FEDERAL COURT OF AUSTRALIA Shord v Commissioner of Taxation [2016] FCA 761 Appeal from: Shord v Commissioner of Taxation [2015] AATA 355 File number(s): WAD 299 of 2015 Judge(s): GILMOUR J Date of judgment: 29 June 2016 Catchwords: TAXATION – whether the appellant was engaged in foreign service within the meaning of s 23AG(7) of the Income Tax Assessment Act 1936 (Cth) and thereby exempt from income tax – whether the appellant was entitled to tax offsets for foreign income tax paid pursuant to s 770-10(1) of the Income Tax Assessment Act 1997 (Cth) – whether appellant was an "employee" under s23AG (7) of the Income Tax Assessment Act 1936 (Cth) – whether the burden of proof is upon the appellant to positively disprove the amended income tax assessments by proving the amount of foreign income tax paid Legislation: Income Tax Assessment Act 1936 (Cth) ss 23AG(1), 23AG(7) Income Tax Assessment Act 1997 (Cth) ss 770-10, 770-10(1) Taxation Administration Act 1953 (Cth) s 14ZZK(b) Cases cited: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] 2 ALL ER 680 Blank v Commissioner of Taxation [2015] FCAFC 154 Blank v Commissioner of Taxation (No 2) [2014] FCA 517 Fletcher v Federal Commissioner of Taxation (1988) 19 FCR 442 Haritos v Commissioner of Taxation [2015] FCAFC 92 Hollis v Vabu Pty Ltd (2001) 207 CLR 21 May v Military Rehabilitation and Compensation Commission [2015] FCAFC 93 Minister for Immigration and Citizenship v Li (2013) 249 CLR 332 Mulherin v Commissioner of Taxation [2013] FCAFC 115 On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 Date of hearing: 16 November 2015 Registry: Western Australia Division: General Division National Practice Area: Taxation Number of paragraphs: 41 Counsel for the Appellant Mr JW Fickling Solicitor for the Appellant: Robson Hayes Legal Counsel for the Respondent: Ms F Vernon Solicitor for the Respondent Australian Government Solicitor ORDERS WAD 299 of 2015 BETWEEN: MICHAEL SHORD Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGE: GILMOUR J DATE OF ORDER: 29 June 2016 THE COURT ORDERS THAT: 1. The appeal is dismissed. 2. The appellant pay the respondent's costs of the appeal to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GILMOUR J: 1 Two questions of law arise in this appeal from a decision of the Administrative Appeals Tribunal (Tribunal), affirming an Objection Decision of the Commissioner. First, whether, at the relevant times, the appellant was engaged in foreign service within the meaning of s 23AG(7) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) in the tax years ended 30 June 2006 to 30 June 2009, and thereby exempt from income tax. The Tribunal concluded that he was not so engaged. Second, was the appellant entitled to tax offsets for foreign income tax paid in the years ended 30 June 2006 to 30 June 2011 pursuant to s 770-10(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). The Tribunal concluded that he was not so entitled. 2 The first issue arises as Question of Law 3 in the Notice of Appeal. It is conceded by the appellant, if this question is resolved against him, that it is not necessary for consideration to be given to Questions of Law 1 and 2. In this event, only Question of Law 4 would remain to be considered. 3 I would resolve Questions 3 and 4 adversely to the appellant for the reasons which follow. Background 4 From 1999 to August 2010, the appellant worked as a saturation diver, diving supervisor and diving superintendent for various foreign companies overseas. Following a tax audit, the appellant was requested to lodge income tax returns for the years ended 30 June 2006 to 30 June 2011 (the Relevant Period). As a result, he was issued with amended assessments for those years, which in total increased the amount of income tax payable by him by $149,967.75. This was as a result of including, in the amended assessments, payments received by him for his work overseas during the Relevant Period. The Commissioner also imposed substantial interest charges and penalties for the Relevant Period amounting to almost $134,000. Question of Law 3 : Appeal ground 1(d) : Did the Tribunal find that the applicant was not engaged in foreign service within the meaning of s 23AG(7) of the ITAA 1936 because the applicant was not engaged in service as an employee, in circumstances where it was not open to the Tribunal to make that finding? 5 Paragraph 94 of the Tribunal's Reasons (Reasons) states: 94. Finally, Mr Shord's description of the terms of his engagement by the relevant foreign companies indicates that, at all material times, he was not engaged in service as the holder of an office or in the capacity of an employee within the meaning of "foreign service" in s 23AG(7) of the ITAA 1936: refer to paragraphs 49 to 54 above. 6 Paragraph 94 is characterised by the appellant as no more than an observation; not a finding of fact but merely an "indicia". This, the appellant submits, follows from the use by the Tribunal of the expression "[The appellant's] description… indicates that". 7 He then submits that this "indicia" is unsupported by the facts found at [88] to [93], which treat the appellant as an employee, and is contrary to written submissions to the same effect made on his behalf as well as by the respondent, which both treated the applicant as an employee. Thus, he submits that the "indicia" is an error of law in and of itself. 