Case C84

Judges: FE Dubout Ch
G Thompson M

N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 15 December 1971.

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N. Dempsey (Member): The taxpayer concerned in this reference is one of ten private companies which carried on a very substantial business in partnership sharing profits and losses equally.

2. In the return of the partnership for the year ended 30 June 1968 a claim was made for a deduction of `Retiring Allowance $50,000' and in a schedule attached to the return the following information was supplied -

```Retiring Allowance'

A Retirement Allowance of $50,000 was paid to the Executors of `X' who was retired from the full time position of Governing Director of the `X' Group by reason of his death on 29 July, 1967.

It is considered that the payment is more than justified by the full time services given to the business by Mr. `X' since its commencement in 1922, as it was his initiative, drive and business acumen over this period of 45 years that was responsible for the development of the business to its present level of high income earning capacity.

A payment of $5,654.00 was paid from `X' Pty. Ltd. and Associated Companies Staff Provident Fund in accordance with the Trust Deed for the benefit of Mr. `X'.

It is submitted that the Retiring Allowance should be allowed as a deduction under sec.78.''

3. In arriving at the assessable income of the partnership for distribution for the purposes of assessment of the companies the Commissioner allowed only $9,000 of the amount claimed. This had the effect of increasing the share of income from the partnership as returned by this taxpayer from $9,517 to $13,616, the difference of $1 being accounted for by the Commissioner ignoring the fractional amounts and assessing only the full amount of dollars.

4. Taxpayer has objected to the assessment claiming that its share of income from the partnership should be assessed as returned and that the amount of $50,000 paid during the relevant year by the partnership as retiring allowance to `X' in consideration to his past services as an employee should be allowed as a deduction under sec.78(1)(c).

5. At the hearing the representative of the Commissioner indicated to the Board that after reconsidering the matter the Department considered that no part of the amount claimed was in fact allowable but as $9,000 had been allowed and a full disclosure had been made prior to assessment no amendment could be made.

6. The claim has therefore to be considered solely under sec.78(1)(c) which section reads as follows -

``Section 78(1)

The following shall, subject to sub-sec. (11.) of sec. seventy-seven A, sec. seventy-seven B and sec. seventy-nine C of this Act, be allowable deductions -

(c) Sums which are not otherwise allowable deductions and are paid by the taxpayer during the year of income as pensions, gratuities or retiring allowances to persons who are or have been employees or dependants or employees, to the extent to which, in the opinion of the Commissioner, those sums are paid in good faith in consideration of the past services of the employees in any business operations

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ATC 382

which were carried on by the taxpayer for the purpose of gaining or producing assessable income.''

7. In his decision reported as
12 C.T.B.R. (O.S.) Case 54, at p.482 the then chairman, Mr. Gibson paraphrased the section as it then stood. The present section is practically the same as the section he was then considering, the only substantial differences being that the word `gratuities' has now been added and the reference to residents has been omitted.

8. With the addition of the word gratuities to his paraphrasing it would now read -

``Sums paid by taxpayer as (a) pensions (b) gratuities or (c) retiring allowances to -

• (1) persons who are employees
• (2) persons who have been employees
• (3) persons who are dependants of employees
• (4) persons who have been dependants of employees.''

9. It is thus seen that Mr. Gibson considered that there were four classes of people to whom the section applied and with this wiew I am in full agreement.

10. The case for the taxpayer, shortly stated, is that the payment to the executor or the trustee is equivalent to a payment to the deceased personally, who, it is not disputed, was an employee. On the other hand, the Commissioner contends that such a payment is not a payment which answers any one of the four categories outlined supra, because the payment was made to the executor of the estate, a separate and distinct person.

11. It is my opinion that this primary submission is correct and that a payment to a trustee or an executor cannot be brought within the terms of sec.78(1)(c). The wording of the section is quite clear and leaves no room, in my view, for interposing categories not specifically in the section.

12. There may be some doubt as to whether a payment direct to a person who was at some time a dependant of the employee but who was not a dependant for income tax purposes at the relevant time can come within the section but it is not necessary, in the view I have taken, to go into this matter in detail or to give a considered decision theron.

13. However, I would mention that in a case reported as
15 T.B.R.D. Case Q.13, at p.56, Board of Review No. 1 held at page 61 that the section did not apply to extend the deduction to a payment to such a person. This decision however conflicts with an earlier majority decision of this Board as then considered which is reported as
9 T.B.R.D. Case J.91, p.509.

14. Dealing with the question as to whether a wife in receipt of her own income could be regarded as a dependant for the purpose of sec.78(1)(c) the then Chairman, with whom Mr. Antcliff agreed said at p.514: " In
Fenton v. Batten (1948) V.L.R. 422 at p.423 , Fullager J. said `It is established, I think, that the existence of an obligation to maintain has no part in the conception of dependency. Conversely, an obligation to maintain may exist, but if it has not been performed and cannot be enforced there is no dependency. These are considerations which seem to me to show that the word `dependant' is in a true sense a technical term. If the evidence establishes that the alleged `dependant' relied or relies on another as the source, wholly or in part, of his or her subsistence then dependency is established.' "

15. It is thus seen that there is some conflict in views on the matter, at least so far as a wife is concerned. However, as it is unnecessary to decide the matter in this case, I will leave it until the appropriate occasion arises.

16. In conclusion, I would add that from what I have said, it is probable that if the payment had been made direct to one of the categories of persons as paraphased by Mr. Gibson, supra, it may have qualified as a deduction under sec.78(1)(c).

17. However, the matter must be decided not on what the taxpayer may or could have done but what in fact was done. See
Henricksen v. Grafton Hotel Ltd. 24 T.C. p.453 and the concluding remarks of Lord Greene, MR. at p.460.

18. The decision of the Commissioner to disallow the objection is therefore upheld.

Claim disallowed