30 June 2002 by which the Commissioner notified his assessment of Mr Russell's taxable income to be $87,954 with the amount due for payment being specified as $30,037.69;
(c) notice of assessment for the financial year ended 30 June 2003 by which the Commissioner notified his assessment of Mr Russell's taxable income to be $106,548 and the amount due for payment being specified as $39,055.78; and
(d) notice of assessment for the financial year ended 30 June 2004 by which the Commissioner notified his assessment of Mr Russell's taxable income to be $74,893 with the amount due for payment being specified as $23,130.10.

8. In each of the financial years in question the basis for the Commissioner's assessment of Mr Russell's taxable income was his conception that the amount so assessed constituted personal

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services income attributed to him by virtue of the operation of Part 2-42 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). He adhered to that view in disallowing Mr Russell's objection and upon the hearing of the appeal against the objection decision.

Penalty (related to income tax) assessments

9. Also on 9 February 2007, the Commissioner also issued two notices of assessment of liability to pay penalty (totalling $91,986.75) comprising:

(a) an assessment totalling $71,169.60 made up of:
- (i) for the 2001 financial year a penalty amount of $8,985.20;
- (ii) for the 2002 income year a penalty amount of $27,034.05;
- (iii) for the 2003 income year a penalty amount of $35,150.35; and
(b) an assessment for the 2004 financial year of a penalty amount of $20,817.15.

10. The related penalty assessments were said to flow from allegedly false or misleading statements as to personal services income which resulted in a tax shortfall for each of the income years in question. For the purposes of s 284-90(1) of Schedule 1 to the TAA, the Commissioner worked out the base penalty on the basis that the tax shortfall had resulted from intentional disregard by Mr Russell of the ITAA 1997. In each instance and in reliance on s 284-220(1) of Schedule 1 to the TAA, the Commissioner also assessed penalty on the basis that the base penalty should be increased by 20%. On the hearing of the appeals he did not press that the base penalty of 20% should be increased.

Income tax and related penalty appeal issues

11. The issues which arise for determination in respect of the income tax and related penalty appeal are:

(a) Whether the income received by a New Zealand incorporated company known at the relevant times as The Ancath Corporation Ltd (now called Juan International Ltd - Ancath) from an Australian incorporated company, Tradecorp International Pty Ltd (Tradecorp), was mainly a reward for Mr Russell's personal efforts or skills?
(b) Whether the income paid to Ancath by Tradecorp constituted the personal services income of Mr Russell?
(c) More particularly:
- (i) whether Ancath satisfied conditions of conducting a personal service business for the purposes of s 86-15 of the ITAA 1997?
- (ii) whether, having regard to s 87-15 of the ITAA 1997, 80% of Mr Russell's personal services income was from the same entity?
- (iii) whether Mr Russell met the results test under s 87-18 of the ITAA 1997?
(d) Whether an overseas registered company can be a personal services entity in relation to the assessment of personal services income of an individual?
(e) Whether it is contrary to the Double Taxation Agreement between Australia and New Zealand to attribute the income paid to Ancath by Tradecorp as the personal services income of Mr Russell?
(f) Whether the penalties for having tax shortfall amounts were correctly assessed at 75% as resulting from intentional disregard of a taxation law under item 1 of s 284-90 of Schedule 1 to the TAA?
(g) Whether the Commissioner's related penalty remission decision was attended with error such that the Court should reach its own conclusion on that subject?

Goods and services tax and related penalty assessments

12. As to GST, on 30 May 2007, the Commissioner disallowed the following objections:

(a) an objection dated 20 April 2007 against the Commissioner's assessment of GST net amount (the GST net amount) dated 16 April 2007 for the tax periods 1 July 2000 to 30 June 2006 (the tax periods); and
(b) an objection dated 10 January 2007 against:
- (i) the Commissioner's assessment of penalty dated 13 December 2006 for the tax periods for having a shortfall amount; and
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  (ii) the Commissioner's related decision on remission of penalty.

13. The GST and related penalty assessments concerned a partnership the members of which were Mr Russell and his now former wife, Mrs Catherine Russell (née Orange). Whether the partnership has been dissolved (and, if so, when it was dissolved and what impact such dissolution has on the partnership's entitlement to claim the ITC amount) is an issue.

14. In his assessment of the GST net amount the Commissioner:

(a) included an amount of $43,898 in respect of GST collected by the partnership purportedly as agent for Ancath pursuant to s 57-5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) less $3,909 reported by the partnership by its business activity statements (resulting in a net amount of $39,989) (the resident agent amount); and
(b) disallowed various input tax credits totalling $31,545 (the ITC amount) that had been claimed by the partnership in the Business Activity Statements lodged in respect of the periods. The sum of $31,545 comprised the following amounts of input tax credits in respect of three enterprises purportedly carried on by the partnership:
- (i) $27,284 in respect of an accountancy practice;
- (ii) $1,522 in respect of a forestry activity; and
- (iii) $2,739 in respect of a naturist retreat.

Penalty (related to GST) assessment

15. The GST penalty assessment assessed:

(a) a base penalty amount at the rate of 75% on the GST shortfall; and
(b) a 20% increase ("the 20% increase").

16. On the hearing of the appeals, the Commissioner did not press that the partnership was liable for:

(a) the resident agent amount (and that component of the base penalty amount referable to the resident agent amount); or
(b) the 20% increase.

Goods and services tax and related penalty appeal issues

17. The Commissioner has conceded that the partnership is not liable for the "resident agent amount" (and the related base penalty amount). The GST issues which remain for determination concern the ITC amount and are:

(a) whether the assessment of the GST net amount, insofar as it relates to amount of the input tax credits disallowed by the Respondent, is excessive;
(b) as subsidiary issues arising out of sub-paragraph (a):
- (i) whether any of the items the subject of the claimed input tax credits were acquired by the partnership in carrying on an "enterprise";
- (ii) whether the partnership was carrying on an enterprise of:
  - (a) an accountancy practice;
  - (b) a forestry activity;
  - (c) a naturist retreat;
- (iii) whether the items the subject of the claimed input tax credits were of a private or domestic nature; and
(c) whether, insofar as it related to a period prior to 1 July 2002, the issuing of the assessment was beyond power?

18. The Commissioner has further conceded that the appeal in respect of penalty should be allowed insofar as it challenges the 20% increase in base penalty.

19. As to GST related penalty, the issues are:

(a) whether the statutory pre-conditions to the assessment of the base penalty (set out in s 284-90 of Schedule 1 to the TAA) were satisfied;
(b) whether the Commissioner properly exercised his discretion (pursuant to s 298-20 of Schedule 1 to the TAA) not to remit the base penalty; and
(c) whether, in respect of the period prior to 1 July 2002, it was necessary for the Commissioner to form an opinion that there was an avoidance of tax due to fraud or evasion pursuant to s 105-50 of Schedule 1 to the TAA in order to assess and, if so, whether that opinion is vitiated by relevant error of law?

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Onus of proof

20. Common to each appeal is that it falls on Mr Russell to prove that the assessment concerned is excessive: s 14ZZO(b)(i) of the TAA (taxation liability appeals) and s 14ZZO(b)(iii) of the TAA (penalty appeals).

Business structures, entities and individuals associated with Mr Russell

21. It is convenient first to reach some conclusions about business structures, entities and individuals with which and whom Mr Russell has been relevantly associated.

A W Russell & Co

22. Mr Russell and his then wife, Mrs Catherine Russell, came to Australia from New Zealand in 2000. They took up residence here. Before leaving New Zealand and by an agreement evidenced in writing dated 1 January 2000 (the Partnership Agreement) they formed a partnership which was to commence trading after 1 April 2000 under the name of "A W Russell & Co" (the partnership). The original members of the partnership comprised Mr Russell and his then wife alone. Though the Partnership Agreement made provision for the admission of additional partners, in the result Mr and Mrs Russell were the only members of the partnership during its existence.

23. That such a partnership was formed was not controversial on the hearing of the appeals. There was though some controversy between the parties as to when the partnership came to an end. The controversy was one of law rather than fact.

24. Mr Russell gave evidence by affidavit that he and his wife separated on 23 February 2004 and "effective from that date she verbally resigned from the partnership". Mrs Russell did not give evidence. It emerged that she was now residing abroad.

25. In his oral evidence Mr Russell referred to his former wife having "effectively resigned" from the partnership on the date of their separation. I did not take this to be a departure from the position earlier described by him in his affidavit. Consistent with his wife's earlier resignation, I note that, later in 2004, Mr Russell caused the Queensland Business Names Register to be altered so as to delete his wife from co-proprietorship of the business name "A W Russell & Co" and to record him as the sole proprietor of that name. I find that Mrs Russell resigned from the partnership on 23 February 2004 by notice given orally to Mr Russell that day.

26. Mr Russell also deposed: "Since 23 February 2004 Catherine Russell has continued to receive a share of the net profit of the partnership. For the year ending 30 June 2004 she received a full 50% of that year's net income in accordance with a verbal agreement between us and for each year thereafter she has received 10% of each year's profit in line with clause 5 of the Partnership Agreement".

27. Clauses 2 and 5 of the Partnership Agreement are in these terms:

"2. The partnership shall not dissolve for reason of the bankruptcy, death, or resignation of one of the partners, nor shall the partnership dissolve for reasons of a new partner being admitted to the partnership.

…

5. If a partner leaves the partnership for any reason his or her capital in the partnership shall be paid out over a period of years not to exceed five (5) years during which time the leaving partner shall be paid a share of each years profits at a rate to be agreed upon but not exceeding 10% and such profit share shall be in lieu of interest."

The Partnership Agreement also purported to provide that the minimum number of partners might be "one" (cl 3). Save insofar as that agreement provided to the contrary, the Partnership Agreement expressly provided that it was governed by the Partnership Act 1908 (NZ) (Partnership Act (NZ)).

28. Mr Russell's submission was that: "Mrs Russell may well have resigned from an active role in the partnership at the time of the marriage separation but she has continued to receive a share of the net profit of A W Russell & Co up until she received her final payout of capital which occurred in June 2008". He alleged that there was a practice within the Commissioner's office "to allow a retired partner to remain on a partnership income tax return and receive a share of profit until such time as he/she is completely gone from the business relationship".

29.

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The Commissioner's position was that the partnership had ceased to exist upon Mrs Russell's resignation with payments to her thereafter being nothing more than a settlement of accounts. He developed this submission firstly by reference to one of the inherent elements of a partnership for the purposes of legislation modelled on the Partnership Act 1891 (UK) (Partnership Act (UK)), which is that the partnership business must be carried on by two or more persons in common: see, materially, the definition of partnership in s 5(1) Partnership Act 1891 (Qld) (Partnership Act (Qld)) and s 4(1) Partnership Act (NZ).

30. As there is no presently material difference between the New Zealand and Queensland Partnership Acts it is unnecessary to consider the extent to which the Queensland Act came to apply to Mr and Mrs Russell's New Zealand-formed partnership upon their commencing to carry on business in Queensland. So as to highlight the absence of any material difference I shall refer, where necessary, to both the New Zealand provision and its Queensland equivalent.

31. Secondly, because of its particular significance for the GST appeal, the Commissioner drew attention to the definition of "partnership" for the purposes of the GST Act. Section 195-1 of the GST Act incorporates by reference for the purposes of the GST Act the definition of "partnership" found in s 995-1 of the ITAA 1997. The latter definition changed (on and from 2 December 2003) over the course of the tax periods. It is not necessary to reproduce either its former or present terms in full. Common to each version is either that there be an association of persons carrying on business as partners or that persons be in receipt of income jointly. Each version of the definition thus both includes a partnership as understood under the general law of partnership as well as expands its embrace so as to include those in receipt of income jointly, even if they are not carrying on business in common with a view to profit.

32. Given the finding of fact I have made as to Mrs Russell's resignation, the partnership was dissolved on 23 February 2004. It was on that date that Mr Russell received notice from the only other partner then carrying on business under the name A W Russell & Co. The Partnership Agreement did not specify any fixed term for the duration of the partnership. It was thus a partnership at will. Nor did the Partnership Agreement specify any particular manner and form for the giving of notice of the dissolution of the partnership. It was able to be dissolved by Mrs Russell's giving to Mr Russell notice of her intention to dissolve the partnership; s 35(1)(c) Partnership Act (NZ); s 35(1)(c) Partnership Act (Qld). It was permissible for the notice of dissolution to be given orally. Mrs Russell did not specify any prospective date as the date upon which dissolution of the partnership was to take effect. In those circumstances, dissolution occurred on the day upon which Mr Russell was given notice of dissolution by his wife: s 35(2) Partnership Act (NZ); s 35(2) Partnership Act (Qld). That was 23 February 2004.

33. The giving of notice by Mrs Russell necessarily brought the then existing partnership to an end. No fresh partnership constituted by continuing partners replaced it. It is the very essence of partnership under the general law that two or more persons carry on business in common. Clause 2 of the Partnership Agreement cannot and does not alter that position. After 23 February 2004, though Mr Russell carried on the business of A W Russell & Co, he did so as a sole trader. He and his now former wife thereafter no longer carried on business in common.

34. Provision is made in partnership legislation in respect of the entitlements of an outgoing partner where a surviving partner continues to carry on the business of the firm before any final settlement of accounts: s 45 Partnership Act (NZ); s 45 Partnership Act (Qld). That legislative provision is subject to any provision in a partnership agreement to the contrary.

35. In this instance, and as Mr Russell deposed, he and his wife did come to an agreement to the contrary. Their agreement was that, for the year ended 30 June 2004, she would receive 50% of the profits of the business and thereafter, as cl 5 of the Partnership Agreement provided, in lieu of interest on capital, 10% of those profits would be paid to her for a period of not more than 5 years. The

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payment of these sums occurred in the course of the winding up of a partnership which had been dissolved. They were payments by Mr Russell in his own right to a former partner. That they were paid did not mean that the partnership was continuing. Nor did it mean that he and his former wife were in receipt of income jointly. The sums were paid from the profits of a new business carried on by Mr Russell in his own right under the name A W Russell & Co.

36. It follows from the conclusions just reached that, after 23 February 2004, not only was there no partnership under the general law but also there was none under the expanded notion of "partnership" resulting from the definition applicable to the GST Act. After 23 February 2004 Mr and Mrs Russell could not even be classified as persons in receipt of income jointly.

37. Administrative practices adopted by the Commissioner in relation to partnerships are irrelevant to the operation of the general law of partnership and to the effect of the expansion of the general law by the definition of "partnership" for the purposes of the ITAA 1997. It may be that these practices are referable to circumstances where, after notice of dissolution is given, a partnership business is carried on for a limited time solely for the purpose of collecting fees which were outstanding prior to the giving of that notice. That is not this case. It is unnecessary to consider the extent, if at all, to which any such practice of the Commissioner conforms to the general law of partnership or the expanded statutory definition. I accept though that adherence, however mistaken in law, by a taxpayer to an administrative practice condoned by the Commissioner may be relevant to whether any penalty tax is exigible.

38. Under the general law, a partnership is not a legal entity separate from its members. Incongruently with the general law, a "partnership" as defined is classed as an "entity" for the purposes of the GST Act: s 184-1. It also follows from the conclusions which I have reached that, after 23 February 2004, the partnership carrying on business under the name A W Russell & Co ceased to be an "entity" for the purposes of the GST Act. Thereafter, a new GST "entity", Mr Russell as an individual, came to carry on business under that name.

Ancath

39. One "entity" both for the purposes of the GST Act and under the general law which also features in these appeals is Ancath.

40. I have no doubt that Ancath was an existing legal entity at all times material to the appeals. It is not necessary just to rely upon Mr Russell's own evidence for that conclusion. Its certificate of incorporation upon its change of name to Juan International on 5 September 2005 is in evidence. That certificate also discloses that Ancath was originally incorporated under the Companies Act 1955 (NZ) on 23 November 1992.

41. Other official corroboration of Ancath's existence comes from the records of New Zealand's Inland Revenue Commissioner and its Registrar of Companies. Ancath has lodged annual returns with each of these officials. It will be necessary later to make reference to some of the information disclosed on the New Zealand income tax returns.

42. Ancath also holds a registered mortgage over Mr Russell's Sarina hinterland property. It secures a loan to him by Ancath in the sum of $250,000.

43. Read in conjunction with a New Zealand Companies Office search, Ancath's annual company returns disclose that its sole shareholder is and has been Mr Russell's now former wife. Her shareholding is recorded under her maiden name, Catherine Orange. A director of Ancath since 1998 has been a Mr Theunis Miedema. Mr Miedema is a resident of New Zealand.

