WELLS v FC of T
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
[2000] AATA 920
KL Beddoe (Senior Member)
The applicant seeks review of two objection decisions by the respondent in relation to the years of income ended 30 June 1997 and 30 June 1998. In both years the applicant claimed a deduction for secretarial fees paid to a company. The respondent disallowed those claims on the basis that the applicant is an employee and therefore if he made arrangements for his wife's company to perform secretarial services for him in connection with his employment then payments for those services were essentially an outgoing of a private nature.
2. The issues arise under section 51(1) of the Income Tax Assessment Act 1936 and under Division 8 of the Income Tax Assessment Act 1997.
3. At the hearing the applicant's case was conducted by Mr Quinn and Miss Gilligan represented the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were placed before the Tribunal as the T documents and further documents were tendered and marked as exhibits. Oral evidence was given by the applicant, his wife, and three other witnesses.
4. There was little dispute about the facts of this case and it is therefore not necessary for me to make detailed findings of fact. However I do find that during the relevant years of income the applicant was employed as a Business Development Manager with the Bank of Melbourne and subsequently with Westpac Banking Corporation.
5. It was the essence of that employment that the applicant obtained loan applications for the bank. The evidence satisfies me that there was a sophisticated procedure adopted by the Bank of Melbourne and its successor, Westpac to obtain loan business for the bank by using employees who were in essence individual contractors. That was not the fact of the matter because there is no dispute that the applicant was in fact an employee of the bank paid on a retainer plus supply of a car plus a commission basis when the value of loans obtained for the bank exceeded $1,500,000 per month.
6. The details of the commission were provided to the Tribunal but it is not necessary that I set them out here other than to observe that by increasing the value of loans obtained in the month for the bank there was an escalating rate of commission paid by the bank for the additional loans obtained.
7. The exercise required to be undertaken by the applicant as a Business Development Manager was not an unsophisticated one. It was not a matter of obtaining contacts or of getting names and addresses but rather of providing the bank with a fully detailed and set out loan application including all documentation so that the bank was presented with a file of documents in the form required by the bank and set up as required by the bank. In effect the bank's file was created and produced by the Business Development Manager to be submitted to the Head Office for final credit checks and approval in Head Office.
8. The bank's involvement in the obtaining of the business was all through the Business Development Manager who in turn relied upon contacts to obtain the business. It seems that the obtaining of loan business for the Bank of Melbourne was highly competitive it being apparent to the Tribunal both from the evidence given in the Tribunal and also as a matter of common knowledge that there is considerable competition in the home loan industry in particular and that the applicant was clearly at the forefront of this sort of competition on behalf of the Bank of Melbourne. It was said in evidence that the Bank of Melbourne had the lowest cost ratio on its lending operations because of the way in which it obtained its loans business. During the relevant years the applicant was an essential part of this process.
ATC 2079
9. The applicant came to the conclusion that he could improve his commissions by boosting the number of loans obtained for the bank if he was able to divest himself of the paperwork involved in creating the file of documents for the bank.
10. It was quite clear on the evidence before me that to prepare a file of documents was both time consuming and complicated in the sense that everything had to be exactly right without any errors. All documents had to be in an ordered and error free state requiring careful checking. If mistakes were made then retyping of documents became essential.
11. The applicant concluded that it was better for him to boost his commissions and for his wife to do much of the paperwork involved in submitting the loan applications to the bank. I note that the applicant's wife was herself an experienced bank officer with experience in dealing with the type of documentation that banks would be involved in when considering loan applications.
12. The applicant's wife was employed by a company which was the trustee of a family trust and therefore although there was some equivocation about this before me I am satisfied that the applicant's wife was in fact employed by the company and that when she acted to assist the applicant in the preparation of the documents that she was doing so as an employee of the company and for the benefit of the company. I also accept that the applicant made payments for these services to the company.
13. The applicant's assessable income as a Business Development Manager was substantial and certainly much more than might be considered the norm for a person employed by a bank. I am satisfied that the applicant was very good at obtaining business for the bank and that he was able to obtain more business and therefore earn himself quite substantial additional commissions because of the fact that he had the arrangements whereby his wife performed the more routine task of creating the file of documents for each loan application. As I have already noted it was clear that precision was necessary in the creation of these files of documents and it is also clear on the material that commissions are only paid for successful loan applications.
Consideration
14. Little was said before me about whether the applicant was an employee of the Bank of Melbourne and its successor Westpac Banking Corporation. I am satisfied that at all relevant times the applicant was an employee of the respective banks and there is no real issue taken about this on behalf of the applicant.
15. The Commissioner takes the view that because the applicant was an employee any arrangements which he made for part of his duties as an employee to be performed by his wife were private arrangements which had nothing to do with the derivation of the applicant's assessable income. That submission of course denies the fact that the applicant was only able to increase his assessable income quite substantially by not being required to perform the work of preparing the loan application files for submission to the bank.
16. It is clear enough that if the applicant had been required to do the file creation work personally then his commissions would have been substantially less. There is no doubt in my mind that the action of making arrangements with the company for his wife to do this work resulted in additional assessable income derived by the applicant.
