Internal Revenue Commission v Hamidian-Rad [2002] PGSC 3; SC692 (22 March 2002)

SC692

PAPUA NEW GUINEA

[IN THE SUPREME COURT OF JUSTICE]

SCA NO. 47 of 2000

INTERNAL REVENUE COMMISSION

Appellant

AND

DR. PIROUZ HAMIDIAN RAD

First Respondent

Waigani : Amet CJ, Sevua & Kandakasi JJ

2001 : 21 February

2002 : 22 March

INCOME TAX – Distinction between a "resident" and non-resident" taxpayer – Distinction important only to determine scope of one’s assessable income – A resident is liable to have all of his income from all sources whether from within or outside the country assessed while a non-resident would only have his income from within the country assessed – Nature of occupation of income earner and purpose of his presence in the country are relevant factors to determine whether a taxpayer is a "resident" or not – Where a person resides in the country either continuously or intermittently for more than one half of the year of income he is a resident and all his income from all sources are assessable income - Income Tax Act 1959, ss. 4(1), 11, 46

Assessable income –All income earned from sources within the country are assessable income whether or not the income earner is a resident – Remittance to an overseas account of income earned in the country by a consulting firm for the benefit of an employee resident of Papua New Guinea is assessable income in the hands of the employee – The Corporate veil may be lifted if it is raised to avoid legal obligations such as one’s tax liabilities by having regard to the nature of the activity generating the income and the way in which that is carried out - Income Tax Act 1959, ss. 4(1), 11, 46.

Obligation to lodge tax returns – Where a taxpayer fails to lodge his tax returns the Commissioner for Internal Revenue is entitled to assess his income and determine his taxable income – A taxpayer is entitled to object to such an assessment and has the onus to establish the grounds for his objection – A failure to do so would oblige the taxpayer to pay the tax assessed against him – Income Tax Act 1959 s 245.

Accounting under taxation law – The law recognises two methods of accounting "cash receipts" basis and "earnings" or "accruals" basis – Both are accepted as they aim to arrive at the real tax position of a taxpayer – The former is based on actual cash receipts meaningfully earned while under the later it is on the basis of a right to an income accruing on the income side while on the outgoing side a liability being incurred – Income Tax Act 1959 ss.46(1) and 68.

STATUTORY INTERPRETATION – Settled law that all tax legislation must be strictly interpreted and given their plain and ordinary meaning unless an irrational consequence will result.

COMPANY LAW – Lifting of the corporate veil – A corporate veil may be lifted where it is raised to avoid legal obligations such as tax liabilities

WORDS & PHRASES – "Resident" or a "resident of Papua New Guinea" – A person who resides in the country either continuously or intermittently for more that one half of the year of income –Whether or not a person is a resident is a question of fact – It does not matter whether a person is resident in more than one place – Income Tax Act 1959 s. 4(1) and 46.

"Source" - The legislature in using the term ‘source’ meant, not only a legal concept but something which a practical man would have regard to as a real source of income - The ascertainment of the actual source of income is a practical, hard matter of fact - where income is derived solely from the simple acts of a taxpayer the source of that income is the acts of the taxpayer, and the geographical location of that source is to be found where the acts are performed – Income Tax Act 1959 s.46.

"gross income" - All income received by a taxpayer from external sources separate from the source itself and must be money or something that can be expressed in money terms – Generally, it is something that can be characterized as the produce of a property, or a reward for ones labour or the proceeds of carrying on a business - Income Tax Act 1959 s.46.

"derivation" or "derived" – It is associated with the calculation of a taxpayers taxable income from all his or her assessable income - It has to do with income and expenditure in the relevant period of assessment –The general rule going by section 46(1) is that income must be "derived" while expenditure must be incurred - Income Tax Act 1959 s.46.

Papua New Guinean Cases Cited:

R.H. Rayner (Mincing Lane) Limited v. The Chief Collector of Taxes [1993] PNGLR 416.

Mairi v Tololo [1976] PNGLR 125.

Odata v. Ambusa and National Provident Fund Board N.2106.

Other Cases Cited:

Levere vs The Commissioner of Inland Revenue Vol [1928] UKHL 1; 13 TC 486.

Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64.

Attorney-General v The Earl of Selborne [1901] UKLawRpKQB 215; [1902] 1 KB 388.
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297.
Gregory v. Federal Commissioner of Taxation [1937] HCA 57; (1937) 57 CLR 774: 1 AITR 20.
Federal Commissioner of Taxation v. Applegate (1979) 9 ATR 899.
Federal Commissioner of Taxation v. Jenkins (1982) 12 ATR 745.
Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183.
Esquire Nominees Pty Ltd v. Federal Commissioner of Taxation [1973] HCA 67; (1972) 129 CLR 177: ATR 105.
Federal Commissioner of Taxation v. French [1957] HCA 73; (1957) 98 CLR 398: 7 AITR 76.
Executor Trustee & Agency Co of SA Ltd v. Commissioner of Taxation (SA) (Carden’s Case) [1938] HCA 69; (1938) 63 CLR 108; 1 AITR 302.

Counsels:

G Sheppard, for the Appellant.
P Parkop, for the Respondent.

22 March 2002

AMET CJ: The Internal Revenue Commission (the Appellant) appeals from the judgement of the National Court that Dr Pirouz Hamidian Rad (the Respondent) was neither a resident nor an income earner in Papua New Guinea and was therefore not liable to pay of the tax assessed by the appellant and therefore the objections raised by the respondent to the assessment of income tax by the appellant should be upheld.

The Appellant pleads the following grounds of appeal:

(i) The learned trial judge erred in fact and in law in finding that the respondent was not a "resident" or "resident of Papua New Guinea." Within the meaning of Section 4(1) of the Income Tax Act (the Act) for the year 1999.

(ii) The learned trial judge erred in law in finding, contrary to Sections 11 and 46 of the Act that non-residents are not liable to pay income tax.

(iii) The learned trial judge erred in fact and in law in finding that the appellant did not earn any income within the meaning of the Act, contrary to Sections 46, 47(1) and 144 of the Act.

These grounds of appeal raise the following principle issues:

(i) whether the respondent was a resident in Papua New Guinea within the meaning of Section 4(1) of the Act for the year 1999;

(ii) whether non residents are liable to pay income tax within the meaning of Section 11 and 46 of the Act, and;

(iii) whether the respondent earned any income within the meaning of the Act for the purposes of Sections 46, 47(1) and 144 of the Act.

In June 1998, a two-year consultancy agreement was entered into between the State and Ikub Consulting Ltd (the consultant). The Respondent Dr Hamidian Rad was the Managing Director of Ikub Consulting Ltd and signed the Consultancy Agreement on behalf of his company. The consultancy agreement provided for the respondent to provide consultancy service as the Chief Economic Advisor to the Prime Minister for two years for a fee of K1 million per annum. In 1998 the appellant did not make any income tax assessment against the respondent. An assessment was made only against Ikub Consulting Ltd which was reimbursed by the State pursuant to the Consultancy Agreement.

In July and August 1999, the Appellant served on the respondent Notice of Assessment of Income Tax for an amount of K1, 181,974.48 as being payable by the respondent. The respondent filed objection to the assessment pursuant to Section 245 of the Act which was disallowed by the appellant. The respondent then referred his objection to the National Court as an appeal pursuant to Section 247 of the Act. From that National Court judgment this appeal arises.

The appellant has first submitted that the learned trial judge erred in the conclusion that the respondent was not resident in Papua New Guinea within the meaning of Section 4(1) of the Act for the year 1999, in that the respondents on evidence acknowledges that he had been in Papua New Guinea for 183 days in 1999. It was submitted therefore that pursuant to the proper interpretation and application of Section 4(1) of the Act as to the definition of "resident" or "resident of Papua New Guinea". Alternatively, the appellant has submitted that whether the respondent was a resident or not resident did not change the important fact that the respondent earned taxable income within the year of income.

Secondly, the appellant submitted that the learned trial judge erred in law in finding, contrary to Sections 11 and 46 of the Act that non-residents are not liable to pay income tax. The appellant has submitted that Section 11(1) and 46(1)(b). Quite explicitly impose tax on taxable income derived during the year of income by any person, whether a resident or a non-resident.

