P. Iori & Sons Pty. Limited v. Federal Commissioner of Taxation.
Members:Yeldham J
Tribunal:
Supreme Court of New South Wales
Yeldham J.
These four appeals, which were heard together, relate principally to deductions claimed by the appellant ("the taxpayer") under sec. 82 AAC of the Income Tax Assessment Act 1936 (as amended) for the years ended 30 June 1976-1979 inclusive. That section, during the years in question, provided:
"82AAC Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount or the sum of the amounts, as the case may be, so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction."
It is convenient to take the principal relevant facts from the document handed to me during the course of his opening by senior counsel for the taxpayer. In my opinion it is accurate and is supported by facts established in evidence. The relevant journal, ledger and other documents referred to were all tendered as exhibits. It was in these terms:
"1. The taxpayer was incorporated in 1961. Its principal business at all material times was that of poultry farming at Rouse Hill.
2. The taxpayer's directors at all material times have been:
- Pellegrino Iori (the father now aged 80 years);
- Edo Iori (the eldest son now aged 59 years);
- John Iori (the youngest son now aged 52 years).
3. Until 22 December 1975, each of the abovenamed held one share each in the taxpayer. On that day, they transferred their individual shares to their respective family companies, namely Pelmaria Holdings Pty. Limited, Mile End Holdings Pty. Limited and Stedikas Holdings Pty. Limited (see Minute Book at folio 42).
4. On 30 June 1980, the main asset of the poultry business, namely the hen quotas, were sold to John Earnings Pty. Limited for $354,000, another Iori family company. That transaction was evidenced in writing only by journal book entry: see the taxpayer's Journal folio 88 bearing date 30 June 1980. On the same date, the taxpayer's land and buildings were sold to Mile End Holdings Pty. Limited for $230,000 (folio 88).
5. The subsequent superannuation fund was established by the taxpayer pursuant to Trust Deed dated 9 May 1975, the firm of Nelson
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Wheeler advising on and attending to preparation and execution of the Trust Deed. The trustees appointed were John Iori and Edo Iori. Thereafter that firm prepared the annual accounts and taxation returns for the fund, at least for the years in dispute.6. At the time of establishment of the fund, the taxpayer's accountants were H.W. Rown Miller & Company of Parramatta (Mr Franks). They prepared (and continued to do so until 1982) the taxpayer's annual accounts and taxation returns.
7. In respect of the year ended 30 June 1975 (as to which see the taxpayer's financial statements for that year):
- (a) The taxpayer claims to have contributed $8,000 to the fund, apportioned as follows:
Pellegrino $4,000 Edo $2,000 John $2,000See journal folio 70.
- (b) The whole of such sum of $8,000 was lent back by the fund to the taxpayer, without any interest charge.
- (c) The annual accounts, duly signed by the directors, reflected (a) and (b) above.
- (d) The Commissioner allowed $8,000 in full as a deduction to the taxpayer.
- (e) No income was derived by the fund in that year.
- (f) In June 1975, the fund acquired 8,000 Commonwealth Bonds for $6,821 from the following Iori family companies at the following respective prices:
The taxpayer $1,706 John Earnings Pty. Ltd. $1,705 Iori Holdings Pty. Ltd. $1,705 Pelmaria Investments Pty. Ltd. $1,705See journal entries at folio 65.
8. In respect of the four contentious years in question, the following summaries are made from the fund's returns and assessments:
Net income Penalty for late Year of fund Tax assessed lodgment $ $ $ 1976 120 51.00 12.75 1977 936 397.80 99.45 1978 937 431.02 62.46 1979 6,957 3,200.22 156.05The fund has continued in the fiscal years thereafter to derive income and has submitted taxation returns in respect thereof and paid the tax assessed.
