3 November 2017
- Michael Shord is in his late 60s. He holds UK and Australian passports and served in the UK armed services before coming to Australia.
- Between 2006-2011 he worked as an oilfield diver or diving supervisor in the oil and gas industry overseas.
- He travelled to and from Australia (Perth) on numerous occasions between working overseas.
- Because overseas income is not subject to PAYG, the ATO relies on people such as Michael declaring their overseas income.
- During the relevant periods of his work the tax that had to be paid in Australia was calculated on legislative formulas according to
- How much time was spent working overseas
- How much time was spent in Australia between jobs.
- How much tax was paid overseas and how that tax is offset against the tax owed in Australia.
- Whether he worked as an ‘employee’ when working overseas
- And other issues
- Michael owns (with his wife) a house in Perth in which they live and a investment property.
- Michael initially did not declare his overseas income from 2006 to 2011, believing that during that period he was a non-resident for Australian tax purposes.
- In 2012 Michael lodged Australian tax returns that triggered an audit by the ATO. The dispute is over how much is owed.
- The ATO is/was claiming tax, interest and penalties of around $284,000.
2. The behaviour of the ATO
The issue of interest is whether in assessing Michael’s tax
- the ATO has acted with honesty, integrity and within the obligations of the ATO to act as a model litigant and
- whether ATO officers have behaved within the requirements of the Public Service Code
3. The sequence of investigative events covering Shord
Of significant importance in the assessment of Michael Shord’s tax liabilities is the issue of whether when working overseas he was engaged as an ‘employee’.
There have been five (5) levels of investigation
- ATO internal audit
- ATO internal appeal/objection
- Administrative Appeals Tribunal hearing
- Federal Court single judge
- Full Federal Court of three judges.
The Full Federal judgment was handed down on 26 October 2017 and the comments, rulings quoted below are from that judgment.
Ref: Shord v Commission of Taxation  FCA 761. File number WAD 332 of 2016
Judges: Siopis, Logan and White.
4. The issue of Shord being an ‘employee’
The ATO accepted that Michael Shord had worked as an employee in
(a) the ATO internal audit and
(b) ATO internal appeal/objection process
But then in
(c) written submissions to the AAT the ATO said Michael Shord was not an employee. However
(d) in oral submissions to the AAT, the ATO reversed its position again and accepted that Michael Shord was an employee.
Michael Shord always maintained that he was an employee.
The consequence of that acceptance of Michael Shord being an employee was presumably to lower his Australian tax obligations.
- Inexplicably, the AAT ruled that Michael Shord had not been an employee and gave little reason for this.
It should/would have been expected that the ATO, in acting with honesty and for the purposes of justice, would have pointed out the error to the AAT. However, the ATO took the technical advantage they had achieved (in error) and pursued Michael Shord.
- Shord appealed to the Federal Court. The ATO objected to and fought the appeal. Michael Shord lost before the single judge.
- Michael Shord appealed to the Full Bench of the Federal Court. The ATO objected to and fought the appeal. The Full Bench ruled in Michael Shord’s favour.
5. Comments from the Judgment on the behaviour of the ATO
Below is a selection of quotations from the Full Bench ruling referenced above.
167 It is now more than a century ago that, in Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333, a case to which a subordinate of the Commonwealth’s chief revenue officer of an earlier era, the Comptroller General of Customs, was a party, Griffith CJ felt obliged to state, at 342:
I am sometimes inclined to think that in some parts – not all – of the Commonwealth, the old-fashioned traditional, and almost instinctive, standard of fair play to be observed by the Crown in dealing with subjects, which I learned a very long time ago to regard as elementary, is either not known or thought out of date. I should be glad to think that I am mistaken.
The “standard of fair play to be observed by the Crown in dealing with subjects” to which Griffith CJ referred was not, in 1912, a new subject. Part of the constitutional history of the United Kingdom and, thus, derivatively, our own, was oppressive, unlawful behaviour by the Crown in the 17th century in the imposition, collection and recovery of taxes and a resultant and vicious civil war leading to regicide and not a republican ideal but military dictatorship. The later restoration of the monarchy was on terms that evolved into the constitutional separation of powers, legislative, judicial and executive and what we have come to know as the Westminster system of responsible government, each feature of which is to be found in the Australian Constitution. The standard of fair play expected of the Crown and its officers in litigation is a standard in keeping both with the avoidance of behaviours that, in an extreme form, led to the civil war and with the later constitutional settlement. Once this heritage is understood, the requirement for its observance is, or should be, as Griffith CJ stated, “elementary”.
168 The standard expected of the Crown is not one diminished by the passage of time since the Restoration, much less since 1912, as this Court and others have, in the circumstances of particular later cases, felt obliged to highlight. Then, as now, there is a vital public interest in the maintenance of confidence in administrative government.
169 The “standard of fair play to be observed by the Crown in dealing with subjects” in litigious business, termed the duty to act as a model litigant, antedates and, if anything, is more onerous than the duty which all parties and their lawyers have in proceedings before this Court to assist in the achieving of the “overarching purpose” of facilitating the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible
170 As I have observed, the Tribunal’s denial of procedural fairness to Mr Shord in relation to the employment issue is patent. After the Tribunal made its decision and published its reasons, that jurisdictional error ought, ideally, upon a study of those reasons, to have been manifest to the Commissioner and to those advising him. Only the Commissioner had been legally represented before the Tribunal and it was via his lawyer that he expressly made the factual concession in question. Had the Tribunal’s error been noticed, and it was not, there ought, given the concession, forthwith to have been a proactive acknowledgement of this error in dealings with the Tribunal and those acting for Mr Shord. That may or may not have obviated an appeal under s 44 of the AAT Act.
171 When a s 44 appeal did materialise, raising as a question of law whether the Tribunal was entitled, in relation to s 23AG(7) of the ITAA 1936, to find that Mr Shord was not an employee, another opportunity for the Commissioner to have conceded that, in the circumstances prevailing before the Tribunal, which materially included his factual concession, that the Tribunal’s decision entailed this jurisdictional error was lost, apparently because the ramification of the Commissioner’s concession was not appreciated. That not having occurred, when, finally, Mr Shord came to identify with precision the procedural fairness error in a proposed further amendment to the notice of appeal, the Commissioner should not just have not opposed the amendment but readily consented to it and actively promoted the upholding of that ground. That is how a model litigant ought to behave. It does not follow from that that the Commissioner was, in the particular circumstances, duty bound to concede the appeal. He was perfectly entitled to advance any reasonably arguable submission which was unaffected by the jurisdictional error he conceded.
174 It has been opined that, “Other than expressing their opinion, however, there are few tools available to the courts to hold government litigants accountable to the standards of conduct expected of model litigant. … That, with respect, is not so. Departures from model litigant behaviour can, in particular circumstances, constitute professional misconduct, a contempt of court or an attempt, contrary to s 43 of the Crimes Act 1914 (Cth), to pervert the course of justice. In the circumstances of the present case, given that the concession but not its ramification was mentioned to the primary judge by counsel for the Commissioner, it appears to me that the lack of a ready concession of the jurisdictional error was just the result of a lack of understanding, removed only by the direct exchange mentioned. Given that experience, and a patent absence of any bad faith, there the matter should rest, save perhaps in respect of costs.