FEDERAL COURT OF AUSTRALIA SOCIAL SECURITY - age pension - whether commission-only real estate saleswoman an employee or "carries on a business" - Social Security Act 1991 (Cth), s 1075. Administrative Appeals Tribunal Act 1975 (Cth) - s 44 Social Security Act 1991 (Cth) - ss 1064, 1072, 1075 Income Tax Assessment Act 1936 (Cth) - ss 6, 51 Blackwood Hodge (Australia) Pty Ltd v Collector of Customs (New South Wales) (1980) 47 FLR 131, followed Mersey Docks and Harbour Board v Henderson Bros (1888) 13 App Cas 595, followed Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389, followed Haldane-Stevenson v Director-General of Social Security (1985) 9 FCR 73, followed Secretary, Department of Social Security v Garvey (1989) 91 ALR 245, followed Read v The Commonwealth (1988) 167 CLR 57, followed Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280, followed Blockey v Federal Commissioner of Taxation (1923) 31 CLR 503, referred to London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 138 CLR 106, followed Shepherd v Federal Commissioner of Taxation (1975) 5 ATR 646, followed Commonwealth of Australia v Human Rights and Equal Opportunity Commission (1998) 152 ALR 182, followed Federal Commissioner of Taxation v Barrett (1973) 129 CLR 395, referred to Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16, followed Vabu Pty Ltd v Federal Commissioner of Taxation (1996) 96 ATC 4,898, followed Commonwealth Banking Corporation v Percival (1988) 20 FCR 176, followed Baxter Healthcare Pty Ltd v Comptroller-General of Customs (1997) 72 FCR 467, referred to Hughes v Clubb (1987) 10 NSWLR 325, referred to THE SECRETARY TO THE DEPARTMENT OF SOCIAL SECURITY v MARY ELIZABETH EKIS QG 29 OF 1998 DRUMMOND J 6 AUGUST 1998 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 29 of 1998 on appeal from the Administrative Appeals Tribunal BETWEEN: THE SECRETARY TO THE DEPARTMENT OF SOCIAL SECURITY Applicant AND: MARY ELIZABETH EKIS Respondent JUDGE: DRUMMOND J DATE OF ORDER: 6 AUGUST 1998 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be allowed and the decision of the Administrative Appeals Tribunal be set aside. 2. The matter be remitted to the Administrative Appeals Tribunal, as originally constituted, for redetermination upon the materials the parties elected to put before it on the previous occasion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 29 of 1998 on appeal from the Administrative Appeals Tribunal BETWEEN: THE SECRETARY TO THE DEPARTMENT OF SOCIAL SECURITY Applicant AND: MARY ELIZABETH EKIS Respondent JUDGE: DRUMMOND J DATE: 6 AUGUST 1998 PLACE: BRISBANE REASONS FOR JUDGMENT This is an appeal under s 44 the Administrative Appeals Tribunal Act 1975 (Cth) from a decision of the Administrative Appeals Tribunal reversing a decision of the Social Security Appeals Tribunal, which affirmed a determination by an authorised review officer of a decision of the delegate of the applicant that the rate of the respondent's age pension granted to her in August 1996 was to be calculated by reference to her gross income as a real estate saleswoman rather than her net income. The issue for determination by the AAT was whether the respondent, who worked as a commission-only real estate saleswoman for Wavecourt Pty Ltd, an LJ Hooker franchisee, was a person who "carries on a business" within the meaning of that expression in s 1075(1) the Social Security Act 1991 (Cth). If she was, her "ordinary income" must be reduced by the expenses she incurred in generating her real estate sales earnings before that income figure is used in the calculation of the rate of her age pension entitlement: see s 1075(1) the Social Security Act. This calculation is provided for by Module A in s 1064 of the Social Security Act. If she was not a person who "carries on a business", her "ordinary income" was, for the purposes of the calculation, her gross income from her real estate sales work without any reduction for the expenses she incurred in earning it: see s 1072. The applicant, by his notice of appeal, identified the questions of law raised in the appeal as: (a) whether on the facts found by it the Tribunal was able in law to conclude that the Respondent was carrying on a business for the purposes of s.1075 of the Act such that her "ordinary income" for pension rate calculation purposes was to be reduced by those amounts specified in s.1075(1)(a), (b) and (c); (b) the true construction of the words "carries on a business" and "business" in s.1075 of the Act. The applicant acknowledged with respect to ground (a) that an appeal lies to this Court only on a question of law and accordingly contended that, on the facts found by it, the Tribunal was bound in law to conclude, on the true construction of s 1075 the Social Security Act, that the respondent was not carrying on a business. Extensive submissions were directed both by the applicant and the respondent to the question whether the respondent's relationship with Wavecourt should be characterised as that of employee. The case was fought in the AAT and, in large