17. The initial test is whether the outgoings incurred by the applicant for secretarial services were incidental and relevant to the gaining or producing of assessable income. There is ample authority in relation to what that means but for present purposes I refer to and respectfully adopt the summary by the High Court in
Fletcher & Ors v FC of T 91 ATC 4950; (1991) 103 ALR 97 and in particular the dicta at ATC pages 4957-4958; ALR pages 106-107.
18. I have concluded that the outgoings for secretarial services incurred by the applicant were incurred for the purpose of deriving his assessable income, no other purpose appears and it would not be appropriate in my view to attribute some other purpose to the applicant. It is clear beyond doubt in my mind, and I so find, that the applicant incurred the secretarial fees for the purpose of boosting the amount of commission he derived and thereby boosting his assessable income. It follows that I am satisfied that the secretarial fees were incidents of the derivation of the commissions and in particular the additional commissions that the applicant was able to generate by the force of the fact that
ATC 2080
he had arranged for his wife through the company, to perform the secretarial services.19. The Commissioner also submits that because the applicant is an employee any decision by the applicant to in effect delegate some of his work to his spouse was purely a private arrangement so that even if the outgoings fall within the first positive limb of section 51 (and its successor provision) the expenditure was denied deduction by force of the fact that it was correctly characterised as private expenditure.
20. I have considerable difficulty with the Commissioner's submission that the fees paid by the applicant for the secretarial services can be correctly characterised as private expenditure. Certainly in some instances it would be the case that where an employee makes an arrangement for someone else to perform part of that employee's duties, unbeknown to the employer, that could easily be characterised as a private arrangement. However, in this case the evidence indicates that the applicant's employer was very well aware of the fact that he was generating large volumes of work and thereby a high level of commissions because of the fact that he was able to make arrangements for the secretarial services to be performed by his wife.
21. The mere fact of the employer having knowledge of that arrangement does not in my view either add or subtract to the resolution of the issue in so far as it is necessary to characterise the outgoings. I am satisfied that it would not be correct to characterise the outgoings for secretarial services as being outgoings of a private nature. They were, in my view, an essential ingredient in the income deriving activities of the applicant and were just as essential as lots of other types of expenditure incurred by taxpayers who are employees. An example is travel expenses, which in the ordinary course of events would be characterised as private expense but cease to be so characterised because the expense is incurred in the course of gaining or producing assessable income and is therefore incidental and relevant to the derivation of that income within the tests as annunciated by the High Court.
22. The respondent relies upon dicta of Dr Beck of Taxation Board of Review No. 3 reported as Case M55
80 ATC 366. In that case a medical technologist employed by a large company providing pathology services was required to be on call after business hours at certain times. In the event that the taxpayer was out on call at night his wife would take telephone messages for him relating to his after hours duties. To compensate her for this inconvenience the taxpayer paid her $20 per week and claimed an amount of $1,040 in his taxation returns.
23. The respondent Commissioner adopted a somewhat equivocal approach to the issue but the Board of Review No. 3 had no doubt in its collective mind that the outgoings were in the words of the Chairman ``classically an expenditure of a private or domestic nature''. Dr Gerber thought the outgoing had been incurred in the course of gaining or producing the employer's income but this does not seem to have been of any assistance to the taxpayer and the Board was unanimously of the view that the claim was not allowable.
24. Dr Beck said at page 368 that ``if an employee pays another party to render some of the services for which the employee is paid this expenditure is not a cost of deriving the income''. Taking a line through Dr Gerber's reasons it may well be that Dr Beck would have accepted the outgoings were incurred in the course of gaining the employer's income but as the wife was not employed by the employer that seems to have been treated as of little relevance to the issue that was before the Board.
25. I am satisfied that the decision of the Board of Review, is, with respect, of little assistance in this case. Here there is a direct involvement by the wife in the preparation of the documents which are submitted to the bank for the approval of loans business originally obtained by the applicant. There is a real connection between the activities of the wife in providing the services through the company and the derivation of the applicant's assessable income by means of the increased commissions derived by the applicant because of the services provided by the wife.
26. It is clear that it is not necessary to establish a manifest connection between the outgoings and the derivation of assessable income but in this case I am satisfied that there is both a relevance and an incidence which connects the payment for secretarial services with the derivation of the commission income by the applicant. The applicant says and I accept that his increased commissions are directly attributable to the fact that he paid for
ATC 2081
secretarial services to be performed by his wife and he can, therefore, show a clear link between the outgoings for the secretarial services and the increased commissions obtained. I am satisfied that the outgoings in relation to the secretarial services are reasonable amounts for the services provided.27. As to whether, notwithstanding the satisfaction of the first positive limb of section 51 (and its successor), the expenditure should be disallowed because it is of a private nature I am satisfied that there is nothing private about the arrangements between the applicant and the company for the supply of the secretarial services and those arrangements deny because of the very nature of the arrangements themselves a character of private expenditure for the outgoings incurred in respect thereof by the applicant.
28. For these reasons I will set aside the objection decisions under review and remit the matters to the respondent with directions that the claims for deduction for secretarial services should be allowed.
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