Federal Commissioner of Taxation v. P. Iori & Sons Pty. Limited.
Members:Fox J
Lockhart J
Beaumont J
Tribunal:
Full Federal Court
Fox J.
These are four appeals from a decision of a Judge of the Supreme Court of New South Wales ( Yeldham J.) [reported at 87 ATC 4058] allowing objections by the respondent ("the taxpayer") against assessments made by the Deputy Commissioner of Taxation for the years 1976, 1977, 1978 and 1979.
The matter in dispute, common to all these assessments, concerns deductions claimed for each of the years in question for what were said to be amounts paid or set aside as, or to, a superannuation fund in accordance with sec. 82AAC of the Income Tax Assessment Act 1936. Deductions were originally allowed in the amounts claimed for the years 1976, 1977 and 1978, but on 27 May 1982 the Deputy Commissioner issued amended assessments for those years and an original assessment for the year 1979 disallowing the deductions. Penalties were also imposed on the taxpayer under sec. 226 of the Act, as it then stood.
At all relevant times there were three principals of the taxpayer: Pellegrino Iori and his two sons, Edo and John. The three were the directors of the taxpayer, and its shareholders were their family companies.
By deed executed on 9 May 1975, the taxpayer established a fund which provided for contributions by it and other "invited" employees and was for the benefit of "certain of its employees". The deed is loosely framed, but no challenge has been made to it as an effective deed. The trustees were the two sons, John Iori and Edo Iori. All three principals, as directors, were, under sec. 82AAA(2)(a), employees of the taxpayer for the purposes of the Act (see also sec. 23F(11)). There is no similar provision in the deed, but this circumstance has not been the subject of comment or argument. The term "member" is used in the deed and is defined, but does not include anyone other than an "employee".
Clause 2(a) of the deed deals with investment and is as follows:
"All moneys comprising the Fund shall be vested in the Trustees and shall be invested in their names and in any of the following investments and not any others but the Trustees may from time to time vary and transpose investments: -
- (i) Investments which a Trustee is permitted to make under any law of the Commonwealth or an Australian State or of a Territory of the Commonwealth without special authorisation;
- (ii) Shares stock debentures notes bonds or other securities or obligations of a company including rights to subscribe for or take up such shares stock or debentures;
- (iii) Units or other investments of a fixed or flexible Unit Trust;
- (iv) Interest Bearing Deposits with or loans to a Bank in Australia an
ATC 4777
authorised dealer in the Australian short term money market or a company mentioned in paragraph (ii) or with or to the Company so long as the Company shall execute a charge acceptable to the Trustees over an asset or assets real or personal acceptable to the Trustees;- (v) Policies of Assurance on the life of a Member as shall be effected by transferred to or deposited with the Trustees such Policies to be of such nature or type and with such Life Assurance Company as the Trustees may from time to time determine.
So far as is practicable Fund investments shall at all times be readily realisable so that the benefits may be paid promptly to a Member or the dependants of a Member in accordance with the terms of this Deed as they become due."
Clause 2(b) is as follows:
"The Company shall contribute to the Fund at such rate and [ sic; scil. `as'] the company shall determine and notify to the Member [sic] 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 PROVIDED THAT the contribution of the Company shall include the total cost of providing any Life Assurance Cover held by or effected by the Trustees pursuant to Clause 5A hereof. The contribution of a Member shall be such sum as the Trustees shall notify to such Member on his admission to Membership of the Fund PROVIDED THAT:
- (i) The Trustees may vary such contribution in their absolute discretion so long as such contribution shall not at any time exceed the proportion of such Member's salary or wage which such Member's contribution bore to such Member's salary or wage at the date of his admission to membership of the Fund.
- (ii) The contribution of a Member shall cease on his Normal Retirement Date.
PROVIDED ALWAYS THAT the Trustees shall not be authorised (notwithstanding any thing contained in this Deed) to accept nor shall they accept contributions except from the classes of persons specified in Section 23F(2)(c) of the Income Tax Assessment Act 1965 (as amended)."
