Federal Commissioner of Taxation v. Bill Wissler (Agencies) Pty. Ltd.Judges:
GN Williams J
Supreme Court of Queensland
G.N. Williams J.
At all material times Bill Wissler (Agencies) Pty. Ltd. (hereinafter called ``Agencies'') was the trustee of the Peter Wissler Family Trust (hereinafter referred to as the ``Trust''). The Trust imports footwear for sale, and obtains income by selling such goods on commission. It also provides the necessary administrative services for Bill Wissler (Can-Rub) Pty. Ltd. (hereinafter referred to as ``Can-Rub'') which has an agency agreement for the distribution on commission of canvas and rubber footwear manufactured and/or imported by the Dunlop organisation. Agencies is controlled by Mr Peter Wissler (hereinafter referred to as ``Wissler''); one other share therein is held by his father. The primary beneficiaries of the Trust are Wissler, his wife, and their four infant children, including Amanda Jane Wissler who was born on 23 April 1966. Can-Rub is controlled by Wissler's parents, who hold 52% of the shares; the remaining 48% of the shareholding is divided equally between Wissler, his brother, and his sister.
Though Wissler's parents control Can-Rub, they do not participate in the day-to-day running of that company's affairs. The distribution activities of Can-Rub are carried on from a warehouse which is located in close proximity to the premises from which Agencies carries on, on behalf of the Trust, its own separate footwear business. Agencies provides Can-Rub with a full range of management services; all incoming telephone calls for Can-Rub are received at the office of Agencies, and all paperwork associated with the recording of sales, the checking of orders, the checking of deliveries, and the keeping of accounts are handled by Agencies staff. The actual warehousing operation is conducted by storemen and packers and invoicing clerks who are the only employees of Can-Rub. In the first instance those employees of Can-Rub are paid wages by Agencies, but in turn Can-Rub reimburses Agencies for that outlay. There is also a monthly transfer of funds from Can-Rub to Agencies to cover the day-to-day costs incurred by Agencies on Can-Rub's behalf; the amount so transferred covers, inter alia, telephone costs and clerical functions. Such costs are not precisely calculable, and the amount transferred is really a negotiated figure, but it is a realistic assessment of expenses incurred by Agencies on Can-Rub's behalf.
Over and above that Can-Rub and Agencies negotiate at arm's length an annual payment for the managerial services rendered; according to the evidence the approach adopted by the board of each company is that the amount should be a fair and equitable recompense for the services
ATC 4628rendered. As Wissler said in evidence, the amount payable is ``negotiable on the basis of performance. It is on the basis of performance - it is on the basis of the ability to pay. If the company is going well, if through the entrepreneurial skills of myself and the staff around me we are able to generate more business for Can-Rub, then rightfully I would expect more remuneration from Can-Rub''.
In the financial year to 30 June 1981 Agencies received from Can-Rub two payments for services rendered, being the managerial services provided throughout the year. The first payment was on 3 February 1981, when an amount of $18,348.58 was received, and the second payment was on 28 May 1981, when $28,000 was received; in all $46,348.58 was received. Apparently Can-Rub made an accounting review after six months of the year's trading, and the first payment was an interim figure based on the trading for the first six months. By the end of May, given the nature of the business, an accurate projection could be made for the trading for the year of Can-Rub, and in consequence it was possible to fix upon the final payment at that time.
In its accounts for the subject year, Agencies kept the $46,348.58 so received from Can-Rub in a separate account; that figure did not appear in the profit and loss account. That was because it was a ``separate stream of income'', and the outgoings were not in any way referable to it; as stated above there was a separate reimbursement for actual outgoings incurred by Agencies on Can-Rub's behalf.
The Trust then made a separate and specific distribution of that $46,348.58 in accordance with the Trust deed. That distribution was effected by a minute at a directors' meeting of Agencies held on 22 June 1981. It is sufficient to say that of the $46,348.58, the sum of $10,000 was distributed to Amanda Wissler.
Generally each of the companies and the Trust acted in accordance with advice received from Mr J.P. Rawson, a chartered accountant, and the principal of Rawson and Co. It was he who was responsible for preparing the various income tax returns submitted for the year ended 30 June 1981.
