Russell v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (QUD 008/10)
Judgment date: 4 February 2011
Date published: 2 July 2012

Summary of decision:
Outlines the ATO's response to this case that concerns, first, whether an overseas registered company is a 'personal services entity' and if payments to it are the taxpayer's assessable income. Secondly, whether a partnership carried on enterprises and is entitled to input tax credits.

Overview of facts:
Income Tax - Individual taxpayer | 1. The taxpayer applied for a position as an office manager with an Australian company. | 2. A contract for the taxpayer's full time services was entered into between the Australian company and a New Zealand company, whose sole shareholder was the taxpayer's wife. | 3. The Australian company made all payments for the taxpayer's services (less an amount for GST) to the New Zealand company. | 4. The taxpayer claims not to have received salary or wages from the New Zealand company and only returned partnership distributions as income (amounts equal to the GST). | 5. The taxpayer was assessed for personal services income (PSI) for the monies paid by the Australian company. | 6. The Full Court found that these amounts constituted the taxpayer's PSI. | GST - Partnership | 1. The taxpayer and his wife, as a partnership, purported to carry on a number of enterprises - accountancy practice, forestry activity and naturist retreat. | 2. The Commissioner considered the partnership was not carrying on any enterprises and disallowed GST credits as being private expenses. | 3. The primary judge found that the partnership was carrying on a forestry activity enterprise but not an accountancy practice or naturist retreat enterprise. | 4. The Full Court found that the partnership was carrying on a naturist retreat enterprise but not an accountancy practice. | Issues decided by the Full Federal Court | 1. Court unanimously dismissed the individual's appeal. The ITAA 1997 does not purport to tax profits of a New Zealand company but taxes part of its income as the personal services income of the individual. Pursuant to the ITAA 1997 the taxpayer's personal services income would be excluded from the New Zealand company's assessable income and therefore, its taxable income, as it was not part of its profits and therefore not taxation of the profits of the New Zealand company's enterprise. | 2. On the issue of whether there are partnership input tax credits for expenses in relation to the accountancy practice enterprise and the naturist retreat enterprise, the Court held that the partnership: • was not carrying on an accountancy practice and was not entitled to input tax credits (unanimously). • was carrying on the enterprise of naturist retreat and was entitled to input tax credits (by majority) | • was not carrying on an accountancy practice and was not entitled to input tax credits (unanimously). • was carrying on the enterprise of naturist retreat and was entitled to input tax credits (by majority)

Issues decided:
1. Court unanimously dismissed the individual's appeal. The ITAA 1997 does not purport to tax profits of a New Zealand company but taxes part of its income as the personal services income of the individual. Pursuant to the ITAA 1997 the taxpayer's personal services income would be excluded from the New Zealand company's assessable income and therefore, its taxable income, as it was not part of its profits and therefore not taxation of the profits of the New Zealand company's enterprise. 2. On the issue of whether there are partnership input tax credits for expenses in relation to the accountancy practice enterprise and the naturist retreat enterprise, the Court held that the partnership: • was not carrying on an accountancy practice and was not entitled to input tax credits (unanimously). • was carrying on the enterprise of naturist retreat and was entitled to input tax credits (by majority) • was not carrying on an accountancy practice and was not entitled to input tax credits (unanimously). • was carrying on the enterprise of naturist retreat and was entitled to input tax credits (by majority)

ATO view of decision:
The ITAA 1997 does not bring to tax the profits of a New Zealand company but taxes, as statutory income, the personal services income of the individual. The facts of this case were unusual and it is not expected a factual scenario of like kind will often arise. | It was open on the facts to find that the partnership was carrying on a forestry enterprise and naturist retreat enterprise.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None. | Implications for Law Administration Practice Statements | None.

Legislative references: Income Tax Assessment Act 1997 ("ITAA 1997") s 4-1 s 6-5 Pt 2-42 s 86-20 s 86-30 s 86-35 s 86-60 A New Tax System (Goods and Services Tax) Act 1999 s 9-20 s 11-5 s 11-10 s 11-15 s 11-20 s 195-1 International Tax Agreements Act 1953 s 3(2) s 4(2) s 6B(1A) Schedule 4 : NZ Agreement Article 3(1) Article 7(1)
Case references: Commissioner of Taxation v Anstis [2010] HCA 40 272 ALR 1 76 ATR 735 2010 ATC 20-221 241 CLR 443 Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402 72 ATR 120 2009 ATC 20-100 Ell v Federal Commissioner of Taxation [2006] FCA 71 2006 ATC 4098 61 ATR 661 Fairwell Estates Pty Ltd v Federal Commissioner of Taxation [1970] HCA 29 123 CLR 153 1 ATR 726 70 ATC 4061 Fox v Percy [2003] HCA 22 214 CLR 118 Handley v Federal Commissioner of Taxation (1981) 148 CLR 182 John v Federal Commissioner of Taxation [1989] HCA 5 166 CLR 417 20 ATR 1 89 ATC 4101 McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation [2005] FCAFC 67 142 FCR 134 2005 ATC 4398 59 ATR 358 Minister for Immigration and Multicultural and Indigenous Affairs v OAAH (2006) 231 CLR 1 NBGM v Minister for Immigration and Multicultural and Indigenous Affairs [2006] HCA 54 231 CLR 52 Peerless Marine Pty Ltd v Federal Commissioner of Taxation [2006] AATA 765 2006 ATC 2419 63 ATR 1303 Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 21 ATR 531 90 ATC 4717 Warren v Coombes (1979) 142 CLR 531
Subject references: Personal services income International Tax New Zealand Agreement Double taxation Carrying on an enterprise Meaning of 'creditable acquisition'