FEDERAL COURT OF AUSTRALIA Secretary, Department of Family & Community Services v Cantlay [2000] FCA 345 SOCIAL SECURITY – income test – respondent employed by State Government Department as consultant to member of parliamentary party – whether respondent "carries on a business" – whether gross ordinary income to be reduced by business outgoings WORDS AND PHRASES – "carries on a business" Social Security Act 1991 (Cth) s 1075(1) Re Ekis and Secretary, Department of Social Security (AAT, 13 March 1998) disapproved Secretary, Department of Social Security v Ekis (1998) 85 FCR 382 followed SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES v IAN JAMES CANTLAY NO. T 25 OF 1999 HEEREY J 24 MARCH 2000 HOBART IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY T 25 OF 1999 BETWEEN: SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES Applicant AND: IAN JAMES CANTLAY Respondent JUDGE: HEEREY J DATE OF ORDER: 24 MARCH 2000 WHERE MADE: HOBART THE COURT ORDERS THAT: 1. The appeal is allowed. 2. The decision of the Administrative Appeals Tribunal made 29 September 1999 is set aside. 3. The decision under review by the Tribunal is affirmed. 4. The respondent pay the applicant's costs, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY T 25 OF 1999 BETWEEN: SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES Applicant AND: IAN JAMES CANTLAY Respondent JUDGE: HEEREY J DATE: 24 MARCH 2000 PLACE: HOBART REASONS FOR JUDGMENT 1 The applicant appeals from a decision of the Administrative Appeals Tribunal ("AAT") on 29 September 1999 which set aside a decision of the Social Security Appeals Tribunal ("SSAT") and substituted a decision that the respondent's losses and outgoings as allowable under ss 51 and 54(1) of the Income Tax Assessment Act 1936 (Cth) be deducted from his gross ordinary income in accordance with s 1075(1) of the Social Security Act 1991 (Cth) ("the Act") for the purposes of the income test for certain social security benefits. 2 The SSAT decision had affirmed internal Departmental decisions to cancel the respondent's parenting payment single benefit, and raise consequential overpayment debts, on the basis that the respondent's income as an employee of the Tasmanian Department of Premier and Cabinet ("the Department") exceeded the maximum allowable under the income test in relation to parenting payment single benefit and its predecessor sole parent pension (hereafter collectively "the SSA benefits"). 3 In essence, while accepting that the respondent was an employee of the Department, the AAT treated the income from that employment as income from carrying on a business and thus income which, for the purposes of the Act, could be reduced by deducting business losses and outgoings. Evidence before the AAT 4 The respondent, who was single at all material times, received the SSA benefits from 22 September 1994 until 16 April 1998 when payment was terminated by Centrelink. 5 In 1995 the respondent commenced doing consulting work for Mr Michael Foley, a parliamentary member of the Tasmanian Greens Party. Initially this work related to waste management policy; later it extended to other areas. The respondent said that the remuneration was "very little" and that Mr Foley "paid for my expenses basically". At the time the respondent was endeavouring to re-establish a business which he had set up in 1987 under the name "Sounding Board Management and Research Services". 6 At the Tasmanian State election in February 1996 the Tasmanian Greens gained the balance of power in the House of Assembly and as a consequence were granted some funding which could be used for advisory support services in connection with their parliamentary duties. Mr Foley was able to get access to such funding to pay for the respondent's services. However the State Government required that the respondent be appointed by the Department as a temporary employee, allocated to the parliamentary office of Mr. Foley. 7 On 23 May 1996 the Manager Corporate Services of the Department wrote to the respondent in the following terms: "Mr Ian Cantlay C/- Office of Tasmanian Greens HOBART 7000 Dear Ian Temporary Appointment – Assistant – Office of Tasmanian Greens This will confirm your full-time temporary employment in the above position from 16 May to 10 July 1996. This employment is subject to the provisions of the State Service Act 1984 and to the following terms and conditions: 1. You will be required to undertake duties in the Office of Tasmanian Greens, on a part-time basis, pending finalisation of your contract of appointment. 2. You will be paid an hourly rate of $13.96 per hour in accordance with Classification Level 3, Administrative and Clerical Employees' Award. 3. The period of employment in [sic] finite, and not withstanding the termination date, may be terminated at any time by the giving of seven (7) days notice by yourself or this Department. 