part, in this Court on the assumption that there was an unbridgeable dichotomy between a person who carries on business and a person who is an employee. The Tribunal made extensive factual findings. But I was also directed by applicant's counsel to various passages in the evidence before the Tribunal which it was said were all uncontested. The assumption was that I should take this evidence into account, as well as the findings of fact made by the Tribunal, in resolving the appeal. For example, I was invited to have regard to what was said to be the uncontested evidence that Wavecourt deducted amounts in respect of income tax from the respondent's earnings and paid them to the Australian Taxation Office on the basis that she was an employee; yet the Tribunal was not prepared to make such a finding, saying instead that it was "unable to and need not make any finding as to the actual taxation arrangements for salespersons because of the limited evidence". The Tribunal was, in my opinion, entitled to take this approach in view, eg, of the evidence of Mrs Schultz, the principal of Wavecourt, in the written statement which she provided to the applicant as to why she made tax deductions from the respondent's remuneration, apparently only for the 1997 year, action that does not appear to reflect anything on her part other than a willingness to comply with whatever instructions Wavecourt received from the Australian Taxation Office, whether or not the respondent was in fact an employee. In developing the argument in support of ground (a), the applicant in truth invited the Court to form its own conclusion on the significance of the relevant indicia revealed by the Tribunal's findings and in the evidence, which did not, by any means, all point in the one direction, and to conclude that the respondent was an employee and so could not be a person who carries on business within the meaning of the relevant section of the Act. That is not the function of this Court when hearing an appeal from the AAT. Given the way the applicant conducted this appeal and given that it constitutes the fourth review of the respondent's pension entitlement claim, it is appropriate to recall that an appeal to this Court against a decision of the Tribunal, unlike the ordinary appeal by way of rehearing, is an appeal that is limited to the correction of errors of law affecting the decision reached by the Tribunal. The implication that should be drawn from the system of review of administrative decisions consisting of statutory merit review (here, by a review officer, then by the Social Security Appeals Tribunal and then by the AAT) and finally by an appeal to this Court, limited to the correction of material errors of law in the Tribunal's decision, was identified long ago by Fisher J in Blackwood Hodge (Australia) Pty Ltd v Collector of Customs (New South Wales) (1980) 47 FLR 131. His Honour, in the course of explaining why no appeal lay to this Court from a decision of the Tribunal where there was some evidence upon which the Tribunal could rely to reach its decision, said, at 145: It is my firm view that this Court when hearing appeals from a Tribunal constituted for the purpose of reviewing decisions of this nature, should adopt a restrained approach. Parliament contemplated that only in exceptional circumstances should the decision of the Tribunal not be the final decision. This does not mean that when an error of law is identified, the court should be reluctant to intervene. In fact, it is under a duty to do so. Rather it should heed the comments of Davies LJ (as he then was) in R v Industrial Injuries Commissioner; Ex parte Amalgamated Engineering Union (No 2): "I should like to echo the words of my Lord, Lord Denning MR, in saying that I deprecate the practice, and hope it would not continue, of attempting to magnify or inflate questions of fact into questions of law and of trying to obtain decisions from the courts on matters which the legislature would appear to have thought suitable for decision by the various bodies and authorities set up under the Act of 1946". The applicant cannot succeed in overturning the Tribunal's decision in reliance on the case it made out under ground (a) of the notice of appeal. However, the applicant's argument under ground (b) is well-founded. The Tribunal reached its conclusion that the respondent carried on a business within s 1075 by misconstruing the expression in the statute, "carries on a business". The Tribunal noted authorities to the effect that terms used in the Social Security Act which are also found in other legislation, particularly taxation legislation, could not automatically be treated as bearing the meanings they have in different statutory contexts. It then said: 49. It may therefore be more appropriate to refer to the Macquarie Dictionary which defines "business" as "one's occupation, profession or trade" where "occupation" is defined as "one's habitual employment, business, trade or calling". It is noted that this definition does not make reference to the factor of whether a person is an employee. 