Russell v Commissioner of Taxation (includes Corrigendum dated 7 February 2011) [2011] FCAFC 10 (4 February 2011)

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Russell v Commissioner of Taxation (includes Corrigendum dated 7 February 2011) [2011] FCAFC 10 (4 February 2011)

Last Updated: 9 February 2011

FEDERAL COURT OF AUSTRALIA

Russell v Commissioner of Taxation [2011] FCAFC 10

Citation:		Russell v Commissioner of Taxation [2011] FCAFC 10
Appeal from:		Russell v Commissioner of Taxation [2009] FCA 1224
Parties:		ANTHONY WHITWORTH RUSSELL v COMMISSIONER OF TAXATION
File number:		QUD 8 of 2010
Judges:		DOWSETT, EDMONDS AND GORDON JJ
Date of judgment:		4 February 2011
Corrigendum:		7 February 2011
Catchwords:		TAXATION – effect of International Tax Agreements Act 1953 (Cth) – double taxation – New Zealand Agreement Article 7(1) – meaning of ‘personal services income’ under Pt 2-42 of Income Tax Assessment Act 1997 (Cth) – meaning of ‘enterprise’ – interpretation of international conventions incorporated into Australian law – deductions – s 11-5 of A New System (Goods and Services Tax) Act 1999 (Cth) – meaning of ‘creditable purpose’
Legislation:		Income Tax Assessment Act 1997 (Cth) A New System (Goods and Services Tax) Act 1999 (Cth) Taxation Administration Act 1953 (Cth) International Tax Agreements Act 1953 (Cth)
Cases cited:		Commissioner of Taxation v Anstis (2010) 272 ALR 1 Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402; (2009) 72 ATR 120 Ell v Federal Commissioner of Taxation 2006 ATC 4098 Fairwell Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153 Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 Handley v Federal Commissioner of Taxation (1981) 148 CLR 182 John v Federal Commissioner of Taxation [1989] HCA 5; (1989) 166 CLR 417 McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 Minister for Immigration and Multicultural and Indigenous Affairs v QAAH (2006) 231 CLR 1 NBGM v Minister for Immigration and Multicultural Affairs (2006) 221 CLR 52 Peerless Marine Pty Ltd v Federal Commissioner of Taxation 2006 ATC 2419 Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531
Date of hearing:	12 May 2010
Place:	Brisbane
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	104
Counsel for the Appellant:	The Appellant appeared in person
Counsel for the Respondent:	Mr RW Gotterson QC with Mr SR Lumb
Solicitor for the Respondent:	Australian Government Solicitor

FEDERAL COURT OF AUSTRALIA

Russell v Commissioner of Taxation [2011] FCAFC 10

CORRIGENDUM

1. Cases cited on the cover sheet, the case “Fairwell Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153” should read “Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153”.
2. In paragraph 70 of the Reasons for Judgment, in the first sentence, the word “Fairwell Estates” should read “Fairway Estates”.
3. In paragraph 87.6 of the Reasons for Judgment, in the last sentence, the word “Fairwell Estates” should read “Fairway Estates”.
   

I certify that the preceding three (3) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justices Dowsett Edmonds & Gordon JJ.

Associate:

Dated: 7 February 2011

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION	QUD 8 of 2010

ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY WHITWORTH RUSSELL Appellant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGES:	DOWSETT, EDMONDS AND GORDON JJ
DATE OF ORDER:	4 FEBRUARY 2011
WHERE MADE:	BRISBANE

THE COURT ORDERS THAT:

1. On or before 11 February 2011 the parties provide draft orders giving effect to the judgment of the Court; and
2. On or before 11 February 2011 the parties provide any submissions as to costs.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION	QUD 8 of 2010

ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY WHITWORTH RUSSELL Appellant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGES:	DOWSETT, EDMONDS AND GORDON JJ
DATE:	4 FEBRUARY 2011
PLACE:	BRISBANE

REASONS FOR JUDGMENT

DOWSETT J:

1. The judgment under appeal deals with two separate matters, one arising under the Income Tax Assessment Act 1997 (Cth) (the “1997 Act”), and the other arising under the A New System (Goods and Services Tax) Act 1999 (Cth) (the “GST Act”). Although the matters are factually related, I will deal with them separately.

THE INCOME TAX APPEAL

2. On 9 February 2007 the respondent (the “Commissioner”) issued notices of assessment in respect of income tax payable by the appellant (“Mr Russell”) for the years ended 30 June 2001, 2002, 2003 and 2004. The Commissioner also assessed penalties for each of those years, upon the basis of intentional disregard of the 1997 Act. Pursuant to s 284-220(1) of Sch 1 of the Taxation Administration Act 1953 (Cth) (the “Administration Act”) the penalty was increased by a further 20%. On the hearing of the appeal the Commissioner conceded that the additional penalty was excessive. On appeal, the primary Judge affirmed the assessments for the 2003 and 2004 years. His Honour remitted the 2002 assessment to the Commissioner so that he could issue an amended assessment reducing Mr Russell’s taxable income by $416.00. His Honour concluded that the assessment for 2001 understated Mr Russell’s income but dismissed the appeal in relation to that assessment. As to penalties, the primary Judge set aside the Commissioner’s decision, held that the base penalty should be 25% and remitted that penalty in full.
3. Mr Russell appeals against the decision on the basis that his Honour failed properly to apply the International Tax Agreements Act 1953 (Cth) (the “Tax Agreements Act”) and the relevant agreement with New Zealand contained in Sch 4 to that Act (the “NZ Agreement”). Mr Russell also complains about his Honour’s treatment of certain income apparently derived by a partnership known as “AW Russell & Co” (the “partnership”).

The taxpayer

4. Mr Russell and his then wife, Catherine Patricia Russell (nee Orange), arrived in Australia from New Zealand in or about February 2000. Mr Russell claims to have been an accountant in New Zealand but is not a registered tax agent in Australia. Mr and Ms Russell entered into the partnership by agreement dated 1 January 2001. On 23 February 2004 Ms Russell resigned as a partner. However she continued to receive a share of partnership profits. Both before and after Ms Russell’s resignation the partnership purported to receive amounts from a New Zealand company, then called Ancath Corporation Limited (“Ancath”). At all material times, Ms Russell was its sole shareholder. Ancath paid amounts to both Mr and Ms Russell. Notwithstanding Ms Russell’s resignation and the probable dissolution of any partnership, I will refer to the entity which received money from Ancath and paid money to Mr and Ms Russell as the “partnership”, regardless of whether the relevant receipt or payment occurred before or after such resignation.
5. On or about 4 August 2000 Ancath entered into a contract with an Australian company, Tradecorp International Pty Ltd (“Tradecorp”), for the supply of Mr Russell’s services by Ancath to Tradecorp. Tradecorp was to pay Ancath $45,000 per annum plus 8% superannuation. Mr Russell was entitled to eight days’ paid sick leave and four weeks’ annual leave, in addition to statutory holidays. On 24 September 2001, by addendum to the contract, the annual payment was increased to $65,000 plus a superannuation allowance. Ancath provided Mr Russell’s services to Tradecorp from August 2000 until August 2004. Ancath issued tax invoices to Tradecorp for such services, generally monthly. Tradecorp remitted payment to Ancath’s New Zealand account. After 20 March 2001 Tradecorp was instructed to pay goods and services tax (“GST”) to the partnership, described in the invoices as Ancath’s Australian agent. Thereafter, Tradecorp made such payments.
6. In the years in question Mr Russell returned income in his individual tax returns as shown below. These amounts comprised 50% of the net income allegedly derived by the partnership for the relevant years of income. The Commissioner’s assessments also appear below. Those amounts are:

	Returned	Assessed
2001	$4,119.00	$ 43,186
2002	$4,331.00	$ 87,954
2003	$5,274.00	$106,548
2004	$5,751.00	$74,893

7. The assessments reflected the Commissioner’s view that in each year Mr Russell had received “personal services income” as contemplated by Pt 2-42 of the 1997 Act. As I have said, the Commissioner also assessed penalties. Mr Russell lodged an objection against those assessments and, on 6 June 2007, the Commissioner issued objection decisions disallowing the objections. On 2 August 2007 Mr Russell appealed against the various objection decisions. The primary Judge concluded that the assessment for the 2001 year should have been $45,055, and for the 2002 year, $87,538.00. His Honour otherwise dealt with the appeal as I have described above.