Mr Miedema

44. Mr Miedema was at one stage going to give affidavit and oral evidence in Mr Russell's case. Mr Russell had secured and filed affidavits from him. The Commissioner sought to cross-examine Mr Miedema on the affidavits. He gave notice of that intention well before the dates fixed for trial. Where a notice that a deponent attend for cross-examination is given and that deponent does not attend, his or her affidavit may only be used with the leave of the Court: Federal Court Rules O 14, r 9.

45.

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Mr Russell sought to explain his failure to have Mr Miedema available in person for cross examination on the additional basis of a recollection on his part that he had been informed early in 2008 by a lawyer in the Australian Government Solicitor's (AGS) office that he could lodge an affidavit given by Mr Miedema and that, "it certainly was the impression I got that she [the AGS lawyer] wouldn't be interested in cross-examining him. And I had transmitted that information to Theunis [Mr Miedema], and because it meant he did not have to come back to Australia, he was quite happy to give me that affidavit". An affidavit from Mr Miedema was filed in March 2008 and another in May 2008.

46. Whatever might be the accuracy of that recollection, and it must be said that it is inconsistent with the Commissioner's subsequent forensic disposition, the evidence also disclosed that, by May 2008, it had been made pellucidly clear to Mr Russell by the AGS lawyer then responsible for the case that Mr Miedema was required for cross-examination. Later that month, Mr Russell wrote to the AGS office advising: "I have at last been able to make contact with the witness from New Zealand, Theunis Miedema, and he has confirmed his availability during the period 14 July to 1 August 2008." Thereafter, it was confirmed to Mr Russell that each of the persons whose affidavits had been filed in his case was required by the Commissioner to attend for cross examination.

47. Mr Russell sought to make something of the failure on the part of the Commissioner to call the original AGS lawyer he had named. However, against the background that I have just recited, the accuracy of Mr Russell's recollection of early dealings with the Commissioner's solicitor is something of a distraction. It would not at all surprise me if there had been some early acknowledgement on the part of those acting for the Commissioner of the expense of bringing a prospective witness from New Zealand and an associated reservation about whether that was necessary prior to the filing, service and consideration of an affidavit from that proposed witness. It is not impossible to see how that might have created an initial impression in Mr Russell's mind that Mr Miedema was not definitely required for cross-examination. However, it is quite apparent that, by the end of May 2008, he not only was aware of the requirement to produce Mr Miedema for cross examination but had also confirmed that gentleman's availability over the period during which the hearing of the appeals had been programmed to occur.

48. Mr Russell's further response in relation to his failure to secure Mr Miedema's attendance was that he could not afford to secure his attendance. Upon noting that Mr Russell had qualified for court fee relief on the basis of his financial position and given that he was not legally represented, I drew Mr Russell's attention to the Evidence and Procedure (New Zealand) Act 1994 (Cth). That Act provides for the service of Australian subpoenas in New Zealand and for the receiving in Australia of evidence by telephone or video link from New Zealand where facilities are available. Inquiries were made which disclosed that it was possible to arrange a video link to a District Court in New Zealand in reasonable proximity to the place in New Zealand where Mr Miedema resided. The availability of this facility was made known in open court to Mr Russell and to the Commissioner. The Commissioner was disposed to utilise such a facility rather than insist upon Mr Miedema's physical attendance in Australia. I indicated to Mr Russell that I was prepared to adjourn the proceedings to a time when Mr Miedema was able to attend at the District Court.

49. In the course of his oral evidence Mr Russell mentioned on several occasions his need to report his actions to Mr Miedema and to consult with him because it was Mr Miedema who was the director of Ancath.

50. I ruled that I would not grant leave to permit the use of an affidavit from Mr Miedema without his attendance for cross examination. I gave brief reasons for this at the time. In essence, my reasons for refusing to grant leave under O 14 r 9 were these. Whether to permit Mr Russell to rely upon an affidavit without producing Mr Miedema for cross-examination required the exercise of a discretion. Mr Russell's relative impecuniosity was relevant to the exercise of that discretion, particularly where the witness concerned resided overseas.

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That Mr Miedema did reside overseas was itself a relevant consideration. These considerations were tempered by the ability, buttressed by legislation, to secure Mr Miedema's testimony in cross examination by video link at a locale in reasonable proximity to his place of residence in New Zealand.

51. The nature and extent of Ancath's business operations in the years in question was of particular significance in both the income tax and GST appeals. One might apprehend that, prima facie, as its sole director, Mr Miedema could give first hand evidence on those subjects. Certainly, the role consigned to Mr Miedema by Mr Russell in the course of his evidence in this Court was such that it was understandable that the Commissioner would wish to cross examine Mr Miedema. The role then consigned to Mr Miedema echoed that evident in Mr Russell's letter of objection dated 10 April 2007. It was evident from the conduct of the Commissioner's case that Mr Russell's credibility was a controversial subject. If their use were permitted Mr Miedema's affidavit evidence had the potential, if accepted, to corroborate some of the evidence that Mr Russell gave concerning Ancath. To permit the adducing of that evidence without the Commissioner's having the ability to cross examine Mr Miedema did not, on balance, strike me as in the interests of justice in the circumstances.

52. After this ruling I granted an adjournment for the purpose of the parties bringing forward a proposal for the reception of Mr Miedema's evidence by video link. Upon resuming, Mr Russell decided not to pursue that option. He did so even after being advised that I was prepared to dispense with his paying for the cost of the video link on the basis of his confirmation that his financial position had not materially changed since he obtained fee waiver. Mr Russell's decision not to make Mr Miedema available for cross examination, even in these circumstances, was, to my then observation and as I distinctly recall, a very deliberate decision.

Failure to call Mrs Russell and Mr Miedema

53. In the result therefore the only other individuals who might have been able to provide direct evidence from an internal perspective as to the management and operations of the partnership or, as the case may be, of Ancath did not give evidence. Marital estrangement as well as foreign residence might well and, I accept does, sufficiently explain the absence of evidence from Mrs Russell. Mr Miedema was though disposed to give affidavits but not to be cross-examined upon them. It was lawfully and, in my opinion, reasonably possible for his cross examination to occur without his leaving New Zealand. The absence of evidence from Mr Miedema is not unexplained but it is an absence nonetheless. It is the result of a deliberate forensic choice. I regard the absence of evidence from Mr Miedema as a significant absence in terms of Mr Russell's discharging his obligation to prove the assessments concerned to be excessive.

Income tax appeal

54. In respect of the various income tax and related penalty assessments Mr Russell adopted the permissible course of lodging a single objection embracing each of them and the Commissioner, in turn, adopted the equally permissible course of making a single objection decision (see s 14ZR of the TAA). In turn, Mr Russell's appeal is against what one might term that "omnibus" taxation objection decision.

55. I have already summarised the issues pertinent to the income tax appeal.

56. In terms of proximity to the relevant events, the earliest account from Mr Russell which I have before me is that offered in statements made by him for the purposes of proceedings in the Queensland Industrial Relations Commission and in related written submissions prepared by him for the purposes of those proceedings. Mr Russell acknowledged his authorship of these documents in the course of his cross examination.

57. It appears that Mr Russell instituted proceedings against Tradecorp in the Industrial Commission in the "unfair contracts" jurisdiction conferred upon it by s 276 of the Industrial Relations Act 1999 (Qld). It further appears that Tradecorp sought to have those proceedings dismissed. The outcome of those proceedings and especially any conclusions reached by the Industrial Commission as to Mr Russell's credibility, his status vis-à-vis Tradecorp, whether Ancath had a contract for

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service with Tradecorp or whether Mr Russell ought properly to be regarded an employee of Tradecorp are not relevant in either the income tax or GST appeals: s 91(1) Evidence Act 1995 (Cth) (Commonwealth Evidence Act);
National Mutual Life Association of Australasia Ltd v Grosvenor Hill (Qld) (2001) 183 ALR 700 at 715, [46]. Mr Russell's prior statements and submissions are though in a different category.

58. That Mr Russell performed accounting and managerial work for Tradecorp at its Mackay business premises for about four years between August 2000 and August 2004 is clear. His title when performing that work was that of Tradecorp's "financial controller". He was appointed to undertake that work by Tradecorp's managing director, Mr Tony Zarb. That followed an interview with Mr Zarb and Tradecorp's outgoing financial controller, Ms Gillian Sandhoff. It is also clear that Mr Russell ceased undertaking this work following a breakdown in relations between him and Mr Zarb. It is not necessary in these proceedings to explore the rights, wrongs and responsibilities for that breakdown in relations.

59. Relations between Tradecorp and Ancath were at least purportedly regulated by a written agreement made between those companies made on 4 August 2000 (the Tradecorp Agreement). Mr Russell, I note, has signed the agreement on behalf of Ancath underneath the common seal of that company. Mr Zarb has apparently signed on behalf of Tradecorp.

60. The Commissioner did not submit that the Tradecorp Agreement was a sham. The expressed date of commencement for the Tradecorp Agreement was 30 August 2000.

61. In his affidavit evidence filed in these proceedings Mr Russell made reference to the existence of the Tradecorp Agreement. He did not in that evidence state that, from his perspective as a signatory to it on behalf of Ancath, it was a sham. Rather, he stated that there was such an agreement in existence between 30 August 2000 and 30 June 2004. I understood his reference to 30 June 2004 not to be a statement that the Tradecorp Agreement had been terminated on that date but rather that the agreement had been operative for the whole of the 2004 income year, which is the last of the income years covered by the assessments. Neither Mr Zarb nor any other officer of Tradecorp gave evidence, much less gave evidence that Tradecorp regarded the agreement as a sham.

62. I approach the determination of the income tax appeal on the basis that, as it came to be varied, the Tradecorp Agreement did indeed regulate relations between Tradecorp and Ancath according to its tenor until terminated by Tradecorp in August 2004. It transpired that, on 24 September 2001, Ancath and Tradecorp varied their original agreement, effective inter se from 1 September 2001, so as to increase the initial contract sum from $A45,000 per annum to $A65,000 per annum. Again, there was no suggestion that this variation agreement was a sham.

63. What Mr Russell did state in his affidavit evidence in this Court was that he was never an employee of Tradecorp but rather an employee of Ancath in relation to the performance of work at Tradecorp. Obviously enough, his status is a mixed question of law and fact. Insofar as it is factual, his position before me was that he was a mere employee who deferred in terms of decision-making to those who controlled Ancath. This was in marked contrast to the position which Mr Russell adopted in evidence before the Industrial Commission as to his position vis-à-vis Ancath and Tradecorp.

64. The tenor of the statement which Mr Russell gave to the Industrial Commission as to his relationship with Ancath was quite different. His position on that subject before the Industrial Commission was, if anything, even more starkly put in an outline of submissions which he signed and then filed on 31 January 2005 with the Industrial Commission when acting for himself in that forum. Under the heading "The Relationship of Ancath and Myself" Mr Russell stated:

"Ancath was only brought into the contractual arrangement for my employment with Tradecorp at the behest of Anthony (Tony) Zarb, Managing Director of Tradecorp.

…

At all times when I was working with Tradecorp, Ancath and myself were treated as one. Changes in the terms of my

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employment were discussed only with myself, and Tradecorp never at any time attempted to communicate with Ancath.

Throughout the time of my engagement with Tradecorp I effectively controlled Ancath although not so from a strict legal point of view. My wife was the sole shareholder and because of my relationship with her I could run Ancath. I have signing authority on the company's bank account and possess a debit card for use at any ATM any where in the world.

More recently, I have acquired a controlling interest in Ancath giving me formal control of the company." [sic]

65. Mr Russell submitted that I should ignore the material tendered by the Commissioner relating to the statement he gave and the submission he made to the Industrial Commission. He submitted that these had been prepared on legal advice. The written submission which from which I have just quoted was signed not by a lawyer but by Mr Russell personally.

66. Mr Russell did mention that he had initially consulted lawyers in relation to the Industrial Commission proceeding but was unable to afford to continue to be legally represented. Assuming in his favour (as I do) that he was initially given particular legal advice as to how his position as Tradecorp's financial controller ought to be regarded for the purposes of Queensland industrial legislation, that advice must necessarily have been given against an account of facts pertinent to the relationship between Ancath and Tradecorp and of the work performed by Mr Russell. It was Mr Russell who had the intimate knowledge of these facts. It is his account of the facts in his submission to the Industrial Commission which is of interest. That either he or his onetime legal advisers may have been in error as to the characterisation of his position in law on those facts for the purposes of Queensland industrial legislation is nothing to the point. I regard the factual content of the submission which he made to the Industrial Commission as relevant and revealing.

67. It is not difficult to see how Mr Zarb on behalf of Tradecorp may well have perceived advantage for his company in terms of a supposed saving in labour oncosts such as pay-roll tax by securing the services of Mr Russell by means of a contract for service with another body corporate which would in turn deploy Mr Russell to perform work for Tradecorp. Nor is it difficult to see how Mr Russell was able readily to accommodate Mr Zarb's preference if indeed, as Mr Russell also stated, Ancath was a dormant company immediately available to him.

68. It matters not for the purposes of this appeal whether Mr Zarb's perception as to the efficacy for pay-roll tax or other labour on cost purposes of such an arrangement was misconceived in law. What does matter is the striking variance in Mr Russell's accounts as to the nature of his relationship with Ancath as between the Industrial Commission and the present proceeding. I regard it as inherently more likely that his account to the Commission as to his ability to control Ancath was factually correct, ie that he was able, initially in a de facto way and later more formally, to control Ancath's affairs. That may well also explain his reluctance, even in the face of an offer of considerable facilitation, to see Mr Miedema exposed to cross-examination.

69. The income tax returns which Ancath lodged with New Zealand's Inland Revenue Commissioner cover taxation years which end on 31 March. They thus do not align with the usual Australian taxation year, which ends on 30 June. Allowing for this, it nonetheless appears that Ancath has returned in New Zealand as ordinary income, described as "fees received", the amounts paid to it by Tradecorp net of Australian GST. There is no other apparent source of income for Ancath evident in its New Zealand income tax returns for the years ended 31 March 2001 to 31 March 2005 (inclusive).

70. According to Mr Russell, Ancath did though have sources of income which were not referable to his performance of work for Tradecorp. He referred to work performed for clients who were based in Vanuatu. In support of this claim Mr Russell exhibited to an affidavit which he swore a bundle of what purported to be copies of invoices directed by Ancath to such clients (JAT Investments, Cobra Holdings, Barbara Farms) for that work. On the

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copies he produced, the addresses of the clients had been obliterated. The reason for this, so Mr Russell said, was that, "Vanuatu is a tax haven and income earned and retained there is not subject to income tax and accordingly that proportion of [Ancath's] income was not returned by the company in its New Zealand tax returns". As to the obliteration of client addresses, Mr Russell stated in cross-examination that: "My employer made those available to me on the condition the addresses be blacked out to protect the privacy of the clients". The "employer" concerned, Mr Russell agreed, was Ancath. In light of that reference, the absence, in the result, of evidence from Mr Miedema is eloquent.

71. I have a very particular recollection of Mr Russell's giving this evidence concerning what "his employer" would make available to him. His demeanour was obstinate. His reference to "his employer" had a surreal quality about it when given in oral evidence in light of the earlier exposure of the dogmatic statement as to his control of Ancath which he had made in the Industrial Commission proceedings.

72. Mr Russell admitted in cross-examination that he had never been to Vanuatu. He said that the work concerned had been done by him for Ancath's clients either from his premises near Sarina or when he was in New Zealand. He also admitted that there was no-one other than himself and his former wife who was involved in the preparation of Ancath's New Zealand income tax returns.

73. It transpired that the amounts of these purported invoices to Vanuatu based clients were, in each income tax year, just sufficient to bring Ancath below the 80% threshold which features in the legislation in relation to personal services income. Mr Russell claimed that Ancath had undertaken other such work but that, as it was only necessary for him to show an amount less than 80% all that he had done was to produce copies of sufficient of its invoices to do this.

74. I did not find Mr Russell's explanation as to the reason why no income was returned by Ancath in New Zealand in respect of services performed in Vanuatu either compelling or even persuasive. Quite what relevance Vanuatu's status as a so-called "tax haven" had with respect to such responsibility as Ancath had under New Zealand's revenue laws to return that income in New Zealand escapes me. As viewed from New Zealand, the income that Ancath derived from the performance of services in Australia for Tradecorp via Mr Russell was also foreign sourced income. Yet Ancath's New Zealand income tax returns disclosed this particular foreign sourced income. Mr Russell did not adduce any admissible evidence before me as to the revenue laws of New Zealand or of the revenue laws and other laws of Vanuatu which might in this way serve to explain the omission in the New Zealand returns of the Vanuatu sourced income.

75. Given the control he stated he had over Ancath in the proceedings before the Industrial Commission, I formed the view that Mr Russell had not been at all candid in his evidence before me concerning Ancath, its activities and the degree of control he was able to exercise in respect of that company. His failure to call Mr Miedema did nothing to dissuade me from that view.