No payment, in cash or kind, was made to or for the fund in any of the years in question. What I relied upon are entries made in the books of the taxpayer, and in the annual balance sheets of the trust, albeit the latter may have been prepared some years after the dates to which they relate. The business of the taxpayer was not a large one (its net profit for 1977 is shown as $3,774.05), and allowance can be made for the fact that its books were not kept in as complete or as elaborate a form as would be expected of a company with a business of greater size. Financial dealings were entered by hand in a journal.
There is an entry dated 30 June 1976 in the journal of the taxpayer which reads as follows:
"Superannuation $8,000
Loan P. Iori Super-
annuation Fund $8,000
Being superannuation
paid on the lives of
Pellegrino $4,000
Edo $2,000 John
$2,000"
On its face the entry records a debit to "Superannuation", in association with a loan back to the taxpayer of the same amount. The distribution of the amount as between the beneficiaries is stated in the entry, and is the only place, except for the trust balance sheets, in which it appears. There are similar entries for the other years now in question. One way of looking at these entries is to say that the superannuation amounts came out of the "loan" funds, but obviously they are counterbalancing. The debits were all simply to "Superannuation". Put shortly, they do not show, or indicate, credits to the fund now in question. There was no debit to cash, or other funds. None of the "loans" were secured. It is also of significance that the amounts of superannuation were not debited to an appropriation account, but directly to the combined trading and profit and loss accounts.
The minutes of a meeting of directors of the taxpayer held on 30 December 1976, attended by the three principals, records:
"The Balance Sheet as at 30th June, 1976 together with Supporting Accounts, Directors Statement and Report and
ATC 4778
Statement by the Person Responsible for Preparation of the Accounts were received and after discussion of results achieved for the year it was resolved that they be adopted."
Similar entries appear in the minutes in relation to the following years.
No reference is made to interest on the "loans" from the fund to the taxpayer until a journal entry for 30 June 1979:
"Interest paid $6,020.34
Loan P. Iori
&
Sons
Super Fund $6,020.34
Being interest paid at
6% p.a. on outstanding
balance"
There is not in evidence any minute to support this entry; nothing is known as to how it came to be made. It does not constitute a debit for interest at 6% p.a. on the "loans" throughout the whole of the respective periods since 30 June of each year.
It seems that the exact amounts to be debited to the superannuation fund were left on each occasion to be determined by an accountant, he taking into account what the Commissioner would allow and the taxpayer's profits for the year. There is no minute of the directors in evidence specifically authorising the payments of the particular amounts shown in the journal, and, despite the dates shown, it seems that the amounts were arrived at some time after the close of the financial year and later inserted as one of a number of closing entries for the year. There was no minute, or note, of an arrangement concerning the loans, as to duration, interest, or otherwise.
The trustees were of course two of the three directors of the taxpayer. They did not, as trustees, keep any accounts, or minutes, except that in respect of each year an income and expenditure account and a balance sheet of the trust was at some time drawn up. The evidence suggests that no balance sheets were prepared during the first years, and that possibly none were prepared until about 1980. The balance sheet stated to be as at 30 June 1976 was as follows:
"P. Iori & Sons Pty. Limited Superannuation Fund
Balance Sheet as at 30th June, 1976
1976 1975 Accumulated funds Opening Contribution Share of Closing balance for the net balance 1975 year profit 1976 -------------------------------------------------- $ $ $ $ $ Pellegrino Iori 28,500 4,000 53 32,553 28,500 John Iori 3,718 2,000 7 5,725 3,718 Edo Iori 4,636 2,000 9 6,745 4,636 ------------------------------------------------------------ 36,854 8,000 69 44,923 36,854 ------------------------------------------------------------ Investments $12,000 Commonwealth Bonds ( ) 9,635 6,821 Current assets P. Iori & Sons Pty. Limited 35,339 30,033 ------ ------ 44,974 36,854 Less: current liabilities Provision for taxation 51 - ------- ------- $44,923 $36,854 ------- --------"
ATC 4779
The opening balances carried forward from 1975, the government bonds and the provision for taxation referred to in the balance sheet all relate to assets acquired by the fund in the 1975 financial year, which is not in question in the present proceedings.