Personal services income

8. The concept of personal services income emerges from Pt 2-42 of the 1997 Act. Broadly speaking the Commissioner contended, and the primary Judge held that the effect of that part was that the amounts paid by Tradecorp to Ancath in respect of the services rendered by Mr Russell comprised his “personal services income” and were therefore to be included in his assessable income. As I understand it, Mr Russell challenges his Honour’s conclusions in two respects. First, he submits that pursuant to the Tax Agreements Act, including the NZ Agreement, his personal services income is not taxable in Australia because it is the income of Ancath, a New Zealand resident. Secondly, he submits that amounts paid by Ancath to the partnership should be treated as in some way reducing his liability. It is not entirely clear whether Mr Russell claims that they are allowable deductions or that the amounts have already been taxed in such a way as to relieve him from liability to tax.

The Tax Agreements Act

9. The Tax Agreements Act gives the force of law to certain agreements as to tax between the Australian and other governments. The relevant agreements are contained in schedules to the Act. The Tax Agreements Act, itself, says little about the content of the various agreements or their effects. However I should set out certain of its provisions.
10. Pursuant to s 3(1) the term “Assessment Act” includes both the 1997 Act and the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”).
11. Section 3(2) provides:

For the purposes of this Act and the Assessment Act, a reference in an agreement to profits of an activity or business shall, in relation to Australian tax, be read, where the context so permits, as a reference to taxable income derived from that activity or business.

12. Section 4 provides:

(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.

(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160AO or Part IVA of that Act) or in an Act imposing Australian tax.

13. Section 6B(1A) provides:

Subject to this Act, on and after the date of entry into force of the New Zealand agreement, the provisions of the agreement, so far as those provisions affect Australian tax, have the force of law according to their tenor.

The NZ Agreement

14. The NZ Agreement is, I understand, generally in accordance with a model prepared by the Organization for Economic Co-operation and Development (the “OECD”). Understandably, there are documents emanating from the OECD concerning its interpretation. There are also decisions of overseas courts and academic commentary concerning such interpretation. The primary Judge made extensive reference to that material.
15. Mr Russell relies primarily upon art 7(1) of the NZ Agreement which provides:

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

16. Australia and New Zealand are the Contracting States for the purposes of the New Zealand Agreement. Pursuant to art 3(1)(f) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively “an enterprise carried on by a resident of the Contracting State” and “an enterprise carried on by a resident of the other Contracting State ...”.
17. At [113] the primary Judge set out Mr Russell’s case as follows:

(a) Ancath’s income from Tradecorp forms part of its assessable income in New Zealand;

(b) were Ancath itself taxed in Australia on this income it would receive a credit as against its New Zealand tax for any Australian tax it paid;

(c) the personal services income regime in Pt 2-42 of the [1997 Act] deems Ancath’s income to be part of [Mr Russell’s] assessable income;

(d) Ancath receives no credit in New Zealand for any Australian tax it pays on income so included by deeming; and

(e) the outcome, at least potentially, is double taxation and hence it is in breach of the double taxation agreement.

18. At [115] his Honour continued:

[Mr Russell] then submitted that the effect of the requirement flowing from s 4 of the [Tax Agreements Act] to read that Act with [the 1997 Act] meant that Pt 2-42 could have no application so as to deem what was Ancath’s income to be his when that income formed part of Ancath’s assessable income in New Zealand because that would amount to taxing the profits of Ancath, which was an enterprise of New Zealand, in Australia rather than, as art 7 of the Double Taxation Agreement required, in New Zealand only.

The decision at first instance

19. Because Mr Russell’s appeal is quite limited in scope, I need not examine many aspects of the decision at first instance. Concerning the application of the Tax Agreements Act, his Honour said:
    119. On the basis of the evidentiary findings I have made, Pt 2-42 of the [1997 Act] will apply so as to subject Mr Russell, not Ancath, to taxation in Australia. It is true that art 7 cl 1 uses the language “the profits of the enterprise”. Read in isolation, and affording primacy to the New Zealand double taxation agreement as incorporated by the [Taxation Agreements Act], that might be thought to support the notion that any measure which would subject those profits to taxation, even if the means of so doing was to deem the same to form part of the assessable income of an individual, rather than the enterprise which derived them, was inconsistent with the [NZ Agreement]. The foundation for such an approach to interpretation would be “juridical” in the sense that it would be textual.
         
    120. The difficulty with that approach is that, read in the context not only of the balance of art 7 but the [NZ Agreement] agreement as a whole, the focus of the clause is on the prevention of the double taxation of an “enterprise”, not of profits as an abstract, economic concept.
         
20. His Honour then considered the OECD commentaries, court decisions and academic work, concluding that such material favoured the view that he should take a “juridical” approach to the construction of art 7 of the NZ Agreement rather than an “economic” approach. I take this distinction to be between a textual approach and an approach which focuses on economic effect.

Enterprise

21. The word “enterprise” is of some significance in the operation of art 7. The meaning of that word, in the context of an agreement with Switzerland, was considered by the High Court in Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338, especially at 344-5 per Mason CJ, Brennan and Gaudron JJ, at 350-352 per Dawson J and at 357-359 per McHugh J. It seems that the word has a broad meaning. As Mason CJ, Brennan and Gaudron JJ said at 344:

... an activity, as well as a framework within which such activities are engaged in, may constitute an “enterprise” for the purposes of the agreement.

22. In other words, a business, in the usual sense, will be an enterprise. However an activity, which might not generally be treated as a business because of lack of continuity, may also be an enterprise; certainly if the activity amounts to an adventure in the nature of trade: Edwards v Bairstow (1956) AC 1; Minister of National Revenue v Tara Exploration and Development Co Ltd (1972) 28 DLR (3d) 135; Thiel at 352 per Dawson J; at 360 per McHugh J.

Profits of an enterprise

23. As a relevant enterprise is one which is carried on by a resident of a Contracting State, it follows that the term “enterprise” does not denote the person carrying on the enterprise, whether that person be a natural person or a corporation. Mr Russell’s case necessarily involves the assertion that Ancath was carrying on an enterprise. The primary Judge seems to have concluded that its only activity was the supply of Mr Russell’s services to Tradecorp. That activity must be the relevant enterprise. The primary Judge found that Ancath had returned the amounts received from Tradecorp as “fees received”. Whether such amounts were “profits of (the) enterprise” seems not to have been considered but was, perhaps, assumed.
24. I note that for the years ended 31 March 2001 and 31 March 2002, Ancath’s net income is shown as $37232.60 and $43,050.66 respectively. For the years ended 31 March 2003, net income is shown as $12.98. For the year ended 31 March 2004, it is shown as $6.38. For the year ended 31 March 2005, it is $4.43. I am not sure whether these are New Zealand or Australian dollars. It does not matter. The significant differences in income between 2001 and 2002 on the one hand, and 2003, 2004 and 2005 on the other appear to be attributable to the amounts paid as “management fees” in all years.

Interpretation of international conventions

25. The primary Judge observed that the NZ Agreement generally followed the OECD model and that:

It is settled that, in construing such an agreement, a court may have regard to, inter alia, the OECD commentary on its model agreement ... .