8 He also submits that the "indicia" fails to consider the following documentary evidence tendered by him at the Tribunal to the effect that he was "engaged in service as the holder of an office or in the capacity of an employee": (1) A one page extract of a "Subsea employment agreement" with the letter head "PT Global Industries Asia Pacific" (Global Industries) stating that the agreement is entered into between Global Industries (referred to as the employer) and the appellant (referred to as the employee) subject to terms and conditions set out therein. (2) A letter of appointment with the letterhead Global Industries, dated 14 July 2009, stating that the applicant is appointed as an "Air Diving Supervisor" on the "Vessel Comanche Barge". The letter states, "This letter of appointment is valid for operation carried out by this company for the duration of 2009. Global Industries reserves the right to cancel this appointment at its discretion". (3) The appellant's personal safety log book containing a page titled "employment particulars". In this document it is stated that the applicant was employed in Miri, Sarawak on 20 June 2005, and in Dubai. (4) An email from the applicant to Ms Libby Haydon on 28 November 2012 in which the appellant states that a lot of the agreements regarding pay and travel involve word of mouth. It states, "As an example, I have been on this contract now for just over a week and I have just received a contract to sign". 9 He also complains that the Tribunal failed to explain the use and application of the phrase "as the holder of an office or in the capacity as an employee" and "employee" within s 23AG(7) being in and of itself an error of law. He points out that the definition of "employee" in s 23AG(7) is not prescriptive but inclusive ("employee includes"), and submits that the concept of "employee" in s 23AG(7) includes employees within the ordinary meaning of that term: see also Hollis v Vabu Pty Ltd (2001) 207 CLR 21. This, he submits, amounted to a failure to exercise jurisdiction in applying the question of whether the appellant was an employee within the meaning of "foreign service" or a combination thereof. 10 The appellant relied upon May v Military Rehabilitation and Compensation Commission [2015] FCAFC 93 at [170], [184], [186], [191] and [194] in support of the above submissions. Section 23AG(7) 11 Prior to 1 July 2009, in order to gain exemption under s 23AG, a taxpayer must have been engaged in "foreign service" as defined by s 23AG(7). As Edmonds J explained in Blank v Commissioner of Taxation (No 2) [2014] FCA 517 at [29] section 23AG(1), as it was prior to 1 July 2009, reads as follows when the relevant definitions are read in: 29. Substituting the definitions of "foreign service" and "foreign earnings" in s 23AG(7) for these terms in s 23AG(1) where they first appear, s 23AG(1) read (prior to its amendment in 2009): Where a resident, being a natural person, has been engaged in [service in a foreign country as the holder of an office or in the capacity of an employee] for a continuous period of not less than 91 days, any [earnings, salary, wages, commission, bonuses or allowances] derived by the person from that foreign service is exempt from tax. This extended version of the provision was affirmed by the Full Court in Blank v Commissioner of Taxation [2015] FCAFC 154. 12 Relevantly, the definition of "foreign service" in s 23AG(7) reads as follows: "foreign service" means service in a foreign country as the holder of an office or in the capacity of an employee. and "employee" includes: (a) a person employed by a government or an authority of a government or by an international organisation; or (b) a member of a disciplined force. Consideration: Question of Law 3 13 I reject the appellant's submissions concerning [94] of the Reasons. When regard is had to the relevant context within its Reasons, it is evident that the Tribunal has made a finding that the appellant was not engaged in foreign service. The word "indicates" has been used in the sense of "demonstrates" or "establishes". The paragraph commences with the word "finally". It is a conclusion, as expressly referred to by the Tribunal, to what was contained in its Reasons at [49] – [54] dealing with the Tribunal's determination on the application under s 23AG of the ITAA 1936. 14 Contrary to the appellant's submissions, the findings of fact by the Tribunal at [49]-[54] are not inconsistent with what is said at [94] of the Reasons. Nor is the finding inconsistent with the Reasons at [88]-[93]. These paragraphs concern the appellant's ineligibility to rely on the exemption in s 23AG on other grounds. 15 It may be seen at [49]-[54] of the Reasons that the Tribunal gave consideration to a number of factors from which it concluded that the appellant was not engaged in service in the capacity of an employee, and accordingly had not been engaged in foreign service for the relevant periods for the purposes of s 23AG(1). These factors included that: (1) he was engaged on a job by job basis ([50]); (2) he had no written employment contract ([51]); (3) he was engaged only until the job was completed ([52]); (4) he had no entitlement to superannuation, sick leave, holiday leave, or long service leave ([53]); and (5) he would upon completion of a job wait until he was assigned another job ([54]). 16 Additionally, his written statement, set out in full by the Tribunal at [49], stated that he did not get the benefit of public holidays. He described the time in between jobs as "recreation leave". He did not explain what he meant by this, but the inference was that he was not paid other than when working on a job. He stated that the terms of his engagement were oral, but that he had been unable to obtain confirmation of the terms from the company which engaged him. 17 The Tribunal considered all of these factors, enabling it to make an objective assessment as to the nature of the relationship or the real substance of that relationship: On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 at [188]-[190]. See also Hollis at [24], [47] and [58]. 