76. It is possible, I suppose, that work as purportedly invoiced was indeed undertaken and that the omission of Vanuatu client income might be referable to an innocent mistake as to a requirement to declare the same in New Zealand. In the absence of corroboration, I am not though prepared to find these facts proved. In so concluding I accept that Mr Russell is not at all obliged to prove to demonstration that Ancath undertook such work, only on the balance of probabilities that it did so. Nor is it the law that an appellant taxpayer can only discharge the onus of proof, even on the balance of probabilities, by the tendering of corroborated evidence:
Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation 83 ATC 4015; [1983] 1 NSWLR 1. It is just that, recalling on whom the onus lies and applying that standard of proof, I did not regard Mr Russell's uncorroborated evidence on the subject as sufficiently reliable to admit of a conclusion that these facts were proved.

77. I have reached these conclusions without taking into account Mr Russell's New Zealand criminal history, an official copy of which was

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tendered by the Commissioner in the course of Mr Russell's cross examination. Mr Russell has been convicted in that country of numerous offences of dishonesty including using a document with intent to defraud and forgery. He was, I thought, reluctant to acknowledge his criminal past in cross examination although his statement that it concerned an era in his life that he had sought to put behind him and forget was understandable enough. He also voiced disagreement with his having been truly guilty of some at least of the offences in respect of which convictions were recorded. Mr Russell's criminal history in its own right does give pause for thought about his credibility. However, the divergence in accounts as between evidence in the Industrial Commission and this Court with regard to his control over Ancath engendered in any event my disposition not to act on his uncorroborated testimony as to Ancath's undertaking work for Vanuatu based clients.

78. For completeness, I should record that Mr Russell exhibited to one of his affidavits a letter dated 11 January 2008 addressed to Ancath (by its new name, Juan International) marked for Mr Miedema's attention from the National Bank of New Zealand which stated that a debit card issued on 24 November 2004 for use by Mr Russell had never been used. The letter says nothing as to the position in relation to the use of such a debit card during the period of interest in the appeals. Further, the letter is addressed not to any New Zealand address associated with Ancath or Mr Miedema but rather to the company in Australia at a post office box at Sarina. I did not therefore regard the letter as offering any corroboration with respect to the account Mr Russell gave concerning Ancath's affairs and the role he played.

79. The usual pattern of payment as between Tradecorp and Ancath was by periodic funds transfer in response to an invoice issued by Ancath, initially fortnightly and, on and from 20 March 2001, monthly. The funds transfer to Ancath was net of Australian GST with the amount of the latter being added and separately remitted, again on and from 20 March 2001, by Tradecorp to A W Russell & Co. In this usual pattern, the invoice concerned was expressed to be for "professional services" for a particular month or fortnight. Its amount was calculated by dividing the prevailing agreed annual payment plus an allowance of 8% (presumably in recognition by analogy of superannuation) by either 26 or, as the case may be, by 12.

80. Mr Russell also stated that two amounts received by Ancath from Tradecorp were not derived as a result of work performed by him. The amounts are:

(a) in the 2002 income year, $3,350 (invoice 29 dated 8 May 2002 refers); and
(b) in the 2003 income year, $16,667.65 (invoice 39 dated 4 December 2002 refers).

81. As to the sum of $3,350 (Invoice 29), Mr Russell's evidence was that this income was derived by Ancath as a result of stock checks conducted by others in New Zealand. The invoice concerned, like all of those rendered by Ancath to Tradecorp, is in Mr Russell's handwriting. It refers to stock checks conducted in New Zealand with some related work apparently performed in Australia as well as in New Zealand. It gives no detail as to when the stock checks were performed or by whom. It is also annotated with a reference to an agreement of some sort but it is not possible to decipher all of the detail of that annotation. I do note though that the invoice is apparently annotated in Mr Zarb's writing with the words "OK to pay" and with a question mark after the annotation "GST". In the absence of corroboration, I am not, for reasons already given, prepared to accept that, on the balance of probabilities, these "stock checks" in New Zealand were other than the result of services work undertaken by Mr Russell. I am persuaded by the annotated "OK" that services of the kind described were performed.

82. There is some corroboration in respect of the account which Mr Russell gave in relation to the sum of $16,667.65.

83. Invoice 39 at least purports to be referable to commission in respect of "container lease deals to South Pacific Islands" (the description used in the invoice).

84. A typed schedule is annotated to invoice 39. It giver particulars of, it seems, clients and related commission amounts. That schedule bears the annotation "OK to Pay", a signature and the handwritten date, "5/12/02", each seemingly in the same handwriting.

85.

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The signature on my inspection corresponds with that of Mr Zarb on a Tradecorp letter dated 8 September 2000 detailing Mr Russell's then monthly income. That same signature, on my inspection, appears to have been placed on behalf of Tradecorp on the Tradecorp Agreement. Both the invoice and its schedule were tendered in Mr Russell's case. It was never part of the Commissioner's case that either of these documents was a forgery.

86. Were the authorship of the schedule to be disputed, it would be open to me, pursuant to s 59(2) of the Evidence Act 1977 (Qld) (Queensland Evidence Act), as applied by s 79 of the Judiciary Act 1903 (Cth) and insofar as the Queensland provision is not inconsistent with the Commonwealth Evidence Act to reach my own conclusion as to its authorship by comparison with a genuine signature. The schedule not being a disputed document, I consider that it is open in any event as a matter of inference and comparison to reach the conclusion that it is Mr Zarb who made the annotation. This conclusion corresponds with Mr Russell's unchallenged statement under cross examination that it was Mr Zarb who had signed the payment approval on the schedule.

87. In these circumstances, I accept Mr Russell's evidence that an arrangement of some sort existed between Tradecorp and Ancath in 2000, 2001 and 2002 whereby Tradecorp would pay Ancath a commission in respect of "container lease deals to South Pacific Islands". Even allowing for the generality of the following description, I consider that, as a subject, container leasing extends beyond the service described in cl 5 of the Tradecorp Agreement, viz:

"Ancath shall ensure that Tradecorp is provided with full accounting services including maintaining of computer systems, streamlining of accounting procedures, supervision of staff, production of regular financial reports, evaluation of proposals and generally attending to the entire accounting function of Tradecorp and its associated companies and other business entities. End of year annual accounts and tax returns will continue, at least initially, to be completed by an outside firm of Public Accountants."

88. That agreement, I also note, makes reference to the prospect of "profit share".

89. Mr Russell's evidence also was that the transactional work in relation to container leases was undertaken by others in Tradecorp's office and occasionally by Mr Zarb but not him personally. His evidence was further that others in Tradecorp's office also received a modest bonus by way of a percentage in respect of commissions derived by Tradecorp from the leasing off-shore of containers. In particular, he stated in respect of the payment of commission:

"Well it was actually quite a practice in the firm, in Tradecorp. There were other staff, say some of the typists, the clerks, for example, who had nothing to do with the company earning commissions on lease deals. They were given a portion of the commission income as bonuses."

This is not inconsistent with the an approved payment of commission income by Ancath even though Mr Russell had not physically performed any work in relation to off-shore container leases while at Tradecorp. I accept Mr Russell's evidence on this subject.

90. Though the evidence on the topic is compressed, what emerges is that the derivation of income by way of commission from the leasing of containers throughout the South Pacific was part of Tradecorp's business. A practice existed within that company of allocating a percentage of that commission income by way of a bonus above their usual remuneration to persons working at Tradecorp even though they might not have personally undertaken work in relation to the container leasing aspect of that company's business. That practice was not formally documented, but its existence and adaptation to the Tradecorp Agreement is evidenced by invoice 39 and its schedule if, as I do, one accepts Mr Russell's evidence in this regard.

91. It does not follow from this that the payment of this percentage of commission income should be characterised as anything other than an additional reward for Mr Russell's services or skills as provided to Tradecorp by Ancath under the Tradecorp Agreement. The position would be different if Ancath, via Mr Russell or otherwise, had separately put to Tradecorp a business opportunity involving the

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leasing of containers throughout the South Pacific, an agreement as to profit sharing by way of a percentage of commission in relation to that business opportunity had been reached and then the work in respect of such leases performed by other Tradecorp staff. In those circumstances, the commission income could not, in my opinion, be characterised as mainly a reward for Mr Russell's skills or services. That is not this case. Rather, as with other persons working at Tradecorp, the payment of a percentage of commissions seems to have been by way of a bonus in respect of the services they were rendering whether or not those services related in any way to the leases.

92. There was nothing about such evidence as Mr Russell gave in the taxation appeals or in that which he put before the Industrial Commission concerning the tasks he performed at Tradecorp which suggested to me that, via Ancath's obligations under the Tradecorp Agreement, he was engaged so as to produce a particular result. Rather, the description in cl 5 of the Tradecorp Agreement seemed a fair summary of the tasks which he performed. He seems to have been based at Tradecorp's premises and engaged, albeit in a position of some seniority and responsibility, in the day to day routine of financial and managerial tasks encountered in the course of Tradecorp's business. He brought to the performance of those tasks the personal skills, qualifications and experience which he had accumulated in New Zealand, nothing more and nothing less. By "nothing more and nothing less" I mean that he did not, on the evidence, additionally bring to the performance of those tasks any plant or equipment of any significance. The Tradecorp Agreement did not require that Ancath do so. Further, there was no suggestion by Mr Russell that Ancath deployed anyone other than him to perform tasks at Tradecorp's Mackay premises.

93. What then are the consequences of these findings having regard to the issues identified in respect of the income tax appeals?

94. It is convenient first to answer that question upon the assumption that, contrary to Mr Russell's submissions, an overseas registered company can be a "personal services entity" for the purposes of Part 2-42 of the ITAA 1997 and, further, that there is nothing in the Double Taxation Agreement with New Zealand which would prevent the attribution of the amounts paid to Ancath by Tradecorp to Mr Russell as part of his assessable income.

95. A necessary consequence of the findings which I have made in the evidence is that the amounts received by Ancath from Tradecorp were each in one way or another a reward to it for its provision of Mr Russell's personal efforts or skills. Insofar as Mr Russell sought to prove otherwise I have either not accepted that evidence (the stock checks) or my acceptance of it (the percentage of container lease commissions) does not affect that consequence.

96. It follows from this that the amounts paid by Tradecorp to Ancath (which are Ancath's "ordinary income") constitute Mr Russell's "personal services income" as that term is defined in s 84-5(1) of the ITAA 1997.

97. Mr Russell's assessable income will include an amount of ordinary or statutory income of a "personal services entity" that is his "personal services income": s 86-15 of the ITAA 1997. Subject to any application of the "personal services business" exception for which s 86-15(3) provides, Ancath was in each of the income years in question a "personal services entity" because its ordinary income included Mr Russell's "personal services income": s 86-15(2) of the ITAA 1997.

98. Whether the "personal services business" exception applies requires regard to Division 87 of the ITAA97. A diagram showing how that Division is intended to operate is helpfully included in s 87-5 of the ITAA 1997:

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Russell

99. As can be seen issues which I identified at the outset in relation to the income tax appeal are represented diagrammatically and in context above.

100. There was no evidence adduced of the making of any applicable "personal services business determination".

101. That being so, the "results test" then falls to be answered. That test is found in s 87-18 of the ITAA 1997. In
IRG Technical Services Pty Ltd v Commissioner of Taxation 2007 ATC 5326; (2007) 165 FCR 57 at 70, [36], Allsop J (as his Honour then was) observed of that section that its elements "were to be understood against the background of the jurisprudence concerning independent contractors". In so doing, his Honour referred with approval to an earlier observation made by

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Lindgren J in
Commissioner of Taxation v Metaskills Pty Ltd 2003 ATC 4644; (2003) 130 FCR 248 at 254, [28], that, "Broadly speaking, an individual or entity, who or which is an 'independent contractor' under traditional concepts should meet the results test.". Their Honours were not in these cases promoting the use of the common law as a substitute for the language of the statute, for that would clearly be erroneous. It is just that, for example, the phrase "the income is for producing a result" in s 87-1(a) and s 87-18(3)(a) of the ITAA 1997 obviously draws upon one of the traditional touchstones for distinguishing between a contract for service and a contract of service. Thus guidance offered by cases decided at common law as to whether a payment is or is not for the production of a result is relevant. That this is what Parliament intended is confirmed by recourse to secondary materials, as Allsop and Lindgren JJ note in their respective judgements. Approaching the matter this way, I respectfully agree with their Honours observations in relation to s 87-18.

102. Neither the Tradecorp Agreement itself nor the descriptions in the consequential invoices nor Mr Russell's evidence as to his tasks at Tradecorp suggest that the amounts being paid by Tradecorp were for the production of any result. The services supplied by Ancath and provided by him were just accounting and managerial services generally. Mr Russell has not proved that the "results test" in s 87-18(3)(a) is satisfied in any of the income years in question. To the contrary, the evidence shows that it has not been satisfied.

103. That conclusion itself dictates a need next to have regard to the "80% rule" found in s 87-15(3). In short, that poses a question as to whether 80% or more of Mr Russell's "personal services income" came from the one source. That need is reinforced by an inability of Mr Russell, on the evidence, not even on the face of the Tradecorp Agreement, to show that Ancath was required to supply any plant or equipment: as one element of s 87-18(3)(b) requires.

104. As to the 80% rule, Lindgren J made the following observation in
Commissioner of Taxation v Metaskills Pty Ltd 2003 ATC 4644; (2003) 130 FCR 248 at 253, [26], with which I respectfully agree:

"Subsection 87-15(3) distinguishes between two situations, namely, where less than 80% of an individual's personal services income (not including certain specified classes of income not presently relevant) is income from the same entity, and where 80% or more of an individual's personal services income is income from the same entity. In the former case (less than 80% from the same entity), if any one or more of the four personal services business tests is satisfied, the personal services income is taken to be from a personal services business, and it is not necessary to apply for a personal services business determination. In the latter case (80% or more from the same entity), if the results test is satisfied, the personal services income is taken to be from a personal services business, and it is not necessary to apply for a personal services business determination. But otherwise, it is necessary for there to be a personal services business determination in force, if the personal services income is to be taken to be from a personal services business."

105. On the findings I have made with respect to the purported Vanuatu invoices and his evidence concerning them, Mr Russell has failed to prove that, in any of the income years in question, more than 80% of Ancath's income did not come from the one source. During those income years Tradecorp was the source of Ancath's income and that income in turn was a reflection of Mr Russell's efforts or skills.

106. For completeness, I should record that Mr Russell did not lead any evidence which would admit of a conclusion that either the unrelated clients test found in s 87-20, the employment test found in s 87-25 or the business premises test found in s 87-30 of the ITAA 1997 were satisfied.

107. What follows from these conclusions is that the personal services income is not income from conducting a personal services business. That means that the exemption is not engaged.

108. Before turning to the subject of whether any deductions are open I should address Mr Russell's two technical submissions as to the

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inapplicability of the personal services income regime found in Part 2-42 of the ITAA 1997.

109. The first of these may be disposed of shortly. Mr Russell's submission that the personal services income regime found in this Part can have no application because a foreign registered company cannot be a personal services entity requires that the word "company" in s 86-15(2) be read in this limited way even though neither there nor elsewhere in Part 2-42 is it so limited. Materially, s 995-1 of the ITAA 1997 defines "company" to be a "body corporate" (paragraph (a) of the definition). "Body corporate" is not separately defined for the purposes of the ITAA 1997 by s 995-1. There is nothing in the Acts Interpretation Act 1901 (Cth) which requires that, in any Commonwealth Act and in the absence of an intention to the contrary, "body corporate" should be construed as referring only to a corporation formed within the limits of the Commonwealth.

110. To construe "company" in the narrow way submitted by Mr Russell would be incongruous with other employments of the word in the ITAA 1997. For example, it is inherently unlikely that the word "company" as used in Division 975, "Concepts about Companies" of the ITAA 1997 was intended to be limited to Australian registered companies. Further, the term "CFC" is used repeatedly throughout the ITAA 1997. That term bears the same meaning in the ITAA 1997 as it does in Part X of the ITAA 1936: s 995-1 of the ITAA 1997. Regard to s 340 of the ITAA 1936, which defines "CFC" for the purposes of Part X of that Act, materially discloses that "CFC" is an abbreviation for "controlled foreign company". Given this, neither as used in Part X of the ITAA 1936 itself nor as the term "CFC" is used in the ITAA 1997 would it make any sense at all to regard the word "company" as referring to an Australian registered company. Rather, the word is used generically with adjectival qualification employed as required to designate a particular kind of "company".

111. Nor does context or purpose suggest that the word "company" as used in Part 2-42 of the ITAA 1997 should, exceptionally, nonetheless be construed in the limited way submitted, even in the absence of adjectival qualification. Certainly not expressly, nor even impliedly, is there anything in the language of that Part which would support such a construction of the word "company".