Various accounts and other documents accompanied the return lodged by the Trust. Included amongst those was a profit and loss statement; it showed a gross profit from trading of $48,413.43, and then other income totalling $179,475.45, giving a total income of $227,888.88. Included in that were moneys received from Can-Rub being reimbursement of wages paid and reimbursement of expenses incurred. The other side of that account showed expenditure totalling $215,951.69, which included in the item ``wages'' the amount paid to employees of Can-Rub, and generally under the various headings expenses incurred on behalf of Can-Rub. That account then showed a net profit for the year of $11,937.19. The whole of that amount was distributed in accordance with the Trust deed to Mrs Wissler. Then there was a separate ``Statement of Income Received for Services Rendered and Distribution Thereof''. It showed the receipt of the $46,348.58 referred to above and its distribution in accordance with the minute of 22 June 1981; it is sufficient to say that it then set out the fact that $10,000 was distributed to Amanda Wissler. The following notes were appended to that statement:
``1. Income received for services rendered is `employment income' as defined by s. 102AF(1) of the Income Tax Assessment Act.
2. Pursuant to s. 102AG(2)(b) of the Income Tax Assessment Act an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of Trust estate to the extent to which the amount is assessable income of a trust estate that resulted from employment income.''
It is unnecessary to refer in any greater detail to that return. The appellant, the Commissioner, determined that Div. 6AA of the relevant Income Tax Assessment Act applied, and that sec. 102AG(1) thereof operated with respect to the $10,000 distributed to Amanda. In consequence he assessed that the trustee was liable to pay tax at the rate of 46% on that sum of $10,000. The trustee objected, claiming that the $10,000 was ``excepted trust income'' and therefore was not liable to the special tax rate; it must be remembered that the significance of Div. 6AA is that if it applies a higher rate of tax is assessable than otherwise would be the case.
The appellant disallowed the objection, and the trustee appealed to the Board of Review which decided to allow the objection. From that
ATC 4629decision the Commissioner appeals to this Court. The appeal raises certain questions of law, specifically the proper construction of sec. 102AF(1)(b), and 102AG(2) and (4) and also whether the facts of this case are caught by those provisions properly construed.
There is no doubt that at the material time Amanda Wissler was a ``prescribed person''; she was at the relevant date a person ``less than 18 years of age'' (sec. 102AC(1)). Section 102AF is important, and so far as is relevant it provides:
``(1) Subject to sub-section (2), a reference in this Division to employment income shall be read as a reference to -
- (a) salary or wages within the meaning of Division 2 of Part VI; and
- (b) payments made for services rendered or to be rendered.
(3) In this Division, a reference, in relation to a person in relation to a year of income, to business income shall be read as a reference to income, not being employment income, derived by the person during the year of income from carrying on of a business either alone or together with another person or persons.''
Prima facie the statute creates a clear cut distinction between ``employment income'' and ``business income''. It is clear from subsec. (3) that ``business income'' is exclusive of ``employment income''.
Then come the critical provisions, subsec. (1) and (2) of sec. 102AG; they provide:
``(1) Where a beneficiary of a trust estate is a prescribed person in relation to a year of income, this Division applies to so much of the share of the beneficiary of the net income of the trust estate of the year of income as, in the opinion of the Commissioner, is attributable to assessable income of the trust estate that is not, in relation to that beneficiary, excepted trust income.
(2) Subject to this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount -
- (b) is employment income;
As I have already pointed out, Amanda Wissler was at the material time a ``prescribed person'' and in consequence the provisions of the Division applied to her share of the net income of the Trust unless that income was ``excepted trust income''; in other words, the provisions of the Division would apply to the $10,000 distributed to her unless it came within the definition of ``excepted trust income'' found in subsec. (2). The contention of the appellant is that the $10,000 was not ``employment income'' and therefore the Division applied; on the other hand, the respondent taxpayer argued that the Board of Review was correct in unanimously holding that the $10,000 was ``excepted trust income'' within sec. 102AG(2) properly construed.
