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Decision Impact Statement

Russell v Commissioner of Taxation

Venue: Full Federal Court
Venue Reference No: QUD 008/10
Judge Name: Dowsett, Edmonds & Gordon JJ
Judgment date: 4 February 2011
Appeal: The High Court refused an application for special leave to appeal by the taxpayer on 10 February 2012 - [2012] HCATrans 21.
Decision Outcome: Partly adverse

Administrative Treatment (Implication on current Public Rulings and Determinations)

Relevant Rulings/Determinations:

Subject References:
Personal services income
International Tax
New Zealand Agreement
Double taxation
Carrying on an enterprise
Meaning of 'creditable acquisition'

Précis

Outlines the ATO's response to this case that concerns, first, whether an overseas registered company is a 'personal services entity' and if payments to it are the taxpayer's assessable income. Secondly, whether a partnership carried on enterprises and is entitled to input tax credits.

Brief Summary of Facts

Income Tax - Individual taxpayer

1. The taxpayer applied for a position as an office manager with an Australian company.

2. A contract for the taxpayer's full time services was entered into between the Australian company and a New Zealand company, whose sole shareholder was the taxpayer's wife.

3. The Australian company made all payments for the taxpayer's services (less an amount for GST) to the New Zealand company.

4. The taxpayer claims not to have received salary or wages from the New Zealand company and only returned partnership distributions as income (amounts equal to the GST).

5. The taxpayer was assessed for personal services income (PSI) for the monies paid by the Australian company.

6. The Full Court found that these amounts constituted the taxpayer's PSI.

GST - Partnership

1. The taxpayer and his wife, as a partnership, purported to carry on a number of enterprises - accountancy practice, forestry activity and naturist retreat.

2. The Commissioner considered the partnership was not carrying on any enterprises and disallowed GST credits as being private expenses.

3. The primary judge found that the partnership was carrying on a forestry activity enterprise but not an accountancy practice or naturist retreat enterprise.

4. The Full Court found that the partnership was carrying on a naturist retreat enterprise but not an accountancy practice.

Issues decided by the Full Federal Court

1. Court unanimously dismissed the individual's appeal. The ITAA 1997 does not purport to tax profits of a New Zealand company but taxes part of its income as the personal services income of the individual. Pursuant to the ITAA 1997 the taxpayer's personal services income would be excluded from the New Zealand company's assessable income and therefore, its taxable income, as it was not part of its profits and therefore not taxation of the profits of the New Zealand company's enterprise.

2. On the issue of whether there are partnership input tax credits for expenses in relation to the accountancy practice enterprise and the naturist retreat enterprise, the Court held that the partnership:

•

 was not carrying on an accountancy practice and was not entitled to input tax credits (unanimously).

•

 was carrying on the enterprise of naturist retreat and was entitled to input tax credits (by majority)

ATO view of Decision

The ITAA 1997 does not bring to tax the profits of a New Zealand company but taxes, as statutory income, the personal services income of the individual. The facts of this case were unusual and it is not expected a factual scenario of like kind will often arise.

It was open on the facts to find that the partnership was carrying on a forestry enterprise and naturist retreat enterprise.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

None.

Implications for Law Administration Practice Statements

None.

Your comments

We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.

Date Issued:	2 July 2012
Due Date:	27 August 2012
Contact officer:	John Evans
Email address:	john.evans@ato.gov.au
Telephone:	(02) 9374 8173
Facsimile:	(02) 9374 8628
Address:	ATO, Latitude East, 52 Goulburn Street, Sydney, NSW, 2000

Legislative References:
Income Tax Assessment Act 1997 ("ITAA 1997")
s 4-1
s 6-5
Pt 2-42
s 86-20
s 86-30
s 86-35
s 86-60

A New Tax System (Goods and Services Tax) Act 1999
s 9-20
s 11-5
s 11-10
s 11-15
s 11-20
s 195-1

International Tax Agreements Act 1953
s 3(2)
s 4(2)
s 6B(1A)
Schedule 4 : NZ Agreement
Article 3(1)
Article 7(1)

Case References:
Commissioner of Taxation v. Anstis
[2010] HCA 40
272 ALR 1
76 ATR 735
2010 ATC 20-221
241 CLR 443

Commissioner of Taxation v. Swansea Services Pty Ltd
[2009] FCA 402
72 ATR 120
2009 ATC 20-100

Ell v. Federal Commissioner of Taxation
[2006] FCA 71
2006 ATC 4098
61 ATR 661

Fairwell Estates Pty Ltd v. Federal Commissioner of Taxation
[1970] HCA 29
123 CLR 153
1 ATR 726
70 ATC 4061

Fox v. Percy
[2003] HCA 22
214 CLR 118

Handley v. Federal Commissioner of Taxation
(1981) 148 CLR 182

John v. Federal Commissioner of Taxation
[1989] HCA 5
166 CLR 417
20 ATR 1
89 ATC 4101

McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation
[2005] FCAFC 67
142 FCR 134
2005 ATC 4398
59 ATR 358

Minister for Immigration and Multicultural and Indigenous Affairs v. OAAH
(2006) 231 CLR 1

NBGM v. Minister for Immigration and Multicultural and Indigenous Affairs
[2006] HCA 54
231 CLR 52

Peerless Marine Pty Ltd v. Federal Commissioner of Taxation
[2006] AATA 765
2006 ATC 2419
63 ATR 1303

Thiel v. Federal Commissioner of Taxation
(1990) 171 CLR 338
21 ATR 531
90 ATC 4717

Warren v. Coombes
(1979) 142 CLR 531