4. Please note that the following form is enclosed and required by the pay officer before any payments can be made:- · Direct Deposit Form – to be completed, with your Financial Institution's endorsement, and returned immediately to the address below. · Taxation Declaration – to be competed and returned immediately to the address below. · A copy of your birth certificate (if we have not received one previously) for superannuation purposes. If you are prepared to commence duty under these terms and conditions, please sign the attached form and return it to the Corporate Services Branch of this Department. Yours sincerely Sgd Philip Foulston Manager Corporate Services 23 May 1996" 8 The T documents also contained an instrument of appointment in the following terms: "INSTRUMENT OF APPOINTMENT WHEREAS the Premier has requested the appointment of IAN CANTLAY to the position of Assistant, Office of the Tasmanian Greens, subject to the terms and conditions hereinafter appearing, NOW THEREFORE I, THE HONOURABLE SIR GUY STEPHEN MONTAGUE GREEN, Companion of the Order of Australia, Knight Commander of the Most Excellent Order of the British Empire, Governor in and over the State of Tasmania and its Dependencies in the Commonwealth of Australia, in exercise of the prerogative powers me thereunto enabling and acting with the advice of the Executive Council DO by this Instrument appoint IAN CANTLAY to the position of Assistant, Office of the Tasmanian Greens, to hold such position upon the following terms and conditions: 1.(a) The appointment shall be for a term expiring on the thirty-first day of May two thousand or on the resignation or other termination of the Government whichever shall occur earlier (hereinafter called 'the termination date'). 1. (b) In the event of the Government being re-elected at a general election the Government shall, for the purposes of this agreement, be deemed to have resigned at the close of business on the day prior to the Premier being requested by His Excellency the Governor to form a new Government. 2. The appointee shall receive the remuneration set out in Schedule 1. 3. The appointee shall be entitled to the conditions of service set out in Schedule 2. 4. The appointee shall abide by the conditions set out in Schedule 3. 5. (a) The appointment may be terminated by the appointee or by the Premier, or his delegate, upon two weeks notice in writing to the other. 5.(b) Should this appointment be terminated by expiration of its terms, or by the Premier, or his delegate, other than for a reason specified in paragraphs (d)-(i) of Section 30(3) of the Tasmanian State Service Act 1984, the appointee shall receive the entitlements set out in Schedule 4. 5. This Instrument formalises the engagement of the appointee which commenced on the sixteenth day of May one thousand nine hundred and ninety-six and restates the terms and conditions of that engagement. Given under my hand at Hobart in Tasmania this …………… One thousand nine hundred and ninety-six. GOVERNOR BY His Excellency's Command, PREMIER AGREED ­­­­­­­­__________________ (I Cantlay)" 9 Schedule 1 states remuneration is to commence at the rate of $13.96 per hour and superannuation contributions at a rate of six per cent. Schedule 2 provides for reimbursement of expenses incurred on official business and for long service and recreation leave. It also states that Pt II of the Tasmanian State Service Regulations 1985, the Administrative and Clerical Employees Award and the General Conditions of Service Award, "shall apply to the employment of the appointee as if they were incorporated herein". Schedule 3 provides that the appointee "shall work such hours as are required to adequately discharge the duties and responsibilities of the position". It also deals with outside work, intellectual property and standards of conduct. Schedule 4 deals with severance pay. 10 While the copy of the instrument in the T documents is unsigned and undated, it was accepted by Mr Foley in his evidence before the AAT that the respondent was appointed by the Governor. 11 On 3 June 1996 Centrelink records noted advice by the respondent that he "has commenced work for 'Tasmanian Greens' and earnings will be $202.50 per week but out of this expenses will be deducted for: telephone, travel, admin costs, rental for business and miscellaneous. It is contract work. He will provide details in writing asap." 12 This notification did not advise of the respondent's engagement in the State service. 13 Accordingly the respondent was assessed as self-employed and permitted to deduct business expenses from his income for the purposes of applying the income test for the SSA benefits. On 24 July 1996 in a sole parent review form the respondent advised Centrelink that as from 11 July 1996 his "business income" was now $180.00 per week. This figure was confirmed on subsequent occasions. 14 The respondent had an office himself in Parliament and when the House was sitting would be in Mr Foley's office, but he basically worked from home using his own equipment which included computers, a photocopier, Internet access and printers. 15 He was paid through the State payroll, received fortnightly pay slips and had PAYE tax taken out of his pay. He received a group certificate and was paid annual leave. The State government made employer superannuation contributions on his behalf. 