Finally, the appellant submitted that the learned trial judge erred in finding that the appellant did not earn any income within the meaning of the Act and therefore was not liable to Income Tax.

The appellant submitted that both the respondent and the consulting company Ikub Consulting Ltd were liable to pay income tax on monies received as income. The respondent’s transfer of money to his wife was in fact money in the possession of the respondent as income paid to him by Ikub Consulting Ltd. The respondent was also paid living allowances that was taxable income.

The respondent submitted in reply that in relation to the non-residency of the respondent, the appellant had considered that he was not resident in Papua New Guinea in 1998. The respondent said that the court in fact referred to both 1998 and 1999 but referred to 1998 only as an example. In 1999, the respondent had wanted to leave Papua New Guinea but was ordered by the Court to remain in Papua New Guinea and so this period was involuntary and ought not to be counted against him for the computation as to the period for the purposes of the definition of a resident. It was submitted that the respondent was not on a salary from Ikub Consulting and in fact only also stayed in the hotel the whole period of time he was in Papua New Guinea. The learned trial judge therefore did not err in concluding that the Respondent was not resident in Papua New Guinea for the Income Year.

Alternatively, in relation to the second ground of appeal, it was submitted that the appellant has misapprehended the judgment. The judgment was not on the basis that the respondent was not resident but rather on the basis that the respondent was not an income earner. He was in fact not on a salary but was maintained for his basic living by Ikub Consulting Limited and therefore the finding by the learned trail judge that he was not an income earner was correct and therefore the assessment of income tax was wrong. The learned trail judge was therefore not wrong in upholding the appeal and the objection to the assessment.

Section 4(1) of the Act defines "resident" or "resident of Papua New Guinea" as follows:

"(a) In relation to a person, other than a company, means a person who resides in Papua New Guinea, and includes a person –

(i) Whose domicile is in Papua New Guinea, unless the Chief Collector is satisfied that his permanent place of abode is outside Papua New Guinea;

(ii) Who has actually been in Papua New Guinea, continuously or intermittently, during more than one half of the year of income, unless the Chief Collector is satisfied that his usual place of abode is outside Papua New Guinea, and that he does not intend to take up residence in Papua New Guinea; or

(iii) Who is a contributor to a prescribed superannuation fund or who is the spouse or a child under 16 years of age of such a contributor."

I am satisfied that the year of income for the purposes of the assessment was 1999 and not 1998. I am satisfied that the respondent was in Papua New Guinea for a minimum of 183 days being more than one half of the year of income within the meaning of Section 4(1)(a)(ii).

I accept the submission for the appellant that the Internal Revenue Commissioner disallowed the objection on the ground of non-residency on the basis that the services of the respondent as Chief Economic Adviser to the Prime Minister and Government was required for 2 years, sufficiently qualified him to be considered a resident for the purposes of assessment of Income Tax. I consider that the nature of the occupation of the income earner and the purposes of his presence in the country are relevant factors to be considered in determining whether or not such an income earner is resident in the country notwithstanding the fact or assertion that that person’s usual place of abode is outside of Papua New Guinea and that he does not intend to take up residence in Papua New Guinea. The important factor is the nature of the business and the purpose of which the income earner is present in the country conducting business. The Act indicates the minimum period, which, amongst these other factors, would qualify such a person as being a resident. This conforms with the old common law proposition referred to by Counsel in the National Court; Levere v The Commissioner of Inland Revenue Vol [1928] UKHL 1; 13 TC 486 that:

"residents must depend on question of degree and of facts, residents which makes a person chargeable depends not on mere presence but on the quality of the presence in relation to the object and intentions of the person."

I consider therefore that the nature of the consultancy contract of the Respondent required some permanence of presence to sufficiently fall within the definition of resident of Papua New Guinea for the purposes of the year of income for Income Tax purposes. I consider therefore that the learned trail judge erred in finding that the Respondent was not resident.

I agree with the submission for the Appellant that, if the inference from the learned trail judge’s summary in conclusion in the judgment meant that a non resident was not liable to pay income tax, then the conclusion is with respect wrong. If taxable income is earned during the year of income, the person in receipt of that income is liable to pay tax whether he is resident or non-resident.