The balance sheet for 30 June 1978 is more revealing as to what was happening to the amounts shown as credited to the fund:
"P. Iori & Sons Pty. Limited Superannuation Fund
Balance Sheet as at 30th June, 1978
1978 1977 Accumulated funds Opening Contribution Share of Closing balance for the net balance 1977 year profit 1978 ------------------------------------------------- $ $ $ $ $ Pellegrino Iori 57,919 20,000 364 78,283 57,919 John Iori 10,800 5,000 68 15,868 10,800 Edo Iori 11,709 5,000 74 16,783 11,709 ------------------------------------------------------------ 80,428 30,000 506 110,934 80,428 ------------------------------------------------------------ This is represented by: Investments Commonwealth Gov. Bonds 9,635 9,635 Current assets Unsecured loans - at call 102,160 71,224 ------- ------- 111,795 80,859 Less: current liabilities Provision for income tax 861 431 -------- ------- $110,934 $80,428 -------- -------"
It is apparent that the "fund" was largely being administered from within the taxpayer, by its directors and accountant. The amounts shown as credited to it were retained by the taxpayer, albeit they were shown in the annual balance sheets of the fund. As property they never left the taxpayer, and were not, notionally or otherwise, received by the trustees. No identifiable property of the taxpayer passed to the trustees. No record, except for the journal entries, was made of a loan back by the fund, nor, of course, of its terms.
Section 82AAC of the Act was at relevant times as follows:
"Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart of 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 was submitted that by reason of the book entries and their acceptance the amounts were paid or set aside as or to the fund, and were secured for the beneficiaries by the deed. His Honour accepted these submissions, placing reliance on "payment" and not as a result
ATC 4780
having to deal with the alternative of "setting aside".Counsel for the taxpayer relied on authorities which go to show, as he submitted, that payment does not necessarily require a transfer of moneys or other property (see
In
re Harmony and Montague Tin and Copper Mining Co. (Spargo's case)
(1873) 8 Ch. App. 407
;
Whim Creek Consolidated N.L.
v.
F.C. of T.
77 ATC 4503
at p. 4506;
(1977) 31 F.L.R. 146
at p. 150
. In
F.C. of T.
v.
Steeves Agnew
&
Co. (Vic.) Pty. Ltd.
(1951) 82 C.L.R. 408
,
Dixon
J., after referring to
Spargo's case
and to
Commr of Stamp Duties (N.S.W.)
v.
Perpetual Trustee Co. Ltd.
(1929) 43 C.L.R. 247
and
Joseph
v.
Campbell
(1933) 50 C.L.R. 317
, 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. If they are not equal payment of the residue must be effected by other means. A continuing account balanced at yearly intervals is not the same thing."
Counsel accepted that there had to be an agreement between the parties, but he submitted that such an agreement was plainly to be implied in this case.
Although the two sons were directors, they were also the trustees, and it was submitted that they could be taken to have concurred in the making of the relevant entries as trustees, besides having in due course their own balance sheets, as trustees, relating to the fund. It was added that the three principals were the only members of the fund. They were not however the only possible beneficiaries.
There are several difficulties about the approach mentioned. In the first place, a deemed payment requires an underlying liability, or a mutuality of liabilities, which the book entries are treated by the parties as settling (or, possibly, partly settling): F.C. of T. v. Steeves Agnew & Co. (Vic.) Pty. Ltd., supra. The "agreement" relates to settlement. In some cases it may be implied. The broad purpose of Spargo's case is to avoid circuity. Here, there was no underlying liability, or mutuality of liabilities. The taxpayer was under no liability to contribute anything. The acceptance of its decision to do so in any year was not an agreement in the relevant sense. The entries could conceivably have had some effect, in law or equity, but even if they had done so, they did not constitute payment, or, for that matter, a "setting aside". It is not necessary to decide the matter, but on the present material it would be at least doubtful if they had any such effect. The alleged "payments" remained as part of the assets of the taxpayer, albeit they were, after their making, described as loans. The trustees, although acting in breach of trust and in breach of their duties to the taxpayer, with a conflict between duty and interest, and two duties, in effect claimed their dual capacities as virtues. Being, as it were, on both sides of the transactions, they say that what they did as directors was necessarily with their agreement as trustees, and vice versa. Whether in relation to the particular entries they could be regarded as acting as trustees is doubtful, but it is not necessary to pursue this question. Apart from questions arising in this way, there can be no escape from the fact that the taxpayer was not under any prior obligation, and the trust fund took in each case as a volunteer. Perhaps it is sufficient to say, simply, that it was not intended that there be any payment. All that was intended by the directors, but in their own interests, was to make book entries, doubtless in the hope that in due course they could give effect to them, and certainly in the hope that taxation deductions could be obtained in the meantime.
