VN Railway Pty Ltd & Anor v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 289/2013 (Full Federal Court); VID 317/2012 (Federal Court))
Judgment date: 27 March 2013
Date published: 10 December 2013

Summary of decision:
Outlines the Tax Office's response to this case which concerns the meaning of "employee" and "eligible employee" (s82AAA and 82AAC of the Act), and whether a contribution was made to a complying superannuation fund (s82AAC(1)).

Overview of facts:
Vrondis Nominees Pty Ltd ('Vrondis') was the trustee of a trading trust which operated a supermarket. The Commissioner conducted an audit of the business for the period 1 July 1992 to 30 June 2003 and raised assessments for each of the income years between 1993 and 2003. The assessments related to items of undeclared income and the disallowance of certain deductions. The Commissioner imposed penalties at 75% of the shortfall for understatement of taxable income in the financial years between 1993 and 2000. | The taxpayer lodged objections against all of the assessments and these were disallowed by the Commissioner. In a decision dated 23 March 2012, the Administrative Appeals Tribunal ('Tribunal') affirmed the Commissioner's objection decisions. | After the Tribunal handed down its decision, VN Railway Pty Ltd replaced Vrondis as trustee. The taxpayer appealed certain aspects of the Tribunal's decision to the Federal Court. | The first aspect of the appeal related to the disallowance of deductions claimed by the taxpayer in the 2001-2003 financial years for superannuation payments claimed to have been made on behalf of certain family members who were said to be employees. The Tribunal had found that these persons were not employees for the purposes of section 82AAC of the Income Tax Assessment Act 1936 ('the Act'). In reaching this view, the Tribunal applied the common law understanding of the term "employee". | The second issue concerned the requirements for a "contribution" to be "made" to a superannuation fund, and whether it was sufficient for the purposes of section 82AAC of the Act that an entitlement was granted even if no payment was actually made in the particular financial year. | The third issue related to the imposition of penalty and whether it was open to the Tribunal to determine that the appellants had intentionally disregarded the law where the director was allegedly not cross-examined with respect to his beliefs about Vrondis' tax obligations. | Issues decided by the court | 1. Whether the persons for whom contributions were made to a superannuation fund were "eligible employees" within the meaning of paragraph 82AAC(1)(a) of the Act | The Court held that the Tribunal was correct in finding no deductions were allowable because the family members who were said to be employees were not employees for the purposes of section 82AAC of the Act. | The Court referred to the legislative history of sections 82AAA and 82AAC and stated at [13] that: "The legislative amendments which saw the introduction of ss82AAA and 82AAC of the Act were, in part, directed at preventing deductions being claimed in respect of persons such as family members who might have been employees of other persons who had no proprietary interest in the business of the claimant. This objective could not have been achieved if the broad interpretation of the word "employment", contended for by Vrondis, were to be adopted." | The Court also referred to the statutory context of the provisions, noting that an employee is defined to mean one who is employed by a taxpayer and/or is producing assessable income for the taxpayer or is engaged in the taxpayer's business, which is strongly suggestive of a technical use of the words "employee" and "employment." at [14] and [15]. | At [16], the Court noted that the adoption of the common law understanding of "employee" sits comfortably with the definition of "eligible employee." The Court also held that although the Tribunal had regard to a "presumption that any work done in the ....business by [the beneficiary] was done for family reasons, and that there is authority to the effect that such presumptions are unhelpful and no longer represent a correct analysis, the Tribunal had nevertheless correctly applied the common law meaning of "employee" and "employment" at [19] and [20]. | 2. Whether the Tribunal was correct in finding that the "contribution" had to be "made" to a complying superannuation fund as per s 82AAC(1) of the Act for the then director of Vrondis. | The Court held that in order to attract a deduction the taxpayer must make a contribution, and that the deduction is not allowable even if some form of entitlement exists unless the payment is actually made. The Court held that the contribution must be paid into a complying superannuation fund as required by section 82AAC(1)(b) at [25]. The Court found that the taxpayer did not make a superannuation payment on behalf of the then director in the 2002-2003 financial year, despite the taxpayer entity recording a book entry which indicated a contribution to the director's superannuation fund as a liability at [26] and [27]. The Tribunal was therefore correct in finding that no deduction was allowable. | 3. Whether penalties for intentional disregard at 75% per s226J of the Act were properly imposed. In this regard, the taxpayer argued that the Tribunal had failed to ensure that the rule in Browne v Dunn (1893) 6 r 67 was complied with and that the taxpayer had satisfied the onus; that the Tribunal had denied Vrondis procedural fairness; and/or that this aspect of the Tribunal's determination was unreasonable. | The Court dismissed the taxpayer's argument that applying the rule in Browne v Dunn (1893) 6 R 67 required that, in the absence of cross-examination, the Tribunal was bound to find that Vrondis had satsified the onus. The Court upheld the Tribunal's finding that the Director and the beneficiaries would have been aware that the trust had understated its income in its tax returns. In doing so, the Court considered a number of matters including that the Applicants were put on notice of the allegation of intentional disregard of a taxation law by the finding of evasion, the objection decisions, and the Respondent's amended statement of facts and contentions filed prior to the hearing before the Tribunal. Further, the director's state of mind was repeatedly challenged during cross-examination before the Tribunal in respect of the accuracy of the tax returns and the deliberate provision of false information to the Respondent. | The Court held [at 62] that, in the circumstances, the Tribunal was entitled to conclude that Vrondis had intentionally disregarded its obligations to provide true and correct information in its filed tax returns. | Furthermore, the Court held [at 66] that Vrondis was not denied procedural fairness and that the rule in Browne v Dunn was complied with. In particular, the decision of Jessup J in Howard v Commissioner of Taxation (No 2 ) [2011] FCA 1421 was distinguished on the basis of previous disclosure of relevant material. The Court also found that the Tribunal's decision was open to it and not manifestly unreasonable (the Court however noted that there is strong authority for the proposition that Wednesbury unreasonableness is only available as a ground of challenge to discretionary decisions.) | The taxpayer lodged an appeal to the Full Federal Court against the decision of Tracey J but discontinued the appeal prior to hearing.