16 The respondent was assisted by Ms Kate Harrison in research work and Mr Scott Phillips in computing work. The respondent paid them in kind by giving them use of the Internet and his computer and printer. The respondent's son Luke undertook data base work for Mr Foley's accounts for which the respondent paid him $50 per week "where possible". Whilst he had introduced these young persons to Mr Foley, it was the respondent's decision to engage them and allocate their work tasks. He said that these persons were solely responsible to himself. 17 The respondent met frequently with Mr Foley for the purpose of discussing work tasks. These meetings were somewhat irregular ranging from, on occasions, several meetings each day to periods of time when he would not see Mr Foley for many weeks. The respondent said that he basically selected the type of work he wished to do and if there was a task that he felt was outside his area of expertise, he would suggest to Mr Foley that he engage someone else. 18 Mr Foley continued to pay the respondent some additional money but this was not quantified in any way in the evidence. 19 On 18 March 1998 Centrelink sought from the Department verification of the respondent's employment. Upon receipt of this information the SSA benefits were stopped as from 16 April 1998 on the basis that the respondent's income exceeded the maximum allowable under the income test. Issues before the AAT 20 Before the AAT the respondent contended that at all times he was in effect employed by Mr Foley as an independent contractor and not as an employee. Therefore his business expenses should be allowable deductions from his gross salary in calculation of his benefit entitlement. He saw the arrangement that he had entered into with the State Government as merely a mechanism for payment of his services and that it in no way affected the fundamental working relationship between himself and Mr Foley. He continued to work for Mr Foley as he had done prior to entering into that arrangement. The legislation 21 It is not necessary to refer in detail to the legislative requirements of the SSA benefits. For both benefits there was an income means test. 22 Section 1072 of the Act provides: "A reference in this Act to a person's ordinary income for a period is a reference to the person's gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 1A." 23 Division 1A entitled "Business Income" includes s 1075(1)(a) which is as follows: "1075(1) Subject to subsection (2), if a person carries on a business, the person's ordinary income from the business is to be reduced by: (a) losses and outgoings that relate to the business and are allowable deductions for the purposes of section 51 of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997, as appropriate; and" 24 Sub-s (2) is not relevant for present purposes. The AAT's reasons 25 After summarising the evidence the AAT said: "19. There is no dispute that the applicant was employed by the Department of Premier and Cabinet pursuant to an instrument of appointment during the relevant period. This instrument appointed the applicant to the position of assistant, Office of the Tasmanian Greens for a fixed term, made provision for his remuneration on the basis of certain award terms, provided for the deduction of income tax and employer superannuation contributions. The instrument also set out the applicant's conditions of service which included long service and recreation leave and severance payment entitlements. The hours of work were to be 'as required' and any outside employment was subject to departmental approval. 20. However this instrument of appointment and the relationship thereby created does not of itself determine for the purposes of the Act whether or not the applicant is entitled to have any business expenses deducted from his ordinary income. Pursuant to the provisions of s. 1075 of the Act, the applicant would be entitled to reduce his ordinary income as defined in s. 1072 by deductions allowable under the Income Tax Assessment Act if it is found that he is carrying on a business. 21. Senior Member K. L. Beddoe in his decision in Re Ekis and Secretary, Department of Social Security (1998) (AAT Decision No. 12731, 13 March 1998) noted that the Social Security Act does not define the term 'business' and noted previous courts' reluctance to import definitions from other legislation into the Social Security Act. The Senior Member referred to a passage of Hill J, in Evans v FCT (1989) 98 ATC 4540 where he 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 …' 22. In the case of Ekis, the Tribunal was required to determine whether the applicant, while working as a commission only real estate salesperson, 'carried on a business' within the meaning of s. 1075 of the Act. Senior Member Beddoe considered the fact that the applicant employed her own skill and personality in discharging her duties, that she had the ability to seek and establish her own sales, that she supplied the majority of her equipment and bore her own operating, maintenance and insurance costs, and the fact that the majority of her time was not supervised or directed all pointed to the fact that she was conducting a business. As was stated by the High Court in Blockley v Federal Commissioner of Taxation (1923) 31 CLR 503, at p. 511 the question as to whether a person is carrying on a business 'is one of fact, not of law, depending on a variety of circumstances …'." 