9. The following contributions were claimed to have been made by the taxpayer to the fund, apportioned as between Pellegrino, Edo and John, and thereafter lent back to the taxpayer:
Year Claimed $ 1976 10,100 (journal folio 70) 1977 38,300 (journal folio 73) 1978 31,300 (journal folio 78) 1979 31,300 (journal folio 82)10. No interest was charged in respect of such loan accounts until 1979, when the sum of $6,020.34 was debited to the taxpayer and credited to the fund by book entry; see journal folio 31.
11. In respect of the 1976, 1977 and 1978 years, the sums claimed by the taxpayer for contributions (para. 9 above) were wholly
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allowed by the notice of assessment originally issued by the Commissioner to the taxpayer. On 27 October 1982, the Commissioner issued notices of amended assessment in respect of the 1976, 1977 and 1978 years (but not 1975), together with an original assessment for 1979, whereby the contributions were disallowed to the extent detailed below, and tax and penalties imposed in relation to the contributions disallowed also as detailed below:Tax Assessed in respect of Penalty for Contributions Contributions disallowed Incorrect Year Claimed Disallowed sum return $ $ $ $ 1976 10,100 8,000 1,877 1977 38,300 35,000 7,110 1978 31,300 30,000 4,945 1979 31,300 30,000 3,565 ------- $47,100 $17,497 ------- -------12. The sums allowed appear to relate to premiums paid on behalf of the fund by the taxpayer to M.L.C. Insurance Company: see general ledger entries at folio 89.
13. Coincidental with the sale of the taxpayer's assets on 30 June 1980 was the discharge by the taxpayer of its then accumulated indebtedness to the fund amounting to $136,359.34; this was effected by means of a loan from John Earnings Pty. Limited: see journal folio 89.
14. The financial statements for the years 1976 to 1980 signed by John and Edo Iori reflect the foregoing ledger and journal entries for those years."
Some other facts and matters should be added. In the first place, it appears from the taxpayer's general journal, and in particular from folio 68 to 92 inclusive, that there was an accounting convention between the taxpayer and the companies with which it was associated by virtue of which transactions between them were dealt with by book entry alone, there being no other contractual or other similar documents entered into. That this is so was made plain in evidence by Mr John Iori whose evidence, like that of Mr Franks, who at the time was the companies' accountant, I accept. Secondly, as Mr Franks swore in evidence, in each of the taxation years commencing with that ending on 30 June 1975, before any entries were made in the balance sheets or the books of account of the taxpayer concerning superannuation, it was his practice to have a conversation with Mr Scott of the firm of Nelson Wheeler, which acted as accountants to the superannuation fund, at Mr Scott's office, in which in substance Mr Franks said to Mr Scott "the figure for superannuation is X, you will have to take up the journal entry within the superannuation fund to agree with what we have made the contribution from the company". To this Mr Scott would assent and the figure "$X" would appear in the journal and ledger for the relevant period. Those books contain the entries set out in para. 9 of the facts (above). Thirdly, the superannuation deed dated 9 May 1975, which was tendered in evidence, provides, in cl. 2(b):
"The company shall contribute to the fund at such rate (as) the company shall determine and notify to the member and the trustee shall be required to ensure the stability of the fund and to secure the rights of the members and the benefits (and) beneficiaries..."
Fourthly, the trustees of the superannuation fund were and still are John and Edo Iori, and they and their father are the only members of such fund. The balance sheet for the relevant years, duly signed by directors on behalf of the taxpayer, show the provision made in each such year for superannuation. Such balance sheets and supporting accounts for each of the relevant years were adopted by the taxpayer in general meeting.
The affidavit of Mr John Iori says, inter alia:
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"5. I recall that in or about April of 1976, 1977, 1978 and 1979 a directors' meeting of the company was held at which a dividend was declared. This meeting was held at the offices of Mr R.W. Franks, who is a partner in a firm of chartered accountants who act for the company. I am unable to recall the precise words which I said to Mr Franks but the substance of what I said was that `the company was to contribute to the superannuation fund as much as it was allowed to do so by the Commissioner of Taxation and that it could afford'. I recall that the amount of the contributions in respect of my father Pellegrino Iori and myself were also discussed with Mr Franks at this meeting.