Section 11(1) of the Act states that:

"subject to this Act, a tax by the name of Income Tax is imposed and shall be levied and paid, at such rates as are declared by Act, for the Physical Year that commenced on 1 July 1975, and for each subsequent Physical Year on the taxable income derived during the year of income by any person, whether a resident or a non resident."

Section 46(1) also provides that:

"That the assessable income of a tax payer shall include –

(a) where the taxpayer is a resident – the gross income derived directly or indirectly from all sources whether in or out of Papua New Guinea; and

(b) where the taxpayer is a non-resident – the gross income derived directly or indirectly from all sources in Papua New Guinea."

Quite explicitly therefore, whether the income earner was resident or not resident is irrelevant for the purposes of imposition of income tax.

The Respondent is however correct in the contention that, although the inference is open from that summary of conclusion of the learned trail judge, he in fact in the substantive body of the judgment concluded that "for the purpose of Income Tax, he was neither a resident nor an income earner." His Honour concluded that the Respondent was not liable to be assessed for Income Tax because he did not earn income.

The final issue, upon which the appeal turns, is as to whether the Respondent earned income within the meaning of the Act during the year 1999. The consultancy agreement was entered into between the State and Ikub Consulting Ltd as the consultant and signed on behalf of the State by Minister Iaro Lasaro and for and on behalf Ikub Consulting Ltd by Pirouz Hamidian Rad as Managing Director. Throughout the agreement, the term "consultant" referred to Ikub Consulting Limited. In the definitions and interpretation Section, the agreement referred to services as meaning all services of Mr Pirouz Hamidian Rad reasonably necessary to enable the State to achieve the objectives specified in Clause 3.2. In Clause 3.1 provision was made for performance by Mr Hamidian Rad in these terms:

"The consultant shall provide the serves of Mr Pirouz Hamidian Rad to act as Chief Economic Adviser to the Prime Minister of the State. Mr Hamidian Rad shall report directly to the Prime Minister through the Secretary of the Department of Treasury and Corporate Affairs."

Clause 4.1 of the Agreement provides for the amount of remuneration in the following terms:

(a) "The State shall pay to the consultant a fee of K1 million per annum as remuneration for performance of the services (the fee), in the manner set out;

(b) in Clause 5.2 on indemnity the agreement provides that:

"The State shall indemnify the consultant on demand against the tax and any amounts recoverable from the consultant in respect of the tax."

The Respondent was not a party to this consultancy agreement. He is not the consultant as referred to in the agreement. He was to be the principle services provider agreed to be provided by the consultant to provide the services referred to in the objectives and the scope of the Consultancy Agreement. The remuneration payable under the agreement was therefore to the consultant Ikub Consulting Ltd and not to the Respondent. The indemnity also was to the consultant Ikub Consulting Ltd and not to the Respondent in person.

The issue as to whether the service provider, the Respondent, earned any taxable or assessable income during the Income Year 1999 did not turn on the provisions of the consultancy agreement, but rather on what in fact was paid by the consultant to the respondent for services he provided under the consultancy agreement.

I am satisfied also that, in principle, both the consultant Ikub Consulting Ltd and the principle service provider, the Respondent and any other sub-contracting service providers would be liable for Income Tax on any taxable income they received during the income year. Pursuant to Sections 11(1), 46(1)(a)(b) and 47(1)(d), the Respondent is liable to pay Income Tax on the gross income he derived pursuant to the consultancy agreement for services he provided. Pursuant to the provisions of the consultancy agreement referred to above, the principle remuneration is payable by the State to the consultant Ikub Consulting Ltd for the performances of the services agreed to be provided by the service provider, the Respondent, as well as any other employed service providers.

The final assessment by the appellant issued on 18 August 1999 in the amount of K1,181,974.48 represents the total of transfers effected by Ikub Consulting Ltd from monies paid to it by the State, to the Respondent’s spouse in USA in 1999. The Respondent also contended that the money remitted to the USA was for his family’s maintenance and payment to other sub-contracted consultant service providers. It is true that the Respondent was not on a specific salary while in Papua New Guinea but was maintained for his living expenses by the consultant Ikub Consulting Ltd.