26 After quoting a statement by Mason J in Stevens v Brodribb Sawmilling Co Pty Ltd (1996) 160 CLR 16 at 24 the AAT continued: "23. The Tribunal finds on the evidence presented that whilst Mr. Foley suggested tasks to the applicant that he wished him to perform, he had no right to direct performance of those tasks and recognised that the applicant was free to refuse to undertake any work that was requested of him if he felt that it was beyond his capacity or for some other legitimate reason. There is no provision in the terms of applicant's appointment with the Department of Premier and Cabinet indicating that the Department retained any measure of control over the nature and performance of the applicant's work. Whilst the control test is a significant element in determining the nature of the relationship, it is not the sole criteria and as the Court stated at page 24 in the above decision [i.e. Stevens], 'that the exercise of control, whilst significant, is not the sole criterion by which to gauge whether the relationship is one of employment The approach of this Court has been to regard it merely as one of a number of indicia which must be a determination of that question … Other relevant maters include, but are not limited to, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, the deduction of income tax and the delegate [sic] of work by the putative employee.' 24. In Stevens case the High Court concluded that in the absence of lawful authority to command the work of the parties in question, the fact that they provided and maintained their own equipment, set their own hours of work, and received payments by reference to the volume of timber delivered, rather than in the form of a fixed salary or wages, suggested that the relationship with the respondent was not that of employment, but one of independent contract. 25. Similarly, in the present case, the evidence is that the applicant provided and maintained his own equipment, set his own hours of work, and often worked hours beyond those expected of him. Whilst the applicant received a base salary from the Department of Premier and Cabinet, it was supplemented by Mr. Foley and was therefore irregular and determinative more on the volume of work performed. Further whilst the applicant was entitled to holiday leave he did not in fact take such leave but chose to work his own hours. In accordance with the applicant's terms of employment with the Department, income tax was deducted, however this is but one factor to be considered in the total relationship picture and was not regarded as significant by the Tribunal in Ekis. It is also clear on the evidence that the applicant was free to and did engage other employees to assist him with his tasks over which Mr. Foley had no control or input. As Mason J said in Stevens 'The power to delegate is an important factor in deciding whether a worker is a servant or an independent contractor'. 26. The Tribunal disagrees with Mr. Zeeman's contention that the employment relationship the applicant had prior to March 1996 was irrelevant, as the evidence supports Mr. Sparkes' contention that the fundamental relationship existing prior to March 1996 did not change when the formal pay arrangement was put in place." 27 As essential element of the AAT's reasoning appears in the following paragraph: "28. The Tribunal agrees with the applicant's contention that the formal arrangement entered into between the applicant and the Department of Premier and Cabinet was merely a mechanism to provide for the payment to the applicant for his services. In all other respects the same arrangement continued between the applicant and Mr. Foley as had existed previously, some of the relevant aspects of which have been outlined above. There is no evidence to suggest that the nature of that working relationship was in any way altered by the terms of the formal appointment." 28 The AAT went on to find that, on balance, the circumstances of the respondent's employment relations suggested one of a contract for services rather than a contract for service in that it was "task or result orientated rather than simply the provision of labour in return for a specific wage". It then found that the respondent was carrying on business within the meaning of s 1075(1). After referring again to the decision in Re Ekis the AAT said: "Similarly in the present case there is sufficient evidence to persuade the Tribunal that the applicant had established a business and was trading as Sounding Board Management and Research Service in the provision of his services for Mr. Foley during the relevant period and was 'carrying on a business' within the meaning of s. 1075(1) of the Act. The applicant's evidence was that his business related expenses have been accepted as legitimate deductions from his gross income by the Australian Taxation Office." 