50. In determining what is a business, Hill J in Evans v FCT 89 ATC 4540 stated: "The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. There is no one factor that is decisive of whether a particular activity constitutes a business…" 51. In this instance the applicant was engaged in real estate sales as a qualified real estate agent having met the requirements to operate as a principal if she so chose. This engagement being perhaps best described as an occupation or calling in the business of conducting real estate sales. 52. It is my view that the skill and personality the applicant employed in discharging her duties, the ability she had to seek and establish her own sales leads as well as follow up those sales leads referred through the office, the supply of the majority of her own equipment necessary to effect sales including a car and telephones, the bearing of all operating, maintenance and insurance costs, the fact that the majority of her time and thus duties discharged in that work time was not supervised or directed by the franchise operator and perhaps most importantly the possession of an agent's licence allowing her to operate as a principal were all factors in my opinion that pointed to the fact that the applicant conducted a business. The Tribunal, in seeking the meaning of the statutory expression "carries on a business", broke it up into two components: it determined first what it considered was the true meaning of the word "business" and then, having concluded that the respondent was engaged in "an occupation or calling in the business of conducting real estate sales", sought for the meaning to be given to the other component of the phrase, "carries on", and concluded that the respondent met the statutory requirement. Interpreting a composite phrase by dissecting it into its component words and seeking a meaning for each has, however, long been identified as an inappropriate method of construing such a phrase: see, eg, Mersey Docks and Harbour Board v Henderson Bros (1888) 13 App Cas 595 at 599 - 600 and Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 399 - 400. This approach led the Tribunal away from identification of what in my opinion is the true meaning of the statutory expression. As I have mentioned, the Tribunal referred to judicial warnings against applying to expressions in the Social Security Act the meanings given to similar expressions in other statutes, particularly the Income Tax Assessment Act 1936 (Cth). However, there is, in my opinion, good reason to read the expression "carries on a business" in s 1075 the Social Security Act as having exactly the same meaning as the expression "carrying on a business" in s 51(1) the ITAA. At one stage, the Social Security Act did not contain any provision corresponding to ss 1072 and 1075 and the wide-reaching definition of "income" in the Act was interpreted as meaning net realised income: see Haldane-Stevenson v Director-General of Social Security (1985) 9 FCR 73 at 75 and Secretary, Department of Social Security v Garvey (1989) 91 ALR 245 at 249. In 1991, however, new provisions, including ss 1072M and 1072P, which correspond to ss 1072 and 1075, were inserted in the Social Security Act by Schedule 1 to the Social Security (Rewrite) Amendment Act 1991 (Cth). These amendments changed, in a radical way, the entitlement of a person to an age pension where that person was in receipt of income from other sources. Save only for a few specific classes of outgoing, of which outgoings incurred by the pensioner in carrying on his or her business were one, a person's pension entitlement thereafter had to be reduced by reference to the gross amount, without any reduction, of the pensioner's ordinary income from all sources. The purpose of an income-related pension such as the age pension is to ensure that pensioners in the lower income brackets receive a measure of social security: Read v The Commonwealth (1988) 167 CLR 57, per Brennan J at 68. It would appear that the assumption underlying this changed approach was that where a pensioner had another source of income, the outgoings incurred in earning that income were, in general, likely to be relatively small in total amount and, for that reason, should be ignored in determining the person's pension entitlement. An exception was made, however, in relation to expenses incurred in earning income from the carrying on of a business; the assumption would appear to be that, in contrast to the position generally obtaining in respect of deriving income from other sources, eg, work as an employee, a person would only derive a gross amount of income from carrying on a business at the cost of having to incur what might be substantial expenses, so that it would be unfair to ignore those expenses in determining such a person's pension entitlement. The exception now made in the case of a person who carries on a business by s 1075 requires that that person's ordinary income from the business, which is taken into account in assessing his