Case U225

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 11 December 1987.

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P.M. Roach (Senior Member)

The principal question to be determined in these references is whether certain moneys paid by logging contractors (each referred to as "the contractor") - and which constituted assessable income - was "derived" by an individual or by a partnership. The individual in question is a married man ("the applicant"); and the partnership was one formed between the applicant and his wife - also an applicant - by an agreement in writing made on 15 May 1983.

2. The applicant alleges that the partnership carried on business in the sense provided by the Partnership Act 1981 from that date and that, alternatively, the partners were "in receipt of

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income jointly" from that date in the sense provided by the definition of partnership in sec. 6 of the Income Tax Assessment Act 1936 ("the Act"). Other questions to be determined relate to the deductibility of expenses "incurred" in the course of generating the assessable income already referred to.

3. The issues all arise out of the operation of the woodchip industry as organised by Associated Pulp and Paper Mills Limited ("APPM") in Tasmania. APPM carries on business (inter alia) as a manufacturer of fine papers utilising pulpwood from Tasmanian forests. It also converts pulpwood from those forests into woodchips for export overseas. To enable it to carry out those activities it controls extensive timber resources on Crown Lands and private lands in Tasmania. The activities of APPM commence in the forest. APPM engages contractors to fell, snig and load pulpwood. Sawlogs which are felled are supplied to sawmillers. So far as is relevant for present purposes there were two such contractors, one operating in succession to the other. They were the contractors. The pulpwood so harvested is then delivered to the mills of APPM by trucks operated by haulage contractors. The pulpwood is measured at the APPM weighbridges and the measurements so obtained became an integral factor in the calculation of future payments. Payments to the haulage contractors are based upon weight and distance and are not material to the present issues. Payments by APPM to the contractors were ordinarily based on a standard scale with the price per tonne varying according to the pulpwood size. In special circumstances, having regard for example to natural hazards and difficulty of terrain, prices might be increased.

4. Harvesting commissions issued to contractors whereby it was agreed that they would harvest all suitable pulpwood on a clear-fell basis from coupes and at rates from time to time indicated by APPM. Coupes were identified pursuant to a working plan under the appropriate legislation. Quotas fixing the rate of delivery of pulpwood were determined by APPM in accordance with its own production and delivery schedules. From time to time APPM would suspend taking delivery either to provide for planned mill shutdowns for maintenance purposes; or for unplanned shutdowns occasioned by such vicissitudes as strikes; or for the reduction in or cessation of production occasioned by market conditions.

5. All of the foregoing activities were carried out by the contractors under the supervision and direction of APPM staff and also under the oversight of officers of the Forestry Commission.

6. The performance of harvesting operations called for each contractor to make available the personal services of appropriately experienced forest workers such as fallers, skidder operators and excavator drivers. It also called for the use of hand tools and chain-saws (at a cost of the order of $1,000 each) and skidders and excavator-loaders (costing possibly $200,000 each). Prior to the formation of the partnership, the applicant was a man working in the interests of the contractor upon such forest operations. Upon the evidence, I am satisfied that at all material times in that period his responsibilities were to organise a crew of workers to carry out such harvesting operations. A typical crew which would work a coupe of about 70 hectares in something of the order of four months, would comprise two fallers, two skidder operators and two excavator drivers. The applicant, in the field, worked principally as a faller but also, as occasion required, operated skidders and excavators and carried out minor works of maintenance and repair. The contractor was responsible for the provision of all parts and fuel for the skidders and excavators and for having major repairs carried out. The applicant was responsible for providing his own chain-saws; and chain-saws for occasional use by others in cutting pulpwood to appropriate lengths and in removing heads from felled pulpwood. Fallers provided their own chain-saws and bore all the expenses attending their use. Personal safety gear was for the most part provided by each forest worker at his own expense.

7. The responsibilities of the applicant also extended to arranging all matters necessary to ensure the smooth conduct of forest operations. In conjunction with APPM supervisors, he selected landing sites. He was responsible for organising and disciplining the other workers. He was responsible for collating production information ex APPM's weighbridges and communicating it to the contractor, together with advice as to the entitlements of each member of the team. When difficulties in

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harvesting were experienced which he considered warranted additional remuneration to the contractor and, in turn, to members of the crew, he would sometimes participate in negotiations with APPM. No officer of the contractor supervised his bush activities. It was his responsibility to organise the provision of spares and parts and fuel in the bush. He was not subject to any direction as to when or how he worked provided only that he performed to quota and in accordance with standards set by APPM and the Forestry Commission.

8. He understood himself to be entitled to "workers compensation" in the event that he was injured in the course of his work and it was accepted by the Commissioner that the protection so afforded him was ensured to him because APPM provided a scheme of compensation for all forest workers working in its interests whether or not they were "workers" within the meaning of the Workers' Compensation Act and even though, should they be workers, they were employed by others such as the contractors. Working as he did, the applicant did not claim that he was entitled to any other employee benefits such as paid recreational leave, and sick leave. The sites at which harvesting operations involving the husband were concerned were changed periodically and were at varying locations. He was responsible for ensuring that his crew got to their appointed coupe and, if they did not provide their own transport, was responsible for providing transport for them himself. At all material times he operated a vehicle of his own frequently using it to transport parts, spares and other necessaries. From November 1983, when a four-wheel drive vehicle came to be used, the vehicle was equipped with a two-way radio which enabled him to make communication with his wife and, in turn, enabled her to make such telephone communications as were necessary without awaiting his return from the bush. Over and above that he had a daily need to use the telephone in and about his work-related purposes.

