KELLY v FC of T (No 2)

Members:
Besanko J

Tribunal:
Federal Court of Australia, Adelaide

MEDIA NEUTRAL CITATION: [2012] FCA 689

Decision date: 29 June 2012

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Besanko J

1. The Court delivered reasons for judgment in this proceeding on 27 April 2012:
Kelly v Commissioner of Taxation [2012] FCA 423 ("Kelly No 1 "). At that time the following orders were made:

• 1. The applicant file and serve within 14 days draft minutes of order reflecting the conclusions in these reasons and, if so advised, a short submission on the propriety of the superannuation deduction claimed by the Kelly Family Trust for the year of income ended 30 June 2009.
• 2. The respondent file and serve within 21 days draft minutes of order reflecting the conclusions in these reasons and, if so advised, a short responding submission to any submission filed and served by the applicant pursuant to order 1 above.

2. On 11 May 2012 Mr Kelly filed and served a document entitled "Applicant's submission on newly raised superannuation issue, application for leave to be revoked and application to reopen case". There were various documents attached to the submission. Mr Kelly also filed and served a draft document showing the orders which he contended should be made.

3. On 18 May 2012 the Commissioner filed and served an Outline of Submissions and a draft document showing the orders he contended should be made.

4. Due to problems with counsel's availability, the hearing with respect to the final orders which should be made was not listed to take place until 19 June 2012. On or about 13 June 2012 Mr Kelly filed and served a document entitled "Applicant's submissions in support of a proposed application for the Court to review its reasons published on 27 April 2012". In response, the Commissioner by letter dated 19 June 2012, forwarded to the Court short submissions in reply to Mr Kelly's submissions dated 13 June 2012. As a separate matter, the Commissioner forwarded a worksheet showing how the amount of taxable income set out in paragraph 2 of his proposed orders had been calculated.

5. When the proceeding came on for hearing on 19 June 2012, I indicated that, subject to hearing from counsel, the appropriate order for dealing with the various matters was as follows:

• 1. Mr Kelly's application for the Court to review its reasons and conclusions. I permitted Mr Kelly to make his application orally (see Rule 17.01(3) of the Federal Court Rules 2011).
• 2. Mr Kelly's application to the Court that it revoke its permission or leave for the Commissioner to claim that the superannuation deduction was not an allowable deduction. Again, I permitted this application to be made orally.
• 3. If the second application is rejected, the question of whether the superannuation deduction was an allowable deduction. As part of this issue, Mr Kelly made an application to reopen his case to tender an affidavit he had sworn and an affidavit sworn by his wife.
• 4. The appropriate orders in light of my conclusions with respect to the foregoing matters and the conclusions expressed in Kelly No 1.

6. Counsel did not suggest that this was not an appropriate order in which to deal with the outstanding matters, and I heard submissions on each of the matters. With respect to the first matter, I decided that Mr Kelly's application for the Court to review its reasons and conclusions should be refused. I said that I would deliver my reasons for that decision and my reasons follow. With respect to the second matter, I decided that Mr Kelly's application that the Court revoke its permission or leave for the Commissioner to claim that the superannuation determination was not an allowable deduction should be refused, and again my reasons for that decision follow. With respect to the third and fourth matters I reserved my decision and these reasons deal with those matters.

THE APPLICANT'S APPLICATION FOR THE COURT TO REVIEW ITS REASONS AND CONCLUSIONS

7. As I have said, I have delivered reasons in this proceeding but I have not made orders. The matters I reserved were the terms of final orders and, if so advised, further submissions by the parties as to whether the superannuation deduction was an allowable deduction. I did not reserve for further consideration any of the matters put forward by Mr Kelly in support of his application for the Court to review its reasons and conclusions.

