Case R63
Judges:HP Stevens Ch
TJ McCarthy M
PM Roach M
Court:
No. 1 Board of Review
H.P. Stevens (Chairman)
The question for decision in this reference is whether the taxpayer is denied a deduction in respect of a motor cruiser in terms of sec. 51AB(3) and (4) for the years of income ended 30 June 1979 to 1981, inclusive.
2. Incorporated in 1970 the taxpayer initially was purely an investment company with A and his wife equal shareholders therein. A was employed by a radio station on the technical side until he was offered a position on the advertising side. At that stage a number of persons were selling ``time'' and A suggested that the taxpayer be given the right to sell exclusively. Subsequently a deed dated 1 September 1973 was executed. The parties were the station and others (employer), A (sales manager) and the taxpayer and it was recited that whereas the employer had ``the right to employ staff to work for the'' station, A was the managing director of the taxpayer ``which amongst other of its objects operates as an advertising agency'' and the employer desired to employ A ``as its sales manager'' it was agreed:
- (1) the employer should employ A as its chief sales manager for a period of ten (10) years;
- (2) the position shall rank in priority to all other employees on the sales staff and be answerable only to the employer;
- (3) A will carry out all reasonable directions given by the employer and ``use his utmost endeavours exclusively to promote the interests of the employer'';
- (4) A both in his capacity as sales manager and as managing director of the taxpayer ``devote himself throughout the term of his employment wholly to the business of the employer during normal business hours'';
- (5) A shall be entitled to annual holidays;
- (6) the employer shall be entitled to determine A's employment if he be made bankrupt, etc.;
- (7) A shall be entitled to long service leave and shall be a contributor to the employer's superannuation fund;
- (8) the employer to remunerate the sales manager by:
- (a) paying A a basic weekly retainer of $150 (increases on account of basic wage changes) and
- (b) paying taxpayer ``commission on all advertising obtained for the employer through the effort of the sales manager as a director of (taxpayer) and such commission shall be at a rate of not less than (12 ½ %) on advertising which is obtained directly by the sales manager from clients and at the rate of (5%) on advertising which is obtained by the sales manager through agencies''.
Upon expiration of the ten-year term the employer wished to renew it for three years but A, who was over 60, wanted to keep his position fluid and would only agree to 12 months with a two-year option. It was renewed on this basis.
3. Around 1960 A was the owner of a speedboat for a year but has continued to hold his licence to operate a boat. He joined a yacht club in about 1964 and is still a member thereof. Thus when the deed was entered into he was, despite being a member of the club, ``boatless''.
4. Although A gave evidence the precise mode of operation after the execution of the deed was rather unclear. The impression was sought to be given that the position as sales manager was concerned more with paper work and that his work for the taxpayer took place at nights and weekends. However, as he submitted, obtaining advertising is a cut-throat business and I do not understand that he never sought advertising during ``normal business hours''. Entertaining is a necessity to obtain business and a lot was spent on such activity. For some years neither the taxpayer nor A had a boat and entertaining was done in the usual manner. A said this included taking clients to the yacht club and deposed that some said wouldn't it be nice to be out on the water.
5. A boat was acquired in about 1975 or 1976 and replaced under a leasing arrangement during the 1977/78 year of income. The claims made in respect of entertaining expenses and boat expenses for the years of income ended 30 June 1977 to 1981 inclusive were:-
The components of the boat expenses for 1978 to 1981 were:
1978 1979 1980 1981
$ $ $ $
Leasing 5,999 9,763 9,764 4,882 (to Feb 81
- purchased)
Mooring, petrol and oil 854 854 960 1,266
Registration, licence and insurance 640 50 513 561
Repairs and maintenance 261 2,145 10,313 41
----- ------ ------ -----
7,754 12,812 21,550 6,750
----- ------ ------ -----
6. The boat was a motor cruiser providing accommodation for about 6/7 persons and used about once a fortnight to take guests, friends or family at a weekend out on the water. The average duration of a trip was said to be from 10-11 am to 4-5 pm (depending on weather, etc.) and the procedure was to drive around, show the sights, pull up and anchor for lunch and for a talk - as A deposed to do it in a nice way. A perusal of the list of persons entertained since 1 July 1976 indicates the manager, directors, announcers and staff of the station were ``frequent'' guests on the boat.
7. It was A's view that the use of the boat had contributed substantially to the increase in the taxpayer's commissions which had increased over the period. The commissions received by the taxpayer were:
$
1978 100,820
1979 106,271
1980 114,522
1981 163,014
No details of rate charges, i.e. charges by station on which commission based, were given but most probably there were upward changes accounting for some part of the increase in commissions. Also it appears that commissions paid by the taxpayer increased in the 1981 year from $47,692 in 1980 to $77,994. The basis on which such commissions were paid was not explained but they were paid, inter alia, to other executives of the employer and to announcers employed both by the employer and opposition stations. A new name appeared on the list for 1981 for an amount of $16,418 and it would seem he brought a number of advertising clients to the station when he joined it. Depending on the rate paid by the taxpayer in relation to the rate paid to it by the employer the apparent ``surge'' in 1981 could have been applicable predominantly to this one person whose name does not appear on the lists of people taken out on the motor cruiser.
8. It is difficult from the taxpayer's accounts to determine precisely the profit applicable to the advertising commissions received for income was also received from investments (interest and dividends received) and share trading activities whilst it apparently owned the residence occupied by A - cost $96,133 (1978) mortgage $50,000 and the rental charged $2,800 per annum - and claimed the whole of the expenses applicable thereto, viz. $6,888 (1979), $7,263 (1980) and $6,776 (1981). In addition the total motor vehicle expenses of $4,286 (1978) to $8,144 (1981) were claimed as deductions.
9. The motor cruiser was inoperative during various periods, e.g. end October 1979 to January 1980 and October 1980 to December 1980, without any apparent effect on the taxpayer's activities whilst A told an officer at an interview he would dispose of it if a deduction could not be obtained. Whilst not denying the above statement he didn't remember telling the same officer he used it privately to entertain his in-laws. After being shown notes of the interview A said he remembered taking them out but it may have been doing a test run.
ATC 460
10. Turning to the issue to be decided the relevant provisions of sec. 51AB(1), (3) and (4) have been set out in the reasons of my colleague Mr. Roach and there is no need to repeat them here. Having regard to those provisions and to the facts of this reference I am unable to conclude that ``the use of the boat was essential to the efficient conduct of the business'' of the taxpayer. It is quite clear that the activities could be conducted satisfactorily without the use of the boat whilst, on the evidence, I am far from satisfied that its use has been the cause of any real increase in the volume of commissions received.
11. For the above reasons I would uphold the Commissioner's decision on the taxpayer's objection and would confirm the primary and Div. 7 assessments for the years ended 30 June 1978 to 1981 inclusive and 1978 and 1980 respectively.
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