Case U67
Members:P Gerber SM
KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
Dr P. Gerber and K.L. Beddoe (Senior Members)
The question at issue before the Tribunal is whether assessable income derived by the infant applicant during the year ended 30 June 1980 is business income and therefore excepted assessable income for the purposes of Div. 6AA of Pt III of the Income Tax Assessment Act. The respondent assessed the applicant on the basis that Div. 6AA applied to the taxable income so that sec. 6HA of the Income Tax (Rates) Act 1976 applied to the applicant's taxable income.
2. The statutory provisions in issue are of the convoluted variety for which the Income Tax Assessment Act is notorious. We will attempt to explain the operation of the provisions in simple terms. We are confident that a mere recitation of the relevant provisions in the language of the Act would be meaningless to the applicant and others who may have cause to read these reasons.
3. Division 6AA applies in relation to the year of income ended 30 June 1979 and subsequent years of income. It seeks to apply special provisions to a class of persons described as "prescribed persons". A person is a "prescribed person" in relation to a year of income if that person is less than 18 years of age on the last day of the year of income and that person is not an excepted person. "Excepted person" is defined in subsec. 102AC(2). Suffice it to say that there was no suggestion that the applicant came within the terms of one of the paragraphs in subsec. 102AC(2) and, on our understanding of the evidence, it is clear that the applicant is not an excepted person. The applicant is therefore a "prescribed person" who is not an excepted person.
4. The eligible taxable income of a prescribed person is the amount remaining after deducting from the eligible assessable income -
- (a) any allowable deductions that relate exclusively to that eligible assessable income;
- (b) so much of any other deductions (other than apportionable deductions) which relate, in the opinion of the Commissioner, to that eligible assessable income; and
- (c) the prescribed proportion of apportionable deductions.
5. In considering what is a person's assessable income for the above purposes, a reference to the derivation by a person of assessable income is to be read as including a reference to the inclusion of an amount in the assessable income of the person (subsec. 102AA(2)).
6. For the purposes of the Division, the eligible assessable income of a person is so much of that person's assessable income as is not excepted assessable income. Subsection 102AE(2) defines excepted assessable income. For the purposes of this application the only relevant provision is para. 102AE(2)(a) which provides, subject to the section, that an amount included in the assessable income of a person is excepted assessable income to the extent to which the amount is employment income or business income.
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7. A reference to business income is to be read as a reference to income, not being employment income, derived by a person during the year of income from carrying on a business either alone or with others (subsec. 102AF(3)).
8. Where the business is carried on by a minor alone, the reference in para. 102AE(2)(a) to business income shall, in relation to any business income derived by a minor from the carrying on of a business, be read as a reference to so much of that business income as the Commissioner considers fair and reasonable having regard to:
- "(i) the extent to which, during the year of income, the minor had the real and effective conduct and control of the business and participated in the operations and activities of the business;
- (ii) the extent to which the minor had the real and effective control over the disposal of income derived by the minor from the business during the year of income;
- (iii) the extent to which the capital of the business consisted of property contributed by the minor, being property the income from which would, in the opinion of the Commissioner, be excepted assessable income in relation to the minor; and
- (iv) such other matters (if any) as the Commissioner thinks fit; and
(b) in any other case..."
(subsec. 102AE(5)).
9. Subsection 102AE(6) provides in effect that where assessable income is derived by a person under or as a result of an agreement any two or more of the parties to which were not dealing with each other at arm's length so that the amount of the assessable income is greater than it would have been if the parties had dealt with each other at arm's length then subsec. 102AE(2) does not apply to that part of the assessable income which exceeds the arm's length amount of assessable income.
10. Subsection 102AE(2) does not apply where there is in existence an agreement entered into for purposes that included the purpose of securing that the assessable income would not be eligible assessable income (subsec. 102AE(7)).
11. Section 6HA of the Income Tax (Rates) Act 1976 fixes the rates of tax in respect of the taxable income of a person who is a prescribed person for the purposes of Div. 6AA and who has an eligible taxable income of an amount exceeding $1,040.
12. We turn now to the facts of this application.
13. During the year of income the applicant was 11 years of age, a full-time student, and residing with his parents on a farming property some 200 km outside a major city. He was not the only child of the family.