26. The decision in Thiel is quoted as authority for this proposition. Reference is also made to the decision of the Full Court in McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 at [42]. It is certainly true that in both cases, reference was made to such commentary. However both of those cases were decided prior to the decisions of the High Court in Minister for Immigration and Multicultural and Indigenous Affairs v QAAH (2006) 231 CLR 1 and NBGM v Minister for Immigration and Multicultural Affairs (2006) 221 CLR 52. In both cases the Court emphasized the primary position of the words used in Australian legislation and the Australian rules of statutory interpretation in construing legislation which gives effect to international obligations, including treaties. Thus, in QAAH at [34], Gummow ACJ, Callinan, Heydon and Crennan JJ said, after discussing various aids to interpretation of such legislation:

The relevant law of Australia is found in the Act and in the Regulations under it. It is Australian principles of statutory interpretation which must be applied to the Act and the Regulations.

27. After referring to the approach taken to legislation and regulations giving effect to international conventions their Honours continued:

But despite these respects in which the Convention may be used in construing the Act, it is the words of the Act which govern.

28. In NBGM, Callinan, Heydon and Crennan JJ, with whom Gummow ACJ agreed, observed, at [61], concerning the approach taken by a member of this Court in the decision under appeal:

It is appropriate to point out at this stage that to approach the matter in that way was to invert the steps which an Australian court should take in situations in which international instruments have been referred to in, or adopted wholly or in part by, enactments. The first step is to ascertain, with precision, what the Australian law is, that is to say what and how much of an international instrument Australian law requires to be implemented, a process which will involve the ascertainment of the extent to which Australian law by constitutionally valid enactment adopts, qualifies or modifies the instrument. The subsequent step is the construction of so much only of the instrument, and any qualifications or modifications of it, as Australian law requires. The first step is not, contrary to his Honour’s express holding, to derive an understanding of the proper interpretation and operation of the Convention.

29. At [68]-[69] their Honours continued:
    68. It is desirable to say something further, however, about the proper approach to the construction of the Act and the Convention. Section 36 of the Act must be considered in context. The context is provided by other provisions of it. ...
        
    69. The Convention does not provide any of the framework for the operation of the Act. The contrary is the case. That does not mean that the Convention in and to the extent of its application to Australia should be narrowly construed. It simply means that Australian law is determinative, and it is that which should be clearly ascertained before attention is turned to the Convention.
        
30. Whilst I remain bound by the actual decision in Thiel, the approach adopted in QAAH and NBGM appears to require care in referring to material concerning international instruments. I see no reason for applying a different approach to model agreements. The approach is of some importance in the present case. Mr Russell’s primary criticism of the decision is that his Honour relied upon “OECD rulings or pronouncements”. As he puts it in his submissions in reply at paras 1 and 2:
    1. [The Commissioner] appears to be re-writing the [NZ Agreement] between Australia and New Zealand. He has assumed words to exist that are simply not there. At his paragraph 8 he suggests that Article 7 “is concerned only with the taxing of the same profit, in two or more States in the same period, in the hands of the same legal entity”. Underlining is mine and these words underlined simply do not appear in Article 7, nor elsewhere in the Act. Section (f) of Article 3 defines the term “enterprise” as follows – “the term ‘enterprise’ applies to the carrying on of any business”. The [NZ Agreement] has been carefully worded to exclude any reference to the double taxing of an entity and instead the [NZ Agreement] refers to the double taxing of “profits of an enterprise”. Given such wording it is therefore quite possible, I suggest, that there could be, as between the contracting states, more than one entity.
       
    2. At his paragraph 11, the [Commissioner] has provided authorities for referring to OECD Commentaries. However, there is nothing in the [NZ Agreement] ... nor in the [Tax Agreements Act], that allows for such Commentaries to over ride the Agreement. The Act, by embodying the NZ Agreement] ... at Schedule 4, is the dominant legislation or authority. Only when the text is unclear should regard be had to the Vienna Convention on the Law of Treaties in order to correctly interpret the treaty, but in so doing the courts must, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions, something, I respectfully submit, the Court below failed to do.
       
31. I do not accept that the primary Judge’s consideration of the NZ Agreement focussed upon the material concerning the OECD model to the exclusion of the wording of the Tax Agreements Act and the NZ Agreement. At [120] his Honour records his view as to the effect of the wording of the NZ Agreement. In subsequent paragraphs he discusses the international material, concluding that it supports that view. In any event, I propose to focus upon the terms of the Tax Agreements Act, including the NZ Agreement.

Article 7(1)

32. Mr Russell’s primary submission is simply that the amounts which have been treated as being his personal services income were parts of the profits derived by Ancath, a New Zealand resident. The question is whether the effect of the Commissioner’s assessments is that Ancath’s profits are being taxed in Australia. As I understand it, Ancath allegedly made payments to the partnership, calculated as a percentage of the former’s profits, as fees for services provided. The partnership then distributed amounts to both Mr and Ms Russell. The latter continued to receive such payments even after her resignation from the partnership, which resignation presumably brought it to an end.
33. Mr Russell’s argument is that art 7(1) confers Australian tax immunity upon Ancath’s profits and that such immunity extends to moneys received by him from the partnership, which moneys were, in turn, derived from Ancath’s profits. The 1997 Act does not purport to tax Ancath’s profits. Rather, it treats part of Ancath’s income as being, for Australian tax purposes, that of Mr Russell and taxes it in his hands. Pursuant to s 4(2) of the Tax Agreements Act, its provisions, including the NZ Agreement, take effect notwithstanding inconsistent provisions in the 1997 Act. Whether there is any relevant inconsistency for present purposes depends upon the construction of art 7(1). That question must be resolved in the context of the Tax Agreements Act as a whole, including the NZ Agreement.
34. The purpose of the inquiry is to determine whether the 1997 Act imposes a tax on Ancath’s profits. The starting point is the meaning of the term “profits of an enterprise” in art 7(1). Such meaning will define the ambit of the protection given by that article. The only apparent guide to the meaning is s 3(2). There is little doubt that the words “profits of an activity or business” are intended to refer to an enterprise of the kind identified in art 7(1). Article 7 is headed “Business profits”. For the purposes of the Tax Agreements Act and the 1997 Act (which are to be read together), the profits of an enterprise are taken to be its taxable income. That provision is subject to two conditions:
    • that it applies only “in relation to” Australian tax; and
    • that the context so permits.
35. I am presently seeking to determine the extent to which Ancath’s profits are protected from liability to taxation pursuant to Australian law. I conclude that the relevant question is “in relation to Australian tax”. The first condition is satisfied. As to the second, there is no immediately obvious basis for concluding that the context does not permit such an approach. Section 3(2) is not limited in its operation to Australian enterprises. Prima facie, it applies to New Zealand enterprises. Although the core meaning of the term “profits” is generally understood, there can be difficulty in identifying a clear meaning in specific cases. It is therefore not surprising that the Australian Parliament should have sought clearly to define the ambit of protection to be conferred by the Tax Agreements Act. The well-established regime contained in the 1936 Act and the 1997 Act was an appropriate way of so doing. As I have observed, both Acts are incorporated into the Tax Agreements Act.
36. Pursuant to s 4-15 of the 1997 Act “taxable income” is the difference between a taxpayer’s assessable income and his or her deductions. Both assessable income (s 6-5) and allowable deductions (s 8-1) are those of an identifiable taxpayer. It follows that the “profits” of an enterprise which are protected from Australian taxation are those which would, according to Australian law, otherwise be taxable income in the hands of an identifiable taxpayer.
37. Pursuant to s 86-30 of the 1997 Act, Mr Russell’s personal services income would be excluded from Ancath’s assessable income and, therefore, from its taxable income. It follows that it was not part of its profits. Thus the taxation of Mr Russell’s personal services income is not taxation of the profits of Ancath’s enterprise. There is nothing surprising about such an outcome. Part 2-42 is plainly an anti-avoidance measure. Ancath’s so-called profits were effectively attributable to Mr Russell’s exertions. There is no reason to believe that Parliament intended, in enacting the Tax Agreements Act, that an Australian resident, earning personal services income in Australia, should be able to avoid the operation of Pt 2-42 simply by using a New Zealand company. Although it does not appear clearly from the Commissioner’s submissions, this line of reasoning underlies the assertions made in paras 4, 5 and 21 of his written submissions. In those circumstances, it is not necessary to consider the OECD material, overseas cases and academic commentary. His Honour’s conclusion was correct.