6. I am also unable to recall the precise words said by Mr Franks on each of these occasions in April 1976, 1977, 1978 and 1979. However, the substance of what he said to me was that he told me of the profit the company was likely to earn in the current year. He said to me, that the company should make the same or about the same contribution to the superannuation fund as it had made for the previous year. I accepted his advice both as a director of the company and as trustee of the superannuation fund.
7. I say that I did not open a bank account for the superannuation fund until about June, 1981 when I caused an account to be opened at the Commonwealth Trading Bank, Parramatta on Mr Wenham's instructions. Up to and for some time after this date, all cash receipts and cash payments relating to the affairs of the superannuation fund were made on behalf of the trustees by the company or associated companies of which I was a director. I say that this was simply done as a matter of convenience."
There was no evidence of any meetings of directors of the taxpayer expressly resolving to make advances to the superannuation fund or to set aside moneys for that purpose, nor were there any cheques drawn to effect the transactions claimed by the taxpayer. The relevant book entries were obviously made following upon discussion between the accountants, and they were reflected in the annual accounts and, as I have said, adopted by the company.
On behalf of the Commissioner, it was submitted that the taxpayer did not, in any of the relevant years of income, for the purpose of making provision for superannuation benefits, set aside or pay any amount from which the benefits were to be provided. Alternatively, it was argued that if such amounts were set aside or paid, the benefits to be provided to eligible employees were not fully secured within the meaning of sec. 82AAC. On behalf of the taxpayer it was argued that there had been compliance with sec. 82AAC both as to setting aside or payment, and that the benefits to be provided were fully secured. It was submitted also that, in the circumstances of the present case, the Commissioner did not have power to impose penalties such as he did; and that he was not entitled to amend the original assessments for the years 1976, 1977 and 1978.
No attempt was made by the Commissioner to rely upon sec. 260, or to assert that the transactions or any of them were a sham or a fiscal nullity; the only issues raised were those which I have mentioned.
The first matter for consideration is whether, within the meaning of the relevant section, the taxpayer paid the amounts claimed as deductions for the purpose of making provision for superannuation benefits. In this respect reliance was placed by the appellant upon the credit entries in its journal and general ledger; the provisions of cl. 2(b) of the superannuation deed, the relevant terms of which have been set out; and the practice of the amount of contributions being discussed between Mr Iori senior and his two sons and then between Mr Franks and Mr Scott in the manner earlier referred to, the amounts in fact agreed upon being reflected in the financial accounts which were later adopted by the company. Senior counsel for the taxpayer submitted that these facts "demonstrate the making of agreements partly expressed and partly tacit or implied, and the instantaneous performance or effectuation of those agreements, in order to create there and then cross-liabilities, equal in amount, to be duly set off against each other... The transactions the subject of those agreements were, as stated in the book entries actually made in (the journal and the general ledger), first the quantification and satisfaction of the superannuation contributions in respect of each of the three beneficiaries, and secondly, the loan back to the appellant of an amount equal to
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the total annual contribution". Counsel argued that there was no reason in principle why book entries may not only record transactions, including payments the subject thereof, but also effect them, and that in fulfilling that role "the entries become an essential or integral part of the bargain". Counsel argued that because the trustees at all material times did not operate a bank account it would have been impossible for the company to make contributions to the superannuation fund in any way other than that in which it did, and that the method used constituted the payment of the contributions, albeit one which was expedient. He argued further:"Simply put, the relevant journal entry for each of the disputed years records two transactions. First, an agreement between the company and the trustees to make contributions to the superannuation fund in accordance with cl. 2(b) of the trust deed. Secondly, trust moneys were agreed to be lent by the trustees of the superannuation fund to the company. The first obligation is for the company to pay contributions and the second but offsetting obligation was for the trustees to pay an equivalent amount to the company by way of loan."