112. I reject the submission.

113. At a general level of abstraction and from an economic point of view, it is not difficult to have sympathy with Mr Russell's double taxation submission. Its essential premises were these:

(a) Ancath's income from Tradecorp forms part of its assessable income in New Zealand;
(b) Were Ancath itself taxed in Australia on this income it would receive a credit as against its New Zealand tax for any Australian tax it paid;
(c) The personal services income regime in Part 2-42 of the ITAA 1997 deems Ancath's income to be part of his assessable income;
(d) Ancath receives no credit in New Zealand for any Australian tax it pays on income so included by deeming; and
(e) The outcome, at least potentially, is double taxation and hence it is in breach of the Double Taxation Agreement.

114. More particularly, Mr Russell made the following submission by reference to the Double Taxation Agreement:

(a) Clause 1 of Article 7 materially provides, "The profits of an enterprise of a Contracting State shall be taxable only in that State …";
(b) "Article 23 deals with sources of income"; and
(c) "Article 24 deals with elimination of double taxation."

115. He then submitted that the effect of the requirement flowing from s 4 of the International Tax Agreements Act 1953 (Cth) (International Tax Agreements Act) to read that Act with the ITAA 1997 meant that Part 2-42 could have no application so as to deem what was Ancath's income to be his when that income formed part of Ancath's assessable income in New Zealand because that would amount to taxing the profits of Ancath, which was an enterprise of New Zealand, in Australia

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rather than, as art 7 of the Double Taxation Agreement required, in New Zealand only.

116. The Double Taxation Agreement between Australia and New Zealand made in Melbourne on 27 January 1995 (hereafter the NZ Double Taxation Agreement) is reproduced as Schedule 4 to the International Tax Agreements Act. That agreement is given force of law in Australia and affects Australian tax by s 6B(1A) of that Act.

117. Section 4 of the International Tax Agreements Act does indeed, as Mr Russell submitted, require that the ITAA 1997 be incorporated and read as one with that Act. Further, the effect of s 4(2) of the International Tax Agreements Act is that, in so doing and subject to an exception not presently material, the provisions of the International Tax Agreements Act (and hence a double taxation agreement given the force of domestic law by that Act) have effect notwithstanding anything inconsistent in those provisions in, materially, the ITAA 1997. In other words, a provision in the International Tax Agreements Act or a double taxation agreement given effect by it prevails over a provision in the ITAA 1997 to the extent of any inconsistency.

118. The NZ Double Taxation Agreement generally follows the OECD Model Double Taxation Agreement (OECD Model). It is settled that, in construing such an agreement, a court may have regard to, inter alia, the OECD Commentary on its model agreement:
Thiel v Commissioner of Taxation 90 ATC 4717; (1990) 171 CLR 338 at 344, 356-357. The interpretative use of that type of extrinsic material is a manifestation of the recognition that a double taxation agreement is but a particular example of an international treaty. The Full Court has sounded a cautionary note in relation to the use for the purpose of interpretation of commentary published after the ratification of a double taxation agreement:
McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation 2005 ATC 4398; (2005) 142 FCR 134 at 144, [42].

119. On the basis of the evidentiary findings I have made, Part 2-42 of the ITAA 1997 will apply so as to subject Mr Russell, not Ancath, to taxation in Australia. It is true that art 7, cl 1 uses the language, "the profits of the enterprise". Read in isolation, and affording primacy to the NZ Double Taxation Agreement as incorporated by the International Taxation Agreements Act, that might be thought to support the notion that any measure which would subject those profits to taxation, even if the means of so doing was to deem the same to form part of the assessable income of an individual, rather than the enterprise which derived them, was inconsistent with the NZ Double Taxation Agreement. The foundation for such an approach to interpretation would be "juridical" in the sense that it would be textual.

120. The difficulty with that approach is that, read in the context not only of the balance of art 7 but the NZ Double Taxation Agreement as a whole, the focus of the clause is on the prevention of the double taxation of an "enterprise", not of profits as an abstract, economic concept.

121. There is no prior Australian authority directly touching upon the intersection between Part 2-42 of the ITAA 1997 and either the NZ Double Taxation Agreement or any other of the OECD Models to which Australia is a party.

122. The industry of counsel for the Commissioner did result in my being taken in supplementary written submissions to a number of foreign authorities in which national courts have had to grapple with the conundrums presented by the reconciliation of an attribution regime in their national revenue law with their country's adoption of a double taxation agreement on the OECD Model which would, under their national law, prevail to the extent of any inconsistency with the attribution regime.

123. Of these, the case from which I have derived particular assistance is a decision of Finland's Supreme Administrative Court in relation to whether an inconsistency existed between the attribution rules in that country's controlled foreign company (CFC) regime in its domestic revenue law and art 7 of its double taxation agreement with Belgium, which was in conformity with the OECD Model:
Re A Oyi Abp (2002) 4 ITLR 1009 (
Re A Oyi Apb). In that case, the Supreme Administrative Court observed (at 1064):

"Tax treaties are therefore concerned with judicial double taxation which means that the same taxable person is taxed on the same

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income in two different countries. Tax treaties do not generally concern economic double taxation, that is, where the same income is taxed in the hands of several taxable persons. Unless otherwise provided in a tax treaty, the removal of economic double taxation is a task which remains the responsibility of the national legislation. The tax treaty between Finland and Belgium does not contain provisions on the removal of economic double taxation."

124. There are passages in a decision of the French Conseil d'État in
Re Société Schneider Electric (2002) 4 ITLR 1077 which, read in isolation, might be thought to support an opposite conclusion in relation to the immateriality of economic consequences when considering whether a national CFC regime was in conflict with Article 7 of an OECD model treaty with Switzerland. For example, in referring to Article 7 of the Franco-Swiss double taxation agreement, the Conseil d'État opined (at 1108):

"In the absence of any factor requiring a different interpretation, the 'profits' to which art 7 of the convention refers are those determined according to the rules established by the [French General Tax Code]. It follows that the court below did not make any error in deciding that there is an identity in nature between the business profits (bénéfices) of the Paramer company, the taxation of which is attributed to Switzerland by art 7(1) of the Franco-Swiss tax treaty, and the profitable results (résultats beneficiaries) of the Paramer company which are taxed in France in the name of the Schneider company on the basis of the [CFC regime in the French General Tax Code]."

125. The actual decision in that case was that that the French CFC regime was in conflict with and was overridden by the relevant tax treaty. However, on closer analysis, the tax treaty concerned contained, apart from an OECD Model art 7 provision, another provision (art 25(A)(1)), which expressly exempted from the relevant French tax "income … where such income is liable to taxation in Switzerland". Against that background, where the treaty itself authorised a focus on income per se, rather than enterprise, the seeming incongruence of result with that in
Re A Oyi Abp is explicable.

126. There is no equivalent of art 25(A)(1) of the Franco-Swiss Double Taxation Agreement in the NZ Double Taxation Agreement.

127. Assistance in the resolution of any doubt about the focus of art 7, cl 1 is gained by having regard to the commentary concerning the OECD Model. I refer to the commentary as published in OECD Model Tax Convention on Income and Capital, Condensed Version - 2008 and Key Tax Features of Member countries 2008 published by IBFD (Copyright as to the Convention, OECD and as to the Key Features, IBFD - "OECD Commentary"). Article 7, cl 1 of the NZ Double Taxation Agreement replicates art 7, cl 1 of the OECD Model Convention.

128. In the introduction to the OECD Commentary (para 1) the following statement is made:

"International juridical double taxation can generally be defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods."

129. The following opinion is given in the OECD Commentary (para 9 and para 10) in respect of art 7 of the OECD Model:

"9 This paragraph is concerned with two questions. First, it restates the generally accepted principle of double taxation conventions that an enterprise of one State shall not be taxed in the other State unless it carries on business in that other State through a permanent establishment situated therein. …

10 The second principle, which is reflected in the second sentence of the paragraph, is that the right to tax of the State where the permanent establishment is situated does not extend to profits that the enterprise may derive from that State but are not attributable to the permanent establishment. …"

130. These quoted statements and expressions of opinion in the OECD Commentary predate the NZ Double Taxation Agreement. They are not, as sometimes occurs

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with explanatory memoranda for statutes, in conflict with the language of either the OECD Model or the latter's replication of present interest, the NZ Double Taxation Agreement. The understanding of the meaning of art 7 reflected in the commentary is that the intended approach to the construction of art 7 of the OECD Model is juridical, not economic. Hence the reference in the commentary to "enterprise". Accepting this, Part 2-42 violates neither the letter nor the spirit of the intent of the Double Taxation Agreement in that it does not effect juridical double taxation.

131. Regard to academic literature in relation to double taxation does not support a construction of art 7(1) of the NZ Double Taxation Agreement based on a conception that its design is to eliminate economic, as opposed to juridical taxation.

132. In his seminal work, Klaus Vogel on Double Taxation Conventions (3^rd ed, Kluwer Law International, 1997), the late Professor Dr Klaus Vogel of the University of Munich, a leading academic commentator on international double taxation, deliberately contrasts (at pp 9-10) international juridical taxation with economic double taxation. He uses (at p 10) attribution rules which differ as between domestic taxation laws of different nations to exemplify one way in which economic double taxation can occur. He further notes (ibid) that, though "the concept of 'double taxation', its prerequisites and its limitations, have been subject to much academic controversy … Application of tax treaties, however, is merely a matter of interpretation of the respective treaty. What conceptually is - and what is not - 'double taxation' is therefore of no importance for the treaty's application". [As to academic controversy and nuances concerning what constitutes "double taxation", regard might usefully be had to the comprehensive summary offered by Professor M Pires in his work International Juridical Double Taxation of Income, (1989, Kluver Law and Taxation Publishers) at Chapter 1. I note that, in this chapter, at pp 15-16, para 2.2.2.2.2.1, Professor Pires states that the requirement for the taxable person to be the same is an "often used criteria for differentiating [economic] double taxation from the juridical".

133. Article 7 of the OECD Model forms part of what Professor Vogel describes (at p 357) as "distribution rules" ("Metatatbestand"), to be contrasted with that particular item under domestic tax law the taxation of which the distribution rule is designed to restrict ("Objekattatbestand"). Article 7's role in the OECD Model is to lay down what Professor Vogel describes (at p 400) as the "residence and permanent establishment principle". He classifies arts 7-9 of the OECD Model as rules concerning the profits of an enterprise. He notes (at pp 403-404) of art 7 that, while it affords the primary right of taxation to the State of the permanent establishment, being the State of source, it "leaves open the question of the taxation of such profits by the State of residence". The question of whether the profits of the enterprise should be exempted in the State of residence or whether credit should be allowed there for State of source tax paid is, he notes, governed by one or the other versions of Article 23, i.e. the "exemption" or the "credit" version of that article in the OECD Model.

134. In his explanatory notes in respect of the "exemption" and "credit" versions of art 23 of the OECD Model (p 1129 et seq) Professor Vogel does not seek to controvert the OECD Commentary on those model articles (which he also reproduces, at p 1124 et seq). That commentary (Vogel at p 1124) asserts that those model articles are concerned with juridical, as distinguished from, economic double taxation. Professor Vogel's explanatory notes are directed to the relative advantages and disadvantages and underlying philosophies of the "exemption" and "credit" model article versions and to highlighting that neither is exhaustive of the ways in which a contracting State may seek to reduce or avoid double taxation.

135. Article 24 of the NZ Double Taxation Agreement exemplifies the "credit" version of those offered in art 23 of the OECD Model. Though Mr Russell also sought to rely on art 24 of the NZ Double Taxation Agreement so as to support his submission that art 7 of the NZ Double Taxation Agreement overrode Part 2-42 of the ITAA 1997, once it is appreciated, as the OECD Commentary underscores, that its provision for the affording of foreign tax credits

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to an enterprise is concerned with the reduction or elimination of juridical, not economic, double taxation of a particular enterprise by contracting States, not of profits per se, that reliance can be seen to be misconceived.

136. It would be inconsistent with Professor Vogel's conception of the role of art 7 in the OECD Model to construe art 7 of the NZ Double Taxation Agreement as being directed to the subject of the elimination of the double taxation of profits irrespective of identity of enterprise in the contracting States or of the location of that enterprise's "permanent establishment".

137. Mr Russell also relied on art 23 of the NZ Double Taxation Agreement. Neither has any relevance or application in the circumstances of this case. Article 23 is directed to the subject of source of income. Its lack of present utility for Mr Russell may be demonstrated by inserting the names of pertinent countries and entities into a material part of the text of cl 1 of that article, "Income, profits or gains derived by Ancath (assuming it to be a "resident" of New Zealand) which, under … art 7, may be taxed in Australia shall, for the purposes of the law of Australia relating to Australian tax, be deemed to be income from sources in Australia". Ancath does not fall for taxation in Australia in respect of such of its income derived in Australia as is Mr Russell's personal services income and deemed to form part of his assessable income.

138. Insofar as Part 2-42 may effect economic double taxation, given the subjection of Ancath to New Zealand income taxation on the income it derived under the Tradecorp Agreement, the rectification of any resultant hardship or injustice would require either renegotiation of the NZ Double Taxation Agreement or unilateral Australian or New Zealand legislative action.

139. In principle therefore, the NZ Double Taxation Agreement does not prevent a conclusion that Mr Russell is in fact and law liable to assessment in respect of his personal services income by virtue of the operation of Part 2-42 of the ITAA 1997. The question then becomes whether the actual amounts so assessed are correct?

140. On the evidence it is apparent that the Commissioner has made some errors of omission and inclusion in his calculation of the amount of Mr Russell's personal services income and, as a consequence, in his assessment of Mr Russell's taxable income.

141. In respect of the 2001 income year, an amount of $1869.23 has been omitted from Mr Russell's personal services income. That amount is referable to a payment made by Tradecorp to Ancath on or about 21 September 2000. That means that the correct amount of Mr Russell's personal services income for the 2001 income year is $45,055.00.

142. As to the 2002 income year, the Commissioner concedes that the calculation of Mr Russell's personal services income which was made for the purposes of the assessment overstates the amount of that income by $416.00.

143. The question then becomes as to whether any deductions ought to be made from the personal services income included as part of Mr Russell's assessable income? This is the province of Division 86 of the ITAA 1997.

144. Section 86-20 of the ITAA 1997 contemplates that a person's personal services income may be reduced by such deductions to which the personal services entity, here Ancath, is entitled.

145. Mr Russell submits that his personal services income should be reduced by the deduction of amounts paid by Ancath to the partnership A W Russell & Co in each of the 2001 to 2004 income years. Obviously enough, for reasons already given, insofar as any of the amounts put forward as deductions were paid in the 2004 income year after 23 February 2004 they could not be a payment to the partnership but rather were in law nothing more than a payment to Mr Russell personally. I shall assume for the present in Mr Russell's favour that the partnership did perform services for Ancath in relation to Tradecorp. It will be necessary to return to that subject in relation to the GST appeal.

146. The partnership was, in each income year, an "associate" as that term is defined for the purposes of s 86-35 of the ITAA 1997 by s 995-1 of that Act. That definition incorporates by reference the provision made in s 318 of the

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ITAA 1936 in respect of who or what is an "associate". On the findings that I have made and viewing Ancath as the "primary entity", Mr Russell, either alone or in conjunction with his former wife, constitutes a "controlling entity" for the purposes of s 318(2)(d) of the ITAA 1936 because Ancath's actions are sufficiently influenced by either Mr Russell alone or in conjunction with his former wife.

147. On the evidence, Tradecorp was Ancath's sole source of income in each of the income years in question. And that income constitutes Mr Russell's personal services income. In these circumstances, any payments to the partnership must, for the purposes of s 86-35(1)(b), necessarily be "attributable" to that income. In these circumstances, the amount of those payments to the partnership is not an amount which Ancath can deduct, for that is expressly foreclosed in respect of such payments by s 86-35(1)(d) of the ITAA 1997.

148. I note in passing that domestic double taxation in these circumstances is precluded by s 86-35(1)(c), which excludes such payments from the assessable income of the partnership.

149. Approaching matters from the perspective of whether, having regard to s 86-60 of the ITAA 1997, Ancath, as a personal services entity, might deduct an amount to the extent that it relates to the gaining or producing of Mr Russell's personal services income. Neither of the conditions there specified could be met - Ancath was not conducting a personal services business and, had the circumstances giving rise to the postulated deduction applied to Mr Russell personally he could not claim a deduction for he would be trying to claim a payment to himself as a deduction (s 86-60(b) and (a) respectively).