or her pension entitlements, must be reduced by certain expenses incurred in generating that income. The section identifies a specific class of expense which is to be brought into account in calculating a person's pension entitlement by requiring those expenses to satisfy two criteria: first, the expenses must relate to the business and, second, they must be "losses and outgoings that … are allowable deductions for the purposes of section 51 of the Income Tax Assessment Act", ie, they must be losses and outgoings "necessarily incurred in carrying on a business for the purpose of gaining or producing … [assessable] income" not being losses or outgoings "of capital, or of a capital, private or domestic nature". The first requirement in s 1075(1)(a) that the losses and outgoings must relate to the business is explained by the fact that s 51(1) the ITAA declares that, in addition to losses and outgoings necessarily incurred in carrying on a business, all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income are also deductible expenses. The whole purpose of s 1075(1) is to create an exception to the general rule that a pension applicant's gross ordinary income is to be used in calculating his or her pension entitlement, but only in respect of that part of a pension claimant's income that is generated by the business. In the absence of this first criterion, the use of s 51(1) the ITAA to govern the range of expenses to be brought into account in the pension entitlement calculations might permit a person who carries on a business to gain an advantage in that calculation from tax deductions incurred in generating non-business income. Because s 1075(1) the Social Security Act identifies the only class of business expense that is to be brought into account in calculating a pension entitlement as limited to expenses incurred in carrying on a business which are deductible from gross income to arrive at assessable income for the purpose of the ITAA, the expression "carries on a business" in s 1075 the Social Security Act necessarily, in my opinion, has the same meaning as the expression "in carrying on a business" in s 51 the ITAA. While the term "business" as used in s 51(1) the ITAA is defined by s 6(1) of that Act to include "any profession, trade, employment, vocation or calling", it is also defined to exclude "occupation as an employee". It follows that, if a pension applicant who claims to be carrying on a business for the purposes of s 1075 is, in truth, an employee, losses and outgoings incurred in respect of the person's employment are not deductible as business losses or outgoings under s 51(1) and so cannot be brought into account in the pension entitlement calculation. Subject only to the fact that working as an employee cannot, by reason of the definition of "business" in s 6(1) the ITAA, constitute the "carrying on of a business" within s 51(1) the ITAA, the latter expression, which governs the meaning of the phrase "carries on a business" in s 1075(1) the Social Security Act, has the meaning the phrase bears in ordinary speech. That is a question of fact: Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287, proposition 2. But in ordinary speech, this phrase can apply to a wide range of activities, depending on the particular circumstances in which they take place. Cf Blockey v Federal Commissioner of Taxation (1923) 31 CLR 503 at 511. It is impossible to exhaustively enumerate the facts or circumstances which will justify the conclusion that a business is being carried on: London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 138 CLR 106, per Jacobs J at 129. Nor is it likely to be correct that a particular case will establish criteria for application in other cases, even where some of the features are the same: Shepherd v Federal Commissioner of Taxation (1975) 5 ATR 646 at 654. The evidence before the Tribunal was sufficient to suggest that it was a more than theoretical possibility that the respondent's status was that of employee, even though analysis of that same evidence might ultimately justify the Tribunal in deciding that she was not an employee of Wavecourt: in order to give effect to s 1075, the Tribunal was therefore required to determine the question whether she was an employee. The Tribunal did refer to the cases in which, in various contexts, the question whether a particular person should be characterised as an employee or independent contractor has been considered. But it did this only to note the parties' submissions. It did not express any conclusion on this question. On the interpretation it placed on s 1075, it did not consider this was necessary saying, erroneously, that it would not be appropriate to treat s 1075(1) as importing into the concept of carrying on a business there referred to the exclusion in the definition of "business" in s 6(1) the ITAA of persons whose occupation was as an employee; instead, it said that the respondent's argument involved the proposition that "the conduct of one's own business which is synonymous with operating