I have already pointed out that sec. 102AF draws a technical, and perhaps illogical, distinction between ``employment income'' and ``business income''. Each concept is unambiguously defined, and it is clear that ``payments made for services rendered or to be rendered'' cannot constitute ``business income''. Given the categorisation made by the Act itself, it appears clear that the $46,348.58 in question was ``employment income'' of the Trust as it was received in payment for the rendering of services. Each member of the Board of Review came to the conclusion that in the circumstances sec. 102AF and 102AG should be so construed and that the amount in question was ``employment income''. I agree with their reasoning and the result arrived at. Counsel for the appellant urged me to consider the ``explanatory memorandum'' circulated by the Treasurer with respect to the Income Tax Assessment Amendment Bill (No. 6) 1979, and also the Treasurer's speech on moving the Second Reading in the House of Representatives. In so submitting he referred to and relied upon the provisions of sec. 15AA and 15AB of the Acts Interpretation Act 1901 (Cth). It is uncertain to what extent a court should have recourse to such material pursuant to those sections where there is no ambiguity in the language used in the statute. I do not consider that there is any ambiguity here. But in any event, having read the material referred to, I cannot discern any intention therein expressed
ATC 4630that ``employment income'' in sec. 102AG(2) should be limited to income received for services rendered by the beneficiary. It may be that neither the Treasurer nor the draftsman perceived what the provisions in question would produce or what their financial consequences would be, but that does not entitle the Court to depart from the clear words and effect of the statutory provision.
That would be sufficient to enable me to dispose of the appellant's argument upon the construction and effect of sec. 102AF and 102AG(1) and (2). But in the circumstances I am comforted in reaching that conclusion by a consideration of the amendments effected by Act No. 29 of 1982. Section 17 thereof was in the following terms:
``(1) Section 102AG of the Principal Act is amended by inserting after sub-section (5) the following sub-section:
- `(5A) In the application of paragraph 102AF(1)(b) for the purposes of the application of paragraph (2)(b) of this section in relation to a beneficiary of a trust estate, payments made for services rendered or to be rendered shall not be taken to be employment income unless the services are rendered or to be rendered by the beneficiary.'
(2) Subject to sub-section (3), the amendment made by sub-section (1) applies for the purpose of determining the extent (if any) to which Division 6AA of Part III of the Income Tax Assessment Act 1936 applies to a share of a beneficiary of the net income of a trust estate of the year of income of the trust estate in which 28 August 1981 occurred and of any subsequent year of income.
(3) Where an amount (in this sub-section referred to as the `relevant amount') included in the assessable income of a trust estate of the year of income of the trust estate in which 28 August 1981 occurred would not, but for this sub-section, be excepted trust income, within the meaning of section 102AG of the Income Tax Assessment Act 1936, but would be excepted trust income within the meaning of that section but for the amendment made by sub-section (1) of this section, so much of the relevant amount as bears to the relevant amount the same proportion as the number of whole days in the period commencing on the first day of that year of income and ending on 27 August 1981 bears to 365 shall be deemed to be excepted trust income within the meaning of that section.''
Thus it is clear that if the events in question occurred wholly in a year of income subsequent to 27 August 1981, the amount received by the Trust for services rendered to Can-Rub would not be ``excepted trust income''; only if the services were rendered by (for example) Amanda Wissler could that result be produced.
In my opinion the wording of the new subsec. (5A) is of significance. The use of the term ``unless'' suggests to my mind that what is now being excluded was caught by the principal definition. In other words, subsec. (5A) is drafted on the premise that prior to the amendment ``employment income'' included payments for services whether rendered by the beneficiary or not. That view is clearly supported by the formula provided for in sec. 17(3) of the amending Act. The only basis on which the legislature could provide for such a formula is that prior to 27 August 1981 ``excepted trust income'' for purposes of Div. 6AA included payments for services rendered otherwise than by the beneficiary.
Such amending legislation ``may be considered on the question of interpretation'' (see per Dixon J. in
Grain Elevators Board (Vict.) v. Dunmunkle Corporation (1946) 73 C.L.R. 70 at p. 86); as his Honour there went on to say:
``It would be a strange result if we were to interpret the prior legislation as giving a wider exemption than that conferred by the provision so that the express exemption it makes would prove unnecessary and the qualifications it places upon that exemption would be futile.''
Similarly, if one were to so construe sec. 102AF and 102AG as they stood at 30 June 1981 in the way contended for by the appellant, it would render the express exemption or exception found in the new subsec. (5A) unnecessary, and make the complex formula in sec. 17(3) of the amending Act a futile legislative exercise. Such considerations confirm my view that the appellant's contention should be rejected and the provisions construed as I have indicated.