14. An income tax return (Document T2) for the year of income ended 30 June 1980 in the applicant's name was lodged with the respondent. The return is dated 10 September 1981 and signed by the applicant's father and tax agents acting on the father's instructions. That return disclosed a taxable income of $2,162 calculated as follows:
Livestock account
Gross sales
9 cattle $2,851
Stock on hand 30/6/80
5 cattle 26
pigs 321
------
$3,198
less Stock on hand 1/7/79
14 cattle 72
pigs 321 393
------ ------
$2,805
------
Deduct expenses
Animal health 29
Fodder 320
Light and power 21
Protective clothing 61
Newspapers and farm
journals 29
Postage 12
Stationery 14
Telephone 27
Travelling expenses 130 643
------ ------
NET INCOME $2,162
------
15. Quantum of the expenses claimed by the applicant was not in dispute between the parties. As we have not heard detailed evidence in relation to the expenses claimed we do not proceed further on this point albeit we were left with the distinct impression that some of the
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expenses claimed (and allowed) may not have been incurred by the applicant. If, as the respondent asserts, income has been diverted away from the parents to the applicant, there may be thought to be some inconsistency of approach if allowable deductions were also diverted away from the parents.16. Exhibit 1 establishes that similar returns of income had been lodged in the applicant's name for the years of income ended 30 June 1977 through to the year ended 30 June 1984; in each case the return being signed by one of the applicant's parents.
17. The income tax returns for the years ended 30 June 1977, 1978 and 1979 disclosed taxable incomes of $2,603, $1,833, and $2,006 respectively. Most of the assessable income disclosed in those returns was derived from the sale of cattle and pigs.
18. Since the year ended 30 June 1981 when the applicant sold an unspecified number of pigs for $600, no sales of livestock have been reported. It appears from the evidence that the applicant still had cattle on hand at the time of the hearing. However, the evidence was less than clear on this point and there must be considerable doubt as to whether the 14 cattle reported to be on hand at 30 June 1985 were in existence at that date and whether, if they were in existence, they belonged to the applicant.
19. The respondent has accepted the income tax returns as lodged in the applicant's name. The issue which we have to decide arises, as explained above, out of the introduction of Div. 6AA into the Income Tax Assessment Act by Act No. 19 of 1980 being the Income Tax Laws Amendment Act 1980. The new Division first applied in respect of the year of income ended 30 June 1980.
20. During the whole of the year ended 30 June 1980 the applicant was engaged in a course of full-time study at a school.
21. His return of income stated that the applicant received unemployment benefits without disclosing the amount. Neither party made any submissions in relation to such benefits. Exhibit D shows that the applicant derived interest amounting to $393 during the year of income which was not disclosed in his return. Once again neither party made any submission in relation to the interest. In our view the applicant could not have legally received unemployment benefits and, in this state of the evidence, the presumption omnia praesumuntur must operate in his favour. We are therefore prepared to assume he did not receive such benefits.
22. The applicant gave evidence before the Tribunal which may be summarised as follows:
- (a) in 1977 he and his sister attended cattle sales at which they purchased young calves which he reared on a bucket, the funds coming from accumulated child endowment payments received from the Federal Government by the mother;
- (b) they mustered and fed the calves as required;
- (c) the calves were branded with his grandfather's brand so that they could be distinguished from the cattle belonging to the applicant's father;
- (d) for sale purposes the cattle were ear tagged with his initials on the ear tag;
- (e) his cattle were grazed with his father's cattle but he maintains that they were always identifiable by the brand and also because they were named and came to him when called;
- (f) he was adamant under cross-examination by counsel for the respondent that he sold all his cattle when his parents sold their farm in 1980;
- (g) he made the initial selections of stock to be bought and sold but then consulted his father as to the actual purchases and disposals;
- (h) because of adverse seasonal conditions his stock and his father's stock were removed to the property of one D and agisted on that property;
- (i) proceeds from the sale of cattle (and oats and pigs) were banked in a building society bank account conducted by his mother in her name as trustee for him - the amount of $2,851 as proceeds of the sale of 9 cattle was deposited in the account on 10 August 1979;
- (j) Exhibit C is a photocopy of a cheque drawn on the ANZ Bank, dated 30 July 1979, in favour of the applicant by a firm of stock and station agents;
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- (k) Exhibit B is a photocopy of an Account Sales docket dated 25.7.79 addressed to the applicant by the stock and station agents, recording the sale of 25 cattle for $6,070.79, the applicant's half share of 25 cattle being $3,035.39 and the net proceeds after various charges being $2,851.89;
- (l) the other half share of the proceeds from the sale of the cattle went to a person unrelated to the applicant who had been providing agistment for his and his father's cattle;
- (m) the only explanation given to the Tribunal as to the basis of the apportionment of the proceeds of sale was to the effect that the 9 cattle offered by the applicant were in better condition than the 16 cattle offered by the person who had been providing the agistment;
- (n) the building society account conducted by his mother was conducted for his benefit during the year of income but several transactions appear to have had some benefit for the family as a whole in later years of income;
- (o) he was not in receipt of any pension or other entitlements as set out in subsec. 102AC(2).
