Internal Revenue Commission v Dr Pirouz Hamidian–Rad (2002) SC692

• Jurisdiction: Papua New Guinea
• Court: Supreme Court
• Date: 22 March 2002
• Citation: [2002] PNGLR 315
• Docket Number: SCA No 47 of 2000
• Year: 2002

Full Title: SCA No 47 of 2000; Internal Revenue Commission v Dr Pirouz Hamidian–Rad (2002) SC692

Supreme Court: Amet CJ, Sevua J, Kandakasi J

Judgment Delivered: 22 March 2002

1 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, s4(1), s11, s46

2 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, s4(1), s11, s46.

3 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 s245.

4 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 s46(1) and s68.

5 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.

6 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

7 WORDS AND 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 s4(1) and s46.

8 "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 s46.

9 "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 s46.

10 "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 s46(1) is that income must be "derived" while expenditure must be incurred—Income Tax Act 1959 s46.

11 JH Rayner (Mincing Lane) Ltd v Chief Collector of Taxes [1993] PNGLR 416, Norah Mairi v Alkan Tololo (No 2) [1976] PNGLR 125, Odata Ltd v Ambusa Copra Oil Mill Ltd (2001) N2106, Levere v The Commissioner of Inland Revenue Vol 13 TC 486, Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64, Attorney–General v The Earl of Selborne [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) 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) 25 CLR 183, Esquire Nominees Pty Ltd v Federal Commissioner of Taxation (1972) 129 CLR 177; ATR 105, Federal Commissioner of Taxation v French (1957) 98 CLR 398; 7 AITR 76 and Executor Trustee & Agency Co of SA Ltd v Commissioner of Taxation (SA) (Carden's Case) (1938) 63 CLR 108; 1 AITR 302 referred to

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Amet CJ:

The Internal Revenue Commission (the Appellant) appeals from the judgment 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 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 s4(1) of the Income Tax Act 1959 (the Act) for the year 1999.

(ii) The learned trial judge erred in law in finding, contrary to s11 and s46 of the Income Tax Act 1959 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 Income Tax Act 1959, contrary to s46, s47(1) and s144 of the Income Tax Act 1959.

These grounds of appeal raise the following principal issues:

(i) whether the respondent was a resident in Papua New Guinea within the meaning of s4(1) of the Income Tax Act 1959 for the year 1999;

(ii) whether non residents are liable to pay income tax within the meaning of s11 and s46 of the Income Tax Act 1959, and

(ii) whether the respondent earned any income within the meaning of the Income Tax Act 1959 for the purposes of s46, s47(1) and s144 of the Income Tax Act 1959.

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 a 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 s245 of the Income Tax Act 1959 which was disallowed by the appellant. The respondent then referred...