I am satisfied that the remittances by the Respondent as Managing Director of Ikub Consulting Ltd to his wife’s account in the USA for his family’s maintenance and also payment purportedly to other consultant employees, amounts in my opinion as taxable and assessable income derived by the Respondent. I do not consider that it is just that such an employed consultant service provider could quite simply through the corporate vehicle of a consulting company remit funds into an overseas account for his or his family’s benefit, such as the Respondent in this case, and avoid Income Tax, in the country wherein he derived the income.

I am satisfied that the remittances of monies into an overseas account of the Respondent’s spouse is in fact taxable and assessable income in the possession of the Respondent. I am satisfied therefore that the Appellant had properly and validly determined that the amount remitted by the Respondent to his wife’s account in the USA is in fact income derived by him and is therefore taxable.

SEVUA J: I have read opinions of the Chief Justice and Kandakasi J and agree that the appeal should be upheld with costs.

KANDAKASI J: I have had the benefit of reading the draft judgement of the Honourable Chief Justice. For the reasons he gives, I am in total agreement with him. However, I consider it important that I should add the following comments and do so.

The facts and the background as well as the grounds of appeal are sufficiently and succinctly set out in the Chief Justice’s judgement. I need not repeat them for the purposes of my comments.

I start with the distinction between a "resident" and a "non-resident" taxpayer for the purposes of assessing taxable income. The relevant provision here is section 46(1) of the Income Tax Act 1959 as amended. That provision reads in relevant parts:

"46. Assessable income.

(1) The assessable income of a taxpayer shall include—

(a) where the taxpayer is a resident—the gross income derived directly or indirectly from all sources whether in or out of Papua New Guinea; and

(b) where the taxpayer is a non-resident—the gross income derived directly or indirectly from all sources in Papua New Guinea,

but shall not include exempt income."

This provision introduces four important principles or concepts in taxation. The first is the distinction between a "resident" and a "non-resident" taxpayer. Amongst others, this distinction is significant to the extent that it makes it clear that a "resident" taxpayer may end up paying more tax because all of his or her income both from within and outside Papua New Guinean sources is assessable income. The same is not the case for a "non-resident’" taxpayer because only the income received from within Papua New Guinea is assessable income.

The other concepts introduced by section 46(1) are the source of income, derivation and gross income. I have tried to find a local case on this provision without success for assistance as to its meaning. The closest I could come to are cases in which there has been references to the term "non-resident" as in R.H. Rayner (Mincing Lane) Limited v. The Chief Collector of Taxes [1993] PNGLR 416. None of these cases have covered and expounded on the distinction between a "resident" and a "non-resident’ taxpayer and the important principles in taxation that are introduced by this section.

A quick comparative look at other jurisdictions’ tax legislation such as that of our closest neighbour, Australia, reveals that this provision is not unique to Papua New Guinea. Instead it is a common provision. Such provisions have been judicially considered in there own settings. They offer assistance in the absence of anything to the contrary to understand the meaning and or the application of the provision in our setting subject to meeting the constitutional requirements as to the reception or the use of foreign judgements, which are met in this case.

Before considering the overseas cases on the provision in question, it is useful in my view that, we should remind ourselves of the principles governing the way in which tax legislation should be interpreted. In Mairi v Tololo [1976] PNGLR 125, the Supreme Court said:

"[W]e think it is incumbent upon the court to follow a well-trodden road of interpretation. This path suggests that for the imposition of a charge upon the subject to be legal, a clear and unambiguous intention must be shown in a Statute."

The Court went on to quote from Rowlett J in Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64 at 71 the well known passage that:

"In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used".