150. Yet another of Mr Russell's submissions in relation to the quantum of personal services income assessed to him was that it overstated that because Ancath had made two refunds to Tradecorp. He identified these refunds as follows in a schedule exhibited to one of his affidavits (Exhibit G to his affidavit filed on 18 March 2008):

(a) NZD$27,680.83 in respect of services the subject of invoice 29; and
(b) NZD$21,266.23 in respect of services the subject of invoice 33.

151. I have already above referred to each of these invoices in the context of other submissions made and evidence given by Mr Russell.

152. I did not have the benefit of a detailed explanation from Mr Russell in his affidavit evidence as to how the asserted refunds came about. In the relevant affidavit (para 10) Mr Russell just states: "My time and effort gave rise to the invoices that were rendered by [Ancath] to Australian resident Tradecorp. A schedule of those invoices is attached …" The subject was explored in Mr Russell's cross examination. In the course of that Mr Russell stated that the refunds were made in cash. His explanation as to how this came about was aptly described in the Commissioner's submissions as "convoluted", referring to the payment by Tradecorp of a sum in United States dollars to Ancath and to the equivalents of that sum in New Zealand and Australian dollars. His former wife was said to have brought some of the cash back with her to Australia from New Zealand. I did not have the benefit of corroborative testimony from the former Mrs Russell. Nor did I have any evidence before me from Mr Russell of Ancath's bank account statements or from Mr Zarb which might have assisted in evidencing a money trail in respect of Ancath's receipt of payments in respect of invoices 29 and 33 and of withdrawals so as to effect the asserted refunds. Each of invoices 29 and 33 is apparently annotated by Mr Zarb with the words "OK to pay". Given that and the convoluted nature of Mr Russell's explanation, I am not disposed to accept his evidence that refunds were made in the absence of corroboration.

153. As already mentioned, the onus lies on Mr Russell to prove the assessments concerned to be excessive. Insofar as the asserted refunds might serve to reduce the amount of personal services income which has been included in Mr Russell's assessable income, it thus lies upon him to prove on the balance of probabilities that these refunds were made. This he has not done. That is not to say that it is not possible that the asserted refunds were made, only that on the evidence to hand I am not satisfied that it is more probable than not that they were made.

154.

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For completeness, I should also record that Mr Russell asserted in his affidavit evidence (para 7) that, in each of the 2001 to 2004 income years, the partnership A W Russell & Co had included in error monthly payments which had been made into its bank account by Tradecorp. He further asserted that the partnership should not have returned these payments as income as they had been taken into account by Ancath "as part of partnership 'drawings' in calculating annual increases in my loan account". This, in turn, he asserted had led to his overstating his share of the partnership income in his personal returns.

155. This particular basis for a conclusion that each of his income tax assessments was excessive did not feature in his objection. No leave to amend the grounds of objection was sought. Absent a grant of leave to amend, an applicant is confined to the grounds specified in the notice of objection: s 14ZZO(a) of the TAA. In any event, as the Commissioner's submissions also made apparent, each of the assessments which issued was predicated upon the inclusion as assessable income only of the amount of Mr Russell's assessed personal services income in each income year. These amounts were included to the exclusion of amounts received from the partnership. There was no double counting. In these circumstances, even had these assertions been manifested in a ground of objection, they would have been but a distraction.

156. Mr Russell also alleged that the Commissioner's staff had not given him notice that an income tax audit in respect of his personal, as opposed to the partnership's taxation affairs was being conducted, that this was a breach of the "Taxpayer's Charter" and that, accordingly, the Commissioner was "estopped" from issuing amended assessments. It is not necessary to explore the merits of the factual substratum of this allegation. Even if true, no conduct on the part of the Commissioner can affect the operation of a taxing statute in respect of facts the occurrence of which gives rise to a taxation liability:
Commissioner of Taxation v Wade (1951) 84 CLR 105 at 117 per Kitto J.

157. Mr Russell further advanced in his written submissions that there was no lawful ability to "reopen", ie issue amended assessments in respect of the 2001 and 2002 income years. This was not raised as a ground of objection in respect of the assessments. He is confined to those grounds in the absence of a grant of leave to amend. I decline to grant any such leave. So to do after the close of evidence would not be fair to the Commissioner who did not as the objection stood choose or need to lead evidence in respect of the formation of an opinion that in these income years there had been an avoidance of tax due to fraud or evasion.

158. The Court's powers on the hearing of a taxation appeal are set out in s 14ZZP of the TAA. It is there provided that: "the Court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision". The "decision" referred to in this section is the Commissioner's objection decision.

159. The outcome in respect of so much of the appeal as relates to the objection decision as concerns Mr Russell's assessment to income tax in respect of the 2002, 2003 and 2004 income years is clear.

160. In respect of the 2003 and 2004 years, Mr Russell has failed to prove that the income tax assessment concerned is "excessive". Thus, insofar as the objection decision relates to Mr Russell's objection against the 2003 and 2004 income tax assessments, those assessments should be confirmed.

161. Solely as a result of the conceded error of calculation to which I have referred, the income tax assessment in respect of the 2002 income year is excessive. The decision to disallow the objection was, in this regard, incorrect. It is necessary therefore to extinguish the effect of the objection decision and to make provision for the correct result in respect of Mr Russell's taxable income for that income year. Insofar as the objection decision in respect of this income year constitutes a disallowance decision and a confirmation of the income tax assessment, the necessary correction to me, requires more than a "variation" of the disallowance. Rather, so much of the objection decision as disallows the objection to the 2002 income tax assessment should be set aside and, in lieu thereof, it should be ordered that the

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objection to that assessment be allowed and Mr Russell's taxable income for that income year varied by reducing it by $416.00. Section 14ZZQ of the TAA makes provision for how the Commissioner is to implement such an order. The matter should be remitted to him for that purpose.

162. In respect of the 2001 income year, not only has Mr Russell failed to prove that his income tax assessment is excessive but, as noted, an amount of $1869.23 has been shown to have been omitted from his taxable income. That omission certainly supplies an additional reason why the 2001 assessment has not been shown to be excessive but does it also mean that the objection decision confirming that assessment should nonetheless be set aside as in error and a declaration made as to Mr Russell's taxable income for that income year with it then falling to the Commissioner, pursuant to s 14ZZQ, to issue an amended assessment for that income year so as to give effect to these orders once they become final?

163. The Commissioner's submissions rather assumed that it did, but did not elaborate on the foundation for that assumption. Mr Russell did not expressly challenge the Court's power to make an order which would authorise the amendment of his 2001 assessment so as to increase the amount of his taxable income and the tax payable thereon for that income year.

164. Uninstructed by authority, legislative or judicial, that an appellant dissatisfied with an objection decision that has confirmed an assessment of his taxable income to be X and who has failed to prove that X is an excessive amount might be the recipient of an order which not only dismissed his appeal but also set aside the objection decision and directed, in lieu, that the assessed taxable income be amended to X plus Y gives pause for thought about the nature and extent of the power presently exercisable by the Court on the hearing of a taxation appeal.

165. Upon the institution of an appeal against an objection decision by the Commissioner, the Court is "seized of the decision in its entirety":
Commissioner of Taxation v ANZ Savings Bank Ltd 94 ATC 4844; (1994) 181 CLR 466 at 476 (ANZ Savings Bank Case). In that same case (ibid) it was said of a statutory predecessor of s 14ZZP of the TAA, s 199 of the ITAA 1936 that:

"This power is expressed in the widest terms. An appeal relates to the objection decision made by the Commissioner albeit a taxpayer is dissatisfied with only part of that decision. A power to make such order as the Court thinks fit is clearly not unconstrained but there is nothing in s 199 to suggest that the Federal Court may not make such order in relation to the objection decision as is appropriate in all the circumstances once the subject matter of the taxpayer's dissatisfaction with the assessment has been resolved."

At the time those remarks were made, the language of s 199 of the ITAA 1936 was in materially identical terms to those of s 14ZZP of the TAA. Section 199 came to be in that form following amendments made to that section by s 88 of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth).

166. In the ANZ Savings Bank Case (at 479) it was further observed:

"The question for the Court hearing an appeal is not whether the grounds of objection have been made out but whether the taxpayer has satisfied the burden cast by s.190(b) of proving that the assessment is excessive. … Since the Court is concerned to determine whether the amounts assessed as taxable income are excessive , the Commissioner must be able to raise for the Court's determination the deductions properly to be allowed in the light of the Court's decision as to assessable income." [Emphasis added]

The burden once cast on an appellant by s 190(b) of the ITAA 1936 is now the subject of like provision by s 14ZZO(b) of the TAA.

167. Here, I have resolved, adversely to him as it transpires, the subject matter of Mr Russell's dissatisfaction with the 2001 year income tax assessment and I have determined that that assessment is not excessive. What then becomes the appropriate order to make in all of the circumstances bearing in mind that the power, though expressed in the widest terms, is not unconstrained?

168.

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In its pre-1986 amendment form, s 199(1) of the ITAA 1936 provided that the court in which the Federal original jurisdiction to hear a taxation appeal was then vested (a State or Territory Supreme Court) might, on the hearing of the appeal, "make such order as it thinks fit, and may by such order confirm, reduce, increase or vary the assessment " (emphasis added). The 1986 amendment changed the focus of the issue for determination on the appeal from the assessment to the objection decision, consigning to the Commissioner the derivative administrative function of making such amendment to the assessment as was necessary to give effect to the Court's decision once that decision had become final. While that amendment meant that, in the absence of a stay, the requirement to make a refund pursuant to an assessment reduced by a court order which was under appeal was removed, so, too, was removed the express recognition that it was possible for a court hearing a taxation appeal, in which a taxpayer bore the onus of proving the assessment in question to be excessive, to increase that assessment.

169. In
Cornell v Deputy Commissioner of Taxation (1920) 29 CLR 39 and at a time when s 38(1) of the Income Tax Assessment Act 1915 (Cth) (ITAA 1915) was in a form not materially distinguishable from s 199(1) of the ITAA 1936 as it stood prior to its amendment in 1986, i.e. the words "increase or vary" were employed in relation to the assessment, it was opined (at 48) in a joint judgement of six judges that "the fact that an assessment is for too small an amount is [not] any reason for setting aside the assessment at the instance of the person assessed". That judgement is silent as to whether the assessment might have been increased at the instance of the Deputy Commissioner, had positions been reversed, although the express conferral of a power to increase the assessment suggests that such an order could lawfully then have been made.

170. Again in respect of an appeal determined when the Court's powers, including that of reducing the assessment, were as set out in the former s 199(1) of the ITAA 1936, and notwithstanding that he did not adopt the method of calculation promoted by the taxpayer on objection and before him on appeal, Windeyer J in
Mercantile Credits Ltd v Commissioner of Taxation 71 ATC 4015; (1971) 123 CLR 476 at 489 had no difficulty in concluding that the assessments concerned should be varied by order so as to reduce the amounts of the tax payable.

171.
Saffron v Commissioner of Taxation (1994) 94 ATC 4049 (Saffron's Case) is a case which preceded the ANZ Savings Bank Case but which was decided after the 1986 amendments. Saffron's Case was an appeal from the Administrative Appeals Tribunal, not an appeal in the original jurisdiction against an objection decision. Nonetheless, in his reasons for judgement, Davies J (at 4050-4051) made the following observations of a generic nature as to the role of either this Court or the Tribunal when seized with a challenge to (termed by him a review of) an objection decision:

"The review authority, the Court or the Tribunal, must come to its own decision on the facts and the issues. Walsh J said in Krew's case at 4216:-

'I have a duty to reach my own conclusions on the questions of fact which have to be decided and to give effect to those conclusions. .. I must make my own decisions as to the facts.'

Although the taxpayer may be untruthful and a tax evader, that factor, of itself, is no reason not to undertake a calculation of income tax as contemplated by the Act, if such a calculation can be made. As Walsh J said in Krew's case at 4219, 'A witness upon whose word one cannot rely may yet give evidence which is true in part.' In that case, although Walsh J held that he could not accept the appellant himself as a reliable witness, he nevertheless found that several of the facts alleged by the taxpayer were established as a matter of probability and accordingly that four of the amended assessments before the Court should be set aside. Moreover, in the calculation of the taxable incomes of years past, exact proof may not be available. As Burchett J said in
Ma v Commissioner of Taxation (1992) 92 ATC 4373 at 4379:-

'… the making of estimates upon Inexact evidence, which IS so much a feature of both judicial and

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administrative decision-making, cannot be uniquely excluded from appeals against betterment assessments.'

If, despite the general untruthfulness of a witness and the lack of records, the Court or the Tribunal nevertheless feels satisfied, as a matter of probability, as to the existence of a relevant fact or factor, effect must be given to that conclusion."

Though these observations predate by some months those made later in that year by the High Court in the ANZ Savings Bank Case, they draw upon the same cases which the High Court regarded as authoritative and are not inconsistent with the High Court's own observations. However, though the observation made by Davies J that "effect must be given to that conclusion" is no less generic than his Honour's other observations, it is necessary to recall that he was not called upon in that case expressly to decide whether it was within the Court's power to set aside the objection decision so as to increase the amount of an appellant taxpayer's taxable income. The other two judges constituting the Full Court in Saffron's Case, Gummow and Lee JJ, did not find it necessary to make such generic observations.

172. In this case, though I have not accepted aspects of Mr Russell's evidence as to his income in the years in question, I am in respect of the 2001 income year satisfied, as a matter of probability, that Mr Russell's taxable income for that year has been incorrectly assessed and that the true amount of his taxable income for that year is $1869.23 higher than that assessed. Had the former s 199(1) been applicable, I should therefore have ordered that the assessment be increased.

173. One constraint on the width of the powers which the Court may now exercise under s 14ZZP of the TAA must be the nature and extent of the "matter" in respect of which the Court is invested with Federal jurisdiction. In respect of a taxation appeal that investment of jurisdiction is implicit in the conferring, pursuant to s 14ZZ of the TAA, on a person dissatisfied with the Commissioner's objection decision of a right of appeal to this Court against that decision as an alternative to applying to the Administrative Appeals Tribunal for the review of that decision. Since 1986, it has been the correctness of the decision on the objection against the assessment which is, in terms of the formulation of "matter" in
Re Judiciary and Navigation Acts (1921) 29 CLR 257 at 265, "the subject matter for determination" and the source of the "immediate right, duty or liability to be established by the determination of the Court". The Commissioner's obligation in respect of an objection is, materially, within the required period, to decide whether to:

(a) allow it, wholly or in part; or
(b) disallow it (s 14ZY of the TAA).

174. What s 14ZY does not put forward as an alternative for the Commissioner in deciding the objection is the increasing of the assessment which is the subject of the objection. That being so, it would be seem an odd result if the subject matter for determination on appeal included whether the Commissioner should not only have disallowed the objection but also whether he should have increased it.

175. In respect of the 2001 to 2004 income years, s 170(7) of the ITAA 1936 then provided:

"(7) Nothing contained in this section shall prevent the amendment of any assessment in order to give effect to the decision upon any appeal or review, or its amendment by way of reduction in any particular in pursuance of an objection made by the taxpayer or pending any appeal or review." [Emphasis added]

Apart from the express reference to reduction, the absence of any reference to "increase" will be noted.

176. That is not to say that an administrative sequel to the disallowance of an objection might not have been a decision to issue an amended assessment increasing a taxpayer's liability. Consideration of an unmeritorious objection might nonetheless reveal that the original assessment of taxable income was too low. That though would be a separate decision from the objection disallowance decision and permissible only to the extent that the issuing of an amended assessment which increased liability was still lawfully possible pursuant to s 170 of the ITAA 1936. If so, separate rights of objection and subsequent appeal to this Court or

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review by the Tribunal in the event of dissatisfaction with the objection decision would exist in respect of that amended assessment and later objection decision.

177. For these reasons, I do not, as presently advised, conclude that the powers exercisable by the Court in the circumstances obtaining in respect of the 2001 income year extend to the setting aside of the decision disallowing the objection, the making of an order setting aside the assessment concerned and the making of a declaration that Mr Russell's taxable income for that income year was $1869.23 higher than that assessed.

178. I have used the qualification "as presently advised" deliberately. Whether the amount of Mr Russell's 2001 taxable income and related tax liability might lawfully be the subject of increase by consequential amended assessment as a consequence of the orders disposing of the income tax appeal was not a subject expressly addressed by the parties in submissions. Nor did I raise that subject of my own motion in the course of submissions. The conclusion which I have reached as to an absence of power is therefore necessarily provisional. I consider that procedural fairness dictates that, in respect of so much of the income tax appeal as relates to the 2001 income year income tax, Mr Russell and the Commissioner should, in the first instance, have an opportunity, after considering these reasons for judgement, to bring in short minutes of the orders which they submit are appropriate to give effect to the conclusions and findings which I have made, together with supplementary submissions as to the lawful authority for the making of such proposed orders.