I was also urged to consider the explanatory memorandum and the Second Reading speech by the Treasurer with respect to the amendment. I do not read sec. 15AB of the Acts Interpretation Act as permitting the Court to consider a statement made at a later point of time (say when the legislation was being amended) in order to discern the intention of the legislature when the original statute was passed. It is much easier to be wise after the legislation has been applied in practice and scrutinized by the courts. Such belated statements of legislative intent could hardly ever affect the proper construction of the language used in the statute. In consequence I disregard in particular the Treasurer's statement of alleged earlier intention found in his Second Reading speech with respect to the amendment. But in any event the material referred to tends to suggest that the earlier legislation did not in law reflect the intention of the legislature.
That leaves for consideration the alternative argument raised by the appellant. Section 102AG(4) provides:
``Sub-section (2) does not apply in relation to assessable income derived by a trustee directly or indirectly under or as a result of an agreement that was entered into or carried out by any person (whether before or after the commencement of this sub-section) for the purpose, or for purposes that included the purpose, of securing that that assessable income would be excepted trust income.''
The appellant asserts that there was a relevant agreement between Agencies and Can-Rub so that subsec. (4) would apply. In support of the contention that there was an agreement, counsel for the appellant referred to the minutes of a meeting of directors of Agencies held on 22 June 1981, where the receipt of $46,348.58 from Can-Rub was recorded and then that amount was distributed amongst the Trust beneficiaries. The minutes state:
``These payments are for services rendered by the Trust to Can-Rub as the supervising employer of Can-Rub. These payments are in addition to other amounts received in 1980/81 from Can-Rub in the nature of reimbursement for wages, employment services and outlays.''
After recording the distribution the minutes go on to state:
``Mr Rawson stated that this income would constitute `excepted trust income' pursuant to sec. 102AG(2)(b) of the Income Tax Assessment Act because it is `employment income' as that term is defined in sec. 102(1)(b) (sic) of the Act.''
There is no doubt that that was the belief of Mr Rawson at all material times; I have quoted above the ``Notes'' which he appended to the document headed ``Statement of Income Received for Service Rendered and Distribution Thereof''. He was also responsible for preparing accounting documents and tax returns of Can-Rub. It is therefore not surprising to find in the minutes of a meeting of Directors of Can-Rub of 3 February 1981 the following: ``It was resolved to make a payment forthwith of $18,348.58 to Bill Wissler and Co. for services rendered.'' In the minutes of a directors' meeting of Can-Rub of 28 May 1981 there was a minute in identical terms relating to the further payment of $28,000.
The appellant asserts that the use in the minutes of each company of the expression ``services rendered'' evidenced an agreement between the companies caught by sec. 102AG(4). I do not accept that. Either the amount in question was a payment made for services rendered or it was not. It could not be given that character merely by describing it as such in minutes or an account. For the reasons I have stated above, the evidence establishes that in fact it was a payment made for services rendered, and in consequence there is nothing ``sinister'' in so describing it in company minutes and accounts. I am not certain how sec. 102AG(4) should be construed, but clearly it cannot strike down an agreement to make a payment for services rendered. Further, if it is necessary for me to so hold, I am of the view that it would not apply merely where the parties were aware at the time they entered into an otherwise legitimate commercial agreement that a consequence would be that moneys received thereunder would be ``excepted trust income'' for purposes of the Division.
In this regard the appellant also refers to the alleged unusual circumstance that Agencies in preparing its accounts and income tax return kept the amount received from Can-Rub for services rendered separate from its ``business''
ATC 4632accounts. The probable explanation for that is the artificial distinction created by the Act between ``employment income'' and ``business income''. It was conceded on behalf of the Commissioner that the taxpayer had made a full disclosure of all relevant material, and in the circumstances there is nothing improper in dealing with ``employment income'' separately and distinct from ``business income''. Indeed, the legislation encourages the adoption of such a course. The mere fact that such course was followed cannot in my view bring sec. 102AG(4) into play.
I therefore find that properly construed sec. 102AG(4) does not apply to the transaction in question. It follows in my opinion that the appeal should be dismissed.