Judgment summary
This is an appeal under s 172 of the Administrative Review Tribunal Act 2024 (Cth) from a decision of the Administrative Review Tribunal (BHMH and Commissioner of Taxation [2025] ARTA 996), which had largely upheld the Commissioner's objection decisions against the taxpayers, Mr Hasan, Ms Flood and Ms Hassan (1).
The dispute concerned a child care business conducted through Kids First Family Day Care Services Pty Ltd (Kids First), as trustee of the Flood Hasan Family Trust, and whether fees charged to parents for child care services constituted income of Kids First and, in turn, the Trust (5)-(6). The central factual question was whether parents contracted with Kids First or with the Educators who provided the care (7).
The Tribunal found that Kids First, not the Educators, had contracted with the parents, relying in part on the operation of the Family Assistance Law (FAL) (46)-(51). It upheld the Commissioner's assessments in substantial part, and upheld administrative penalties imposed on Mr Hasan and Ms Flood at 50% for recklessness (62)-(66).
On appeal, the taxpayers raised nine issues said to disclose 11 errors of law. Derrington J held that the Tribunal had erred in law by characterising ss 219A and 43 of the FAL as themselves creating or deeming a contractual arrangement or liability, when properly construed those provisions were merely definitional or conditional (137)-(147). The error concerning s 43 was material because the Tribunal's conclusion that parents were contractually liable to Kids First could not be divorced from that erroneous construction (147). This was sufficient to set aside the Tribunal's decision (147)-(148).
The remaining grounds of appeal, concerning derivation of income under s 6-5 of the ITAA97, the identification of the relevant assessments, an alleged concession by the Commissioner, procedural fairness in relation to the Educator Transcripts, the imposition of penalties, alleged irrational fact-finding, and credibility findings, were all rejected (149)-(248).
Background
The taxpayers operated a child care business through Kids First, as trustee of the Flood Hasan Family Trust, of which they were beneficiaries (5). Kids First did not operate care facilities itself but engaged Educators, as independent contractors, who used their own homes or approved premises to provide care (6).
Under the Family Assistance Law (FAL), only an approved child care service, such as Kids First, could attract Child Care Benefit (CCB) and Child Care Rebate (CCR) subsidies for parents; Educators could not independently be approved as a child care service (9)-(10), (80).
In the 2014, 2015 and 2016 income years, total fees charged to parents were $35,455,931.83, of which Kids First received $24,964,229.44 in subsidies, with the balance of $10,491,702.39 comprising 'Gap Payments' payable directly by parents (11). Kids First passed on $23,938,903 of the subsidies to Educators, retaining $1,025,326.44 in administrative fees and other deductions (12).
The Commissioner determined that the total fees charged constituted income of Kids First and the Trust, and assessed the taxpayers as beneficiaries accordingly, allowing 70% of claimed Educator payment deductions (14), (37). The taxpayers had returned their income on the basis that the fees belonged to the Educators, and the Commissioner considered this false or misleading, issuing penalty assessments for recklessness (14)-(15).
The Tribunal, following an extensive review of the evidence, concluded that the taxpayers had not discharged their onus under s 14ZZK of the Taxation Administration Act 1953 (Cth) of showing the assessments were excessive, and made positive findings that Kids First, not the Educators, had contracted with the parents (1), (7), (54).
Core dispute
The taxpayers appealed to the Federal Court on nine issues, said to disclose 11 questions of law, including whether the Tribunal erred by using the FAL to establish the existence of a contract between parents and Kids First, whether it misapplied s 6-5 of the ITAA97 on derivation of income, whether it wrongly identified the assessments under review, whether it overlooked a concession by the Commissioner on deductions, whether the taxpayers were denied procedural fairness in relation to the Educator Transcripts, whether penalties were correctly imposed, and whether various findings of fact were irrational or unsupported by evidence (67)-(68).
The Commissioner contended that many of these were disguised attempts to seek merits review of factual findings, rather than genuine questions of law (2), (67), (72).
Court findings
Derrington J held that the Tribunal's construction of s 219A of the Administration Act, as 'deeming' an arrangement between parents and Kids First upon enrolment, was legally incorrect, but immaterial because other evidence, including Ms Flood's own acknowledgment, led to the same conclusion (137)-(142).
However, the Tribunal's characterisation of s 43 of the Assistance Act as itself creating or imposing liability on parents to pay Kids First was also erroneous, since that section is conditional on a pre-existing liability rather than creating one (143)-(146). This error was material, because it could not be separated from the Tribunal's conclusion that a contractual relationship existed between parents and Kids First, and there was no alternative line of reasoning that avoided reliance on s 43 (146)-(147).
On derivation of income, the Court held that, given the Tribunal's finding of a contract between parents and Kids First, the total fees charged, including the Gap Payments, were properly treated as income derived by Kids First under the accrual method, and the taxpayers' reliance on Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation and BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation was misplaced, as there was no relevant contingency or bona fide dispute over entitlement (167)-(174).
The Court found no material error in relation to the identification of the assessments under s 166 or s 167 of the ITAA36 (175)-(183), the alleged concession on deductions (184)-(191), procedural fairness concerning the Educator Transcripts (192)-(208), the imposition of penalties and the unavailability of the safe harbour provision under s 284-75(6) of the TAA (209)-(227), the alleged irrationality of findings (228)-(237), or the credibility findings made against the taxpayers and Mr Knoblanche (238)-(248).
Outcome
The appeal was allowed, but only on the ground that the Tribunal's construction of s 43 of the Assistance Act constituted a material error of law (147), (249).
The Tribunal's decision dated 27 June 2025 was set aside, and the matter was remitted to the Administrative Review Tribunal for determination according to law (Orders 1-3).
The Court declined to grant the further relief sought by the taxpayers, namely that the Commissioner's Objection Decision and Penalty Objection Decision be set aside and their objections allowed in full, as no error was shown to require that outcome (249).
The parties were to be heard on costs, with the Court noting that the taxpayers succeeded on only one aspect of one of nine issues raised (250).
Major issues / areas of contention
- Whether the Tribunal erred in law by relying on the Family Assistance Law (FAL), including ss 219A and 43, to determine the existence of a contract between parents and Kids First.
- Whether the Tribunal's factual conclusions as to the existence and terms of the contract for child care services were infected by an erroneous construction of the FAL.
- Whether the Tribunal erred in applying s 6-5 of the ITAA97 by finding that the total child care fees, including Gap Payments, were derived by the Trust.
- Whether the Tribunal erred by referring to further amended assessments issued under s 167 of the ITAA36 rather than the original amended assessments under s 166.
- Whether the Tribunal failed to take into account an alleged concession by the Commissioner regarding deductible business expenses.
- Whether the taxpayers were denied procedural fairness in relation to the Tribunal's reliance on the Educator Transcripts.
- Whether the Tribunal erred in upholding penalties imposed under s 284-75 of Schedule 1 to the TAA on the basis of recklessness, and in finding the safe harbour provision in s 284-75(6) unavailable.
- Whether the Tribunal made findings unsupported by evidence or contrary to incontrovertible evidence, including as to the preparation of the Financial Report and Asset Betterment Assessment by Mr Knoblanche.
- Whether the Tribunal erred in law in making adverse credibility findings against the taxpayers and Mr Knoblanche.