as an independent contractor is materially exclusive from the conduct of duties as an employee in a business" and observed that "this approach does not directly address what is meant by 'carries on a business' under s 1075 …". The Tribunal then proceeded to consider that issue. The Tribunal misinterpreted the statutory phrase by failing to recognise that its meaning was qualified by the exclusion from its reach of the activity of working as an employee and came to its conclusion by failing to consider whether, on the evidence before it, the respondent may have been an employee. It follows that the Tribunal's decision must be set aside: see Commonwealth of Australia v Human Rights and Equal Opportunity Commission (1998) 152 ALR 182 at 188. The applicant next invites the Court to dispose of the case rather than to send the matter back to the Tribunal. Counsel refers to cases including Statham v Federal Commissioner of Taxation 89 ATC 4,070 and submits that, on the Tribunal's findings and the undisputed evidence, the conclusion is inescapable that the respondent was not relevantly carrying on business. In order to deal with this invitation, it is necessary to consider whether on the true construction of the statutory phrase, when that meaning is applied to the facts found by the Tribunal, the only conclusion open is that the respondent is not a person who "carries on a business". This will be demonstrated by showing that the only conclusion open is that she was an employee of Wavecourt. In arguing that the respondent was an employee, the applicant placed particular reliance upon Federal Commissioner of Taxation v Barrett (1973) 129 CLR 395, where it was held that salesmen employed on a commission-only basis by a firm of land agents in South Australia were employees of the firm. The old test for resolving the question of employee or independent contractor, viz, whether the work was done under such a degree of actual or potential supervision that the worker should be characterised as an employee of, rather than an independent contractor to, the person with supervisory authority, has now been replaced by a more "flexible" test. See Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 at 24 and 49 and Vabu Pty Ltd v Federal Commissioner of Taxation (1996) 96 ATC 4,898 at 4,900 and 4,902. Barrett itself does not suggest otherwise. Because the question whether a person is an employee rather than an independent contractor must be determined by reference to the circumstances of the particular case, it will rarely if ever be possible to find a determination in an earlier decision on facts so close to those currently in issue as to justify the same conclusion. In resolving this question in a particular setting, no one factor is likely to be decisive. Rather will the proper characterisation of the relationship depend upon an assessment of the relative significance of a number of different features of that relationship. The very nature of such a decisional exercise demonstrates that it will be possible for reasonable minds to reach differing conclusions. It will therefore only be in the exceptional case that a decision that a person is or is not an employee will give rise to an appealable question of law: while the question whether facts fully found fall within the provision of a statutory enactment properly construed is generally a question of law, if the statute uses words according to their ordinary meaning and it is reasonably open to hold that the facts of the case fall within those words, the question as to whether they do or do not is one of fact. See Collector of Customs v Pozzolanic Enterprises Pty Ltd at 288. The question in Barrett was whether the land agents' firm was liable to payroll tax on its salesmen's remuneration. The payroll tax legislation defined wages to mean "any wages, salary, commission, bonuses or allowances paid or payable … to any employee as such". The fact that the firm did not exercise detailed supervision over the salesmen's activities did not require, in Stephen J's view, the conclusion that they were not employees (p 404 - 405). Nor did the fact that they provided their own vehicles or that they were remunerated by reference to the results of their efforts rather than by reference to hours worked (p 405 - 406). (Their being remunerated only on commission reflected the attainment of considerable skill in carrying out their work, which resulted in their being promoted from a waged position (when they were "unquestionably employees") to the commission-only positions (p 406).) It was the fact that the commission-only salesmen could be seen to form a more or less permanent part of the firm's business operation that was considered to be a very significant indication that they were employees (p 406). The respondent appears to be subject to much the same degree of limited control as the salesmen but, in contrast, the evidence suggests that the respondent was not as closely integrated into Wavecourt's operation as were the salesmen into the firm in Barrett. The evidence