The Court also quoted a passage from Attorney-General v The Earl of Selborne [1901] UKLawRpKQB 215; [1902] 1 KB 388 at 396, where Collins MR said:

"[The Crown fails] if the case is not brought within the words of the statute, interpreted according to their natural meaning; and if there is a case which is not covered by the statute so interpreted that can only be cured by legislation, and not by an attempt to construe the statute benevolently in favour of the [Crown]"

The authorities also state that, only in a clear case of an irrational result being suggested by the words used by Parliament, the Courts may depart from the literal and natural meaning. Care must of course, be exercise in such a case to ensure that the Court does not devolve into the sphere of law making in the disguise of statutory interpretation: see Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297, per Gibson ACJ at p 304 which was followed by Sheehan J in R.H. Rayner (Mincing Lane) Limited v. The Chief Collector of Taxes (supra)

I now proceed to consider the way in which the Australian equivalent of our section 46(1), section 25 of the Australian Income Tax Assessment Act 1936 has been interpreted or considered.

The term "residence" has been given wider meaning both by legislation and judgements of the courts. It does not really matter whether a taxpayer has a permanent place of abode or domicile. The existence of a residence in one place does not necessarily exclude residence in another for the purposes of assessing taxable income. Whether or not a person is a resident is a hard question of fact: Gregory v. Federal Commissioner of Taxation [1937] HCA 57; (1937) 57 CLR 774: 1 AITR 20; Federal Commissioner of Taxation v. Applegate (1979) 9 ATR 899 and Federal Commissioner of Taxation v. Jenkins (1982) 12 ATR 745. In fact section 4(1) of or Income Tax Act 1959 as amended gives a similar meaning in its definition of the term "resident" or a "resident of Papua New Guinea in these terms:

"‘resident’ or ‘resident of Papua New Guinea’—

(a) in relation to a person, other than a company, means a person who resides in Papua New Guinea, and includes a person—

(i) whose domicile is in Papua New Guinea, unless the Commissioner General is satisfied that his permanent place of abode is outside Papua New Guinea;

(ii) who has actually been in Papua New Guinea, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner General is satisfied that his usual place of abode is outside Papua New Guinea, and that he does not intend to take up residence in Papua New Guinea; or

(iii) who is a contributor to a prescribed superannuation fund or who is the spouse, or a child under 16 years of age, of such a contributor; and

(b) in relation to a company other than a superannuation fund, means a company which is incorporated in Papua New Guinea, or which, not being incorporated in Papua New Guinea, carries on business in Papua New Guinea, and has either its central management and control in Papua New Guinea, or its voting power controlled by shareholders who are residents of Papua New Guinea;

(c) in relation to a superannuation fund, means a superannuation fund which is established or managed in Papua New Guinea;"

Similarly, the term "source" has been interpreted widely applying a practical man’s test. The test was stated in Nathan v. Federal Commissioner of Taxation [1918] HCA 45; (1918) 25 CLR 183, in these terms:

"The legislature in using the term ‘source’ meant, not a legal concept only, but something which a practical man would regard as a real source of income ... The ascertainment of the actual source of income is a practical, hard matter of fact"

Gibbs J explained in Esquire Nominees Pty Ltd v. Federal Commissioner of Taxation [1973] HCA 67; (1972) 129 CLR 177: ATR 105, that the adjectives "practical" and "hard" in this formulation of the test:

"were inserted not for purposes of empty rhetoric but to emphasize that the question is to be decided in accordance with the practical realities of the situation without giving undue weight to matters of form, and not by the application of absolute rules of law."

Although the authorities such as Federal Commissioner of Taxation v. United Aircraft Corp [1943] HCA 50; (1943) 68 CLR 525; 2 AITR 458 (per Rich J.) say that a case must be decided on its own circumstances or facts, a survey of all the relevant authorities reveals a number of broad and common principles. One principle which is more apparent is the principle that, where income is derived solely from the simple acts of a taxpayer the source of that income is the acts of the taxpayer, and the geographical location of that source is to be found where the acts are performed: see Esquire Nominees Pty Ltd v. Federal Commissioner of Taxation [1973] HCA 67; (1973) 129 CLR 177; 4 ATR 75. The question of geographical location of the source will be affected by factors such as the place of performance, the place of payment and locus of the contract in cases where the taxpayer’s acts involve the performance of a contract: see Federal Commissioner of Taxation v. French [1957] HCA 73; (1957) 98 CLR 398: 7 AITR 76.