Clause 2(b) of the deed has already been set out. It could be argued (but has not) that once a decision was made as to the amount of a member's benefit included within a contribution, that clause operated to bring the amount of the benefits within the trusts of the deed. In this way it could be said that (at some point of time) a liability was created. One difficulty about this approach is that already adverted to, namely that the trusts of the deed were ignored, and plainly the company had to treat the moneys as lent back to it immediately, on its own terms.
Although there has not been evidence precisely in point, it seems to me that the effect of what was done was to create a provision for superannuation. On this view the amount of the fund, it might be argued, would be the loan, but there would be no consideration to support it, and so far as concerns the application of sec. 82AAC there would remain a question whether the "payment" was fully secured.
ATC 4781
It is not possible sensibly to consider this last-mentioned question separately from the question as to payment or setting aside. I shall simply refer again to cl. 2(a) of the deed, which was ignored. Under it, "all moneys comprising the fund shall be vested in the trustees", and provision is made for their investment. Plainly, under the deed, property of some description was to become vested in the trustees. The book entries did not bring about any such situation. The trustees did not exercise any power of investment; they simply let the taxpayer retain the property, unidentified and unappropriated, to which the entries could be regarded as relating. That the entries could in due course possibly have created rights in equity, or for that matter, at law, is not directly relevant. Such security as the deed offered was neglected (cf.
Driclad Pty. Ltd.
v.
F.C. of T.
(1966-1968) 121 C.L.R. 45
at p. 59
).
What happened seems to me to be a situation against which the section seeks to guard, that is one of a taxpayer obtaining a deduction for payments to a superannuation fund, in respect of property with which it never parts and over which it retains complete control for use in its business. Parting with the amount claimed as a deduction by the taxpayer in, say, 1978, if the balance sheet is taken as correct, would have compelled a realisation of some of its assets.
I would therefore allow the appeal, so far as it concerns the amount of the assessments to tax on incomes. This leaves additional tax, which I will now come to consider.
The imposition of the amounts of additional tax, and whether they should to some extent have been remitted were also the subject of the notices of objection. The additional tax was imposed in each case "for incorrect return". The amounts were $1,877 for the year ending 30 June 1976 (tax $4,301), and $7,110 ($18,494.76), $4,945 ($14,559.92), $3,565 ($19,444.20) for the following years. For the 1979 year an amount of $1,150 was added as additional tax for late return. This last-mentioned item was also objected to, but no argument has been addressed in relation to it. The learned Judge at first instance did not have to deal with the matter of additional tax. He remitted the case to the Commissioner for reassessment, the order of the Court providing that the remission was to enable him to give consideration to the application of sec. 82AAE of the Act, which deals with maximum amounts allowable to a taxpayer for amounts paid or set aside for superannuation benefits for an employee.
At relevant times, sec. 226(1), (2) and (3) were as follows:
"226(1) Notwithstanding anything contained in the last three preceding sections, any taxpayer who fails to duly furnish as and when required by this Act or the regulations, or by the Commissioner, any return or information in relation to any matter affecting either his liability to tax or the amount of the tax, shall be liable to pay as additional tax an amount equal to the tax assessable to him or the amount of $2 whichever is the greater.
(2) Any taxpayer who omits from his return any assessable income, includes in his return as a deduction for, or as a rebate in respect of expenditure incurred by him an amount in excess of the expenditure actually incurred by him or, in relation to a claim to be entitled to a rebate under section 23AB, 79A, 79B, 159J, 159K or 159L, includes in his return information that is false in any particular, shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of $2, whichever is the greater.
(3) The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof."
The exercise of the Commissioner's discretion under sec. 226(3) is not reviewed in this Court except in so far as there has been an error of law.
