Case A66

Judges: JL Burke Ch

RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 10 October 1969.

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R. C. Smith (Member): H and his wife (W) are partners carrying on business as public accountants and business managers and in the partnership return for the year ended

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ATC 378

30 June 1966 a claim was made for an export market development allowance under the provisions of sec. 51AC of the relevant Assessment Act. This claim was rejected by the Commissioner after obtaining from the partners additional facts as to the nature and purpose of the expenditure and the partners have now brought their respective objections to this Board. Both references, which depend on the one set of facts, were, by consent, heard together and may conveniently be dealt with in one set of reasons.

2. During the year 1965 the partners came to the conclusion that Australia's future was tied up with Japan and that a company or business that wanted to keep up would have to have contacts in Japan. With that in mind the partners planned to make a trip to Japan and other places in the Far East with a view to exploring the possibility of obtaining export markets for its clients and other companies or firms who might become clients as a result of information obtained as to the existence or probable existence of an export market for their goods.

3. After having made this decision the partners approached several clients, including five companies of which H was a director, namely, A Ltd., B Pty. Ltd., K.H. Pty. Ltd., O Ltd. and R.S. Pty. Ltd., and explained the nature of the proposed trip which was, as expressed in a letter to the Deputy Commissioner of Taxation (undated, but stamped as received by him on 7 June 1967) ``Firstly to obtain orders and income for our clients and indirectly for ourselves from overseas and secondly to purchase raw materials for our clients.''.

4. B Pty. Ltd. are insurance agents who prior to the Second World War held, inter alia, an agency for the X Fire and Marine Insurance Company of Japan. This agency was lost, due to the war, and it was desired to endeavour to re-establish it and with this in mind the directors of the company, on 24 February 1966, formally resolved that the taxpayer partners be requested to contact and have preliminary talks with the company's connections in Japan with a view to regaining and expanding business previously held and they further resolved that the company contribute $1,200 towards the partners' expenses.

5. H was also the managing director of A Ltd., a manufacturing company which relied very largely upon the use of imported materials from Hong Kong and Japan. Almost all of the goods manufactured by A Ltd. were sold in Australia owing to overseas competition being too strong but H did say that the company had, on occasions, made overseas sales but not of very big quantities.

6. It was for this company only that the partnership endeavours in respect of the purchase of raw materials whilst abroad were directed and at a meeting of directors of the company held on 28 January 1966 it was resolved, inter alia, ``That the Managing Director (i.e., H) proceed to Hong Kong and Japan as soon as possible for the purpose of ensuring supplies and so as to prevent any loss of agencies at present held.''. At a subsequent meeting of directors on 28 February 1966 it was resolved ``That H be voted the sum of $1,300 to cover the expenses of the trip to Japan.''.

7. The several sums of $1,200 and $1,300 were duly paid and were credited to the partnership as fees received. No fees were received by the partnership in respect of the trip from any other clients.

8. In the partnership return of income $2,251, being part of, the cost of the trip, namely, $2,771, was claimed as a deduction and was at first allowed but after making further inquiries the Commissioner disallowed the amount on the ground, as expressed in the adjustment sheet, that ``the expenditure incurred was reimbursed to the partnership''.

9. Following upon the disallowance in the partnership return of the $2,251 travelling expenses, amended assessments were issued to H and W and both lodged objections upon the following grounds -

``1. That the Commissioner has wrongfully adjusted the share of income from the partnership of (H and W).

2. Without limiting the above I claim that the Commissioner has wrongfully disallowed the claim under sec. 51AC of the partnership of (H and W) in that the expenditure was not reimbursed, because -

• (a) None of our clients who paid us specified fees have claimed under sec. 51AC nor did we have to account to them for any expenditure we made.
• (b) The amount they paid us was paid before we made the trip so could not be a reimbursement.
• (c) The claim in the partnership under this Section was a proper deduction.''

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10. In his statement furnished in accordance with reg. 35(1) the Commissioner supported his decision upon the following substantive ground -

``1. The amount of $2,251 claimed as a deduction under section 51AC of the Income Tax Assessment Act 1936-1966 in the return of income for the year ended 30 June 1966 of the partnership (H and W) is not allowable as a deduction pursuant to that section in calculating the net income of the partnership in that -

• (a) the outgoings making up the amount of $2,251 are not `export market development expenditure' because -
  • (i) they were not incurred primarily and principally for the purpose specified in the definition of that expression; and
  • (ii) they are specifically excluded from the scope of that expression by the operation of para. ( e ) of the definition; and
  • (iii) they are not `prescribed outgoings' as defined.''

