Cohen and Commissioner of Taxation [1999] AATA 1029; (1999) 43 ATR 1277; 2000 ATC 2001 (15 December 1999)

Last Updated: 8 October 2009

DECISION AND REASONS FOR DECISION [1999] AATA 1029

ADMINISTRATIVE APPEALS TRIBUNAL )

) No NT1999/218
TAXATION APPEALS DIVISION )

Re Phillip lawrence cohen

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member M D Allen

Date 15 December 1999

Place Sydney
ADMINISTRATIVE APPEALS TRIBUNAL ) No NT1999/218
)
TAXATION APPEALS DIVISION )

Re: PHILLIP LAWRENCE COHEN
Applicant

And: COMMISSIONER OF TAXATION
Respondent

DECISION

Tribunal Senior Member M D Allen

Date 15 December 1999

Place Sydney

Decision FOR the reasons given orally at the conclusion of the hearing in this matter, the Tribunal SETS ASIDE the decision under review and remits it to the Respondent with the direction that the Applicant's liability to Income Tax for the Tax Year ended 30 June 1996 be recalculated having regard to the following, namely:

The following are allowable deductions:

Newspapers $75

NRMA Membership $37

Chamber of Commerce Membership $55

Petrol and oil expenses $931

Motor Vehicle Insurance $572.

Penalty imposed for understatement of income be reduced to 10%.

In all other respects the decision under review is affirmed.

I certify that this application resulted in a decision which was more favourable to the Applicant than the decision under review.

(Sgd) M.D. ALLEN
.............................
Senior Member
CATCHWORDS

TAXATION - Applicant received an advance on commissions earned as an insurance agent. Agreement specified that upon termination of employment any advance paid but not met by commissions would not be repaid by Applicant. Whether sums advanced constituted ordinary income.

Taxation Administration Act 1953 - s 14ZZK
Income Tax Assessment Act 1936 - subs6(1), subs25(1), s222C and s226H

Federal Commissioner of Taxation and Steeves Agnew and Company (Victoria) Proprietary Limited [1951] HCA 26; (1951) 82 CLR 408

REASONS FOR DECISION

17 January 2000 Senior Member M D Allen

At the conclusion of the hearing of the above matter the terms of the decision intended to be made and the reasons therefor were stated orally. After service upon the Respondent of a copy of the decision that was in fact made, the Respondent pursuant to Sub-section 43(2A) of the Administrative Appeals Tribunal Act 1975 requested the Tribunal to furnish to the Respondent a statement in writing of the reasons of the Tribunal for its decision.

The oral reasons for decision have been transcribed by Auscript, the Commonwealth Reporting Service. Whereas those oral reasons may reflect the inelegance of an extempore decision, they are in fact the reasons for the said decision.

The said transcript is annexed hereunto and furnished to the Respondent and to the Applicant as it is the reasons for the Tribunal's decision.

I certify that this and the preceding page are a true copy of the decision and reasons for decision herein of:

Senior Member M D Allen

Signed: Ivanka Mamic

....................................................................................

Associate

Date of Hearing 15 December 1999

Date of Decision 15 December 1999

Solicitor for Applicant Applicant unrepresented

Advocate for Respondent Ms V Rands, Australian Taxation Office

DRAFT DECISION

ADMINISTRATIVE APPEALS TRIBUNAL

Matter No NT 99/218

By MR M. ALLEN, Senior Member

COHEN and COMMISSIONER OF TAXATION

SYDNEY, WEDNESDAY, 15 DECEMBER 1999

MR ALLEN: By application received on 15 June 1999 the applicant sought review of an objection decision made 20 April 1999 pursuant to n objection by the taxpayer dated 19 November 1997 to an assessment issued on 13 October 1997 for the income year ended 30 June 1996. The matter came on for hearing before me at Sydney today and at that hearing was taken in as Tribunal exhibits the documents prepared for the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 and numbered T1 to T24.

At the outset of the proceedings it was agreed between the Commissioner and the applicant that the respondent would accept as allowable deductions the following, namely a claim for newspapers in the sum of $75, a NRMA membership of $37, Chamber of Commerce membership a sum of $55, petrol and oil expenses amounting to $931 and motor vehicle insurance in the sum of $572. The main issue fought was the amount of some $23,185 which the applicant claimed was an advance against commissions that eh did not earn and was thus not subject to income tax. See the applicant's grounds of objection which are contained at page 5 of the section 37 documents.