Issues decided:
1. Whether the persons for whom contributions were made to a superannuation fund were "eligible employees" within the meaning of paragraph 82AAC(1)(a) of the Act: The Court held that the Tribunal was correct in finding no deductions were allowable because the family members who were said to be employees were not employees for the purposes of section 82AAC of the Act. The Court referred to the legislative history of sections 82AAA and 82AAC and stated at [13] that: "The legislative amendments which saw the introduction of ss82AAA and 82AAC of the Act were, in part, directed at preventing deductions being claimed in respect of persons such as family members who might have been employees of other persons who had no proprietary interest in the business of the claimant. This objective could not have been achieved if the broad interpretation of the word "employment", contended for by Vrondis, were to be adopted." The Court also referred to the statutory context of the provisions, noting that an employee is defined to mean one who is employed by a taxpayer and/or is producing assessable income for the taxpayer or is engaged in the taxpayer's business, which is strongly suggestive of a technical use of the words "employee" and "employment." at [14] and [15]. At [16], the Court noted that the adoption of the common law understanding of "employee" sits comfortably with the definition of "eligible employee." The Court also held that although the Tribunal had regard to a "presumption that any work done in the ....business by [the beneficiary] was done for family reasons, and that there is authority to the effect that such presumptions are unhelpful and no longer represent a correct analysis, the Tribunal had nevertheless correctly applied the common law meaning of "employee" and "employment" at [19] and [20]. | 2. Whether the Tribunal was correct in finding that the "contribution" had to be "made" to a complying superannuation fund as per s 82AAC(1) of the Act for the then director of Vrondis.: The Court held that in order to attract a deduction the taxpayer must make a contribution, and that the deduction is not allowable even if some form of entitlement exists unless the payment is actually made. The Court held that the contribution must be paid into a complying superannuation fund as required by section 82AAC(1)(b) at [25]. The Court found that the taxpayer did not make a superannuation payment on behalf of the then director in the 2002-2003 financial year, despite the taxpayer entity recording a book entry which indicated a contribution to the director's superannuation fund as a liability at [26] and [27]. The Tribunal was therefore correct in finding that no deduction was allowable. | 3. Whether penalties for intentional disregard at 75% per s226J of the Act were properly imposed. In this regard, the taxpayer argued that the Tribunal had failed to ensure that the rule in Browne v Dunn (1893) 6 r 67 was complied with and that the taxpayer had satisfied the onus; that the Tribunal had denied Vrondis procedural fairness; and/or that this aspect of the Tribunal's determination was unreasonable.: The Court dismissed the taxpayer's argument that applying the rule in Browne v Dunn (1893) 6 R 67 required that, in the absence of cross-examination, the Tribunal was bound to find that Vrondis had satsified the onus. The Court upheld the Tribunal's finding that the Director and the beneficiaries would have been aware that the trust had understated its income in its tax returns. In doing so, the Court considered a number of matters including that the Applicants were put on notice of the allegation of intentional disregard of a taxation law by the finding of evasion, the objection decisions, and the Respondent's amended statement of facts and contentions filed prior to the hearing before the Tribunal. Further, the director's state of mind was repeatedly challenged during cross-examination before the Tribunal in respect of the accuracy of the tax returns and the deliberate provision of false information to the Respondent. The Court held [at 62] that, in the circumstances, the Tribunal was entitled to conclude that Vrondis had intentionally disregarded its obligations to provide true and correct information in its filed tax returns. Furthermore, the Court held [at 66] that Vrondis was not denied procedural fairness and that the rule in Browne v Dunn was complied with. In particular, the decision of Jessup J in Howard v Commissioner of Taxation (No 2 ) [2011] FCA 1421 was distinguished on the basis of previous disclosure of relevant material. The Court also found that the Tribunal's decision was open to it and not manifestly unreasonable (the Court however noted that there is strong authority for the proposition that Wednesbury unreasonableness is only available as a ground of challenge to discretionary decisions.) The taxpayer lodged an appeal to the Full Federal Court against the decision of Tracey J but discontinued the appeal prior to hearing.

