On 10 February 2022, the AAT decided that payments made by various entities, to a service company, for the individual’s services, as a director, were ordinary income of the individual (and not the service company). It reached a similar conclusion about shares that these entities, issued to the service company, to satisfy the invoices.
The facts were these.
- The taxpayer was an IT consultant who provided his services through a company (Hastcombe) he controlled.
- At various times during the 2010-11 to 2013-14 income years, the taxpayer was a director of 3 other companies.
- Hastcombe invoiced the companies for the taxpayer’s services as a director.
- Each company either paid Hastcombe the amounts invoiced or, in some cases, issued shares in satisfaction of outstanding invoices.
- Some shares were issued to the taxpayer’s superannuation fund (the Bilbo Fund).
The ATO assessed the taxpayer on the basis that the payments, and the benefit of the share issues, were his ordinary income because they were made to Hastcombe (or the Bilbo Fund) at the taxpayer’s direction.
The AAT upheld the assessments.
- there was no evidence to corroborate the taxpayer’s assertion that there were oral agreements, to the effect that Hastcombe was to be remunerated for making available the taxpayer’s services as a director.
- The AAT would have expected to see references to such agreements in written records, such as minutes of board meetings of the 3 companies and Hastcombe and contemporaneous correspondence, but there weren’t.
The AAT also upheld the penalty assessments (a 50% base penalty but remitted on objection to 25%).
[The things that strike me as difficult (and possibly appealable) in this decision, are the following.
- That the agreement the AAT wanted to see (that the service company was contracting to provide the services of the individual director) could have been implied from the conduct – invoices from that company and payments to that company.
- There would then be an issue about whether the ‘Personal Services Income’ provisions applied – but that doesn’t seem to have been analysed.
- The individual ‘directing’ these payments and benefits, does not make it his income, if he did so as a director of the service company (and it had the contract with the related companies). It would simply make it the company’s income.
- Income received as money’s worth (eg. shares) should be brought to account at its value when received. As these were private company shares, they were at least illiquid (bringing the value down) and may not represent a net increment in the company’s updated shareholding (though widening the lens, to the net, overall effect, might not be supported by common law).
- There was always a problem with ‘salary sacrificed’ employer contributions, in that the employee had, in some sense, ‘directed’ that part of their remuneration go to the super fund. There was a case (I think Constable’s case) which everyone conspired to treat, as overcoming that problem.]
(Mobbs and FCT [2022] AATA 201, AAT, Olding SM, 10 February 2022.) [LTN 30, 16/2/22]