Amounts returned by the partnership or Mr Russell, or claimed as deductions by him

38. In para 2 of the notice of appeal Mr Russell asserts that:

In assessing the amounts of personal services income the Court failed to allow a deduction for amounts already returned via the partnership of AW Russell & Co and assessed as income.

39. In para 18 of his outline of submissions, Mr Russell asserts:

Should the Court in its wisdom uphold the decision of the Court below, then I submit that I should be allowed as a deduction in arriving at the amounts of the PSI assessed to me 50% of the income allocated by [Ancath] to the partnership ... as my share of those amounts has already been returned by me and included by the [Commissioner] in his assessments of my income. The Court below erred in its decision to disallow all of these amounts as a deduction as it:

(i) failed to recognize that the amounts allocated to the partnership by [Ancath] had been returned in Australia as income and assessed by the [Commissioner], and

(ii) failed to recognize that the amounts had been treated as deductions in the New Zealand tax returns of [Ancath].

40. The amounts in question are said to be:

Year ended 30 June 2001 $30,000
Year ended 30 June 2002 $30,000
Year ended 30 June 2003 $25,000
Year ended 30 June 2004 $33,000

41. The Commissioner does not accept that such amounts were received by the partnership. The partnership returns show assessable income, partnership net income and distributions to Mr Russell as follows:

Year	Assessable income $	Net partnership income $	Distributed to Mr Russell $
2001	41466	8237	4119
2002	40475	8662	4331
2003	36503	10549	5274
2004	39999	11501	5751

42. It is not entirely clear whether Mr Russell claims an entitlement to deductions or that he has already returned parts of his personal services income as income. The amounts shown above as distributions were returned as income by Mr Russell. However they were reflected in adjustments made by the Commissioner in the 2007 assessments. As to the amounts allegedly paid by Ancath to the partnership, Mr Russell identifies no apparent basis for his claiming any reduction in the tax assessed on his personal services income in respect of such amounts.
43. The Commissioner understood this aspect of the appeal to be an attempt to claim deductions available to Ancath. Pursuant to s 86-20 certain deductions incurred by a personal services entity, in this case Ancath, may be deducted from the personal services income attributed to the relevant taxpayer, in this case Mr Russell. The primary Judge concluded that Mr Russell was not entitled to such deductions by virtue of the operation of ss 86-35(1)(d) and 86-60. Mr Russell has not sought to challenge those conclusions. I need not consider the matter further.

THE GOODS AND SERVICES TAX APPEAL

44. Section 11-5 of the GST Act provides:

What is a creditable acquisition?
You make a creditable acquisition if:
(a) you acquire anything solely or partly for a creditable purpose; and
(b) the supply of the thing to you is a taxable supply; and
(c) you provide, or are liable to provide, consideration for the supply; and
(d) you are registered, or required to be registered.

45. Section 11-15 provides:

Meaning of creditable purpose
(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:
(a) the acquisition relates to making supplies that would be input taxed; or
(b) the acquisition is of a private or domestic nature.

(3) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that the supply is made through an enterprise, or a part of an enterprise, that you carry on outside Australia.

(4) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed if:
(a) the only reason it would (apart from this subsection) be so treated is because it relates to making financial supplies; and
(b) you do not exceed the financial acquisitions threshold.

(5) An acquisition is not treated, for the purposes of paragraph (2)(a), as relating to making supplies that would be input taxed to the extent that:
(a) the acquisition relates to making a financial supply consisting of a borrowing; and
(b) the borrowing relates to you making supplies that are not input taxed.

46. Section 11-20 provides:

Who is entitled to input tax credits for creditable acquisitions?
You are entitled to the input tax credit for any creditable acquisition that you make.

47. Section 9-20(1) provides:

An enterprise is an activity, or series of activities, done:

(a) in the form of a business; or
(b) in the form of an adventure or concern in the nature of trade; or
(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
(d) ...
(da) ...
(e) ...
(f) ...
(g) ...
(h) ...

48. Section 9-20(2) provides:

However, enterprise does not include an activity, or series of activity, done:
(a) ...
(b) as a private recreational pursuit or hobby;
...

49. The term “acquisition” is defined in s 11-10 but I need not refer to it.
50. The term “business” is defined in s 195-1 as follows:

Business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

51. The term “carrying on” is defined as follows:

Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

52. Mr Russell claims that in the relevant tax years, the partnership conducted the following “enterprises”:
    • an accountancy practice;
    • a forestry activity; and
    • a naturist retreat.
53. On that basis he claims that the partnership was, in those years, entitled to input tax credits in connection with various acquisitions. The Commissioner disallowed the claim upon the basis that the partnership was not carrying on any of these enterprises. He also imposed a penalty. Mr Russell filed an objection which was disallowed. He then appealed to this Court. The primary Judge allowed the appeal in so far as concerns the forestry activity but otherwise dismissed it. This is an appeal from that decision. His Honour also held that in any event, as the partnership was dissolved by Ms Russell’s resignation on 23 February 2004, no input tax credits accrued after that date. There is no appeal against that aspect of the case. At first instance Mr Russell also appealed against the Commissioner’s imposition of a penalty. There appears to be no separate appeal in connection with the primary Judge’s conclusions concerning that matter. I would think that if the appeal is successful, the penalty may have to be reconsidered.
54. Mr Russell appeals against his Honour’s findings of fact. However the decision appears to have reflected the primary Judge’s serious concerns about Mr Russell’s evidence. He noted that evidence given by him in the Industrial Commission differed from his evidence in these proceedings, making critical observations concerning his reliability at [71]-[78]. He also made adverse comments concerning Mr Russell’s failure to produce a Mr Miedema for cross-examination, either in Australia or in New Zealand. Mr Miedema had sworn an affidavit but did not appear for cross-examination. The affidavit was therefore not received in evidence. Mr Miedema was the sole director of Ancath during the relevant period. Clearly, his Honour rejected much of Mr Russell’s evidence concerning the activities of the partnership.

The accountancy practice

55. Mr Russell submits that the partnership was providing accounting services to Ancath and other, unidentified clients. The arrangement with Ancath was that the partnership would be paid fees calculated as a percentage of Ancath’s income. In evidence is a service agreement between Ancath and the partnership, pursuant to which the latter was to provide the following services to the former:

(i) To supervise the work carried out by Anthony Russell.
(ii) To check to ensure that all aspects of the contractual arrangements between Ancath and its Australian client(s) are met in full to best practice.
(iii) To keep a check on Anthony Russell’s hours of work.
(i) To monitor client satisfaction.
(v) To make regular reports to Ancath’s Director.
(vi) To provide a motor vehicle for Anthony Russell’s use to ensure that he is able to travel to and from his work place and to keep the vehicle in good repair, serviced and fuelled.
(vii) To provide office facilities for Anthony Russell should he have a need to perform work away from the client’s address.
(viii) Any other services which may be required from time to time as requested by Ancath’s director.

56. In his submissions Mr Russell asserts that:
    8. The fact that a share of income was actually allocated by [Ancath] to [the partnership] in each of the years in question indicates that the partnership must have been performing services of some sort for the company otherwise such income would not have been allocated. The service agreement between the two parties, whilst it might be subject to some contention by the [Commissioner], certainly leads [sic] some weight as to why there were income allocations. The finding by the Court below that the service agreement was not acted upon was wrong.
       