Our legislation follows this line of authorities and deems all income generated in Papua New Guinea, be it dividends for shares (s.4B and 48), royalties (s.4C), or proceeds from goods manufactured and or otherwise sold in Papua New Guinea for profit (ss. 60-65) to be from Papua New Guinean sources. Accordingly they are assessable income whether or not the taxpayer is a "resident" subject to the particular provisions dealing with each particular situation.

In much the same way "gross income" has been interpreted in terms of all income received by a taxpayer which is a gain by him from external sources separate from the source itself. It must be money or something that can be expressed in money terms. In general terms it must be something that can be characterized as the produce of a property, or a reward for ones labour or the proceeds of carrying on a business. Gains that are in effect a change from a capital asset to money do not amount to income or an item that can be included in the gross incomes of a tax payer to assess his taxable income: see R I Barrett & P C Green, Principles of Income Taxation 3rd Ed, Butterworths, 1986 at p. 32.

Finally, the term "derivation" or "derived" is associated to the calculation of a taxpayers taxable income from all his or her assessable income. It has to do with income and expenditure in the relevant period of assessment. Our Income Tax Act 1959 as amended uses special terminology to indicate items of income and items of expenditure. The general rule going by section 46(1) is that income must be "derived" while all expenditure which may represent "losses and outgoings" must be "incurred" going by section 68 of the Act. To arrive at a taxpayers taxable income, the Act allows for a deduction of the latter from the former. This calls for a system of accounting to determine "derivations" and "incurrings" as is the case in financial accounting to arrive at profits and losses in a particular period of accounting.

Taxation law recognizes two completely different and conflicting ways of accounting for tax purposes. The first is based on "cash receipts" while the second is based on "earnings" or "accruals". Under the first, derivation and incurrings are assessed on the movement of cash into or out of the taxpayer’s hands. An income item that comes as cash into his pocket or cash register is derived at that point provided he has beneficially earned it and an outgoing is incurred when paid.

On the other hand an assessment on an "earnings" or "accruals" method has regard to potentialities or liability whether actually received or not for income items and actually paid or not for outgoings. What matters is as long as the taxpayer has secured some right or potential which will eventually mature into cash are considered derived in the income side while a liability or commitment that eventually has to be paid or met is treated as incurred.

Both of these methods are acceptable because they are both aimed at arriving at the true income position of the taxpayer. Dixon J made that clear in Executor Trustee & Agency Co of SA Ltd v. Commissioner of Taxation (SA)(Carden’s Case) [1938] HCA 69; (1938) 63 CLR 108; 1 AITR 302, in these words:

"In the present case we are concerned with rival methods of accounting directed to the same purpose, namely the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon the actual appropriateness. In other words the enquiry should be whether in the circumstances of the case, it is calculated to give a substantially correct reflex of the taxpayers true income".

Which of these methods are appropriate is dependant upon "the true nature of the profession [or business] concerned and, indeed, actual mode in which it is practiced in a given case": Dixon J (supra).

Provisions under our Income Tax Act 1959 as amended oblige all taxpayers to file a tax return. Such a return would show the method of accounting used for the purposes of working out the taxpayer’s taxable income. If a taxpayer fails to discharge that obligation the Commissioner for taxes is empowered to make an assessment for him or her using either of the accounting methods.

In the case before us, the Respondent failed to lodge his tax return for the relevant period. The Commissioner General made an assessment and required him to pay the amount of tax assessed against him. The Respondent took issue with the assessment on the basis that he was a non-resident and did not derive any taxable income but his company Ikub Consulting Ltd ("Ikub") did and as such he was not liable to pay any tax. The National Court upheld his contention and that has resulted in this appeal.

The law as noted above distinguishes between a "resident" taxpayer and a "non-resident" taxpayer for the purposes of determining the scope of the source of a taxpayers income which represents his gross income from which a taxable income could be arrived at. The distinction does not have the effect of exempting a "non-resident" from any tax liability, unless of course he or she is not deriving an assessable income in Papua New Guinea. In my view therefore, the learned trial judge fell into error to the extent that he found that the Respondent was not liable to pay any tax because be was a "non-resident".

