Case R63
Judges: HP Stevens ChTJ McCarthy M
PM Roach M
Court:
No. 1 Board of Review
T.J. McCarthy (Member)
The issue in these references is whether the Board is satisfied that the use of such a boat as was used during the relevant years of income by the taxpayer company for the purpose of entertaining on Sydney Harbour clients and potential clients of the taxpayer in the ordinary course of its business as an advertising sales representative for a radio station was ``essential to the efficient conduct of that business'' within the ordinary meaning of those words as contained in para. (b)(iii) of the definition of ``excepted facility'' in sec. 51AB of the Income Tax Assessment Act .
2. If the Board is not so satisfied, the Commissioner submits (and the taxpayer's managing director did not argue otherwise) that subsec. 51AB(3) and (4) preclude any deductions being allowable for expenses incurred in connection with the boat and claimed in the years ended 30 June 1978-1981 (including depreciation claimed in the year ended 30 June 1981), with the additional consequence arising from insufficient distributions that Div. 7 assessments in respect of the years ended 30 June 1978 and 1980 should be confirmed. On the other hand, if the Board is so satisfied, it is common ground that the deductions claimed, which total $49,080 in respect of the four years, should be allowed and the Div. 7 assessments should be set aside.
3. The taxpayer was incorporated in New South Wales on 18 March 1970. By deed of 1 September 1973 the taxpayer and its managing director, A, entered into agreement with a radio station whereby A was to be employed as sales manager of the station for a period of 10 years from that date and the taxpayer was to receive during that period specified rates of commission ``on all advertising obtained for (the station) through the effort of (A) as a director of (the taxpayer)''. If A's employment terminated pursuant to that agreement, the taxpayer's entitlements also terminated. As it happened, the agreement ran its full course and a further agreement was negotiated in 1983.
4. Following suggestions from clients that they would like to be entertained on Sydney Harbour, the taxpayer first leased a boat sometime prior to 1978. That boat was disposed of on 21 March 1978 after the residual value had been paid, and around that time a slightly larger boat, a 32 ' motor cruiser, was leased by the taxpayer. Ownership of the boat was acquired in the year ended 30 June 1981 and depreciation was claimed in that year. A said that the boat seated 6-7 persons comfortably and was more suitable for entertaining than the first boat.
5. A testified that the taxpayer's business of selling advertising time on a radio station was like selling ``hot air''; it was a ``cut-throat'' business. The radio station, he said, was at or around the bottom of the ratings and it was necessary to adopt a personal approach with clients and potential clients in order to obtain orders. As managing director of the taxpayer, A entertained representatives of advertising agencies, clients and potential clients directly and also key employees of the radio station. That entertaining took place in restaurants and in clubs and also on the boat amidst the setting of Sydney Harbour. The persons entertained on the boat often included family members of clients.
6. A kept a record of the persons entertained on the boat (and also on the first boat) and details in respect of the period from 11 July 1976 to 20 September 1981 were tendered. Dates, names of persons entertained and their firms were recorded, showing a wide spectrum of business. The boat trips took place on weekends because A carried out his duties as sales manager of the radio station from Monday to Friday. In cross-examination it was put to A that he once entertained his brother-in-law on the boat, but A replied that he had merely taken out his brother-in-law on a trial run. The boat was not used during his annual holidays or for
ATC 461
fishing. In the light of the evidence, I accept that the boat was acquired solely for appropriate business entertaining on Sydney Harbour and that it was held and used solely for that purpose.7. In addition to engaging in considerable entertaining, the taxpayer also paid commissions to various people. Those commissions, which were allowed as business deductions by the Commissioner, indicate that the taxpayer was endeavouring to adopt every means at his disposal in order to obtain orders and retain the goodwill of clients. A testified that the use of a boat for entertaining had led to a 129% increase in commissions received over five years, but the evidence was deficient on this point. The advertising rates were set by the directors of the radio station and not by A, but there was no evidence of what those rates were, or how they had varied over the years or what was charged by other radio stations or by television stations. There may have been other factors, apart from the use of the boat, which contributed to the success of the taxpayer's business. Nevertheless, I am prepared to accept that the use of the boat was distinctly advantageous to the taxpayer's business and that it gave to the taxpayer what A described as ``an edge'' over those radio station representatives who did not have ready access to a boat for the purpose of entertaining clients, although I note that A did not suggest that no other radio station made use of a boat for that purpose.
8. In cross-examination the Commissioner's representative elicited from A a comment that he intended to sell the boat if he could not obtain tax deductions because running the boat cost the taxpayer $15-$20 an hour. The Commissioner's representative placed reliance on this comment, but I do not give it any weight one way or the other. I think it was merely a case of A ``over-selling'' the Board. Tax deductions in connection with the boat were disallowed each year from the 1978 year of income, but the boat was still retained up to the time of the hearing in May 1984. Furthermore, A is obviously close to retirement and when he renewed the agreement with the radio station in 1983 (see para. 3 hereof) he limited the renewal period to only one year (with an option of a further two years) and not for the three-year period the station sought.