8. There was no dispute between the parties that, in the circumstances outlined in the preceding paragraph, the Court has the power to review its reasons and conclusions. It is sufficient for me to refer to
Federal Commissioner of Taxation v Rozman (No 2) (2010) 186 FCR 14 at 15 [2] and
DJZ Constructions Pty Ltd v Paul Pritchard trading as Pritchard Law Group and Ors [2010] NSWSC 1197 at [26]. The circumstances in which the power should be exercised have been the subject of general statements in the authorities. Counsel for Mr Kelly appeared to accept that the power must be exercised cautiously and in limited circumstances. The Commissioner referred to authorities which emphasised the importance of the finality of litigation and that the power to allow a party to reopen will only be exercised in very limited circumstances:
Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300 at 309 per Brennan J (as his Honour then was) and 317 per Dawson J;
Multiplex Constructions Pty Ltd v Irving (No 2) [2005] NSWCA 1 at [21]-[24].

9. A Court may exercise the power to review its reasons and conclusions if there is a material matter or point which has been overlooked, or if it is satisfied that there has been a palpable error, and it is in the interests of justice to exercise the power. The power may be exercised where it will, or may, save the parties the costs of an appeal. However, the Court will be astute to avoid an exercise of the power where the result is no more than a re-arguing of the application, or a "de facto" appeal from the decision.

10. Mr Kelly submits that in Kelly No 1 there are a number of errors which, as I understand the submissions, are said to be errors of law. These errors mainly relate to the McFadzean Retirement Deed, although it was said by counsel for Mr Kelly that the correct approach would have led to different conclusions as to the effect of the Sterling Retirement Deed and Bligh Nomination Deed. It is said that the errors relate to the effect of a party or parties contracting as a trustee, the law as to whether consideration is needed in the case of an equitable assignment, the law as to the parties or persons who may provide consideration for a contract, and the effect of admissions against interest by an alleged trustee or trustees. There are a number of things that could be said about these matters but I do not think I should fall into the trap of delivering a second set of reasons. My reasons in Kelly No 1, the transcript of submissions and the written submissions must speak for themselves if there is an appeal. It is sufficient for me to say that I do not think there has been oversight or error, let alone palpable error, and that if Mr Kelly wishes to challenge the conclusions reached in Kelly No 1 he must do so by way of an appeal.

11. It was for these reasons that on 19 June 2012 I refused the applicant's application for the Court to review its reasons and conclusions.

THE APPLICANT'S APPLICATION THAT THE COURT REVOKE ITS PERMISSION OR LEAVE FOR THE RESPONDENT TO CLAIM THAT THE SUPERANNUATION DEDUCTION WAS NOT AN ALLOWABLE DEDUCTION

12. The issue of whether the Commissioner should be permitted to claim that the superannuation deduction was not an allowable deduction is dealt with in paragraphs 200-202 of Kelly No 1. I decided that he should be permitted to do that because the point had arisen at the last moment by reason of Mr Kelly seeking to prove the correct amount of his assessable income. Mr Kelly submitted that I was wrong to grant permission or leave, pointing to the fact that the Commissioner had had the Kelly Family Trust Income Tax Return for the year of income ended 30 June 2009 since 13 May 2010, and that the Commissioner had had ample opportunity to raise the matter before trial and had not done so. These were points made during the trial or at its conclusion. They do not bear on the essential reason I decided to allow the Commissioner to raise the point. In so far as Mr Kelly complains of a lack of procedural fairness, I do not need to address that issue because I have the power now to allow him to reopen his case (and would exercise it) if I think that is appropriate. For reasons I will give I do not think that is appropriate.

13. It was for these reasons that, on 19 June 2012, I decided to refuse Mr Kelly's application.

THE SUPERANNUATION DEDUCTION

14. The question of whether the superannuation deduction was an allowable deduction is dealt with in paragraphs 203 and 204 of Kelly No 1.

15. The deduction of employer contributions for superannuation is dealt with in s 290-60 and the following sections of the Income Tax Assessment Act 1997 (Cth) ("Income Tax Assessment Act"). Mr Kelly is not an employee of the trustee company, 351 Pty Ltd, but he is a director of the company. There is an expanded definition of "employee" in s 12 of the Superannuation Guarantee (Administration) Act 1992 (Cth) ("Superannuation Guarantee (Administration) Act"), which is imported into the Income Tax Assessment Act by reason of s 290-65 of that Act.