I am also of the view that, the learned trial judge with respect fell into error when he found that the Respondent was not a "resident" of Papua New Guinea. That finding was contrary to the dictates of section 4(1), which defines a "resident" or "resident of Papua New Guinea" for tax purposes. Section 4(1)(a)(ii) makes a person "who has actually been in the country continuously or intermittently during more than one-half of the year of income" a resident. The Respondent in this case admitted to actually being in the country for 183 days. That was about two days more than one half of the usual 365 days in a year.

The law as noted above is that all tax legislation must be interpreted strictly. The words used by the legislature in the legislation must be given their literal and ordinary meaning unless a clearly irrational result will be arrived at. The legislation here speaks of "actually been in the country continuously or intermittently during more than one-half of the year of income". This simply means more than one half of the days that make up a year of income. A year usually has, except in a leap year, 365 days. One-half of that is 182.5 days. In this case, the period of 183 days in the relevant income year was more than one-half of that year. Neither is there an argument against this, nor is there any argument or evidence that this is irrational.

It follows therefore that, since the Respondent was actually in the country for more than one-half of the income year for which the income tax was assessed, he was a "resident" of Papua New Guinea. That meant that all his income from sources both within and outside Papua New Guinea constituted his gross income, which was his assessable income by reason of section 46(1)(a) of the Act. The basis on which the Commissioner General assessed the Respondent’s taxable income and arrived at the tax payable, were in the main, from source within Papua New Guinea, in particular from the State. These were remitted to the Respondent’s wife in the USA and partly returned to Papua New Guinea to support the Respondent. The payment from the State was for a contract entered into and performed in Papua New Guinea. It was a reward for the services the Respondent rendered under the contract. His wife played no part in so far as the evidence goes, in the generation of the income.

Likewise Ikub also played no part in the generation of the income. Ikub was the Respondent as he was the main person behind Ikub and providing services to the State. He was not strictly speaking a mere employee rendering services to Ikub. Instead he was the brain and the arms and legs of Ikub. Without him, Ikub could not have contracted with the State. He was fully maintained which included hotel accommodation by the funds paid to Ikub by the State. In these circumstances I am of the view that he could not hide behind the corporate veil of Ikub for the purposes of avoiding his tax liability.

I have fully discussed the principles on the lifting of the corporate veil in Odata v. Ambusa and National Provident Fund Board N.2106. To those, I add that, if a corporate veil is raised for the purposes of avoid legal obligations, such as is the case here, the corporate veil should be readily lifted to make those responsible to meet their legal obligations.

In any event, as the Chief Justice says in his judgement, Ikub paid the Respondent for his services from the payment it received from the State in addition to fully maintaining his existence in the country. The provisions of sections 47(1), 144, 144A and 145 were wide enough depending on however the benefits to the Respondents from Ikub could be viewed to be caught as taxable income, in the absence of any argument and proof to the contrary. Hence, they were taxable income in his hand subject of course, to his allowable deductions. By failing to lodge his tax return and arguing against the Commissioner General’s assessment in terms of not having received any income in PNG meant that the Respondent was not able and did not prove any allowable deductions incurred by him in the year of income.

The Respondent took no issue on the income on which his taxable income was assessed. In other words the Respondent did no argue and demonstrate to the satisfaction of the Court that the income was not derived within the year of income assessed by the Commissioner General. Similarly, the Respondent did not take any issue and has also failed to demonstrate to both this Court and the Court below that the Commissioner General failed to allow for any outgoings he may have incurred which would become his allowable deductions so as to reduce the tax payable to a lesser or nil amount. Instead of doing that, he only took issue on his residency and not receiving an income at all. These were not supported by any evidence and were contrary to the provisions of the Income Tax Act 1959, as already discussed.

For these reasons I am also of the view that the learned trial judge erred in finding that the Respondent received no assessable and ultimately any taxable income. I would therefore, uphold the appeal and quash the judgement of the National Court. I would also order costs to follow the event against the Respondent.

Order of Court:
Appeal upheld with costs to the Appellant.

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Lawyers for the Appellant: Maladinas Lawyers

Lawyers for the Respondent: Powes Parkop Lawyers