18 The question of whether or not the appellant was an employee was the subject of evidence and submissions. It cannot be said that the Tribunal's finding of fact at [94] was unreasonable: Minister for Immigration and Citizenship v Li (2013) 249 CLR 332 at [30] per French CJ. To the contrary, it was rationally open for the Tribunal to find, in circumstances where the ordinary incidents of an employer/employee relationship were absent, to conclude that such a relationship did not exist: Fletcher v Federal Commissioner of Taxation (1988) 19 FCR 442 at 451-452. 19 I reject the appellant's submission that the content of the Reasons at [1], [4], [47] and [49], where, for example, the term "employment" is used in relation to the applicant, demonstrated that he was an employee. Plainly at [94] the Tribunal expressly concluded otherwise. A person may have "employment" as an independent contractor. 20 No error of law, in this respect, has been established. 21 I also reject the appellant's submission that, contrary to the Reasons at [57], there was documentary evidence of an employment contract. 22 The appellant submits that the finding at [51], that there was "no evidence" of there being any employment contract, was incorrect as the appellant had given such evidence and had produced documentary evidence to that effect. He submits that this is an error of law in and of itself because [51] is said to be one of the bases for the unsupported conclusion reached in [94], finding that the applicant was not an "employee". He relied, in this respect, upon the documents set out at [9] above. 23 I reject this submission. The finding in the Tribunal is, in effect, that there was no evidence of any employment agreement. None of the documents referred to by the appellant constitute an employment agreement, nor are they capable of establishing the existence of such an agreement during the Relevant Period between 1 July 2005 and 30 June 2011. 24 Moreover, the documents, such as they are, fall outside the period during which s 23AG operated (1 July 2005 to 1 July 2009). Question of Law 4: Appeal Ground 5: Did the Tribunal find that the applicant did not pay foreign taxes and as a consequence was not eligible for a foreign income tax credit where it was not open to the Tribunal to make that finding or the finding was not consistent with the requirement to assess the facts before the Tribunal? 25 The appellant challenges the Tribunal's finding that there was no evidence that personal income tax was paid, either by the appellant or on his behalf by the company for which he worked, and that accordingly he was not entitled to any foreign income tax offset under s 770-10 of the ITAA 1997: Reasons at [55] and [96]. 26 This finding, he submits, is "a fallacy and completely unsupported". I take this to be a submission that the finding was manifestly unreasonable in the Wednesbury sense: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] 2 ALL ER 680. 27 Paragraphs [55] and [96] of the Reasons state: 55. Apart from Brunei, the laws of all countries in which Mr Shord worked during the Relevant Period provided for the imposition of personal income tax. In his Witness Statement (at [21]: see paragraph 49 above) Mr Shord states that his income tax for his overseas work in the Relevant Period was paid directly or on his behalf by his overseas employer. However, there is no evidence of this. Further, there is no evidence that Mr Shord himself paid personal income tax in any of the foreign countries in which he worked during the Relevant Period. [Emphasis added.] 96. Mr Shord has not produced evidence to support an entitlement to any foreign income tax offset, or the quantum of any such offset, during the years ended 30 June 2006 to 30 June 2011. Specifically, there is no evidence that Mr Shord paid any foreign income tax on the foreign source income be derived whilst working overseas in the Relevant Period. Accordingly, Mr Shord has failed to positively establish what must be done to correct the Amended Assessments: Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614. [Emphasis added.] 28 The appellant submits that the Tribunal erred in law in failing to turn its mind to evidence tendered by him and submissions advanced on his behalf upon this question, such that its finding was wholly inconsistent with the evidence before it. 29 He pointed, in particular, to the following evidence which was before the Tribunal: (1) His statement that his income tax for his overseas work in the relevant period was paid directly or on his behalf by his overseas employer; (2) Mr Craig Staggs, Diving Operations, Subsea Division, Technip, which purchased Global Singapore, wrote by email on 1 August 2012: Global did pay taxes in both India and Thailand for the off shore personnel. There was not a set percentage, taxes percentages were based on the number of personnel and the amount of time in country. A percentage would be impossible to ascertain for an individual as they were paid for the group overall. Your paycheck will not show a percentage as this was not deducted from your pay however it should be enough to prove you worked out of country. (3) Ms Marella Diding of Global Industries wrote an email dated around 