16. Subsection 12(2) of the Superannuation Guarantee (Administration) Act is the relevant subsection. It is in the following terms:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate.

17. Mr Kelly first submits that he falls within the terms of this subsection because he was paid a superannuation benefit of $50,000 and payment is within the concept of "entitlement to payment". Secondly, and in the alternative, he submits that actual payment is strong evidence of an entitlement to payment. Finally, he submits that he had an entitlement to payment for services he performed for the trustee and that that entitlement arose as a matter of quasi-contract or on the basis of a claim for quantum meruit.

18. As to his third submission, Mr Kelly submits that the evidence presently before the Court is sufficient to establish his entitlement to payment. However, he seeks to reopen his case to tender an affidavit of himself and an affidavit of Mrs Kelly in order to make clear that he and Mrs Kelly have proper claims for services performed for the trustee.

19. Mr Kelly's affidavit sworn on 11 May 2012 sets out the tasks he performed for the Kelly Family Trust and an estimate of the number of hours he spent on those tasks in the year of income ended 30 June 2009. Mrs Kelly's affidavit, which was sworn on the same day, is to similar effect. Mr Kelly submits that it is sufficient to prove an entitlement to a claim for services performed and that it is not necessary to match the value of the services to the actual payment made.

20. The Commissioner put a number of submissions in answer to these claims. It is sufficient to address only one group of those submissions because they are decisive against Mr Kelly.

21. Before dealing with Mr Kelly's submissions, it is convenient to identify the principles relevant to his third submission. In support of that submission he referred to
Hall v Busst (1960) 104 CLR 206 and
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221. In the latter case, the High Court made it clear that the correct basis of the quantum meruit claim then before the Court lay in restitution or unjust enrichment, rather than quasi-contract (Mason and Wilson JJ at 227; Deane J at 256).

22. There is a well-established principle at common law that directors of a company are not entitled to claim remuneration from the company for services performed unless specifically provided for in the company's constitution or approved by shareholders (
Hutton v West Cork Railway Co (1883) 23 Ch D 654; Re
George Newman & Co [1895] 1 Ch 674). A director as a fiduciary has no right to be paid for the services he or she provides or the efforts he or she expends as a director (
Gerard Cassegrain and Co Pty Ltd v Cassegrain [2011] NSWSC 1594 at [8] per Barrett J). An express contract (such as a provision in a company's constitution) may displace the rule, but if there is such a contract there can be no claim on a quantum meruit (
Pavey & Matthews Pty Ltd v Paul at 256 per Deane J, and Mason and Wilson JJ at 227 agreeing with Deane J; In re
Richmond Gate Property Co Ltd [1965] 1 WLR 335;
Gerard Cassegrain & Co Pty Ltd v Cassegrain at [9] per Barrett J).

23. Subsection 140(1) of the Corporations Act 2001 (Cth) provides that a company's constitution (if any) and any replaceable rules that may apply have effect as a contract between, among others, the company and each director and company secretary. One of the replaceable rules - the rule in subs 202A(1) - provides that directors of a company are to be paid the remuneration that the company determines by resolution.

24. I return then to a consideration of Mr Kelly's three submissions in support of his claim that he is an employee within subs 12(2) of the Superannuation Guarantee (Administration) Act.

25. As to his submission that actual payment is within the concept of entitlement to payment, I reject that submission. In my opinion, payment and entitlement to payment are different concepts, and that is borne out by a comparison between the terms of subs 12(2) and the terms of subs 12(8). The latter subsection is in the following terms:

• (8) The following are employees for the purposes of this Act:
  • (a) a person who is paid to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills is an employee of the person liable to make the payment;
  • (b) a person who is paid to provide services in connection with an activity referred to in paragraph (a) is an employee of the person liable to make the payment;
  • (c) a person who is paid to perform services in, or in connection with, the making of any film, tape or disc or of any television or radio broadcast is an employee of the person liable to make the payment.