9. So far as it is relevant to boats, the definition of ``excepted facility'' in sec. 51AB is as follows:
```excepted facility', in relation to a year of income, means -
- (a) a boat that, at all times during the year of income, is held for sale by the taxpayer as trading stock in the ordinary course of a business carried on by the taxpayer;
- (b) a boat that, at all times during the year of income, is used, or held for use, by the taxpayer principally for any one or more of the following purposes: -
- (i) for the purpose of being let on hire in the ordinary course of a business of letting boats on hire carried on by the taxpayer;
- (ii) for the purpose of transporting for reward members of the public, goods (including live stock) or substances in the ordinary course of a business carried on by the taxpayer;
- (iii) for any other purpose in the ordinary course of a business carried on by the taxpayer if the taxpayer satisfies the Commissioner that the use of such a boat for that purpose is essential to the efficient conduct of that business;''
10. Neither of the two boats leased by the taxpayer during the year ended 30 June 1978 was held for use or used by the taxpayer at all times during that year of income, but provision is made for that situation by sec. 51AB(5) so nothing turns upon it. The Commissioner conceded that the second boat in the years ended 30 June 1979-81 and the first and second boats in the year ended 30 June 1978 were used, or held for use, by the taxpayer principally for a purpose in the ordinary course of the taxpayer's business. Thus the critical words are:
``if the taxpayer satisfies the Commissioner [or the Board] that the use of such a boat for that purpose is essential to the efficient conduct of that business.''
11. The relevant part of the definition does not prescribe that the use of such a boat for that purpose is to be essential to the conduct of the business such that the business could not be conducted without a boat; thus I do not regard it as particularly significant that when the boat was being repaired the taxpayer did not hire another boat. In his address the Commissioner's representative suggested that the exception in
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para. (b)(iii) was enacted so that, for example, boats used by professional fishermen, and by companies in order to transport employees to off-shore locations (such as oil rigs), could be exempted from the provisions of subsec. 51AB(3) and (4) - assuming all the stringent requirements are satisfied. The last-mentioned example might suggest why para. (b)(iii) received its particular wording: a company could effectively transport its employees to off-shore locations by helicopter or by several smaller boats, but that may not be efficient; hence the use of the words ``essential to the efficient conduct of that business''. It may also be noticed that the provision refers to ``that business'' and not ``that kind of business''; the Commissioner cannot say that the ordinary course of the taxpayer's business should be different from what it actually is or that the business should be carried on in a different way; the business actually carried on by the taxpayer is to be examined to see if the use of such a boat for a purpose in the ordinary course of the taxpayer's business is essential to the efficient conduct of that business.12. The dictionary meaning of ``essential'' is ``indispensable'', but perhaps another and more appropriate way of perceiving the force of the word ``essential'' is to turn the relevant phrase around and to ask whether the business conducted by the taxpayer would be conducted efficiently without the use of such a boat for that purpose. The word ``efficient'' has received judicial consideration in various contexts. In
Hogarth
v.
Miller, Brother
&
Co.
(1891) A.C. 48
Lord Morris at pp. 67-68 construed ``efficient state'' in a charterparty as ``fit state''. In
Bevan
v.
Shears
(1911) 2 K.B. 936
Lord
Alverstone
C.J. at pp. 938-939 read ``the child is under efficient instruction'' in relation to provisions exempting a child from attending school as ``the child is receiving effective education so far as that particular child is concerned''. In
Vickers
v.
Gomme (E) Ltd.
(1957) 2 All E.R. 60
Morris
L.J. construed ``efficient guard'' in the context of industrial regulations as ``a guard that properly and effectively guards''. In the context of the definition of ``excepted facility'' in sec. 51AB, it would appear that the word ``efficient'' directs attention to conduct producing an appropriate result at an acceptable cost.
13. The evidence was not sufficient for me to accept A's assertion that the commissions received by the taxpayer from the radio station increased by 129% over five years by reason of the use of the boat in entertaining clients. However, I am prepared to accept that the business would not have been conducted as efficiently as it was but for the use of the boat for that purpose. Amidst the glorious setting of Sydney Harbour, the combination of sun, alcohol and splendour may well have dulled the senses of a client trying to compare, for example, longer time slots on the subject radio station with shorter time slots on the highest rated station.
14. However, a real difficulty for the taxpayer is the almost intractable language of the relevant provision. For the taxpayer to succeed it is necessary for the Board to be satisfied that in the relevant years the business conducted by the taxpayer would not have been conducted efficiently without the use of such a boat for that purpose - it is not enough that the business would not have been conducted as efficiently without a boat. In other words, as I see it, the question to be asked is whether the taxpayer's business would have been conducted inefficiently without the use of such a boat for that purpose. The Commissioner says that it would not, because other forms of business entertaining, such as restaurants and clubs, were available. The taxpayer's managing director says it would, because entertaining on Sydney Harbour gave the taxpayer ``an edge'' over representatives of other radio stations and this form of entertaining produced excellent results at an acceptable cost; thus he argues that it would have been inefficient to dispense with the use of the boat and merely resort to forms of entertaining which the taxpayer's competitors, as well as the taxpayer, already used.
15. In using the word ``efficient'', the draftsman has made it a matter of business judgment. Thus the language of the statutory provision may not be completely intractable so far as the use of a boat for entertaining is concerned, although of course it is the business judgment of the Commissioner or a Board which is made decisive and not that of the taxpayer. In the present reference A did not supply sufficient business and accounting information to enable the Board to arrive at a conclusion that the business would have been conducted inefficiently without the use of the boat for the purpose of entertaining clients and potential clients. At most, he only established
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that the business would not have been conducted as efficiently as it was but for the use of such a boat for that purpose, and unfortunately this is not enough to satisfy the stringent relevant provisions of the Act. Accordingly, the taxpayer's claim must fail.16. For the above reasons I would uphold the Commissioner's decisions upon the objections and confirm the assessments before the Board.
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