Senior counsel for the respondent submitted that the mere making of journal entries, when taken with the other facts mentioned, could not constitute payment. Reference was made to
F.C. of T. v. The Northern Timber and Hardware Co. Pty. Ltd. (1960) 103 C.L.R. 650 where, at p. 657, in a joint judgment the Court, in dealing with the expression "sets apart" in sec. 66 of the Income Tax and Social Services Contribution Assessment Act said:
"... to make a book entry and no more does not come within the words `sets apart... a sum as or to a fund' from which pay for long service leave is to be provided. What the taxpayer did here had no legal effect whatever. The employer gave nothing and the employees gained nothing. There may in some cases be a question whether what an employer has done amounts to setting aside a sum as and to a fund, such a question will only arise when the employer has done something that is binding and confers some benefit upon employees."
The Commissioner argued that, just as there was not in that case, or in the present, any "setting apart" so also there was not any payment made. On the other hand Mr Conti, senior counsel for the taxpayer, asserted that the case was readily distinguishable, since the entries there related merely to provision made by the taxpayer in his books of account to meet its prospective liabilities to employees for long service leave.
Section 82AAC does not in express words require a payment in actual cash or by cheque, nor are there any reasons of policy why such a requirement should be implied.
Some debate took place in the written submissions of counsel as to whether or not the principle derived from In
re Harmony and Montague Tin and Copper Mining Company (Spargo's case) (1873) 8 Ch. App. 407 was applicable in the present appeal. That principle is "that when the liability upon shares and the liability upon a cross-demand against the company of a sum certain immediately payable were mutually extinguished by an agreed set-off, this amounted to payment for the shares `in cash' for the purpose of" company legislation - see the cases collected in
Whim Creek Consolidated N.L. v. F.C. of T. 77 ATC 4503; 17 A.L.R. 421 at p. 425. The true effect of Spargo's case was shortly summarised by Barwick C.J. (with whom the other members of the Court agreed) in
Manzi v. Smith (1975) 132 C.L.R. 671 at p. 674, in these words:
"We were referred to cases in which payment of money was held to have been made by means of entries in books of account. But in those cases the entries represented the agreement of the appropriate parties e.g.
Eyles v. Ellis (1827) 4 Bing. 112; In re Harmony and Montague Tin and Copper Mining Company (Spargo's case) (1873) 8 Ch. App. 407. These decisions, quite clearly, are not authority for the proposition for which they were advanced, namely, that a payment of money was made by the making by the company of a journal entry in the books of account without reference to, or without the agreement of, the person said to be the recipient of the money. The company's assertions in its books of account did not establish the indebtedness of the appellants or any payment of money in discharge of that indebtedness."
This was recognised also by Dixon J. (as his Honour then was) in
F.C. of T. v. Steeves Agnew & Co. (Vic.) Pty. Ltd. (1951) 82 C.L.R. 408
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where, after referring to the well-known passage of Mellish L.J. in Spargo's case at p. 414, his Honour said (at p. 421): "But for the application of these principles there must be cross-liabilities and agreement, express, tacit or implied, and the cross-liabilities must be equal."In
Curran v. F.C. of T. 74 ATC 4296 at p. 4300; 131 C.L.R. 409 Barwick C.J. (at pp. 414-415) said:
"Thus, in more than a formal sense, the shareholder who has been credited actually or notionally with an amount of distributable profits pursuant to a resolution to capitalise them and to issue bonus shares to a total paid up value equal to or less than the amount of such profit, by accepting the bonus shares in terms of the resolution to issue them as paid for the shares. By accepting them he has agreed to the application to the capital of the company of the amount of the distributable profits so credited to him, thus effecting payment of the shares."
See also
Commissioner of Stamp Duties (N.S.W.) v. Perpetual Trustee Co. Ltd. (1929) 43 C.L.R. 247, especially at p. 276.