Penalty assessments - income tax

179. As already noted, the Commissioner concedes that the penalty assessments are excessive to the extent that each applies a 20% of tax shortfall increase to the base penalty amount. He maintains though that a base penalty amount worked out under s 284-90(1) of Schedule 1 to the TAA the basis that Mr Russell's "tax shortfall" resulted from "intentional disregard" of a taxation law by him and has not been shown to be excessive.

180. Guidance as to what constitutes "intentional disregard" for the purposes of determining a base penalty amount was offered by Collier J in
Price Street Professional Centre Pty Ltd v Commissioner of Taxation 2007 ATC 4320; (2007) 66 ATR 1 at [43] when considering a materially analogous predecessor provision, s 226J of the ITAA 1936:

"[43] As made clear by the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 which introduced s 226J, s 226J requires knowledge by the taxpayer that, for example, it has claimed a deduction knowing that it is not allowable. Accordingly, 'intentional disregard' of the ITAA 1936 or regulations requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations. The legislation treats 'intentional disregard' differently from, and more seriously than, negligence to comply with the Act (cf s 226G) or recklessness with regard to the correct operation of the Act (cf s 226H)."

181. An appeal from her Honour's decision in that case, including so much of it as related to penalty, was later dismissed by the Full Court:
Price Street Professional Centre Pty Ltd v Commissioner of Taxation 2007 ATC 5044; (2007) 243 ALR 728.

182. There is nothing in the judgements delivered in the Full Court which would call into question the correctness of her Honour's conception of what constitutes "intentional disregard". I respectfully agree with her Honour's observations. They serve to confirm what a reading in context of "results from intentional disregard" would otherwise suggest. Within s 290-40 of Schedule 1 to the TAA, Parliament has specified gradations of increasing severity in terms of conduct by a taxpayer or his, her or its agent which has resulted in a tax shortfall. Of these, "intentional disregard" is the most serious in terms of the infliction of a base penalty. It is intended to be qualitatively different to and more severe than

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"recklessness". That suggests that wilful blindness of a kind which in other contexts has been regarded as sufficient to supply the mental element in adverbial qualifications such as "knowingly" or "wilfully", q.v.
Iannella v. French (1968) 119 CLR 84 at 95-96 per Barwick CJ and
Comptroller-General of Customs v Woodlands Enterprises Pty Ltd [1996] 1 Qd R 589 at 602-603 per Pincus JA, McPherson JA agreeing, is insufficient to supply the mental element in "intentional disregard". Rather, conduct of that wilfully blind kind would fall under the rubric of "recklessness" for base penalty purposes.

183. In support of his submission that Mr Russell had not shown an "intentional disregard" base penalty to be excessive the Commissioner pointed to Mr Russell's occupational background. Mr Russell's occupational background is relevant to, but not determinative of, any conclusion as to whether his conduct ought to be classed as "intentional disregard".

184. Mr Russell was once registered to practise as an accountant in New Zealand, but never in Australia. It is there that he undertook his professional training. I do have evidence that he has held himself out in Australia as having taxation expertise, but that professed expertise is in the field of GST, and is on the basis of having practised for many years in New Zealand. There is no evidence that he has ever been a registered tax agent in Australia or that he was employed at Tradecorp for his expertise in Australian taxation law and practice. His work there was in the fields of financial and managerial accounting.

185. Mr Russell does acknowledge knowledge of New Zealand taxation law applied over some 15 years in practice as a public accountant in that country. I understood that to be an acknowledgement of more than just knowledge of New Zealand GST related law and practice but extended to New Zealand income tax law and practice. Though one might expect that his broader taxation knowledge embraced at least some understanding of general income tax law principles such as what might constitute income under ordinary concepts, capital receipts and payments on revenue and capital account which would have doubtless have some transnational relevance, it does not follow from this that he is to be taken, in the income years in question, just by virtue of his occupation, with an awareness of Australia's personal services income tax regime as found in Part 2-42 of the ITAA.

186. There were self-evident gaps, too, in Mr Russell's general law knowledge in respect of matters relevant to income taxation. I am well satisfied that he understood the concept of a company as a separate legal entity having regard to the evidence he gave in relation to Ancath. He quite plainly did not though understand that a partnership could not continue to exist with only one member left to carry on business under the partnership's business name. I thought he was genuinely ignorant in respect of this matter. Such is the pervasiveness of accountants in the provision of taxation advice in Australia it is necessary to remind oneself of the potential limitations in the undertaking of this role that this profession has in terms of training in and understanding of the general law. I mean no disrespect to the Commissioner and his officers in observing that it is sometimes easy, when a matter such as the partnership law issue which I have mentioned seems trite, to classify what is truly and objectively ignorance or genuine misunderstanding on the part of others as intentional disregard.

187. It is tempting also to assimilate Mr Russell's absence of candour in evidence as to the degree of control that he was able to exercise over Ancath with intentional disregard of a taxation law when returning income in respect of each of the income years in question. This absence of candour, though, was later conduct.

188. Mr Russell professed not to be aware in the income years in question of the personal services income regime in Part 2-42 of the ITAA 1997. He also professed a belief that the income received from Tradecorp by Ancath was its income returnable and taxable in New Zealand. He also professed a belief, on the strength of knowledge of the existence of double taxation arrangements, that Ancath's income was thereby prevented from being taxed twice.

189.

ATC 10310

It is necessary to recall that it was Mr Russell who prepared Ancath's New Zealand income tax returns and that the Tradecorp sourced income was included in these returns. That conduct is consistent with his professed beliefs.

190. Another way of characterising events is that Mr Russell well knew the degree of control he was able to exercise over Ancath, but was truly ignorant of the personal services income regime in Part 2-42 of the ITAA 1997. With that ignorance, and allowing room for argument about whether Ancath ought to be regarded as having a "permanent establishment" in Australia, it is by no means impossible to see how someone with Mr Russell's general understanding of separate corporate legal personality and general income tax law concepts might hold the view that Ancath had to return the Tradecorp income in New Zealand and only in that country but that the receipt of that income by Ancath carried no Australian income taxation law consequences for him personally. I prefer this characterisation of events.

191. Accepting that means that Mr Russell has shown that the base penalty amount is excessive. He has shown that he did not have an understanding of his personal taxation responsibility arising from the operation of Part 2-42 of the ITAA 1997 in his circumstances and deliberately flouted a responsibility, notwithstanding that understanding, when returning his income for the income years in question.

192. It does not follow from such a conclusion that Mr Russell has shown that no base penalty amount is applicable. Notwithstanding this, the Commissioner did not contend in the alternative to submitting that Mr Russell had not at all discharged the onus of proving the penalty assessment to be excessive, that the facts nonetheless reveal liability to some lesser base penalty amount.

193. Of the two immediately lesser base penalty percentages, the definitive way of conceiving their differentiation and application is that offered, again in respect of materially analogous predecessor provisions in the ITAA 1936, by the majority in
Hart v Commissioner of Taxation 2003 ATC 4665; (2003) 131 FCR 203 at 214:

"[43] Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person's conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective. In
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364 Cooper J made the following observations in relation to recklessness in the context of s 226H:

'Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.'

[44] There is a line between recklessness and dishonesty, and as the Explanatory Memorandum for the Taxation Laws Amendment (Self Assessment Bill 1992 (Cth) (at p 98) confirms, a finding of dishonesty is not necessary for a taxpayer to be subject to a s 226H penalty. Wherever a tax return includes deductions that are not allowable, a foreseeable consequence is that there will be a tax shortfall, particularly in a system of self assessment. But, in the ordinary case, the mere fact that a tax return includes a deduction which is not allowable is not of itself sufficient to expose the taxpayer to a penalty. Negligence, at least must be established although there are some sections (eg s 226K) which impose a liability in particular circumstances even if the taxpayer has not been negligent. The context makes it clear that recklessness means something more than failure to exercise reasonable care (s 226G), but less than an intentional disregard of the Act (s 226J)."

ATC 10311

194. On the characterisation of events which I prefer, Mr Russell has not exhibited disregard of, or indifference to, consequences reasonably foreseeable by a reasonable person. I do not consider that he has been "reckless". Has he, nonetheless, failed to take reasonable care to comply with the ITAA 1997, in particular, Part 2-42, such that a tax shortfall has resulted in each income year?

195. Mr Russell seems to me to have operated on the assumption, notwithstanding his professed ignorance at the time of Australian income tax law, that his and Ancath's positions under Australian income tax law were, for all practical purposes, the same as those which prevailed under the New Zealand income tax law with which he had at least passing familiarity. He had this to say in cross examination about the nature and extent of his knowledge of the two countries' taxation regimes:

"HIS HONOUR: You didn't seek to explore whether your New Zealand qualifications might translate into Australian registration?---For accounting to Australia, I was aware that there were extra examinations that would have to be done, and I just wasn't interested. Whilst some of the tax law is very similar to New Zealand, there are lots of areas that are totally different, and, in fact, so different that there isn't a comparable in New Zealand. And I was just my days of study are long gone, and I just wasn't interested."

I took this to be indicative of Mr Russell's position throughout the income years in question and when he came to prepare his returns for those years.

196. The adoption of Ancath as the entity via which Tradecorp would come to have the benefit of his services exhibited a degree of sophistication on both Mr Russell's and Mr Zarb's parts. He was not to be just one of Tradecorp's wage and salary earners. Yet he must have known, or at least he has not disproved, that he knew that he and only he was to perform all of the work for which Tradecorp was to pay money. Had he undertaken that work as an employee of Tradecorp there could have been no question that he would thereby be personally liable to Australian income tax as a wage and salary earner. Yet, notwithstanding the degree of sophistication in the arrangement and his realisation that there were "lots of areas" in which Australian taxation law was "totally different" to that of New Zealand and his own lack of interest in studying Australian taxation law, he chose not to seek any advice at all about what might be the Australian taxation law consequences of the adoption of the arrangement whereby Ancath came to be interposed. That to me in the circumstances was a failure to take reasonable care to comply with the ITAA 1997.

197. In each income year that failure resulted in a false statement being made by Mr Russell as to his assessable income and, in turn, to a tax shortfall. Having regard to item 3 of the table in s 284-90(1) of schedule 1 to the TAA, he is liable under s 284-75 to pay an administrative penalty of 25% of his shortfall amount for these income years.

198. There remains the question of whether the Commissioner was in error not to remit any penalty? As to this, either by concession or by virtue of the conclusions which I have reached in respect of applicable base penalty category, the Commissioner's decision is exposed as one founded on premises which were wrong in law. It thus falls to the Court to reach its own conclusion as to how the Commissioner ought to have exercised his remission discretion: see, by analogy,
Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation 75 ATC 4028; (1975) 132 CLR 535 at 567-568 and 578-579.

199. That art 7 of the NZ Double Taxation Agreement looks to enterprise, not profit per se, is, as the French decision I have noted in respect of this type of OECD Model Agreement, underscores a subject of some controversy and, in domestic law, hitherto novelty. Further, Mr Russell was patently not seeking to conceal Ancath's income from Tradecorp from revenue officers on both sides of the Tasman Sea. He was careless, but these two factors, in my opinion, tell in favour of the

ATC 10312

remission of the whole of the penalty on this occasion.

Goods and services tax assessment

200. I have already concluded that the partnership hitherto constituted by Mr Russell and his then wife was dissolved on 23 February 2004. It necessarily follows from this conclusion that, on and from this date, there was no partnership "entity" entitled to claim input tax credits under the GST Act. To this extent, the appeal against the GST assessment must fail.

201. It remains to consider whether, in so far as the appeal relates to the period prior to 23 February 2004, Mr Russell has shown that the GST Assessment of the net amount is excessive?

202. Critical to the determination of this question is whether the partnership was engaged in an activity constituting an "enterprise" in the period prior to 23 February 2004? Three activities were put forward by Mr Russell as constituting an "enterprise":

(a) an accountancy practice under the name "AW Russell and Co";
(b) farm forestry operations at the Sarina Hinterland Property; and
(c) the development and conduct of a naturist or nudist retreat at that property.

203. I shall shortly consider the merits of each of these propositions. It is first necessary to make some general observations in relation to the concept of an "enterprise" for the purposes of the GST Act.

204. "Enterprise" is a defined term. Section 9-20 of the GST Act defines the term as follows:

"Enterprises

(1) An enterprise is an activity, or series of activities, done:

(a) in the form of a ^' business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the Income Tax Assessment Act 1997 and to which deductible gifts can be made; or

(da) by a trustee of a ^' complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or

(e) by a charitable institution or by a trustee of a charitable fund; or

(f) by a religious institution; or

(g) by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or

(h) by a trustee of a fund covered by item 2 of the table in section 30 15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.

(2) However, enterprise does not include an activity, or series of activities, done:

(a) by a person as an employee or in connection with earning ^' withholding payments covered by subsection (4) (unless the activity or series is done in supplying services as the holder of an office that the person has accepted in the course of or in connection with an activity or series of activities of a kind mentioned in subsection (1)); or

Note: Acts done as mentioned in paragraph (a) will still form part of the activities of the enterprise to which the person provides work or services.

(b) as a private recreational pursuit or hobby; or

(c) by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a ^' partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or

(d) as a member of a local governing body established by or under a ^' State law or ^' Territory law (except a local governing body to which paragraph 12-45(1)(e) in Schedule 1 to the Taxation Administration Act 1953 applies).

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(3) For the avoidance of doubt, the fact that activities of an entity are limited to making supplies to members of the entity does not prevent those activities:

(a) being in the form of a ^' business within the meaning of paragraph (1)(a); or

(b) being in the form of an adventure or concern in the nature of trade within the meaning of paragraph (1)(b).

(4) This subsection covers a ^' withholding payment covered by any of the provisions in Schedule 1 to the Taxation Administration Act 1953 listed in the table.

Withholding payments covered

Item Provision Subject matter

1 Section 12-35 Payment to employee

2 Section 12-40 Payment to company director

3 Section 12-45 Payment to office holder

4 Section 12-60 Payment under labour hire arrangement, or specified by regulations

205. Within that definition are, materially, two other terms which are themselves defined by s 195-1 of the GST Act:

" ' business ' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

' carrying on ' an enterprise includes doing anything in the course of the commencement or termination of the enterprise."

206. A number of propositions may be distilled from the authorities as to what constitutes the carrying on of a "business" (adopting for this purpose a summary which commended itself to Deputy President Hack SC in
Re Peerless Marine Pty Ltd v Commissioner of Taxation 2006 ATC 2419 (Peerless Marine)):

"• it is not for the Commissioner to tell people how to conduct a business:
Tweddle v FCT (1942) 180 CLR 1, 7;

• even an isolated transaction, which if repeated, would be a transaction in a business, proved to have been undertaken with the intent of carrying on a business can, from the moment of its commencement, be the first transaction in an existing business:
Fairway Estates Pty Ltd v FCT (1970) 123 CLR 153, 165 citing
Re Griffin;
ex parte The Board of Trade (1890) 60 LJQB 235, 237.

• a person may carry on a business if only in a small and even inefficient or incompetent way:
Thomas v FCT (1972) 46 ALJR 397, 401;

• when there is no discernable trading pattern, the presence of an intention to carry on business becomes relevant in characterising the nature of activities undertaken:
John v FCT (1989) 166 CLR 417, 430;

• slimness in the prospect of making a profit (
FCT v Glennan (1999) 90 FCR 538, 555-6 [72]) or even non - achievement of any sales (
Pedley v FCT 2006 ATC 2064, 2091) does not prevent the conclusion that a business is being carried on. And neither does the fact that, with the benefit of hindsight, it is clear that a business venture was not viable:
Case M67(1980) 80 ATC 479, 482."

207. The observations made by Bowen CJ and Franki J on the subject in
Ferguson v Commissioner of Taxation 79 ATC 4261; (1979) 37 FLR 310 at 314 are of general assistance:

"There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances he held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with

ATC 10314
the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial."

208. More recently, but no less helpfully, Emmett J had this to say on the subject in
Ell v Commissioner of Taxation (2006) ATC 4098 at [111]-[114]:

"[111] Although not determinative, intention is relevant where, for example, a particular activity produces no income (see
John v FCT (1989) 166 CLR 417) or where the first step in a business is undertaken (see
Fairwell States Pty Ltd v FCT (1970) 123 CLR 153). It is necessary to examine the activities engaged in, including their nature and extent (see
Martin v FCT (1953) 90 CLR 470 at 474). Activities may constitute the carrying on of a business even though the activities are carried on in a small way and it is not for the Commissioner to dictate to a taxpayer in which business the taxpayer engages or how to run a business profitably or economically (see
Tweedle v FCT (1952) 180 CLR 1). Provided that an activity said to constitute carrying on business is engaged in for the purpose of profit on a continuous and repetitive basis, that activity may constitute the carrying on of business (see
Hope v Bathurst City Council (1980) 144 CLR 1).