ATO view of decision:
The Commissioner considers that the Court's decision confirms that the term "employee" in sections 82AAA and 82AAC of the the Act, is used in the common law sense of a person who is a party to a contract of service. | Sections 82AAA and 82AAC of the the Act were repealed with effect from the 2007-2008 year of income and later years. The decision of the Federal Court in this matter therefore has limited ongoing application. It is also considered that the legislative scheme set out in Division 290 of the Income Tax Assessment Act 1997 , which applies from the 2007-08 income year onwards, has removed any doubt which may have existed over the conditions for deducting an employer contribution and the definition of who is an "employee" for that purpose.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | N/A

Legislative references: Administrative Appeals Tribunal Act 1975 section 44 Income Tax Assessment Act 1936 82AAA 82AAC 82AAR 226J Taxation Administration Act 1953 section 14ZZK
Case references: Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (1983) 70 FLR 447 13 ATR 825 83 ATC 4015 Attorney General (NSW) v Quin (1990) 170 CLR 1 [1990] HCA 21 Browne v Dunn (1893) 6 R 67 Commissioner of Taxation v P Iori & Sons Pty Ltd (1987) 15 FCR 363 19 ATR 201 87 ATC 4775 Confidential v Commissioner of Taxation [2012] AATA 178 2012 ATC 1-044 Ermogenous v Greek Orthodox (2002) 209 CLR 95 [2002] HCA 8 Ex parte Applicant S 20/2002 [2003] HCA 30 (2003) 198 ALR 59 Harris v Commissioner of Taxation (2002) 125 FCR 46 Howard v Commissioner of Taxation (No 2) [2011] FCA 1421 2011 ATC 20-298 86 ATR 753 Kioa v West (1985) 159 CLR 550 Minister for Immigration and Multicultural Affairs v Eshetu [1999] HCA 21 (1999) 197 CLR 611 MWJ v The Queen (2006) 222 ALR 436 Nozzi Pty Ltd v Federal Commissioner of Taxation [2003] FCA 356 (2003) 52 ATR 521 Lend Lease Corporation Ltd v Federal Commissioner of Taxation (1990) 95 ALR 427 21 ATR 402 90 ATC 4401 LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2011] FCA 1146 Reid v Kerr (1974) 9 SASR 367 Tadrous v Tadrous [2010] NSWSC 1388 White Industries (QLD) Pty Ltd v Flower & Hart [1998] FCA 806 (1998) 156 ALR 169
Subject references: Allowable deduction Eligible employee Employee Superannuation contribution Makes a contribution Penalty Intentional disregard Onus of proof