In my opinion senior counsel for the taxpayer is correct in his submission that it is proper to treat the company as having paid the superannuation contributions, and also with having received a loan from the trustees of the superannuation fund; and that, by the application of principles such as were mentioned in Curran's case and in some of the other authorities to which I was referred, the relevant journal entries (against the background of agreement upon the amount of contributions to be made by the plaintiff in respect of superannuation between Mr Iori senior and his two sons, the agreement between the two accountants, the fact that Mr John Iori was both a director of the taxpayer and a trustee of the superannuation fund, and the steps taken in relation to the financial accounts thereafter), constituted the making of agreements in respect of each relevant year, partly expressed and partly implied, and the instantaneous performance or effectuation of those agreements. The case is not one of the mere "making by the company of a journal entry in the books of account without reference to, or without the agreement of the person said to be the recipient of the money" (Manzi v. Smith). The only directors of the taxpayer were Mr Iori and his two sons. They were the only beneficiaries under the superannuation scheme. Plainly the amounts to be inserted in the books of account and reflected in the financial accounts were known to and agreed upon by them. There was agreement between the directors of the company and the trustees of the fund to make contributions to the fund in accordance with cl. 2(b), and agreement also that trust moneys were to be lent by the trustees of the fund to the company. In other words, as senior counsel for the taxpayer submitted the first obligation was for the company to pay contributions and the second but offsetting one was for the trustees to pay an equivalent amount to the company by way of loan. The relevant entries were made with the authority of and in accordance with the directions given by Mr John Iori to Mr Franks, the company's accountant. At the very least they were ratified by the signatures to the relevant balance sheets. The latter acknowledged the debt owed to them in their capacity as trustees and not beneficially.
Thus I conclude that there was a payment made in each of the relevant years for the purpose of making provision for superannuation benefits within the meaning of sec. 82AAC. It is not necessary to consider the alternative submissions relating to setting apart such sums.
The second matter for consideration is whether, within the meaning of the section, the right of the relevant employees to receive the benefits was "fully secured".
The superannuation deed, entered into between the taxpayer on the one hand, and John Iori and Edo Iori as trustees on the other, provides, in cl. 2, for the moneys comprising the fund to be vested in the trustees and invested in their names, in certain specified investments; for contributions to be made by the company at such rate as the company shall determine and notify to the relevant members; and "the trustees shall be required to ensure the stability of the fund and to secure the rights of the members and the benefits and beneficiaries"; cl. 5 provides for the amount of the member's benefit to be paid in the events and at the times and to the persons specified (e.g. upon retirement etc.); and by cl. 6 provision is made for transfer to the member of
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any relevant policies of insurance in the event that he ceases to be employed for certain reasons prior to the date when his benefit would otherwise be payable. The remainder of the deed contains comprehensive provisions in the form commonly found in superannuation deeds.On behalf of the Commissioner it was submitted that the rights of the members of the fund were not fully secured because, for reasons which he advanced in relation to the first matter with which I have dealt, any rights which the employees had were liable to be defeated at the option of the company. Reference was made to the decision of Taylor J. in
Driclad Pty. Ltd. v. F.C. of T. (1966-1968) 121 C.L.R. 45 at p. 60. However, I am of the opinion that this submission should be rejected. The various clauses of the superannuation deed, and those in particular which I have summarised, indicate that the rights of the members were fully secured. It does not matter that there was no security by way of mortgage or charge in respect of the loans back from the fund to the appellant. What was said by Taylor J. in the Driclad case supports the conclusion at which I have arrived. I am satisfied that the rights of the employees as set out in the deed were not liable to be defeated at the option of the company, which was bound by agreement during the relevant years to make the payments set out in the financial records, and claimed by way of deduction. See also
Independent Television Authority and Associated-Rediffusion v. I.R. Commrs (1961) A.C. 427.
Thus the taxpayer is entitled to succeed. I allow the appeals and set aside the respective assessments. I remit each matter to the Commissioner for reassessment in accordance with my judgment. This course will enable him to give consideration to applying the provisions of sec. 82AAE. The Commissioner must pay the taxpayer's costs.
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