[112] If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose.

[113] Where expenses and outgoings claimed as deductions are disproportionate to the assessable income produced, subjective factors, including the direct and indirect objects of a taxpayer, may become determinative (see
Fletcher v FCT (1991) 173 CLR 1 at 17-19). Where an expense or outgoing claimed as an expense or outgoing of a business is disproportionate to any assessable income that may be gained, it will not be as easy to conclude that the expense or outgoing was incurred in gaining or producing that income (see
Spassked Pty Ltd v Commissioner of Taxation (2003) 136 FCR 441 at [64]).

[114] The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business (see
Fairway Estate Pty Ltd v FCT (1970) 123 CLR 153 at 166.8). Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see
Tweedle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see
FCT v Stone (2005) ATC 4234 at 4243). The Taxpayers say that they had a profit making purpose or intention in relation to the use of Athena."

209. As is clear from the definition of "enterprise", an activity which would not under these general conceptions be regarded as a business, eg an isolated venture in the nature of trade, can nonetheless fall within the definition. One must therefore be careful not wholly to assimilate the concept of a business for income tax law purposes with the concept of an "enterprise" for GST law purposes. In the present case though the extensions beyond

ATC 10315

"business" evident in the definition of "enterprise" are not raised on the facts.

210. Was an "enterprise" in the form of an accounting practice carried on by the partnership in the period from 1 July 2000 to the date of its dissolution on 23 February 2004?

211. Mr Russell's evidence was that, under the name AW Russell and Co, an accountancy practice was carried on. His oral evidence was that there was "nothing much" by way of clients for such a practice in this period apart from Ancath. There was likewise "nothing much" in any other evidence would suggest that the partnership had any wider clientele during the period prior to 23 February 2004.

212. Mr Russell introduced in evidence what purported to be a written agreement made between the partnership and Ancath in August 2000 for the provision of services to Ancath by the partnership. Mr Russell instanced his being made available to Tradecorp to fulfil Ancath's obligation to Tradecorp under the Tradecorp Agreement as the provision of services to Ancath by the partnership.

213. The Commissioner disputed the authenticity of the purported agreement as between the partnership and Ancath. In any event, the Commissioner contended that Mr Russell had not demonstrated that the agreement was acted upon. Clause 7 of the Agreement provided, inter alia, that the partnership would provide the following services to Ancath:

(i) To supervise the work carried out by Anthony Russell;
(ii) To check to ensure that all aspects of the contractual arrangements between Ancath and it's [sic] Australian client(s) are meet [sic] in full to best practice; and
(iii) To keep a check on Anthony Russell's hours of work.

214. The only personnel available in Australia to the partnership were Mr Russell and his then wife. She was not a qualified accountant although, according to Mr Russell, she was a member of the Institute of Directors in London and had experience in corporate receivership and liquidation work. It is not necessary to reach a conclusion about whether Mrs Russell did indeed have such a qualification and experience There is no evidence that she undertook or even sought to undertake supervision or checking of Mr Russell's work. Rather, the evidence is that supervision of Mr Russell while he was engaged to work in Tradecorp's business was undertaken either by Mr Tony Zarb or Ms Elizabeth Zarb. It was, I note, these persons to whom Mr Russell directed a leave application in March 2004.

215. In his statement to the Queensland Industrial Relation Commission, although Mr Russell set out at some length how Ancath came to be the vehicle by which his services where provided to Tradecorp, there is no reference at all by him to Ancath, in turn, making an agreement with the partnership pursuant to which his services would come to be provided. The only reference in the statement to the Industrial Commission in relation to the partnership is to its role as Ancath's Australian agent for the purpose of collecting goods and services tax in this country from Tradecorp.

216. In the course of his cross-examination, Mr Russell gave the following answer in response to this question:

"And you were just about to say then, you have operated your own private practice?"

"Yes. For many years I operated my own private practice before coming to Australia. Since then I have not been in a public practice environment, because of my lack of Australian tax knowledge, and instead I have been involved in financial and management accounting work."

217. The only definite evidence of financial and management accounting work undertaken by Mr Russell which I have before me in respect of the period in question is the work which he undertook at Tradecorp. Further, Mr Russell was adamant in evidence that he was an employee of Ancath. Ancath was obliged under the Tradecorp Agreement to make his services available to Tradecorp. It did not need to engage the partnership to discharge that obligation. It could call on its employee to undertake the task.

218. The general authorities concerning the carrying on of the business to which I have referred certainly do not foreclose a conclusion

ATC 10316

that a partnership with but one client is carrying on a business. It is though for Mr Russell to prove that the partnership was carrying on an enterprise. It is possible, perhaps, that the partnership agreement with Ancath was genuine but the description of services referred to cl 7 does not accord with the evidence which I have of the services which Mr Russell actually performed at Tradecorp's premises. Nor is it consistent with the evidence which he gave to the Industrial Commission or his evidence of being an employee of Ancath. I conclude that the partnership did not deploy Mr Russell to Tradecorp in fulfilment of any agreement the partnership has with Ancath. Ancath deployed him there as its employee. To the extent that taxation returns suggest otherwise, they are predicted upon a misconception of Mr Russell's status. It is not necessary for the purposes of the conclusion I have reached to conclude that the August 2000 agreement as between the partnership and Ancath put forward by Mr Russell was a sham or a recent invention. It is enough to conclude, as I do, that it was not acted upon in relation to the work which he performed at Tradecorp.

219. In so concluding, I do not exclude the possibility that some separate accountancy practice role under the name AW Russell and Co was envisaged for the partnership in Australia, by Mr Russell and his wife before they came here. It is just that this did not come to pass in the period in question in respect of the performing by Mr Russell of financial and managerial accounting work at Tradecorp's premises.

220. There is another dimension to the dealings between Ancath and Tradecorp in which the partnership did participate. The partnership did act as Ancath's Australian agent for the purposes of collecting the GST payable in respect of the service supplied by Ancath to Tradecorp under the Tradecorp Agreement. It appears though that it undertook that role gratuitously. That does not constitute an activity which constitutes an "enterprise".

221. It follows from this that Mr Russell has not proved that the Commissioner's GST assessment was excessive in so far as it was predicated upon the disallowance of $27,284 in respect of input tax credits claimed in respect of an asserted partnership accountancy practice.

222. I next consider whether the partnership carried on a forestry enterprise in the period prior to 23 February 2004.

223. I am satisfied that, upon the acquisition of the Sarina hinterland property by Mr Russell and his then wife in 2001, a deliberate program of tree planting was embarked upon. Some of the trees where planted in a line along the front boundary of the property to act as a buffer from an adjacent rail and road corridor. That though does not account for all of the plantings. The property in area is about 5.5 acres, including an access road. Of this total area about 1 acre is devoted to the residence, associated sheds, pool and driveway. The balance, of about 4.5 acres, has been given over, with varying degrees of success, to the planting of trees. That there has been a deliberate course of planting is evident in some of the colour photos of the property which became exhibits. A sketch plan of the property prepared by one of the visiting tax auditors, while it gives a good idea of key locations on the property and its immediate surrounds, does not accurately depict the nature and extent of the plantings. In fairness to its author, I did not understand that it was intended to be anything other than a general locational sketch.

224. Mr Russell has been able to have the benefit in respect of work on the property of labour provided by visitors to the property under the auspices of an organisation known as Willing Workers on Organic Farms (WWOOF) with workers so provided being nicknamed "WWOOFers". He explained the arrangement under which such work was undertaken via his and his former wife's membership of this organisation in this way:

"It s an international organisation and it s usually, although not limited to, younger people and the way it works is that in return for free board and lodging these people who come onto your property, your organic farm or the like, will provide a certain number of hours labour at no cost and the arrangement that we had with WWOOFers was, they worked in the mornings from early rise until about 11 o clock. The rest of the day was theirs to do whatever they liked and we

ATC 10317
provided them with three meals a day and accommodation. The WWOOFer organisation puts out an annual booklet in which it lists all the WWOOFer hosts and Catherine and I were WWOOFer hosts and we qualified as a WWOOFer host because of the farm forestry activity. Our we were entitled to word our own write up in that publication and our write up referred our farm forestry and it referred to it being conducted in a naturist environment and when we had people ringing to make inquiries to see if we had accommodation available, we always made sure that they were aware that this naturist nudist because a lot, although not all, of the persons who showed interest were from overseas and often didn't speak very good English so we had to make it clear on the phone. We had a number of people stay at the property right from the early days in - of owning it in 2001 and they were very helpful. There was a lot of work to do to get things underway. Internal fencing to be removed. Some of them helped with that. Some of them helped with the landscaping around the swimming pool because I had actually built the swimming pool and used some contractors to help me. Some of the WWOOFers helped with the landscaping. Other WWOOFers helped with such things as mulching the seedlings, that s the seedlings, the big lot that were planted in 2002 in particular and they just generally helped around the property be it to do with mostly to do with the farm forestry but also if it was construction work relating to the nudist the naturist retreat."

I accept this evidence. It readily explains how Mr Russell, while undertaking what amounted to full time work at Tradecorp until August 2004, was able to achieve the state of development of the property, including tree plantings, in the period from its acquisition until 2004. He mentioned, and I also accept, that, after he and his wife separated, he did not keep up membership of the WWOOF organisation. As he put it, when his wife Catherine left, "it was a single man's house" and "I felt it was inappropriate to have people who I didn't really know, and often it was women, in a single man's environment at that stage".

225. Mr Russell's own evidence concerning the forestry activities of the partnership was supplemented by evidence by Mr Graham McKenzie. Mr McKenzie, inter alia, carries on business as a farm forester in Central Queensland. He is vice president on the Board of Australian Forest Growers, which is the national association representing private forest growers. He is also a member of the management committee of the Central Queensland Forest Association. That body was established in 2002. In addition, he is secretary and a board member of the Central Queensland Forestry Cooperative. Between 2002 and 2006, Mr McKenzie worked part-time for the Queensland Department of Primary Industries and Fisheries as a private forestry extension officer. He worked extensively with the Department of the Natural Resources and Water when that Department introduced its "Code applying to a Native Forest Practice on Freehold Land". I found Mr McKenzie to be an impressive, independent, knowledgeable witness.

226. Mr McKenzie inspected the Sarina hinterland property in December 2007. In a subsequent report he detailed a number of tree species there which were being silviculturally managed on the property. Each of these species, he opined in his report, had previously been harvested from native forest in Queensland as commercial timber trees.

227. In his oral evidence Mr McKenzie offered the following description of the plantings on the property, refreshing his memory by reference to a large, colour, oblique, aerial photograph of the property which was in evidence:

"I guess, looking at this photo, you can see the trees are all different sizes, and they have been planted over a six year period, I think it is, from 2002 til now. There has been some hits and misses, which is my very untechnical term. Basically there has been some success and some failures. So he has planted lots of different species over a six year period, some of those trees have worked, some of those trees have not worked on this particular site. That is why it is all hickledee pickledee looking in some sense. But it doesn't look like a plantation,

ATC 10318
which most people might think of as a plantation in terms of mono-culture. It doesn't look like a paddock full of Radiata pine that are all the same height and all the same size and so on, because that it's not what it is. It's a whole heap of different species planted over an incremental period of time, with some other wildings that are growing in there as well. So certainly it is a mixed forest, its not a single species forest, and its mixed aged as well as mixed species."

A "wilding" is a naturally occurring tree. Some of the trees on the property are the result of the growth from seeding from trees on surrounding land.

228. Mr McKenzie had, to his recollection, first met Mr Russell in 2004 at "Sarina Land Care" field days. Mr McKenzie had attended these in his expert advisory capacity while working part-time for the Queensland Department of Primary Industries and Fisheries. That suggests strongly to me that Mr Russell's interest in forestry for profit was not a recent contrivance, a mere sequel to the taxation audit.

229. Mr McKenzie related that the region in which the Sarina hinterland property was situated had gone into drought in mid 2002 and only emerged from drought in 2007. He described it as "the longest and worst drought that Mackay had ever had in recorded history". He attributed some of the species losses on the property to the adverse climatic conditions in the drought period. He mentioned that, in the region, there had been, "very very dramatic failures of planted trees which previously governments had planted, governments had advised other people to plant; trees that go up to 25 metres high, 8, 9 years old, and just died". He also related how forestry was an emerging industry in Central Queensland. That meant that there was a degree of trial and error in terms of which species were the most suitable in the region for commercial timber purposes.

230. I accept all of Mr McKenzie's evidence. The Commissioner led none to the contrary.

231. I note that there is reference to the drought in the region in an "Australian Forest Growers Information Sheet" entitled "Sustainable Small Scale Rainforest Harvesting Operation - A Case Study" which was in evidence before me. Mr Russell pointed to costings in this particular case study to corroborate those which he had used in his own plan in respect of the plantings on the property to demonstrate that it was possible to derive a profit from the scale of the plantings. The Commissioner challenged the utility of the document for this corroborative purpose, describing it as hearsay but in any event submitted that the costing in it concerned a different forestry property. I regard the information sheet as a business record of the Australian Forest Growers Organisation which is the repository of information gathered and opinions expressed by that organisation in the ordinary course of its activities. That information, in terms of s 69(2)(b) of the Commonwealth Evidence Act, appears to have been "directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact". So much is apparent by necessary inference on the document's face. The information sheet was patently not brought into existence for the purposes of the present litigation. The effect of s 69 is that the hearsay rule does not apply to the document. The particular author of the information sheet is not apparent. Mr McKenzie is on the board of Australian Forest Growers but did not claim authorship of the information sheet. The Commissioner has thus not had the opportunity to cross examine that author in respect of opinions recorded in the document.

232. The property described in the information sheet is different to the Sarina hinterland property in that it is larger. That necessarily affects the utility of the costs set out in the information sheet. The fact that the information sheet exists at all is though eloquent. It evidences that sustainable, commercial small scale forestry in the Central Queensland region is a subject in respect of which information is being provided by an industry organisation. It also highlights how small scale harvesting can be undertaken.

233. Mr Russell deposed to a longstanding interest in forestry which had predated to his coming to Australia. He had been an honorary forest ranger in New Zealand. His evidence in this regard included New Zealand government

ATC 10319

documents, which I accept were genuine, corroborating that interest.

234. Mr Russell also deposed to how it was possible at minimal cost to secure and how he had secured suitable trees for plantation use either on a subsided basis or via Sarina Landcare. I accept this evidence.

235. Further, the zoning of the property permits the conduct of an agricultural operation such as forestry.

236. The nature and extent of the plantings is, in my opinion, more extensive than just that referable to a hobby or a desire to improve amenity, although I accept that amenity considerations were not ignored so far as they interplayed with a desire to provide a property which was an attractive naturist retreat. It is not possible to ascribe the extent of the planting just to a desire to create a buffer along his front boundary. The plantings were not though for private or domestic purposes. The trees were planted with a view eventually to making money from them by selective logging. The nature and extent of the plantings at the property are consistent with Mr Russell's evidence of a long standing interest in forestry.

237. I was at one stage inclined to regard an assertion of a desire to use the property as a naturist retreat and for forestry purposes as mutually exclusive if only on the basis that tree clearing would be detrimental to privacy. However, once it is appreciated that this is small scale forestry and that selective clearing could be undertaken as a matter of property management this does not strike me as a necessarily fatal inconsistency in respect of asserted use.

238. By its very nature, a forestry operation looks to the longer term for its returns. I remind myself, too, that the embarking upon plantings corresponded with a drought in the region of unprecedented severity. That phenomenon and the as yet experimental quality of suitable plantation tree selection for the region serves to explain the appearance of the plantation. Further, as
Thomas v FCT 72 ATC 4094; (1972) 46 ALJR 397 (Thomas' Case) reminds, a man may carry on business if only in a small and, as Mr McKenzie nicely put it, "hickledee pickledee" way. It is possible to see, having regard to Mr Russell's costings, how the plantings might have been regarded as being able to be turned to a profit. I did not regard these costings as but a recent invention on the part of Mr Russell. Taking all of these factors into account, I am satisfied that the partnership did over the period up to 23 February 2004 carry on an enterprise of forestry operations. It did so in an innovative, perhaps also idiosyncratic, way but with a view to profit. It is not for the Commissioner to limit the entrepreneurial spirit. It follows from this that the partnership was entitled to claim input tax credits in respect of that enterprise.