    9. Whilst under cross-examination I might have said in regard to other accountancy clients that there was “nothing much”, I did not say there was none. Reference to the partnership tax returns ... and appendix A of my submissions dated 4 May 2010 shows that in addition to the income allocations for Ancath there was other accountancy practice gross income of $11,466 in 2001, $10,475 in 2002, $11,503 in 2003, and $6,990 in 2004 ... . Such income does not arise in a vacuum.
       
57. The primary Judge concluded that nothing in the evidence indicated that the partnership had clients other than Ancath. At [211] his Honour referred to Mr Russell’s evidence that at the relevant time, there was “nothing much” by way of clients other than Ancath. Mr Russell takes issue with his Honour’s use of that expression to infer that there were no other clients. However he has not demonstrated that the inference lacked a factual basis. His Honour found that no work had been performed pursuant to the agreement with Ancath, and that to the extent that Mr Russell was supervised in his work for Tradecorp, it was by officers of that company. His Honour also referred to Mr Russell’s statement in the Queensland Industrial Relations Commission that:

For many years I operated my own private practice before coming to Australia. Since then I have not been in a public practice environment, because of my lack of Australian tax knowledge, and instead I have been involved in financial and management accounting work.

58. The other partner (Ms Russell), was not a qualified accountant, although she was a member of the Institute of Directors in London and had experience in corporate receivership and liquidation work. There is no evidence that she relevantly undertook any such work. The only evidence as to any “financial and management accounting work” undertaken by Mr Russell was in connection with Tradecorp. He performed that work as an employee of Ancath, not as a partner or employee of the partnership.
59. The partnership also acted as Ancath’s Australian agent for the purpose of collecting GST payments from Tradecorp. The primary Judge concluded that this role had been performed gratuitously and therefore did not constitute an enterprise conducted by the partnership.
60. Mr Russell says that the amounts paid to the partnership by Ancath constituted “the bulk of the partnership’s gross income” and were returned as partnership profits in each relevant year. Mr Russell also asserts that the Commissioner “has assessed the net profit/loss of all the partnership’s activities for income tax purposes and that he cannot refuse to allow the same expenses that have gone into the make-up of that net profit/loss as eligible input tax credits for GST purposes”. The Commissioner points out that this assertion is incorrect in that in each relevant year the Commissioner issued nil tax advices to Mr Russell and that “the issuing of [those notices] cannot have constrained [the Commissioner] in administering the GST Act”. Mr Russell submits that, nonetheless, such amounts were assessed as taxable income and that “the [Commissioner] has thus from the outset been satisfied that for income tax purposes a business activity was being conducted by the partnership in respect of all three of its activities”. I cannot read the nil tax advices as indicating any more than that on the income as returned, no tax was payable. This submission takes Mr Russell’s case nowhere.
61. As I have said, Mr Russell asserts that the fact that Ancath was paying substantial amounts to the partnership suggests that the partnership was doing something for it. That may have been a persuasive argument in some circumstances but, if it was advanced at first instance, there is no reason to believe that it was not considered. Further, the argument assumes that Mr Russell’s evidence was accepted at face value when, in fact, his Honour had very considerable doubts about its reliability.
62. Mr Russell asserts that the partnership had income other than the amounts received from Ancath, apparently inviting an inference that it was involved with other “clients”. However he offers no basis for upsetting his Honour’s conclusion to the contrary.
63. The Commissioner submits that if there were an accounting practice, there was no evidence of any reasonable expectation of a profit from it. Mr Russell argues that the submission ignores the actual results disclosed in the partnership tax returns. He submits that as neither the forestry activity nor the development of the naturist retreat was producing income in the relevant tax years, any income must have come from the accountancy practice. If such an argument was advanced at first instance, it seems not to have found favour with the primary Judge.
64. I see no basis for doubting the correctness of his Honour’s conclusion that the partnership was not carrying on an accounting practice.

The naturist retreat

65. Both Mr Russell and Ms Russell are naturists. Mr Russell tendered a business plan, said to have been prepared in 2001 or 2002, for an enterprise called “Catherine’s Sarina Nudist Retreat”. The document reads:

Catherine’s
Sarina Naturist Retreat
The Plan
1. To develop a high standard retreat for nudists:
(a) day visitors from the greater Mackay region;
(b) tourist;
(c) the annual migration of grey-haired gypsys [sic].

2. To purchase a situated property (now located) not too far from shopping facilities which is private or which can be made private.
   
3. To develop the property to suit a nudist retreat. This will involve:
   

(a) Stage 1
removal of all internal fencing
installation of a spa pool
construction of in-ground free-form swimming pool
toilets and shower facilities
covered barbeque area with gas barbeque
planting of farm forestry trees as per farm forestry plan.

(b) Stage 2
apply to council for consent
slabs for caravan sites to be poured and power boxes connected
purchase and renovate three non-working refers
gateway to be rebuilt and installation of electronic gate
lining of shed and purchase of 8 x 4 pool table.

66. The activities identified in stage 1 were undertaken in and prior to 2004. Tree planting was for the purposes of both the partnership’s forestry activity and the naturist retreat. Some of the trees provided a screen along a road. Those trees were also to be harvested eventually. Mr Russell said that he had deferred stage 2 of the project as a result of his separation from his wife and because of financial uncertainties flowing from the Commissioner’s investigation of his affairs and the subsequent assessments.
67. His Honour observed that although stage 1 of the project had been carried out, “that work is equally consistent with the development of a residential property for purely private residential purposes”. Notwithstanding his considerable caution concerning Mr Russell’s evidence, the primary Judge did not reject Mr Russell’s assertion that he had a plan to construct and conduct a naturist retreat. He seems to have been inclined to accept much of this evidence. See [240]-[245].
68. Nonetheless his Honour observed:
    249. When the definition of “carrying on” is recalled, it can be seen that a thing may be acquired for a creditable purpose to the extent that it is acquired in the course of the commencement of, materially, a business. The converse of this, necessarily, in my opinion, is that a thing acquired otherwise than in the course of the commencement of a business, even though it may ultimately be deployed in a business once that business commences, is not acquired for a creditable purpose.
         
    250. An acquisition may be a creditable acquisition even though it would not give rise to a deduction under section 8-1 of the [1997 Act]. For example, an acquisition on capital account in the course of the carrying on of a business would not give rise to a deduction under section 8-1 of the [1997 Act] but, all other things being equal, would give rise to a creditable acquisition.
         
    251. That the notion of a creditable acquisition is wider than the notion of an income tax deduction expenditure raises an interrogative note about why “carrying on” was defined in such an inclusive way. Commencement and termination expenditures can, in the income tax deduction context, be regarded as not incurred in, ie in the course of, the carrying on of the business. Are, for example, expenditures on capital works in respect of an accommodation facility before that facility has opened its doors to paying customers, to be regarded as expenditures “in the course of the commencement of the accommodation facility business?”
         
69. His Honour then went on to consider the problem of identifying the “commencement” of a business, concluding that it was a question of fact. He referred to Peerless Marine Pty Ltd v Federal Commissioner of Taxation 2006 ATC 2419, a decision of the Administrative Appeals Tribunal. In that case, a taxpayer company, formed for the purpose of building luxury catamarans for sale, had constructed a catamaran, intending that it be used as a demonstrator vessel to assist in securing orders for other vessels. The construction costs were more than anticipated and, as a result, the business was abandoned and the vessel sold. The taxpayer claimed expenses attributable to carrying on a business and also claimed input tax credits. The reasons are largely concerned with the operation of the 1997 Act. The Tribunal cited at length from the judgment of Emmett J in Ell v Federal Commissioner of Taxation 2006 ATC 4098 at [111]-[114]. That case was concerned with the 1936 Act and the 1997 Act rather than with the GST Act. The cited passage concerned the question of whether the taxpayer was carrying on a business. Relevantly for present purposes, Emmett J said:
    111. Although not determinative, intention is relevant where, for example, a particular activity produces no income ... or where the first step in a business is undertaken ... . It is necessary to examine the activities engaged in, including their nature and extent ... . Activities may constitute the carrying on of a business even though the activities are carried on in a small way and it is not for the Commissioner to dictate to a taxpayer in which business the taxpayer engages or how to run a business profitably or economically ... . Provided that an activity said to constitute carrying on business is engaged in for the purpose of profit on a continuous and repetitive basis, that activity may constitute the carrying on of business ... .
         
