Case M57

Judges:
HP Stevens Ch
CF Fairleigh QC
JR Harrowell M

Court:
No. 1 Board of Review

Judgment date: 25 August 1980.

---

H.P. Stevens (Chairman)

This is the counterpart reference of that by an individual (Reference No. 26/1979) [ Case
M56 80 ATC 369 ] and concerns whether or not the Commissioner's action in treating a claim for a retiring allowance of $20,000 to the individual as allowable to the extent of $8,060 only is correct.

2. In its objection the taxpayer company claimed inter alia, that the amount was pursuant to sec. 78(1)(c), ``paid in good faith in consideration of the past services of the employee'' and that ``notwithstanding Section 78(1)(c) of the Act, in any case Section 51(1) would apply as the whole amount paid was necessarily incurred by the company in carrying on business for the taxpayer (of) gaining or producing of its assessable income''.

3. The Commissioner in his reg. 35(1) statement to the Board said that of the $20,000 paid ``which would otherwise be an allowable deduction, $11,940 is not an allowable deduction because in the opinion of the Commissioner formed under section 109 it exceeded an amount which is considered reasonable''. This statement thus accepts the $20,000 as an allowable deduction in terms of either sec. 51(1) or sec. 78(1)(c) unless an opinion is formed in terms of sec. 109 and the Commissioner's representative argued the case accordingly. He said the holiday pay component of $960 ``may be allowable under 51 and the Commissioner is not disputing the deductibility of the balance under 78(1)(c), purely that it ($20,000) should be reduced to the sum of $8,060, or no greater amount than $8,060, being a reasonable amount''.

4. I have set the above out for the reason that I consider that, irrespective of the Commissioner's attitude, I am constrained by the remarks of members of the High Court in
W.J. & F. Barnes Pty. Ltd. v. F.C. of T. (1957) 96 C.L.R. 294 to initially consider whether the amount of $20,000 satisfies the requirements of either sec. 51(1) or 78(1)(c). In the above case Dixon C.J. at p. 303 said, in relation to prior allowability, ``it is enough to say that it is an obvious presupposition''. Other members of the High Court were more specific with Fullagar J. at p. 310 stating:

``Section 109 requires the commissioner in such cases to form an opinion as to how much of any sum ostensibly paid by a private company to a director or shareholder or relative as remuneration is reasonable in relation to services rendered. When he has formed his opinion on that matter, he must disallow as a deduction in the company's assessment any excess over what he thinks is reasonable, and must treat that excess for all purposes as a dividend paid by the company to a shareholder. The important point is that s. 109 presupposes a payment which, apart from s. 109 itself, would be an allowable deduction to the company. Unless there is a payment of that character, the commissioner is neither commanded nor authorised to form any opinion under that section. It is the reasonableness of the payment as a reward for services that he must consider, and it would be absurd to require him to consider that question if the amount paid were, as a matter of law and apart altogether from its reasonableness, not deductible.''

and at p. 314 Kitto J. commented:

``But was that opinion such an opinion as s. 109 requires for its application? It was, on either of two hypotheses: first, that the section applies to any sum paid by a private company and falling within one of the descriptions given, whether the sum is or is not an allowable deduction under other provisions of the Act; or, secondly, that the section applies only to a sum which is an allowable deduction according to other provisions of the Act and the sums here in question were such allowable deductions. The first hypothesis, however, must be discarded, for the sense of s. 109 is that it operates to convert a portion of a payment which would otherwise be an allowable deduction into

---

ATC 391

a notional dividend paid to a shareholder. As to so much of any sum falling within the given descriptions as the commissioner thinks reasonable, the plain implication of the language used is, not (as the commissioner seems to have thought at one stage) that it is made an allowable deduction by force of the section itself, but that it retains the quality of deductibility which it is assumed to have by force of some other provision of the Act.

The opinion upon which s. 109 is made to depend is therefore an opinion as to some amount, not of a sum which the commissioner or a board of review thinks is an allowable deduction apart from the section, but of a sum which actually is an allowable deduction apart from the section.''