As already mentioned, the superannuation debit was shown in the profit and loss account for each year. It was there simply stated as "Superannuation", but in the balance sheet the loan was shown, at progressively increasing figures under the title "P. Iori & Sons Pty. Limited Superannuation Fund". The documents mentioned were schedules to the various returns.
An ordinary reading of this material would disclose that there had been payments in each
ATC 4782
year constituting "superannuation" in favour of some person or persons, and a borrowing of the same amounts from a particular superannuation fund. No particulars were given which would show deductibility under sec. 82AAC, or, for that matter, would exclude deductibility.In relation to the 1976 and 1977 years, the only disclosure at all was in the trading and profit and loss account, the places in the returns respecting contributions to superannuation etc. funds being in each case left blank. The net profits shown in those accounts were transferred, as such, to the returns proper. For the following year (1978) there was an entry on the return, in the appropriate place, "Iori & Sons Pty. Limited Superannuation Fund", "Total amount claimed as a deduction... $31,300". This was the amount shown as a debit in the trading and profit and loss account, and the making of the entry mentioned did not invite or lead to a further deduction. A similar procedure, with the same amount, was followed in 1979.
The fact, in relation to the first two years, that there was the unexplained and unelaborated entry of "superannuation" would suggest that this was simply an expense of the business for the year. The journal entry to which I have referred would support this view; it was desired to maintain an account simply styled "superannuation" to which credits could be made as against debits to the loan account. The amounts for the superannuation account were written off annually. In income tax terms the "superannuation" was shown at least in the first two years as an outgoing, such as could be deducted under sec. 51, and not as an amount deductible under sec. 82AAC. When ultimately, after the lapse of a number of years, the deductions were challenged, their deductibility was supported only by reference to that section. The returns, one might assume, were lodged after the final entries, already referred to, were made, but they were prepared on a cash, and not an accruals, basis.
The question is whether the taxpayer included in its returns "as a deduction... for expenditure incurred by [it] an amount in excess of expenditure actually incurred by [it]" (sec. 226(2)).
We have heard very little argument on this matter. We were referred to
Nilsen Development Laboratories Pty. Ltd.
&
Ors
v.
F.C. of T.
81 ATC 4031
;
(1981) 144 C.L.R. 616
;
F.C. of T.
v.
Rabinov
&
Anor
83 ATC 4437
;
(1983) 71 F.L.R. 450
; and
North Coast Grazing Pty. Limited
v.
F.C. of T.
87 ATC 4553
.
The meaning of "incurred" was dealt with by the High Court in Nilsen Development Laboratories Pty. Ltd. & Ors v. F.C. of T. 81 ATC 4031; (1981) 144 C.L.R. 616. Barwick C.J. said (at ATC pp. 4034-4035; C.L.R. p. 623):
"Granted that exhaustive definition of what may be denoted by the word `incurred' in sec. 51(1) may not be possible, there can be no warrant for treating a liability which has not `come home' in the year of income, in the sense of a pecuniary obligation which has become due as having been incurred in that year."
Gibbs J. (as Gibbs C.J. then was) said (at ATC p. 4036; C.L.R. p. 627) that there must be a presently existing liability. Mason J. (as Mason C.J. then was) pointed out that provisions for leave and long service leave were not to be regarded as "incurred". There seems no reason for drawing a distinction between the meaning of the word in sec. 51 and that in sec. 226.
The amounts in question were claimed as expenses in the operation of the taxpayer. Yet, no payment was made and no liability to make a payment of superannuation was incurred. What was left at the end of the year was ostensibly a "loan liability". This could not be said to have been "expenditure incurred". On any view, the amounts of the loans were not regarded as then due; the incidences of the "loans", so far as appears, were not determined. They were not repayable on demand, their term was not agreed, nor (until 1979) was there any stated interest rate. If the position was otherwise, it rested on the taxpayer to establish it.
It is therefore reasonably plain that what were claimed as deductions were in excess of expenditure actually incurred, and it was open to the Commissioner to impose additional tax.
In my view, therefore, the appeals should be allowed, the order of Yeldham J. set aside and in lieu thereof the appeals to the Supreme Court dismissed, with costs.
ATC 4783
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