YFR Grbich

Administrative Appeals Tribunal

Decision date: 5 February 1991

Dr YFR Grbich (Senior Member)

The applicant is a senior officer in the Australian defence forces. During the relevant year ended 30 June 1987 he spent $2,586 of his own money in the performance of his duties. The applicant was engaged to negotiate at high levels in the United States over substantial contracts for purchase of Australian defence equipment. Under a formal Defence Department instruction he was entitled to an annual ``representation allowance'' of $3,265. In fact, he overspent this. The nature of the expenditures are set out in great detail in exhibits, since much of it required vouchers to qualify for a government representation allowance. The expenditure in question was incurred on a range of lunches, cocktail parties, dinners and other forms of social contact which were directly relevant to his negotiating duties and the discharge of the protocols of his exacting office. Direct business was done at many of these occasions.

2. Under s 51AE(4) deductions are not allowable ``to the extent to which they are [for] the provision of entertainment''. The key term ``provision of entertainment'' is elaborated in s 51AE(3) and, so far as relevant, refers to ``the provision (whether to the taxpayer or to another person and whether gratuitously, pursuant to an agreement or otherwise) of... entertainment by way of food, drink or recreation'' and ``whether or not... business discussions or business transactions occur''.

3. The applicant's argument was that he was a serving military officer and that he was required to carry out these duties. He argued that the expenditure should be characterised, as was his ``representation allowance'' supplied by Government, as part and parcel of his duties rather than as ``entertainment'' within the meaning of s 51AE(3). The argument and exhibits stressed the ``ethos of service'' and the powerful network of informal obligations which the military imposes on its officers

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to carry out their duties. This involved expenditure on a number of events which blew out the applicant's budget beyond the very limited allowances granted. It was argued, since the applicant had an ``obligation'' to perform these duties, it was excluded from s 51AE(3).

4. As evidence was given by the applicant, undoubtedly an honourable and forthright witness, it became more difficult to apply the clear language of s 51AE(3). But whatever policy compromises are involved in a blunt and essentially arbitrary solution to the problem of the taxation of entertainment fringe benefits, the objectives of this provision are clear. The applicant incurred this expenditure for ``food, drink or recreation''. The fact that these transactions were of direct relevance to ``business transactions'' and that the contacts were an essential part of a process vital to the national well-being and involving very large amounts of government money is rendered irrelevant for tax purposes. The provision extends its umbrella to relevant entertainment, whether provided ``gratuitously, pursuant to an agreement or otherwise''. This would lead to the clear conclusion that, whatever pressure was put on the applicant to make up the shortfall from his own pocket, these are precisely the sorts of expenditures contemplated by s 51AE(4).

5. The provision is circumlocutory in that it defines ``provision of entertainment'' as ``entertainment by way of food, drink or recreations''. The argument can be advanced, and was canvassed, at the hearing that the types of moral ``compulsion'' operating on members of the military forces, who are hardly in a normal arm's length contractual situation with their superiors, might put the expenditure outside the operation of the provision at this threshold level. But such an argument hardly gives a balanced reading to the provision in its full context and having regard to its clear objectives. The introductory note to the legislation (Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 1985, 31) makes it clear that the purpose of the provision is to exclude, formerly deductible expenditures, like business lunches and drinks, dinners, cocktail parties... entertainment of... business associates, clients etc. and that they will be excluded irrespective of any... connection with business activities.

6. In an economy dominated by self-interest, the virtues of duty and commitment to the national interest, reflected in the position of military officers and others operating outside the values of the market system, may seem vaguely quaint. But one could not help being struck by the applicant's sincerity in the witness box and the strong commitment he felt to fully discharge the duties of his partly commercial and partly diplomatic office, no doubt stemming from a powerful network of moral obligations, operating in a military service driven by unquestioning acceptance of authoritative directions. The high level time committed to the hearing and the detailed paperwork were out of all proportion to the modest amounts of tax at issue in this case. Now in a time of economic constraints it can be argued that budgetary limits need to be imposed and the applicant must live within them. It cannot seriously be suggested in the age of the ``even playing field'' that the tax system should grant deductions to government officials not available to other citizens. Certainly such decisions should not be made as a matter of creative construction of legislative provisions. It is difficult to argue that the legislative or this Tribunal can or should quarantine such expenditure from a general and necessarily arbitrary crackdown on the ``free'' lunch. But, equally, it can be said that it is unreasonable in a ``command culture'', such as that operating in the military forces, to construct an ethos in which a military officer, to quote from the applicant's superior and most senior officer in the applicant's service, that allowance struck by Government for important overseas service do ``not normally cover that which is eventually outlaid... and the additional burden must come from their own salary''. Such demands, which are inconsistent with the relevant budgetary limits, exploit the necessary obedience demanded of military officers and they need to be addressed.

7. For the reasons given the decision under review is affirmed. I understand that there is no dispute over quantum or penalties. But if these matters cannot be settled by consent, liberty is reserved for either party to apply to the Tribunal.

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