26. As to the submission that payment is evidence of an entitlement to payment, I reject that submission. While that might be the case where in particular circumstances the facts are unclear, the facts and relevant principles are clear in this case.

27. As to the submission that Mr Kelly and his wife had an entitlement to payment based on a quasi-contractual right or claim for quantum meruit, I reject that submission. Two factual matters should be noted. First, clause 26.1 of the constitution of 351 Pty Ltd provides that the remuneration of the directors shall be such sums (if any) as shall from time to time be voted to them by resolution of the company in general meeting. Secondly, there is no evidence before the Court of a resolution by 351 Pty Ltd within clause 26.1 of its constitution.

28. It is true, as the applicant points out, that under the trust deed for the Kelly Family Trust the trustee is given the power to pay superannuation to directors in the case of a corporate trustee. However, that is not to the point in considering whether the provisions of subs 12(2) of the Superannuation Guarantee (Administration) Act are engaged where it is the company's constitution which is relevant, and indeed, decisive.

29. Applying the legal principles referred to in paragraphs 22 and 23 above to the facts of this case means that Mr Kelly's submission that he has an entitlement to payment based on a claim in quasi-contract or for quantum meruit must fail.

30. In the circumstances, save as to the constitution of 351 Pty Ltd - which I will receive and mark A16 - there is no occasion to exercise the power to allow Mr Kelly to reopen his case. The evidence of Mr Kelly and of his wife, even if accepted without qualification, would not affect the outcome in relation to the superannuation issue.

31. The superannuation deduction was not an allowable deduction within the provisions of the Income Tax Assessment Act.

THE FORM OF THE FINAL ORDERS

32. Subject to one qualification, the Commissioner submits that the orders which should be made are as follows:

• 1. The application be allowed in part.
• 2. The deemed objection decision of the respondent be varied so that the taxable income of the applicant for the income year ended 30 June 2009 is $152,740.
• 3. The matter be remitted to the Respondent to take such action, including amending the assessment for the income year ended 30 June 2009, as is necessary to give effect to the above orders.
• 4. Each party bear their own costs.

33. The one qualification is that the Commissioner submits that Mr Kelly should pay his costs of the first and second applications referred to in paragraph 5 above. They were separate oral applications in respect of which Mr Kelly was unsuccessful.

34. Orders 1, 2 and 3 set out in paragraph 32 above are appropriate.

35. Mr Kelly should pay the Commissioner's costs of his applications for the Court to review its reasons and conclusions and that it revoke its permission or leave for the Commissioner to claim that the superannuation deduction was not an allowable deduction. They were not only separate applications but they were substantial applications, as is shown by their nature and the detail of the oral and written submissions put forward in support and in opposition to them.

36. Save in relation to those matters, the appropriate order as to costs is that each party bear their own costs. If the major issues in the case are considered, honours were fairly evenly divided. Mr Kelly was successful with respect to the transactions in 2005 and 2006. The Commissioner was successful with respect to the McFadzean Retirement Deed, in resisting Mr Kelly's argument about the effect of the Sterling Retirement Deed and the Bligh Nomination Deed and as to whether the superannuation deduction was an allowable deduction. I do not think the fact that there were a number of challenges by the Commissioner to Mr Kelly and the witnesses he called (which were unsuccessful or did not ultimately bear on any of the issues) is sufficient to lead to any different order because it is counter-balanced by the fact that there were a number of errors and inconsistencies in the documents produced by Mr Kelly and his partners and indeed there were failures by the partners of the BCK Partnership. I refer, for example, to my conclusions in paragraph 136 of Kelly No 1.

37. I will make the orders set out in paragraph 32 above, subject to separate orders in the Commissioner's favour in relation to the two applications identified in paragraph 35 above.