The applicant claimed also at one stage as is reflected in the actual objection decision which is document T20 that the amount was a fringe benefit and subject to fringe benefits tax. As was pointed out in document T20 this was during an audit interview and although it does not seem to form a formal ground of objection in the notice of objections lodged by the applicant with the respondent dated November 1997 it was certainly dealt with by the respondent. And although, strictly speaking, it is not in the grounds of objection pursuant o paragraph A of section 14ZZ(K) of the Taxation Administration Act, I ordered that the matter of the sum in question being a fringe benefit is one that would be considered by this Tribunal.

The crux of this case lies in the interpretation of the employment agreement between the applicant and GIO Australia Limited. That document is at document T2 of the section 37 documents and reads inter alia:

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Clause 3. Remuneration and Commission Rates. 3.1 The employee's remuneration is incentive based and is determined and payable in accordance with schedule 2 based on the commission rates in schedule 1.

3.2 GIO Australia may at its sole discretion provide additional benefits to the employee from time to time.

GIO Australia reserves the right to amend schedules 1 and 2 from time to time by notice to the employee. The amendments may include:

1. increasing or reducing commission rates generally or in relation to particular products.
   

iii. increasing or reducing the remuneration advance.

Schedule 2 of the said agreement reads inter alia under clause 1 entitled general:

1.1 The employee's incentive base remuneration base has five components (a) a remuneration advance.

1.4 In the employee's current commission account:

(a) the remuneration advance will be debited as it is paid to the employee.

(b) except as provided in paragraph 1.5 commission will be credited or debited.

(c) payments made to the employee other than payments of the investment growth commission or on behalf of the employee, for example, compulsory superannuation, will be debited.

Clause 2 is entitled remuneration advance and reads:

2.1 The remuneration advance is an amount determined by GIO AUSTRALIA FROM TIME TO TIME. Gio Australia reserves the right to increase or reduce the remuneration advance at any time by giving notice to the employee.

2.2 The remuneration advance is payable fortnightly in arrears.

And at clause 2.3:

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If the base earnings commission for a quarter is less than or equal to the remuneration advance amount payable then only the remuneration advance is payable during the quarter.

Clause 12 is entitled termination and reads:

12.1 On termination of the employee's employment for any reason the employee's current commission account and deferred commission account will be combined after debiting any amounts payable to the employee on or in relation to termination other than accrued long service leave payable in accordance with any applicable long service leave legislation.

12.2 If there is a debit balance it will be written off by GIO Australia.

It is a fact that the applicant has now left the employ of the Government Insurance Office and is a registered tax agent being registered as a tax agent on 1 December 1996, and I will say more of this hereafter.

A representative of GIO Australia expressed certain comments regarding the said agreement. See document T24. Part of those comments are:

This gross remuneration advance was payment of expected commission earnings and was therefore offset against Cohen's actual commission earnings by way of his individual commission account. In the event of a debit balance, meaning advances paid exceeded commission earned, the commission debit balance carried forward to the next period. As stated above the remuneration advance was the minimum package remuneration level and subject to any salary sacrifice allowable was paid in the form of a fortnightly PAYE salary payment to provide the employee with a regular cash flow. Over the longer term Cohen was expected to generate commission earnings to the extent that they exceeded his remuneration advance on an ongoing basis.

Document T24 at page 156 is a group certificate issued by the GIO and which shows a gross salary of some $52,640 and at T24 page 153 is a schedule of advances made to the applicant for the financial year ending 30June 1996. I would only state that if it is thought that I am particularly adopting any particular interpretation of the contract made by GIO I do not. The actual arrangements made between the applicant and the GIO must be ascertained from within the four corners of the actual employment agreement. As I interpret

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that agreement the applicant was made a sum of money called a remuneration advance. That amount could be varied by the GIO. However, the applicant had an enforceable right to have an amount paid to him. Although that advance was set off against commission earned ultimately any debit balance was written off. That is to say, not claimed back from the applicant.

It was a term of the agreement at the outset of the relationship between the applicant and the GIO that any debit resulting from the remuneration advance would not be claimed back from him. Therefore, at no stage could it be said that the applicant had a debt which could be forgiven by the GIO. The advance itself had all the indicia of ordinary income. Subsection 1 of section 25 of the Income Tax Assessment Act reads inter alia:

That the assessable income of a resident taxpayer shall include the gross income derived directly or indirectly from all sources whether in or out of Australia.