1 August 2009, which includes: The Tax people here are processing the tax papers for payment. The documents for Mike Shord have been submitted for Tax ID application to enable to pay the Tax in Thailand. Unfortunately, the tax dept Government in Thailand has indicated Mike Shord has already got the Tax ID No., which Global cannot apply again for him and cannot get the Tax ID details from the Tax Government. Therefore, please check with Mike Shord during his working in Thailand before, Mike has already got the Tax ID No. from his previous company during worked in Thailand. If not, Mike could give Authorization to Global Tax Dept, to get the Tax Information from the Thailand Tax dept / government Out Tax 30 The appellant, in this respect, again relied upon the document consisting of a one page extract of a "Subsea employment agreement" with the letter head "PT Global Industries Asia Pacific", referred to above, as well as the letter of appointment with the letterhead Global Industries, dated 14 July 2009, also referred to above. Consideration: Question of Law 4 31 I do not accept these submissions. It is correct that the appellant gave evidence that his income tax was paid directly or on his behalf by his employer. The Tribunal noted this at [55]. However, what is correctly concluded was that he did not prove, beyond mere assertion that such tax had been paid, or how much income tax, if any, had been paid. This conclusion was reiterated at [96] by the Tribunal. It was incumbent on the appellant to establish this fact in order to positively establish that the amended assessments were erroneous. Indeed, the appellant's objection to his amended assessments in July 2013, in which he claimed foreign tax credits, had been rejected for the very same reason. The objection decision of 18 December 2013 included the following: You claimed you paid local taxes in source countries for your foreign source income. You made reference to an email from Craig Staggs of Technip stating Global Industries paid local taxes in source countries, including India and Thailand. However, you did not provide evidence to prove the amounts paid to each country and when the taxes were paid. Therefore we cannot allow the foreign tax credit or foreign income tax offset. [See Mulherin v Commissioner of Taxation [2013] FCAFC 115]. 32 The appellant's reliance upon Haritos v Commissioner of Taxation [2015] FCAFC 92 at [230]-[234] does not assist. Unlike the facts in that case, which involved "inexact evidence", here there was no evidence whatsoever upon which the Tribunal could make an estimate. 33 Neither the appellant's general statement that "local employment taxes" have been paid either directly or on his behalf, nor the two emails dated 1 August 2009 and 2012, respectively, alter this conclusion. 34 First, they do not establish that the taxes in question were or included income tax. Mr Stagg's email of 1 August 2012 asserts that Global Industries paid taxes in both India and Thailand for its offshore personnel. It is by no means clear that this was in respect of income tax. The explanation that the tax paid was calculated as a percentage based on the number of personnel, and the time they spent in the particular country, does not readily lead to the conclusion that it was income tax which was being paid. 35 Second, even if it were otherwise, this evidence does not establish that income tax in a particular amount was paid by or on behalf of the appellant in any particular income year. Nor was any evidence tendered of any means or formula by which such amounts might be calculated by the Tribunal. The Tribunal had no obligation to make enquiries overseas to ascertain what, if any, income tax was paid by or on behalf of the appellant. 36 Accordingly, there was "no evidence" capable of establishing this necessary fact of which the appellant had the burden of proving: s 14ZZK(b) of the Taxation Administration Act 1953 (Cth). 37 The appellant submits that the respondent had some obligation to obtain evidence of payment by him, or on his behalf, of income tax overseas in circumstances where, he claims, he did not have the resources to do so, to assist him, in effect, in satisfying the requirements of s 14ZZK(b) of the Taxation Administration Act 1953 (Cth). The Commissioner has no such obligation. 38 The appellant sought to tender in evidence a statistical study of prior Tribunal decisions since 2010 in which the Commissioner was a respondent and constituted by a particular senior member. This tender was to support a submission contained in the appellant's supplementary written submissions that the statistical study may indicate that a decision maker failed to adopt a conscientious approach to the task before him, and in particular his approach to findings that there was "no evidence" to support assertions of fact. 39 The Commissioner objected to the tender on a number of grounds. First, it does not apparently refer to any of the Questions of Law. Second, no application to adduce additional evidence has been made. 40 I uphold that objection. Moreover, I cannot otherwise see any utility in this study. The "no evidence" conclusion of the Tribunal is well supported, as I have explained, by a consideration of the material which was before the Tribunal. A consideration of what occurred in other cases, on the evidence before other Tribunals considering those cases, does not assist in the resolution of this appeal. 41 The appeal will be dismissed with costs. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour. Associate: Dated: 29 June 2016