also suggests that the basis of the respondent's remuneration - commission-only - is not a reflection of skills she developed which are productive of relatively high levels of remuneration, but rather a reflection of Wavecourt's willingness to give her the opportunity to exercise such skills as she has, for their mutual financial advantage, to earn as much as she can, be it little or great. In Vabu Pty Ltd v Federal Commissioner of Taxation, the question was whether certain couriers who used a range of pedal and motorised cycles and other vehicles were employees for the purposes of certain Commonwealth legislation providing for the imposition of a superannuation levy on employers. The fact that the couriers provided and maintained their vehicles, at "very considerable" expense to them, was regarded as an important indication that they were independent contractors, not employees, as was the tax position of the couriers (who were taxed as independent contractors and not as employees). Meagher JA also considered it a "very important, indicium" that they were not employees, that they received no wage or salary: their remuneration depended on their efforts, not on hours worked. The exercise of fairly extensive control by the owner of the business over the couriers working for it was not considered sufficient to require them to be regarded as employees. His Honour said, at 4900: "It is not, I think, fanciful to say that each courier conducts his own operation, permitting himself for his own economic advantage to be supervised by the company." Here, the respondent herself provided such a range of equipment and services, including insurances, that her expenses equated to about 70% of the gross income from her real estate sales activities and she was remunerated not by reference to her efforts, but only to the extent that her efforts were productive of benefits for Wavecourt. This limited review of some of the authorities and of some of the features of the respondent's relationship with Wavecourt is sufficient to show that, even if further facts need not be found before a decision can be made on whether the respondent is an employee, that decision involves an evaluation of the relative importance of a number of factual indicia: no one conclusion can be said to be the only possible one open. I consider that such a task is one for the Tribunal, not the Court. See Commonwealth Banking Corporation v Percival (1988) 20 FCR 176 at 183 - 184. Accordingly, the Court must send the matter back to the Tribunal for redetermination. Moreover, the Tribunal did not determine whether the respondent was an employee, as it was required to do, to properly apply s 1075(1). It is open to the Tribunal to take the view that it needs to make further findings of fact before disposing of that question. Since the question of the respondent's pension entitlement may involve further fact finding, it is not open to this Court to finally resolve the case. Cf Baxter Healthcare Pty Ltd v Comptroller-General of Customs (1997) 72 FCR 467 at 490 - 491 and 499. That is another reason why the case must go back to the Tribunal. It remains to be said that it does not follow that if a person is not an employee, he or she will necessarily be a person who "carries on a business", within the meaning of that expression in s 1075 the Social Security Act: cf the casual worker who was neither an employee nor a person who "carries on a business", within the meaning of that term in certain consumer protection legislation in Hughes v Clubb (1987) 10 NSWLR 325. But whether the respondent was an employee was, I think, of critical significance to the proper disposal of the case. It is difficult, in the circumstances of this case, to see how if the respondent is not an employee of Wavecourt, any other conclusion could be reached than that she was carrying on business for the purposes of s 1075(1) by working as a saleswoman for Wavecourt. The parties had the opportunity, availed of, to present extensive evidence to the Tribunal on the issue of whether it could be said, in respect of her sales activities, she was an employee or was carrying on business for the purposes of s 1075 the Social Security Act. Given this and given the protracted nature of the litigation, the matter should be remitted to the Tribunal for redetermination upon the materials the parties elected to put before it on the previous occasion. Moreover, it is clear from para 35 of its reasons that the Tribunal will not have to make any assessment of the credibility of any of the witnesses who gave evidence before it can make any further findings of fact it may consider necessary. In these circumstances, there is no reason why it should not go back to the Tribunal as originally constituted. I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond. Associate: Dated: 6 August 1998 Counsel for the Applicant: JA Logan Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: PE Smith Solicitor for the Respondent: Leneham & Kennedy Date of Hearing: 28 July 1998 Date of Judgment: 6 August 1998