Whereas in subsection 1 of section 6 of the said Act:

Income from person exertion is defined as income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of an employee or in relation to any services rendered.

Looking at various cases it can be said that the applicant was in receipt of income derived beneficially each fortnight. It was actually paid over and available to him each fortnight and ultimately the debt was never subject to any repayment. I accept the argument that the remuneration paid and thus income at the time it was received and no subsequent event altered its character as income. It was obviously money or moneys worth received fortnightly through a bank deposit and it was paid regularly fortnightly in arrears continued that way for the term he was to be employed and was employed by the GIO. Under the contract he had an expectation and indeed an enforceable right to receive the sum or sums as specified in the employment agreement. It was relied upon and expected as a regular payment.

It would seem on those concepts that it was ordinary income. The advances were not advances against commission. Even if the applicant earned no commission for a quarter, he was still entitled under his contract to the payment of an advance. The applicant relied upon the decision of Dickson J as he then was in Federal

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Commissioner of Taxation, and Stees Agnew and Company Victoria Pty Limited, 82 CLR 408. As I see it, that case is distinguishable.

At page 420 of the said decision, his Honour discusses the situation of set off against cross demands, and at page 421 says:

But for the application of these principles, there must be cross-liabilities and agreement expressed, tacit or implied, and the cross-liabilities must be equal. If they are not equal, payment of the residue must be effected by other means. A continuing account balanced at yearly intervals is not the same thing.

Here, there was of course an accounting at the end of every quarter with the ultimate debt at the end of employment being written off. Also, in this matter the applicant was entitled under his agreement to demand a sum called a remuneration advance. In any event, I am satisfied that the moneys paid were not an advance on commissions. By having the ultimate step by which any difference between commissions earned and sums advanced were written off, the nature of the payments changed.

The payments made were no longer mere advances, but something more akin to a retainer. See for example the definition of retainer in the New Shorter Oxford dictionary 1993, where it is defined in the following terms:

A fee paid to secure the services of someone by such a fee; a sum paid to secure a particular service or facility.

Likewise, any sum in debit in the applicant's account in the books of the GIO did not have to replay, so that section 14 of the Fringe Benefits Tax Assessment Act 1986 has no application. As to the penalty of this matter, it was urged upon me that the applicant was reckless in preparing his return, but no doubt refers to section 226H of the Income Tax Assessment Act 1936, which provides that:

Where a shortfall is caused by the recklessness of a taxpayer, the additional penalty is equal to 50 per cent.

In support of that, the respondent argued that at the time he prepared his return, the applicant was nearly qualified a tax agent. As I stated earlier, he was admitted as a tax agent on 1 December 1996, and that also he could have obtained a private ruling in the event. The applicant, on his part, stated that he did have an arguable case. He stated from the bar table that the case he had referred to, namely that of the Federal Commissioner of Taxation and Stees Agnew, was referred to him by a staff member of the Commission's office.

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Section 222C, Income Tax Assessment Act states:

For the purposes of this part, the correctness of the treatment of the application of a law or (b) another matter, is reasonably arguable if, having regard to the relevant authorities, and the matter in relation to which the law is applied, or the other matter, it would be concluded that what is argued for is about as likely as not correct.

It would seem to me that, although the applicant's case certainly doesn't meet that standard, there is on the other hand, a matter of self-assessment. The fact that the Commissioner must accept that persons will make claims with which he will disagree. That is the risk in such a system, and the question is, is the difference between the parties plain fraud on the one extreme, or a legitimate disagreement as to principles of tax law on the other.

The applicant, to my point of view, certainly had a case which was arguable. He has also had some success in this Tribunal, in relation to some albeit minor items. It seems to me therefore, that as there is a discretion under section 227 of the act to produce, that the penalty should be reduced to 10 per cent. The decision under review will therefore be set aside, and this matter remitted to the respondent with the directions that the following amounts be accepted as allowable deductions, namely the newspapers, NRMA membership, Chamber of Commerce membership, petrol and oil expenses, motor vehicle insurance, and sums I have previously set out, and that the penalty be reduced to 10 per cent. In all other respects that decision under review is affirmed.

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