239. The last enterprise allegedly conducted by the partnership is that of a naturist retreat. Mr Russell put forward in evidence a business plan which he said he prepared in either late 2001 or early 2002 in respect of the enterprise. It is entitled "Catherine's Sarina Nudist Retreat". The plan as detailed in that document is as follows:

"Catherine's

Sarina Naturist Retreat

The Plan

1 To develop a high standard retreat for nudists:

(a) day visitors from the greter Mackay region

(b) tourists

(c) the annual migration of grey-haired gypsys

2 To purchase a situated property (now located) not too far from shopping facilities which is private or which can be made private

3 To develop the property to suit a nudist retreat. This will involved:

(a) STAGE ONE -

Removal of all internal fencing

Installation of a spa pool

Construction of inground free-form swimming pool

Toilets & showers facilities

Covered BBQ area with gas BBQ

Planting of farm forestry tees as per farm forestry plan

ATC 10320
(b) STAGE TWO -

Apply to council for consent

Slabs for caravan sites to be poured & power boxes connected

Purchase & renovates 3 non-working refers

Gateway to be rebuilt & installation of electronic gate

Lining of shed & purchase of 8X4 pool table"

[sic]

240. Of the development activities described in this "plan", only those set out in Stage 1 have been undertaken. Mr Russell stated that he had deferred the undertaking of "Stage 2" activities as a result of his separation from his wife and because of unfinancial uncertainties introduced by the taxation investigation and subsequent assessments which remained under challenged.

241. The Commissioner did not, in terms, submit that the plan was a recent fabrication. The work described in Stage 1 has indeed been undertaken. In a sense, that corroborates Mr Russell's account, but that work is equally consistent with the development of a residential property for purely private residential purposes.

242. Whether, truly, these steps evidence the first stage in a plan directed to the conduct of a naturist retreat relies very much on taking Mr Russell at his word. The variance between his evidence before the Queensland Industrial Relations Commission and before me in relation to his ability to control Ancath does make one sceptical. Nonetheless, Mr Russell did, in the course of his oral evidence, exhibit what I thought was unfeigned, unrehearsed and uncontrived knowledge on subjects about which one might expect a person interested in naturism and proposing to establish a resort at Sarina might have knowledge. He was aware, for example, of beaches at Sarina and further north in Queensland (Balding Bay on Magnetic Island) where nude bathing, though not lawful, was nonetheless tolerated. He described, candidly and, I thought, spontaneously, in his oral evidence the nature and extent of the demand for naturist facilities, particularly amongst the "Grey Nomads". Further, the very nature of the proposal is so unusual that it seemed to me inherently unlikely that it was a contrivance.

243. It does not follow from this that the partnership should be regarded as carrying on an enterprise of a naturist retreat for the period up to 23 February 2004.

244. To date, some fellow naturists have stayed at the Sarina hinterland property at Mr Russell's invitation but not on a paying basis. Some, doubtless, have been "WWOOFers". Mr Russell described such non-paying attendances as "market research". To like end, he is also visited an operating naturist retreat in the Sarina area.

245. Mr Russell also prepared, as part of the naturist retreat business plan, financial projections. One item of income shown on these projections is income from the provision of massage. Mr Russell stated, and I accept, that he had secured massage qualifications. These projections do show that it is possible for the retreat to operate at a profit after its commencement. I accept that these projections are not a recent contrivance. That they form part of a document entitled with the name of Mr Russell's now former wife assists in the reaching of that conclusion. They do though seem optimistic in terms of guest numbers; optimistic in the sense that they are assume that in excess of 3,000 people will stay that the retreat in the first year of its operation. I note though that Mr Russell and his former wife travelled extensively in the North Queensland (so he related and I accept) to various naturist retreats to get what he described as a "feel" for likely demand.

246. Section 11-5 of the GST Act provides:

"What is a creditable acquisition?

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a * creditable purpose; and

(b) the supply of the thing to you is a * taxable supply; and

(c) you provide, or are liable to provide, * consideration for the supply; and

(d) you are * registered, or * required to be registered."

247.

ATC 10321

In relation to the acquisition of a thing a "creditable purpose" is defined, materially, as follows by s 11-5 of the GST Act:

" Meaning of creditable purpose

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in * carrying on your ^' enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be * input taxed; or

(b) the acquisition is of a private or domestic nature.

(3) …"

248. If the partnership made a creditable acquisition it will be entitled to an input tax credit. In respect of the naturist retreat the claimed input tax credits of $2,739 relate to acquisitions of $30,139, principally in respect of the construction of the swimming pool on the Sarina hinterland property.

249. When the definition of "carrying on" is recalled, it can be seen that a thing may be acquired for a creditable purpose to the extent that it is acquired in the course of the commencement of, materially, a business. The converse of this, necessarily, in my opinion, is that a thing acquired otherwise than in the course of the commencement of a business, even though it may ultimately be deployed in a business once that business commences, is not a acquired for a creditable purpose.

250. An acquisition may be a creditable acquisition even though it would not give rise to a deduction under s 8-1 of the ITAA 1997. For example, an acquisition on capital account in the course of the carrying on of a business would not give rise to a deduction under s 8-1 of the ITAA 1997 but, all other things being equal, would give rise a creditable acquisition.

251. That the notion of a creditable acquisition is wider than the notion of an income tax deduction expenditure raises an interrogative note about why "carrying on" was defined in such an inclusive way. Commencement and termination expenditures can, in the income tax deduction context, be regarded as not incurred in, ie in the course of, the carrying on of a business. Are, for example, expenditures on capital works in respect of an accommodation facility before that facility has opened its doors to paying customers, to be regarded as expenditures "in the course of the commencement of the accommodation facility business"?

252. Identifying the "commencement" of a business is, obviously, a question of fact but that does not mean that the question will always admit of an easy answer. That is nicely illustrated by Peerless Marine. Peerless Marine professed to be carrying on a boat production business in respect of luxury motor cruisers. It had sold none but sought, inter alia, to claim input tax credits in respect of the design and construction of a prototype. It succeeded in establishing that its then activity did amount to an "enterprise" for GST purposes because, inter alia, there was evidence that the development and successful exhibiting and availability for inspection of a prototype was an essential first step in the carrying on of such a business, not a precursor to the commencement of that business. Determining whether or not a particular business exists calls for a thorough understanding of the nature of the market in which the asserted business operates and exactly what is entailed in commencing to carry on business in that market.

253. On this basis, the partnership is not entitled to the input tax credits claimed because they were not acquired for a creditable purpose. During the course of what Mr Russell termed "Stage 1" in his business plan, there was not yet a business of a naturist retreat being carried on, only the undertaking of steps which were precursors to the commencement of such a business.

254. A remaining issue is whether, insofar as it related to a period prior to 1 July 2002, the issuing of the GST assessment was beyond power. The inspiration for Mr Russell's raising this issue would seem to be the supposed expiration of the 4 year period after which, subject to an exception to which I shall shortly refer, in the absence of a notice from the Commissioner within that period requiring payment, an unpaid net amount together with any related general interest charge ceases to be payable: see s 105-50 of Schedule 1 to the TAA. The exception to this statutory expiration arises where the Commissioner is satisfied that

ATC 10322

the payment of the amount was avoided by fraud or evasion.

255. The short answer to Mr Russell's reliance on this provision was provided by the Commissioner in submissions. It only applies to the situation where a net amount of GST is payable to the Commissioner. That conclusion flows necessarily from the words "payable by you" in the provision. Section 105-50 of Schedule 1 to the TAA has nothing at all to say where, as is now the case here, there is no controversy about an unpaid net amount, only a controversy about an entitlement to claim particular input tax credits.

GST penalty assessment

256. Given the concessions made by the Commissioner, the GST assessment is, for those reasons alone, excessive.

257. It is also excessive insofar as the base penalty amount has been predicated on the basis of a lack of entitlement on the part of the partnership to claim input tax credits in respect of a forestry enterprise. The claiming of these input tax credits was a matter of entitlement and did not give rise to a tax shortfall.

258. Tax shortfall amounts have though occurred insofar as, on the partnership's business activity statements (BAS), input tax credits have been claimed on the basis of the alleged conduct of an accountancy practice and a naturist retreat by that "entity". The amount of the entitled input tax credits is in this regard false. It is overstated.

259. The Commissioner's position is that, if it is concluded that the partnership was dissolved on or about 23 February 2004, there will be no shortfall amounts the subject of the appeal from March 2004 onwards. I agree. There are though shortfall amounts in respect of the period before then. These amounts are not as assessed by the Commissioner because those shortfall amounts include the disallowance of the input tax credits claimed in respect of the carrying on of a forestry enterprise. The shortfall amounts attributable to the wrongful claiming of input tax credits in respect of the asserted accountancy practice and naturist retreat enterprises are though correct. The table of shortfall amounts annexed to the Commissioner's submissions on the GST appeal gives monthly total shortfalls undifferentiated by reference to component parts. There are therefore necessary calculations and adjustments to be made to these figures so as to allow for the success which Mr Russell has enjoyed.

260. The Commissioner has assessed base penalty on the 75%, "intentional disregard" basis in respect of all of the tax shortfalls. I have already discussed what is entailed in the application of this and the other, lesser base penalty percentages when considering the income tax penalty assessments. It does not at all follow the same base penalty amount or even any should apply to all of the remaining tax shortfalls.

261. The tax shortfalls fall into two distinct groups, those attributable to the misconceived accountancy practice enterprise claim and those attributable to the misconceived naturist retreat claim.

262. Of these two groups, the shortfall in respect of the accountancy practice input tax credit claims is the more serious. Mr Russell knew that he was an employee of Ancath. Further, on the evidence, he was able to control Ancath. GST was an area in respect of which, on the strength of his New Zealand experience, he professed expertise in this country as well. There are close affinities between New Zealand's GST legislation and the GST Act. Against this background, I am not satisfied that Mr Russell has proved that the assessment of base penalty in respect of these tax shortfalls was excessive. To put forward, as Mr Russell did, BAS in which the partnership claimed an input tax credit in respect of an accountancy practice with Ancath as its client in circumstances where he knew that he as an employee, not as a partner in A W Russell & Co, was rendering services on behalf of Ancath to Tradecorp was, for a man of his professed knowledge of GST, intentionally to disregard a known position. It was more than reckless.

263. The position in respect of the claimed naturist retreat enterprise input tax credits requires separate consideration. The naturist WWOOFers who assisted in the forestry enterprise doubtless gave feedback incidentally and anecdotally to Mr Russell as to the demand for and likely success of a naturist retreat enterprise on the property, but that did not mean

ATC 10323

that a naturist retreat enterprise was then being conducted. The presence of such persons on the property was primarily referable either to the forestry enterprise then being conducted or to the development of the property to a stage where a naturist enterprise could be conducted (or to both). It is not hard though to see how the very presence of fellow naturists on the property might make it seem to Mr Russell that the naturist enterprise had commenced. I did not have the impression from his evidence in respect of the naturist retreat that he set out intentionally to disregard a lack of entitlement to claim input tax credits, as opposed not to turning his mind to an obvious fact, which was that the property was not yet at the stage where the naturist retreat enterprise could commence. In so doing, he closed his eyes to the obvious. That was reckless.

264. As to the Commissioner's remission decision in respect of penalty, it follows that, both by concession and having regard to the conclusions which I have reached not only as to which enterprises were and were not being conducted as well as the appropriate base penalty percentages, that the remission decision was made on diverse premises which were wrong in law. The remission discretion having thus miscarried, it falls on appeal to determine how it ought to have been exercised.

265. At the time when the various BAS were submitted, Mr Russell was new to Australia but not, by his own acknowledgement, new to the operation of an analogous GST regime in his country of former residence. Insofar as his GST tax shortfall is referable to intentional disregard, I do not consider that any remission of penalty is warranted. He was well aware of his status with Ancath and, knowing that, cast the partnership BAS to that extent on a knowingly false premise.

266. The position in relation to the tax shortfall flowing from the misconceived naturist enterprise input tax credit claim is more complex. Though Parliament has, in the modern era, adopted fixed base penalty categories, it has conferred a power to remit penalty otherwise imposed by law as a matter of discretion. In other words, though a taxpayer's case might fall within a particular penalty category, a discretion remains to be exercised in that person's particular circumstances having regard also to the purpose of the penalty regime. The latter must include the purposes of both encouraging compliance and discouraging non-compliance both generally and in the particular case.

267. While I consider that he closed his eyes to the obvious, it must be acknowledged that Mr Russell nonetheless had the task of differentiating in his own mind and in respect of the one property a forestry operation which one might regard as having commenced with the internal clearing of the property's fences and the initial plantings and the development phase of the naturist retreat which had not as that stage commenced business. Like naturist minded WWOOFers were, in part, assisting in each activity. Had the naturist retreat already commenced as an enterprise, the addition of a swimming pool to improve the site's amenities might well have given rise to input tax credit entitlements (subject to resolving any proportional private or domestic use issues).

268. Mr Russell uncritically took the course advantageous to him whereas one might have expected a person of his background and experience to take the more prudent course of seeking a ruling from the Commissioner. That, to me, tells against any remission of the penalty for recklessness in the particular circumstances of his case.

Outcomes and orders

269. In respect of the income tax and the GST appeals respectively there is a single objection decision under challenge. Both by concession and otherwise for reasons given above, the appeals must be allowed.

270. Mr Russell has, however, only enjoyed limited success. Other orders must be made under s 14ZZ of the TAA which will enable the Commissioner to take necessary action to implement this decision in accordance with the reasons for judgement, including amending assessments. There is a question as to whether such orders may permissibly include an order which would, in respect of one income year, increase the amount of Mr Russell's taxable income.

271. As a consequence of the conclusions which I have reached on the appeals it will be

ATC 10324

necessary to make orders providing for the following:

Income tax appeal

(a) Confirmation of the objection decision insofar as it relates to the confirming of the income tax assessments for the 2003 and 2004 income years;
(b) Setting aside the objection decision insofar as it relates to the 2002 income year and, in respect of that year, ordering that the matter be remitted to the Commissioner for the issuing of an amended assessment on the footing that Mr Russell's taxable income for that year as presently assessed should be reduced by $416.00 with the tax payable on that reduced taxable income being reduced accordingly.
(c) Confirming the objection decision insofar as it concludes that the assessment in respect of the 2001 year was not excessive but on the basis that Mr Russell's taxable income for that year was $1869.23 higher than that assessed and thus his assessed tax was in fact lower than that payable in respect of that higher taxable income.

Income tax penalty appeal

(a) Setting aside the objection decision insofar as it relates to penalty;
(b) In lieu thereof:
- (i) ordering that each of the penalty assessments be set aside;
- (ii) declaring that Mr Russell is liable under item 3 of s 284-90(1) to Schedule 1 of the TAA to a base penalty of 25% in respect of the tax shortfall for each income year.
(c) Setting aside the Commissioner's remission decision and, in lieu thereof, ordering that Mr Russell's base penalty liability be remitted in full.

Goods and services tax appeal

(a) Setting aside the objection decision.
(b) In lieu thereof, setting aside the assessment and remitting the matter to the Commissioner for the issuing of an amended assessment on the footing that the resident agent amount should be excluded and that the partnership is entitled to such input tax credits as relate to the conduct of a forestry enterprise up to 23 February 2004 but not otherwise entitled to the input tax credits claimed.

Goods and services tax penalty appeal

(a) Setting aside the objection decision;
(b) In lieu thereof, remitting the matter to the Commissioner for the issuing of an amended assessment on the footing that:
- (i) as to so much of the partnership's tax shortfall as is referable to the claiming of input tax credits in respect of the alleged carrying on by the partnership of an accountancy practice enterprise, the partnership is liable under item 1 of s 284-90(1) to Schedule 1 of the TAA to a base penalty of 75% in respect of the tax shortfall;
- (ii) as to so much of the partnership's tax shortfall as is referable to the claiming of input tax credits in respect of the alleged carrying on by the partnership of an naturist retreat enterprise, the partnership is liable under item 2 of s 284-90(1) to Schedule 1 of the TAA to a base penalty of 50% in respect of the tax shortfall;
(c) Setting aside the Commissioner's remission decision but in lieu thereof ordering that there be no remission of the partnership's base penalty liability as determined by the Court.

272. To pronounce some final orders immediately and to defer the making of others pending consideration of supplementary submissions would be to bifurcate the period from which the time for any appeal would run. While that might be remedied by an appropriate order extending time, the better course, in my opinion, is to direct the parties to bring in short minutes of orders to give effect to the reasons for judgement accompanied by such supplementary submissions as they may be advised in respect of the ability to increase an assessment and then later to list the matter for the pronouncing at the one time of final orders and the publication of such supplementary reasons for judgement as may be consequentially necessary. That course particularly commends itself given the number of issues dealt with, the need for the parties to have time to consider lengthy reasons for judgement and that it is in the interests of

ATC 10325

justice that Mr Russell be permitted to attend by telephone the publication of these reasons.

273. I propose therefore to give directions to achieve this end.

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Withholding payments covered
Item	Provision	Subject matter
1	Section 12-35	Payment to employee
2	Section 12-40	Payment to company director
3	Section 12-45	Payment to office holder
4	Section 12-60	Payment under labour hire arrangement, or specified by regulations