31 May 1212 Taxpayer loses and Commissioner wins personal services income appeals - Cameron
The Full Federal Court (Emmett, Middleton and Robertson JJ) has dismissed the taxpayer's appeal and upheld the Commissioners cross appeal from the decision of Edmonds J in Cameron v FCT  FCA 1378 (8 December 2011).
Edmonds J upheld, in part, the taxpayer's appeal from the decision of the AAT in Cameron and FCT  AATA 386 and remitted the matter back to the AAT differently constituted.
The taxpayer supplied drafting services through a company of which he and his wife were the only shareholders and directors. The company's income from drafting services was produced through the personal services of the taxpayer. The company also derived income from a stevedoring (provedoring) and sale business. The taxpayer obtained the relevant work by relying on a small number of personal contacts and relationships. The taxpayer performed services at both his own premises and at the premises of clients. In contrast, the provedoring business was wholly conducted from the taxpayer's premises.
The taxpayer argued that the company was carrying on a personal services business within the meaning of s 87-15 ITAA 1997 and, in particular, that it satisfied the unrelated clients test in s 87-20 and the business premises test in s 87-30.
In relation to the unrelated clients test, the AAT did not accept that the contracts were obtained through offers or invitations to the public at large or to any section of the public within the meaning of s 87-20(1)(b).
On appeal to the Federal Court, Edmonds J held that the reasons of the AAT were "notable for their absence of findings on...material questions of fact", sufficient to constitute an error of law. However, Edmonds J held that even if it had, as it should have, considered, and made appropriate findings of fact, it would still have held that the unrelated clients test had not been satisfied.
The taxpayer appealed against this aspect of Edmonds J's decision. Contrary to Edmonds J's finding, the Full Federal held that the AAT's reasons on this matter did not constitute an error of law. Specifically, the Full Federal Court said, at para 60:
"In our view, a fair reading of the Tribunal’s reasons indicates that the Tribunal held, on the facts before it, that there was no public element to the offers or invitations. Not only did the offers or invitations not extend beyond a limited number but also there was no practical possibility of the offer or invitation being taken up by any member of the public or section of the public. The 'subsisting relationship' was not of any significance in identifying the group for the purposes of the 'section of the public' question. Neither did the nature and content of each offer or invitation or its general circumstances assist in that regard."
Accordingly, it was not necessary for the Full Federal Court to consider whether or not Edmonds J was correct not to remit the matter to the AAT, on the basis of his own conclusion that the unrelated clients test had not been satisfied.
In relation to the business premises test, the AAT held that, for the most part, the drafting work in the relevant income year (2004) was performed outside the taxpayer's premises and at the premises of the clients. On this basis, it concluded that the premises were not used for drafting purposes either predominantly or even to any significant extent in the 2004 year.
Edmonds J took the view that the AAT had come to its decision on the basis of a comparison of the income produced from drafting services and the income produced from provedoring and sales in the 2004 year of income, rather than the time the taxpayer had used his premises for providing drafting services, and for this reason its decision was flawed. Accordingly, his Honour remitted the matter back to the AAT for reconsideration of whether the business premises test had been satisfied.
In upholding the Commissioner's appeal and finding that the AAT had not fallen into error, the Full Federal Court said, at para 114:
"In our view the statutory provision does not require simply a quantitative exercise but a qualitative assessment of whether the individual or entity maintained and used business premises at which it mainly conducted activities at the requisite time. This involves an assessment of what activities were mainly conducted at the premises. Where, as here, there was another activity, then the finding that the requisite activity was very largely conducted away from the premises is a relevant factor because it assists in establishing the substance of one of the comparators. The area of the premises and the time allocated to different activities, where more than one was conducted at the premises, must also be relevant."
In particular, the Full Federal Court held that the AAT "did consider temporal aspect of the issue and did not limit itself to a comparison of the income produced" (para 116).
Cameron v FCT  FCAFC 76 (Full Federal Court; Emmett, Middleton and Robertson JJ; 30 May 2012).