29 In relation to the last point, it might be noted that in the only tax return in evidence (that for the 1997 tax year) the respondent returned his income from the Department ($20,002) as salary and wage income. He showed separate income ($1100) as business income. Conclusion on the appeal 30 It is obvious that the AAT placed considerable reliance on the earlier decision in Re Ekis. Regrettably, the AAT does not seem to have been informed that the decision in Ekis was set aside on appeal: Secretary, Department of Social Security v Ekis (1998) 85 FCR 382. This decision of Drummond J was handed down on 6 August 1998, that is to say more than a year before the AAT's decision. 31 As already noted, Ms Ekis was engaged by a company as a real estate salesperson on a commission only basis. Drummond J discussed the history of the social security legislation and noted (at 386) changes in 1991 which had the effect of changing the criterion of income from net realised income to gross income, save only for a few specified classes of outgoings, of which outgoings incurred in carrying on a business was one. His Honour then said (at 387): "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) of 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) of 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 of the Social Security Act necessarily, in my opinion, has the same meaning as the expression in carrying on a business' in s 51 of the ITAA. While the term 'business' as used in s 51(1) of 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." 32 His Honour concluded (at 388) that the AAT had misinterpreted the statutory phrase "carries on a business" by failing to recognise that its meaning was qualified by the exclusion from its reach of the activity of working as an employee. The AAT had failed to consider on the evidence before it whether Ms Ekis may have been an employee. His Honour sent the matter back to the AAT. His Honour said that further facts might need to be found and even if that were not so, the evaluation of the relative importance of a number of factual indicia was a task for the AAT. The AAT had not determined whether Ms Ekis was an employee, which it was required to do in order to properly apply s 1075(1), that being of "critical significance" to the proper disposal of the case (at 390). 33 In the present case, the AAT expressly found, and indeed it was not disputed, that the respondent was employed by the Department pursuant to an instrument of appointment during the relevant period. There being no suggestion that the appointment of the respondent was a sham, the fact of employment could not be set to one side as "merely a mechanism to provide for payment". The instrument of appointment and the relationship thereby created did of itself determine for the purposes of the Act whether or not the respondent was entitled to have any business expenses deducted from the income he received from the Department. 34 That income could not be income from a business carried on by the respondent because it was obtained by virtue of his occupation as an employee and thus not within s 1075(1), for the reasons explained by Drummond J. 35 It is perhaps worth observing that the present case differs from the many cases which, in various legal contexts, raise the question: employee or not? Such cases usually pose the issue whether A is an employee of B. To resolve that issue all the surrounding indicia have to be examined. The present case is different in that it is beyond argument that A (the respondent) was the employee of B (the Department). It does not matter for present purposes that the reason for the respondent's employment was the provision of assistance to Mr Foley and that therefore, as might be expected, the respondent carried out his work in a way which suited Mr Foley and with highly flexible arrangements as between the two of them. 36 It would not be appropriate to send the matter back to the AAT because, in contrast to Ekis, the critical fact of the respondent's status as an employee has already been found. I was informed that the gross amount received by the respondent from the Department would be enough to put him over the relevant income limit. There is therefore no point in enquiring into what extra money Mr Foley may have paid him and deducting business expenses therefrom. Orders 37 There will be orders that the appeal be allowed, that the decision of the AAT be set aside and the decision under review by the AAT affirmed. There will be an order that the respondent pay the applicant's costs, including reserved costs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 24 March 2000 Counsel for the Applicant: Mr D W Wilson Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr R Browne Solicitor for the Respondent: Legal Aid Commission of Tasmania Date of Hearing: 21 March 2000 Date of Judgment: 24 March 2000