11. An examination of the reasons given by the partners for the making of the trip and of their activities whilst out of Australia clearly shows that the trip was undertaken for a dual purpose - one of endeavouring to find export outlets for various clients and another of procuring imports for a company of which H was the managing director so that, were a finding to be made in favour of the taxpayers, the case appears to be one calling for an apportionment of the fares concerned.

12. This is confirmed when one looks at the actual activities undertaken during the actual time spent outside Australia. One day was spent in Singapore when business in connection with exports by O Ltd. was done, one day in Manila on export business for K.H. Pty. Ltd., five days in Hong Kong (two visits) where the time appears to have been spent equally upon importing business for A Ltd. and inquiries re exports for various clients, one day in Taipei upon export and import inquiries, two days in Osaka and Kobe attending a Trade Fair and making inquiries for A Ltd. (H stated that this trip related exclusively to activities on behalf of A Ltd. and in the original claim of the partnership none of the expenses of this part of the trip were included), five days in Tokyo where most of the time was occupied with business on behalf of A Ltd. but inquiries were also made on behalf of B Pty. Ltd. as to the re-establishment of its agency with the X Insurance Company and to some extent on export inquiries on behalf of K.H. Pty. Ltd.

13. Turning to sec. 51AC, its relevant provisions for present purposes are to be found in sub-sec. (1), the definition section, and are as follows -

```export market development expenditure' means prescribed outgoings incurred primarily and principally for the purpose of seeking opportunities, or creating or increasing demand, for -

• (a) the export from Australia of goods that have been manufactured, produced, assembled, processed or packed, or graded and sorted, in Australia:
• (b) the supply for reward of services (including the furnishing of technical advice, training or assistance) outside Australia; or
• (c) the grant or assignment, for reward, of rights exercisable outside Australia in connexion with patents of inventions, trade marks, designs or copyright,

but does not include -

• (d)...
• (e) so much of any outgoings incurred by a person as -
  • (i) has been, or is to be, paid or reimbursed to him by another person; or
  • (ii) is incurred in or in connexion with services or doing any thing for which he has been, or is to be, paid by another person.''

```prescribed outgoings' means outgoings incurred by a taxpayer or an association referred to in sub-section (2.) of section seventy-three of this Act by way of -

• (a) expenses of, contributions towards expenses of, or payments to an agent for the purposes of -
  • (i) the carrying out of market research or the obtaining of market information; or
  • (ii) advertising or other means of securing publicity or soliciting business (including business of a person other than the taxpayer

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    where that business will be beneficial to the business of the taxpayer),
• ...
• (b) expenses (including costs of delivery) directly attributable to providing, without charge, samples or technical information to a person outside Australia; or
• (c) expenses directly attributable to the making of investigations and the preparation of information, designs, estimates or other material for the purpose of submitting a tender for the supply of goods that are not of the same kind and specification as goods that are being regularly produced or supplied by the tenderer, or for the supply of services outside Australia,

  but not including -

• (d) expenses, other than fares, in respect of travel, accommodation, sustenance or entertainment in respect of or in relation to a visit from Australia to a place or places outside Australia by the taxpayer or by a prescribed agent of the taxpayer or association ordinarily employed or carrying out duties in Australia;.''

14. Dealing first with para. ( d ) of the definition of ``prescribed outgoings'' it is to be noted that the expenses claimed by the taxpayers in respect of the trip included accommodation and other expenses expressly excluded by this paragraph, so that the claim must be restricted to the air fares of the partners which were agreed as being $1,881 and it is the allowance or otherwise of this amount which is now the subject of dispute.

15. There is no doubt that whilst abroad the partners did carry out activities in connection with export marketing development though it does appear somewhat doubtful that the obtaining of an agency for Australia from a foreign insurance company could be considered as falling within this category. It is unnecessary, however, to decide this point or to decide whether an opportionment of the fares should be made on the ground that they were not, in toto at any rate, ``outgoings incurred primarly and principally'' for one or more of the purposes referred to in the definition of ``export market development expenditure''. In my opinion the matter is concluded against the partners by the fact that the several sums of $1,300 and $1,200 received from A Ltd. and B Pty. Ltd. respectively are clearly amounts which fall within para. ( e ) of the definition of ``export marketing development expenditure'' and, they being in total more than the sum of the fares, namely, $1,881, there remains no amount allowable under the provisions of sec. 51AC.

16. I would uphold the Commissioner's decisions on the objections and confirm the amended assessments the subject of review.