    112. If there were no real expectation of a profit from engaging in a particular activity, there will be real doubt as to whether engaging in that activity can be said to be the carrying on of a business. Where the expenses and outgoings of an activity are disproportionate to any income that might reasonably have been expected from engaging in the activity that involved incurring those expenses and outgoings, it may be legitimate to draw an inference that the expenses and outgoings were not incurred in gaining or producing the relevant assessable income but were incurred for some other purpose.
         
    113. Where expenses and outgoings claimed as deductions are disproportionate to the assessable income produced, subjective factors, including the direct and indirect objects of a taxpayer, may become determinative ... . Where an expense or outgoing claimed as an expense or outgoing of a business is disproportionate to any assessable income that may be gained, it will not be as easy to conclude that the expense or outgoing was incurred in gaining or producing that income ... .
         
    114. The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business ... . Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical ..., provided it is carried on with the purpose of making a profit ... . The Taxpayers say that they had a profit making purpose or intention in relation to the use of Athena.
         
70. As Barwick CJ said in Fairwell Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153 at 166:

Further, in my opinion, there can be a course of business although as yet there is nothing more than an intention to carry on the business and a single transaction carried out in pursuance of that intention.

71. Mr Russell asserts that he was constructing a naturist retreat with the intention of conducting it at a profit. For present purposes a person will be carrying on an enterprise if he or she is doing anything in the course of the commencement of such an enterprise with the intention of continuing with the enterprise. Both Peerless Marine and Ell demonstrate that the acquisition or construction of a capital asset for the purpose of carrying on an enterprise or business may be an act performed in the carrying on of such enterprise or business. The GST Act gives express recognition to this proposition in the definition of the term “carrying on” of an enterprise. It expressly includes things done “in the course of the commencement or termination of the enterprise”. However, as his Honour recognized, commencement of the enterprise is not necessarily the same thing as taking a step in preparation for such commencement.
72. The cases also establish that the intention of the relevant taxpayer may indicate whether or not a particular action constitutes the carrying on of a business or enterprise, or whether it is attributable to some other purpose. In the present case, the question is whether, in making the relevant acquisitions, primarily in connection with the construction of a swimming pool, Mr Russell was acting in the course of the commencement of his enterprise, namely the establishment and conduct of a naturist retreat. That conduct, by itself, may have been in the course of commencing such enterprise, or it may have been for the purpose of providing the pool for personal use. Mr Russell’s intention was relevant to that question. The question was as to his intention at the time at which the acquisitions were made, that is between about 2000 and 2004. Subsequent events may have been relevant to the question but were not necessarily determinative of it.
73. As I have observed, his Honour took a fairly positive view of Mr Russell’s evidence concerning this aspect of the case. However he made no findings as to his intentions. Given the passage of time without further progress, there may well have been reason to doubt that there was any intention to construct and conduct a naturist retreat. The division of the development into stages may also have been suggestive of an anticipated break in the development of the facilities needed in order to carry on the proposed business. However Mr Russell offered other explanations for the failure to carry on with the project. Those reasons could not be summarily discounted. He referred particularly to the break-up of his marriage and the Commissioner’s investigation. In our view, the ultimate question could only be determined by deciding whether or not Mr Russell had proven that his purpose at the relevant time was the establishment and conduct of a naturist retreat. If that was his purpose, and if he intended to pursue that purpose actively to the point where the retreat was in operation and thereafter, then an available inference was that he had commenced his enterprise.
74. The primary Judge failed to address this question. The thrust of his reasoning appears at [252] and [253]. At [252]-[253] his Honour said:
    252. Identifying the “commencement” of a business is, obviously, a question of fact but that does not mean that the question will always admit of an easy answer. That is nicely illustrated by Peerless Marine. Peerless Marine professed to be carrying on a boat production business in respect of luxury motor cruisers. It had sold none but sought, inter alia, to claim input tax credits in respect of the design and construction of a prototype. It succeeded in establishing that its then activity did amount to an “enterprise” for GST purposes because, inter alia, there was evidence that the development and successful exhibiting and availability for inspection of a prototype was an essential first step in the carrying on of such a business, not a precursor to the commencement of that business. Determining whether or not a particular business exists calls for a thorough understanding of the nature of the market in which the asserted business operates and exactly what is entailed in commencing to carry on business in that market.
         
    253. On this basis, the partnership is not entitled to the input tax credits claimed because they were not acquired for a creditable purpose. During the course of what Mr Russell termed “Stage 1” in his business plan, there was not yet a business of a naturist retreat being carried on, only the undertaking of steps which were precursors to the commencement of such a business.
         
75. It is not clear how his Honour came to this conclusion. The proximity to the discussion of the evidence in Peerless Marine suggests that it was based primarily, or solely upon the fact that there was no evidence establishing that construction of a swimming pool was an essential step in carrying on the proposed enterprise. The problem in such an approach lies in the word “essential”. In Peerless Marine, its use reflected the provisions of s 26-50(5)(d) of the 1997 Act as it then was. Section 26-50(1) disallowed the deduction for tax purposes of outgoings connected with boats and leisure facilities. A swimming pool would arguably be a leisure facility, as that term was defined in the 1997 Act. Pursuant to s 69-5 of the GST Act, acquisition costs not deductible by virtue of s 26-50 of the 1997 Act were not available as “creditable acquisitions” pursuant to the former Act. Section 26-50(5) provided that outgoings in connection with boats would nonetheless be deductible if use of the boat was for “a purpose that is essential to the efficient conduct of a business that you carry on”. That provision did not apply to a leisure facility. Section 26-50(3) provided for deductions in connection with such a facility in certain circumstances including “use ... mainly to provide it ... in the ordinary course of your business of providing leisure facilities for payment”. There was no requirement of essentiality. Thus it was not necessary that Mr Russell produce evidence that his swimming pool was essential to the efficient conduct of his business. In any event, one doubts whether any retreat in tropical Queensland would be viable without a swimming pool.
76. An alternative explanation of his Honour’s conclusion might be that he was not satisfied that Mr Russell intended, at that time, to complete construction and commence to conduct the naturist retreat. However, for reasons which I have given, such an approach would involve rejection of Mr Russell’s evidence as to his intentions, or at least identification of its relevant shortcomings. His Honour seems not to have addressed those matters.
77. There is no other apparent basis for his Honour’s conclusion that Mr Russell’s outgoings were not in respect of creditable acquisitions giving rise to input tax credits. As I have said, the question was whether they were incurred in the commencement of his naturist enterprise. That question depended very much upon his evidence as to purpose and future intentions. It has not been determined. The matter should be referred back for further consideration at first instance.

ORDERS

78. In view of the complexities of the matter I would order the parties to bring in appropriate draft orders within seven days and to make submissions as to costs within the same time period.
    