23. It is beyond argument that the applicant is a prescribed person unless he is an excepted person (subsec. 102AC(1)). There is no evidence to support a finding that the applicant is an excepted person within the terms of subsec. 102AC(2). We find that the applicant is a prescribed person.
24. The principal issue before the Tribunal is whether the assessable income of the applicant is eligible assessable income. For the purposes of Div. 6AA the eligible assessable income of the applicant will be so much of his assessable income as is not excepted assessable income.
25. On the facts of this case the only basis for holding that the applicant's assessable income is excepted assessable income is the extent to which that assessable income is "business income" (subsec. 102AE(2)).
26. Paragraph 102AE(5)(a) sets out the tests to be applied in determining the business income derived by the applicant (a minor) during the year of income from the carrying on of a business.
27. It is therefore first necessary to determine whether the applicant was carrying on a business during the year of income and whether the assessable income derived by the applicant was income from the carrying on of that business.
28. We are satisfied that the applicant was carrying on a business (albeit small) of fattening and selling poddy calves and pigs. Counsel for the respondent did not really seek to persuade us to the contrary view and certainly the applicant was assessed by the respondent on the basis that the proceeds of sale of the stock had been derived by the applicant. Counsel took the Tribunal straight to subsec. 102AE(5) which applies to business income derived by a minor during a year of income from the carrying on of a business.
29. Counsel for the respondent [contended] that the amount of $2,162 is eligible taxable income because of the operation of subsec. 102AE(5) which excludes that amount from the operation of para. 102AE(2)(a).
30. We will deal with the parts of the submission in the order in which they were put to the Tribunal.
31. Firstly, counsel submitted that the applicant's age of 10/11 was a factor mitigating against a finding that the applicant was carrying on the business. That is really an argument as to whether the income is business income although it may also be thought to raise the question as to the extent that the applicant had the real and effective conduct and control of the business and participated in the operations and activities of the business.
32. That is an argument which would have considerable merit if the applicant had relied entirely upon his father in the conduct of the poddy calf operation. However, the evidence of both the applicant and the father was that the applicant very often made his own decisions as to which cattle were to be sold; the father acted mostly as an adviser but not so as to usurp real and effective conduct and control of the business from the applicant. We are satisfied that the applicant had the real and effective conduct and control of the business which was not diminished by his age during the year of income.
33. Counsel for the respondent contended that if the Tribunal considered that the applicant
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had been less than frank in his evidence then the Tribunal could draw inferences against him. We are satisfied that the applicant was frank in his evidence and lapses as to recollection of events of more than five years prior to the date of hearing when the applicant was aged 10/11 are quite understandable in these circumstances.34. It was next contended for the respondent that the capital of the business was not contributed to by the applicant in any significant way. The funds used to commence the business came from accumulated child endowment payments. These payments were paid by the Federal Government to the applicant's mother. Although no evidence was given by the applicant's mother it appears that she had saved the child endowment moneys for the benefit of the applicant and gifted some of the accumulation to the applicant when he first purchased poddy calves. After that initial gift by the mother it seems that the capital of the business was built up by profits retained in the business. We are satisfied that in the year of income most or even all of the capital of the business belonged to and had been contributed by the applicant. If during the year of income any of the capital of the business consisted of property other than property contributed by the applicant then that proportion would be relatively insignificant and we need not consider it further.