9. From time to time, and sometimes quite frequently, the wife of the applicant had to assist him in the performance of his work, obtaining and delivering parts and spares and the like.

10. He consulted his then accountant as to how his wife might be appropriately rewarded for her efforts and it was suggested that a partnership ought be formed. On 15 May 1983 the husband and wife executed a partnership agreement as prepared by solicitors. The partnership agreement provided (inter alia):

"2. THE Partners by their execution of this Agreement hereby acknowledge -

• (a) That as from the commencement date they have carried on business in partnership under the business name set forth in the said Schedule.
• (b) That they wish to record in writing the terms upon which the business has been carried on and will be carried on hereafter."

The business name and description of the business so referred to was "Contract Bushmen".

11. From the commencement of that partnership, the applicant and his wife - who did not give evidence - claimed that what was paid by the contractor for the services of the husband and the support services provided by his wife was derived by the partnership. They point to the fact that the moneys so received were deposited to their joint account, but the moneys previously paid had also been so deposited - according to the evidence. They point to the fact that the expenses which were incurred were borne out of the same funds but, upon the evidence, that also had always been so regardless of the nature of the expense. They point to the fact that, by the income tax returns of the partnership over the years in question, the plant and equipment used by the husband in and about the bush activities had been owned by the partnership. They point to the fact that the telephone to their home had been provided on their joint account. However, it was also acknowledged by the husband in his evidence that, apart from the execution of the partnership agreement and the subsequent preparation of partnership income tax returns and accounts, there had been no change in earlier practices.

12. It was argued for the Commissioner that the nature of the husband's duties to the contractor were such that he was at all times standing as a servant in a master/servant relationship to the contractor. The Commissioner relied upon, in particular, the decision of the Supreme Court of Tasmania in
Fenton v. Webster Hall Timbers Pty. Ltd. (unreported): a decision founded in local

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conditions, but applying principles laid down by the High Court of Australia in the well known case of
Humberstone v. Northern Timber Mills (1949) 79 C.L.R. 389. The Commissioner's further contention was that it was not possible in law for the assessable income derived from the contractor to have been derived by the partnership. It was argued that as sec. 6(1) of the Act provides:

"In this Act, unless the contrary intention appears -

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

and that, in consequence, the partnership could not have been carrying on business; and that, therefore, so long as the husband was an employee, the income generated by his employment could not be derived by a partnership as defined by sec. 6 of the Act which provides:

"In this Act, unless the contrary intention appears -

• ...
• `partnership' means an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company;"

13. I am not disposed to agree with those submissions. I am not persuaded at this time that it is not possible for a partnership to contract with a contractor for the provision of services such as were supplied by this husband and wife to the contractors (cf. the partnership referred to in [Case U228,
87 ATC 1268] decided this day).

14. However, it is unnecessary to determine that question in my view because there is another more serious difficulty facing the applicants. The evidence presented before me is such that I cannot identify any arrangement made with the contractor for whom work was being done in May 1983 which would amount to a novation substituting the partnership for the individual. Nor is there any evidence before me which satisfies me that at any later time, whether in dealing with that contractor or the contractor who in time succeeded the first contractor, there was brought about a contractual relationship between the contractor and the partnership.

15. In considering the evidence which has been placed before me I have been concerned that this Tribunal is something like the poor man's court. It ought not be a Tribunal where everybody needs skilled legal representation in order to succeed. I have also been concerned that, in this instance, the Commissioner has been represented by able counsel, well experienced in the conduct of litigation, who has presented a technical legal argument; and the taxpayers by an able accountant for whom this hearing may have been a first experience of litigation. However, informal though the proceedings of this Tribunal may sometimes be, and even though the Tribunal may seek to assist the less experienced in the presentation of their cases - but without assuming responsibility for representation of either the applicant or the respondent - that cannot relieve the Tribunal of the responsibility for deciding in accordance with the evidence. It cannot entitle the Tribunal to substitute guesswork for judgment.

16. I find that, as the evidence stands before me, I have sufficient evidence to be able to say that I am satisfied on the balance of probabilities as to what obligations arose under the contract with the contractors, and I am satisfied that prior to the formation of the partnership, the party to the contract assuming those obligations was the husband. However, I am not persuaded by the evidence presented that, on the balance of probabilities, it is more likely than not that, from the time of the formation of the partnership, the contracts which undoubtedly existed were contracts involving the partnership: contracts conferring on the partnership an entitlement to remuneration and a responsibility to make available the services of the husband and to provide for the performance of those services in accordance with the requirements of the contract. Accordingly, I conclude that the assessable income claimed to have been derived by the partnership was derived by the husband.