I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

Associate:

Dated: 4 February 2011

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION	QUD 8 of 2010

ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY WHITWORTH RUSSELL Appellant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGES:	DOWSETT, EDMONDS AND GORDON JJ
DATE:	4 FEBRUARY 2011
PLACE:	BRISBANE

REASONS FOR JUDGMENT

EDMONDS J:

79. I have had the great advantage of reading the judgments of Dowsett J and Gordon J in draft.
80. For the reasons given by Dowsett J, I too would dismiss the appeal in relation to the application of the 1997 Act.
81. In relation to the appeal concerning the GST Act, I agree with Dowsett J that the primary judge was correct in concluding that the partnership was not carrying on an accounting practice: see [55] to [64] above.
82. In relation to the application of the GST Act to the naturist retreat, I have reached the same conclusion as Gordon J. This part of the appeal should be allowed for the reasons given by her Honour. The balance of the appeal must be dismissed.
    

I certify that the preceding four (4) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Associate:

Dated: 4 February 2011

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION	QUD 8 of 2010

ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ANTHONY WHITWORTH RUSSELL Appellant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGES:	DOWSETT, EDMONDS AND GORDON JJ
DATE:	4 FEBRUARY 2011
PLACE:	BRISBANE

REASONS FOR JUDGMENT

GORDON J:
INTRODUCTION

83. I have had the considerable benefit of reading the reasons for judgment of Dowsett J in a draft form. I adopt the defined terms and acronyms used in the reasons of Dowsett J.
84. The appeal deals with two separate matters – the 1997 Act and the GST Act. For the reasons given by Dowsett J, I would dismiss the appeal in relation to the application of the 1997 Act. In relation to the appeal concerning the GST Act, I agree with Dowsett J that the trial judge was correct in concluding that the partnership was not carrying on an accounting practice: see [55] to [64] above.
85. I have, however, reached a different conclusion in relation to the application of the GST Act to the naturist retreat. Mr Russell, who was self-represented, asserted at first instance and on appeal that the partnership was entitled to input tax credits related to creditable acquisitions made in carrying on its enterprise of a naturist retreat. The Commissioner submitted that the acquisitions were of a private or domestic nature and thus were not “creditable acquisitions”: see ss 11-5 and 11-15(2)(b) of the GST Act.
86. I agree with Dowsett J that the trial judge erred because he failed to ask the right questions in determining whether the partnership was entitled to input tax credits for the items claimed as “creditable acquisitions”. However, I do not consider that the error necessitates that the matter be remitted to the trial judge. That conclusion requires further explanation.

RELEVANT PRINCIPLES

87. The relevant statutory framework of the GST Act is outlined by Dowsett J at [44] to [51] above. A number of principles are worth restating. It is convenient to state them in substantially the same way as they are stated in the GST Act.
    1. You are entitled to input tax credit for any “creditable acquisition” you make: s 11-20 of the GST Act;
    2. Pursuant to  11-5 of the GST Act, a “creditable acquisition” is made if:

2.1 you acquire anything solely or partly for a creditable purpose; and

2.2 the supply of the thing to you is a taxable supply; and

2.3 you provide, or are liable to provide, consideration for the supply; and

2.4 you are registered, or required to be registered;

3. A thing is acquired for a “creditable purpose” to the extent that it is acquired in “carrying on” your enterprise: s 11-15(1) of the GST Act;
4. Conversely, a thing is not acquired for a creditable purpose to the extent that the acquisition is of a private or domestic nature: s 11-15(2)(b) of the GST Act.;
5. In determining whether the partnership was “carrying on” an enterprise at the relevant time, intention or purpose of the acquisition is relevant but not determinative: see [69] to [71] of Dowsett J’s reason for decision and Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402; (2009) 72 ATR 120 at [73] to [75].
6. “Carrying on” an enterprise is defined in the GST Act as including “doing anything in the course of the commencement or termination of the enterprise”: s 195-1 of the GST Act. An important question then becomes whether Mr Russell was doing the works identified in “Stage 1” of the business plan (and making the creditable acquisitions in the course of doing those works) “in the course of the commencement” of the naturist retreat. Another way of asking the same question is sometimes to ask whether the “intention of the ... taxpayer is that the transaction is the first step in a business” (Ell v Federal Commissioner of Taxation [2006] FCA 71; (2006) 61 ATR 661 at [114]. There can be a course of business even if there is “nothing more than an intention to carry on” a business: Fairwell Estates Pty Ltd v Federal Commissioner of Taxation [1970] HCA 29; (1970) 123 CLR 153 at 166.
88. It is also necessary to understand the nature and limits of the role of an appellate court. In Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531 at 551, the High Court put it this way:

Shortly expressed, the established principles are, we think, that in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge, but, once having reached its own conclusion, will not shrink from giving effect to it.

89. Of course, there are limitations on an appellate court. As the High Court noted in Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at [23]:

These limitations include the disadvantage that the appellate court has when compared with the trial judge in respect of the evaluation of witnesses’ credibility and of the “feeling” of a case which an appellate court, reading the transcript, cannot always fully share. Furthermore, the appellate court does not typically get taken to, or read, all of the evidence taken at the trial. Commonly, the trial judge therefore has advantages that derive from the obligation at trial to receive and consider the entirety of the evidence and the opportunity, normally over a longer interval, to reflect upon that evidence and to draw conclusions from it, viewed as a whole.

90. Against that background, I turn to consider the issues and the evidence before the trial judge in relation to the application of the GST Act to the naturist retreat.

ISSUES AND EVIDENCE BELOW

91. In my view, there were two issues to be determined. The first issue was whether the acquisitions were made solely or partly in “carrying on” the enterprise of the naturist retreat: s 11-15(1). If an enterprise was being “carried on”, it is then necessary to ask whether the acquisitions were solely of a private or domestic nature so as to deprive them of being characterised as being for a “creditable purpose”: s 11-15(2)(b). If the acquisitions were not made for a creditable purpose, then the acquisitions will not be “creditable acquisitions” and the partnership will not be entitled to input tax credits under the GST Act.
92. Here, the acquisitions in issue were those described in “Stage 1” of Mr Russell’s business plan for the naturist retreat prepared in either late 2001 or early 2002. That business plan provided as follows:

...
(a) STAGE ONE –

Removal of all internal fencing
Installation of a spa pool
Construction of inground free-form swimming pool
Toilets & showers facilities
Covered BBQ area with gas BBQ
Planting of farm forestry tees as per farm forestry plan

...

Stage One was completed prior to 2004.

93. The business plan also detailed a series of steps described as “Stage Two”. Stage Two has not occurred. Mr Russell’s evidence was that he deferred undertaking Stage Two due to his separation from his wife and because of the financial uncertainties introduced by the Australian Taxation Office investigation and the subsequent assessments.
94. In addition to describing Stage 1 of the business plan, the trial judge summarised Mr Russell’s evidence as to other steps he had taken at [242] to [245] of his Honour’s reasons for decision:

[242] Whether, truly, these steps evidence the first stage in a plan directed to the conduct of a naturist retreat relies very much on taking Mr Russell at his word.  The variance between his evidence before the Queensland Industrial Relations Commission and before me in relation to his ability to control Ancath does make one sceptical. Nonetheless, Mr Russell did, in the course of his oral evidence, exhibit what I thought was unfeigned, unrehearsed and uncontrived knowledge on subjects about which one might expect a person interested in naturism and proposing to establish a resort at Sarina might have knowledge.  He was aware, for example, of beaches at Sarina and further north in Queensland (Balding Bay on Magnetic Island) where nude bathing, though not lawful, was nonetheless tolerated.  He described, candidly and, I thought, spontaneously, in his oral evidence the nature and extent of the demand for naturist facilities, particularly amongst the “Grey Nomads”.  Further, the very nature of the proposal is so unusual that it seemed to me inherently unlikely that it was a contrivance. 
...

[244] To date, some fellow naturists have stayed at the Sarina hinterland property at Mr Russell’s invitation but not on a paying basis. Some, doubtless, have been “WWOOFers”. Mr Russell described such non-paying attendances as “market research”.  To like end, he is also visited an operating naturist retreat in the Sarina area. 