35. We should add that we have had considerable difficulty with subpara. 102AE(5)(a)(iii) which seems to have a circular meaning if the income referred to in the subparagraph is the income of the business. However, on the facts of this case the only income to be considered is the income in dispute, so that we do not need to consider this matter further.
36. This brings us to subpara. 102AE(5)(a)(ii) dealing with the extent to which the applicant had the real and effective control over the disposal of income derived by him from the business during the year of income. The proceeds from the sale of cattle amounting to $2,851 were banked in a building society account in the name of the applicant's mother as trustee for the applicant.
37. Only three other transactions took place through that account for the rest of the year. These were:
25 January 1980 Withdrawal $200
25 February 1980 Withdrawal $200
12 June 1980 Withdrawal $100
As at 30 June 1980 the balance of the account exceeded $4,300.
38. Counsel for the respondent submitted that the applicant had no real or effective control of the building society account which, he submitted, was controlled by the mother, so that it could not be said that the applicant has any real or effective control over the income in so far as it goes into a bank account of which the applicant is merely the beneficiary.
39. This argument does not lack attraction. However, Exhibit B shows that the proceeds of sale of cattle went into the account of the applicant and Exhibit C shows that the proceeds were in fact paid to the applicant by the stock and station agents. We are therefore satisfied that the fact that the account was operated by the mother on behalf of her minor son does not sufficiently compromise that degree of control which is required for purposes of the subparagraph.
40. So far as the cash withdrawals from the building society account are concerned, for the sake of completeness we note that the applicant's business had cash expenses amounting to $643 during the year of income. No attempt was made to reconcile the bank account with the cash expenses nor was it explained how the expenses were paid. However, as the section requires us to consider the real and effective control over the disposal of the income, an enquiry into the payment of expenses would seem to serve no useful purpose given that the Commissioner has accepted that the expenses were incurred by the applicant.
41. We have therefore concluded that for the purposes of para. 102AE(2)(a), the amount of $2,851 business income is the amount which should be accepted as the fair and reasonable amount within the terms of subsec. 102AE(5).
42. That subsection is, however, subject to the operation of subsec. 102AE(6) and 102AE(7). We can dispose of the latter subsection first because there was no evidence before the Tribunal of an agreement that was entered into or carried out by any person (before or after the commencement of the subsection) for the purpose (or purposes that
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included the purpose) of securing that the assessable income of the applicant would not be eligible assessable income.43. The evidence is that the applicant had been engaged in the raising of calves and pigs for a number of years without any thought as to the tax consequences. Certainly the father's evidence was quite clear that he was unaware of the introduction of Div. 6AA into the law and somewhat bemused by the Commissioner's action in applying the Division to his son.
44. Subsection 102AE(6) demands an enquiry as to whether the assessable income was derived by the applicant directly or indirectly as a result of an agreement, any two or more of the parties to which were not dealing with each other at arm's length in relation to the agreement, and the amount of the assessable income so derived is greater than the arm's length amount. This raises, of course, the transaction involving the sale of the 25 cattle as evidenced by Exhibit B.
45. The only connection between the applicant and the person whose cattle were allegedly sold with the applicant's cattle is that he was the person who had been agisting the applicant's cattle. Prima facie that would be a basis for a favourable split of the proceeds in favour of that person and against the applicant.
46. The evidence before the Tribunal is quite equivocal on this point. At one stage we were inclined to the view that the 16 cattle sold with the 9 cattle of the applicant in fact belonged to some other person, being cattle on agistment, and half of the proceeds of the sale of the 25 cattle was paid out direct as agistment fees. That view, although a rational explanation of the transaction of which we received no other explanation (except as to the relative quality of the beasts), is not open on the evidence.
47. The evidence is that the consideration received by the applicant was fixed by the stock and station agents and we are forced to conclude that the transaction involving sale of the applicant's nine cattle was at arm's length.
48. We therefore hold that the assessable income derived by the applicant during the year of income ended 30 June 1980 was excepted assessable income and therefore not eligible assessable income within the terms of subsec. 102AE(1).
49. The respondent's objection decision will be set aside and the objection allowed in full.
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