17. One of the secondary questions involves claims to telephone expenses. In the years of income ended 30 June 1984 and 1985 the partnership claimed deductions for telephone expenses of $330 and $468 which were said to have been in each case 80% of the expenses

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incurred by the applicants in relation to the telephone service. $50 was allowed to the husband in each year. The husband gave evidence that 80% was fixed on as his estimate and his evidence was that the telephone was extensively used and used on a daily basis. I accept that, and as those contentions were not seriously challenged by the Commissioner, I accept that the 80% is a reasonable estimate. That being so, it seemed at the hearing that the likely result would be that, if the husband-applicant succeeded on the major issue, it would be appropriate that his share of partnership income be reduced by one-half of the disputed telephone expenses; whereas, if he failed on the partnership issue, he should be allowed the whole of those telephone expenses. However, that view might involve a fallacy because the expenses were borne equally by the husband and his wife in the belief that the partnership was deriving the relevant income.

18. The other issue to be determined relates to a claim by the partnership to depreciation in respect of a caravan purchased by the partnership in December 1984 at a cost of $3,750. It is claimed that the caravan was exclusively used for income-producing purposes by the partnership and that it was taken into the bush as required, and otherwise stored, for security reasons, at the home of the applicants or some other suitable site. In the bush it was taken to or near to the logging sites. It was used by the husband applicant and the crew working with him to shelter from the rain and as an equipment store. It was also used from time to time by the husband to "camp out" when it was impracticable for the applicant to return home. I am satisfied that it was not used as a family residence or, in any meaningful sense, as a place of residence or for recreational purposes.

19. I am satisfied that, notwithstanding its use to provide accommodation for the husband-applicant in the way of "camping out" facilities, it was not such an accommodation that the use of it should be classified as being "private" for the purposes of sec. 57(1) of the Act (cf. my reasons for decision this day in [Case U228, 87 ATC 1268]).

20. The amount claimed as depreciation by the partnership - $492 (22.5% of $3,750 for seven months on a diminishing value basis) is in itself reasonable. The question remaining is whether the husband-applicant can claim the entirety of the deduction on property jointly owned by his spouse and himself.

21. In all the circumstances, I think that the deductions to be allowed to the husband should not be reduced because they happen to have been losses and outgoings suffered jointly with his wife - his partner in marriage and also by the terms of the partnership agreement. Once the partnership had failed in its purpose, it is not unreasonable to find an implied term having effect to make the husband bear all the expenses of deriving his income.

22. On that basis, the amended assessment against the husband for the year of income ended 30 June 1984 will be reduced by a further $280 (on account of telephone expenses) reducing his taxable income to $21,515. The original assessment against him for the year of income ended 30 June 1985 will be reduced by $900 ($418 telephone expenses and $492 depreciation) thereby reducing taxable income from $36,447 to $35,547. I exclude from account a set-off for the apparent mathematical error whereby union fees were allowed at $580 in lieu of the $80 claimed. The 1983 assessment against the husband-applicant will be affirmed.

23. As to the wife, there is but one objection before me: that for the year of income ended 30 June 1985. Her claim is that the assessment against her should be reduced by $520 by reason of reducing her share of partnership income by that sum after taking into account depreciation $492, telephone $468 and union fees $80. In her case, as for her husband, the evidence has not persuaded me on the balance of probabilities that the income to which those expenses relate was derived by any partnership of which she was a member or in any way by her. To that extent, her claim fails. That being so, in so far as the expenses were "incurred" by her, they do not relate in any way to the derivation of assessable income by her. A similar result would no doubt apply in relation to the years of income ended 1983 and 1984 but there is no objection before me on behalf of the wife in relation to those years: no doubt for the simple reason that she had been assessed in accordance with returns of income lodged by her and did not dispute the assessments so raised within the time allowed for the purpose.

24. If I am correct as to that, the position will broadly be that the Commissioner will be

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sustaining assessments against the wife, based upon her having derived 50% of partnership income, and against the husband as having derived 100% of the same income. What is more, in relation to the year of income ended 30 June 1985, it will be my responsibility, in view of the findings I have made, to affirm the soundness of the Commissioner's decision upon her objection in that year. That these oddities should arise at all flows from the circumstance that, when the Commissioner issued his assessments for the relevant years against the husband, attributing to him the derivation of income claimed by both applicants to have been derived by the wife, he also sought to maintain assessments against the wife on the basis that she had in fact derived one-half of the assessable income the Commissioner claimed was wholly derived by the husband.

25. The Commissioner has advised that, in the event that the assessments against the husband are affirmed, it is his intention to exercise his power to issue amended assessments against the wife. I have no doubt that he will do so but, none the less, the circumstance points to deficiencies in the processes of assessment provided for by the Act and administered by the Commissioner. Until such time as such amended assessments issue to the wife, she and her husband are, as a matter of law, indebted to the Crown for the tax payable upon the existing assessments against them, upon which debts a liability for interest on unpaid moneys accrues at the rate of 20% per annum.

26. Having expressed those reservations, I affirm the decision of the Commissioner upon the objection of the wife for the year of income ended 30 June 1985 - and thereby affirm her taxable income at a figure substantially in excess of that found to have been derived by her.