[245] Mr Russell also prepared, as part of the naturist retreat business plan, financial projections.  One item of income shown on these projections is income from the provision of massage.  Mr Russell stated, and I accept, that he had secured massage qualifications.  These projections do show that it is possible for the retreat to operate at a profit after its commencement.  I accept that these projections are not a recent contrivance. That they form part of a document entitled with the name of Mr Russell’s now former wife assists in the reaching of that conclusion. They do though seem optimistic in terms of guest numbers; optimistic in the sense that they are assume that in excess of 3,000 people will stay that the retreat in the first year of its operation.  I note though that Mr Russell and his former wife travelled extensively in the North Queensland (so he related and I accept) to various naturist retreats to get what he described as a “feel” for likely demand.

(Emphasis added.)

95. The trial judge then turned to the question of whether Mr Russell had done “anything in the course of the commencement or termination of the enterprise” to satisfy the definition of “carrying on” for the purpose of s 11-15(1) of the GST Act. His Honour concluded:

[252] Identifying the “commencement” of a business is, obviously, a question of fact but that does not mean that the question will always admit of an easy answer. That is nicely illustrated by Peerless Marine. Peerless Marine professed to be carrying on a boat production business in respect of luxury motor cruisers. It had sold none but sought, inter alia, to claim input tax credits in respect of the design and construction of a prototype. It succeeded in establishing that its then activity did amount to an “enterprise” for GST purposes because, inter alia, there was evidence that the development and successful exhibiting and availability for inspection of a prototype was an essential first step in the carrying on of such a business, not a precursor to the commencement of that business. Determining whether or not a particular business exists calls for a thorough understanding of the nature of the market in which the asserted business operates and exactly what is entailed in commencing to carry on business in that market.

[253]  ... During the course of what Mr Russell termed “Stage 1” in his business plan, there was not yet a business of a naturist retreat being carried on, only the undertaking of steps which were precursors to the commencement of such a business.

96. The claimed input tax credits related to acquisitions totalling $30,139.00 principally for the construction of the swimming pool on Mr Russell’s land at Sarina. The Commissioner submitted that the construction of stage one works was “equally consistent with the development of the residential property for purely private residential purposes as it was with the development of the naturist retreat”. By way of contrast, the Commissioner submitted that the stage two works could be seen to be referable only to the development of the naturist retreat and had not been started. For those reasons, the Commissioner submitted that the “mere installation of the swimming pool (or the other miscellaneous items) on [Mr Russell’s] property” did not constitute “carrying on” of a naturist retreat.
97. In my view, the acquisitions must be considered in light of the Mr Russell’s evidence (which was the subject of cross-examination and accepted by the trial judge) that:
    1. Mr Russell had prepared a business plan in 2001 and 2002 which comprised two stages;
    2. Mr Russell had completed stage one of that business plan;
    3. Mr Russell had not completed stage two due to his separation from his wife and because of the financial uncertainties introduced by the Australian Taxation Office investigation and the subsequent assessments;
    4. As part of the naturist retreat business plan, Mr Russell had prepared financial projections. The trial judge found that those projections were not a recent contrivance. In fact, the projections formed part of a document entitled with the name of Mr Russell’s now former wife;
    5. One item of income on the projections was income from the provision of massage and Mr Russell had secured massage qualifications. The financial projections also showed that it was possible for the retreat to operate at a profit after its commencement, although the trial judge did consider those projections were optimistic;
    6. non-paying attendees had visited the Sarina hinterland property for the purpose of the Russells’ obtaining feedback;
    7. he (with his former wife) had visited operating naturist retreats in the area for the purpose of market research.
98. In my view, this Court is in as good as a position as the trial judge to decide on the proper inferences to be drawn from the facts established by the trial judge: Warren v Coombes.
99. In light of those findings of fact, it is necessary to turn to consider the two issues in dispute – whether the acquisitions were made in “carrying on” the enterprise of the naturist retreat and, if an enterprise was being “carried on”, whether the acquisitions were of a private or domestic nature so as to deprive them of being characterised as being for a “creditable purpose”.
100. Answering those questions at the time of the making of the creditable acquisitions and in light of the evidence of Mr Russell which was accepted by the trial judge, I consider that the taxpayer’s purpose in making the expenditures was the establishment and conduct of the naturist retreat and that he had therefore commenced his enterprise. So much necessarily followed from the trial judge's finding that Mr Russell had made a business plan, made financial projections, conducted “market research”, and undertaken training as a masseur. The inference that he made the expenditures in the course of the commencement of the naturist business is much more likely than the inference which the Commissioner sought to have the Court make. Having made the expenditure in the course of commencing the enterprise, the acquisitions were made for the purpose of “carrying on” the enterprise of the naturist retreat: s 11-15(1) of the GST Act.
101. The next question is whether the acquisitions were of a private or domestic nature and thus were not acquired for a “creditable purpose”: see 11-15(2)(b) of the GST Act. The High Court recently considered the words “private or domestic nature” in Commissioner of Taxation v Anstis (2010) 272 ALR 1 at [32] to [38]. Anstis considered the words “private or domestic nature” when determining whether outgoings were deductible under s 8–1 (2)(b) of the 1997 Act. The High Court cited the decision of John v Federal Commissioner of Taxation [1989] HCA 5; (1989) 166 CLR 417 at 427 where Mason CJ, Wilson, Dawson, Toohey and Gaudron JJ said:

We do not see any necessary antipathy between a loss or outgoing incurred in gaining or producing assessable income and a loss or outgoing of a private nature.

102. After identifying that the test to be applied in determining whether an acquisition is of a private or domestic nature is one of “essential character” (citing Handley v Federal Commissioner of Taxation [1981] HCA 16; (1981) 148 CLR 182), the High Court said:

[35] The terms “private” and “domestic” in s 8-1(2)(b) would seem difficult in their application to an entity other than a natural person. It is also difficult to apply them where, unlike the situation in Commissioner of Taxation v Cooper [(1991) [1991] FCA 164; 29 FCR 177], there is no available dichotomy between an essentially “private” expense and an essentially “working or business” expense.

[36] In Cooper, Lockhart J and Hill J held that expenditure by a footballer, in accordance with an instruction by his coach, on amounts of food and drink he consumed in addition to his normal meals were not incurred in gaining or producing income, and were in any event of a private nature... Hill J explained that:

... the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work-related entertainment or expenditure incurred while away from home.

...

[38] ... As Hill J recognised in Cooper, in relation to the consumption of food or drink, the concept of a particular type of expenditure being absolutely or always “private” cannot be sustained. There is no sufficient foundation for a conclusion that the expenditures by the respondent were essentially private in nature within the sense of s 8-1(2)(b) of the 1997 Act.

103. The Commissioner submitted that the “construction of the stage 1 works was equally consistent with the development of the residential property for purely private residential purposes as it was with the development of a naturist retreat” (emphasis added). That submission does not address the question of what the “essential character” of the acquisitions was and in particular ignores the evidence of Mr Russell accepted by the trial judge as summarised. Regardless of whether the acquisitions (and in particular the swimming pool) may also used for private or domestic use, that cannot deny the circumstance that the acquisitions were made by the partnership of Mr and Mrs Russell for the establishment and conduct of the naturist retreat. The Commissioner has not established that the “essential character” of the acquisitions was “private or domestic” in nature. Therefore, I am not satisfied the acquisitions are deprived of being characterised as being for a “creditable purpose” under s 11-15(2)(b) of the GST Act. The acquisitions were made for a creditable purpose, and therefore are creditable acquisitions. The partnership was entitled to input tax credits for the creditable acquisitions made under s 11-20 of the GST Act.
104. For those reasons, I would allow the appeal in part in relation to the application of the GST Act to the naturist retreat. For the reasons stated earlier, I would dismiss the balance of the appeal.
     

I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate:

Dated: 4 February 2011