5. In his reasons in both this and the counterpart reference, my colleague Mr. Fairleigh has set out the evidence and made certain findings of fact. I gratefully accept his statement thereof and wish to add very little.

6. The factual situation in connection with the decision to pay the amount of $20,000 is not entirely clear. For example it was said that the figure was that put forward by the accountant but the accountant deposed that all he indicated was some factors to be taken into account and that they would have to decide the actual figure themselves. However, what is clear from the evidence overall is that the amount was not regarded as being solely ``in consideration of the past services of the'' individual to the company. The evidence also shows that the partnership's activities were not just of minor nature. This is indicated by the following table:

Year

Ended              Fees                    Wages             Net Profit/Income

30 June      Company    P'ship       Company     P'ship    Company       P'ship

                $         $             $          $          $            $

1969        27,537     50,009       13,500     16,938       8,581       12,308

1970        77,423     44,197       41,508     20,128      10,039        4,428

1971        83,831     60,614       55,422     24,283       L 35         3,778

1972       136,288     74,611       64,258     39,503       9,660        3,932*
          

• ^* Apparently after partners' salaries as individual returned his share $1,310 plus $1,928 wages for period 11.8.1971 to 29.2.1972.

The above figures are those as per the returns lodged and do not take account of some journal entries including one of 30 June 1971 whereby an amount of $28,293.86 was transferred from the company's Profit and Loss Appropriation A/C on account of partnership's fees incorrectly returned by the company - the overall result being to reduce the company's balance in that account as at 30 June 1971 to $11,618. They also do not take into account the fact that some Fees figures are on a received basis whilst others could be on an earnings basis - reference being made to an income tax investigation on this score but without the results being given.

7. It is also clear from the evidence that, at the relevant time, the company's activities were to be terminated whilst the same applied to the partnership - other companies being incorporated and taking over the relevant activities. Precise details were not given (only one general question was asked of the accountant) but it is obvious that the $20,000 decision was part of a wider plan of reconstruction of the ``group''. Not that I would view this as determinative of itself in any way but it does illustrate that there was more involved than just the individual's retirement from the company concerned. The company's minute book is entirely silent on the transfer of its activities - its 1973 return merely indicating it ``did not operate during the year'' and its Plant and Fittings having been disposed of at W.D. Values (the 1973 partnership return did indicate its plant and fittings had been sold to a named

---

ATC 392

company - the partnership name Pty. Ltd. - on 14 July 1972 at W.D.V. and that it had not carried on business during the year).

8. Turning now to the question of whether the $20,000 is allowable in terms of either sec. 51(1) or 78(1)(c), it is my view that the facts do not establish eligibility for any greater amount than $8,060. To be allowable in terms of sec. 51(1) a payment must be in the future interests of a company (
Maryborough Newspaper Co. Ltd. v. F.C. of T. (1929) 43 C.L.R. 450 and
Union Trustee Co. (Aust.) Ltd. v. F.C. of T. (1935) 53 C.L.R. 263 ) and the facts here establish that the payment in question (or $19,040 thereof) was made not so the taxpayer company could in the future operate more efficiently - rather its activities were to cease. Insofar as sec. 78(1)(c) the evidence establishes that more was involved than the past services of the individual to the company (services to partnership and period prior to company's incorporation) and I would not be prepared to find that the extent to which the amount of $19,040 (or $20,000) was paid in consideration of the individual's past services to the company exceeded $7,100 (or $8,060).

9. In this situation the only amount I consider falls to be considered under sec. 109 is $8,060 - not $20,000. This is the amount allowed and I would accept it as reasonable in terms thereof.

10. If I were of the view (which I am not) that the amount of $20,000 should be looked at in the light of sec. 109, I would agree with my colleague's conclusion that, on the ordinary civil standard of proof, the Commissioner's action has not been shown to be wrong. Having regard to the circumstances of this case as a whole I am of the clear view that the payment of $20,000 (or $19,040) is unreasonable and I am also of the opinion that the figure adopted by the Commissioner is not unreasonable.

11. For the above reasons I would uphold the Commissioner's decision on the objection and would confirm the taxpayer's assessment for the year ended 30 June 1972.