Temples Wholesale Flower Supplies Pty. Ltd. v. Federal Commissioner of Taxation

Judges:
Davies J

Court:
Federal Court

Judgment date: Judgment handed down 6 July 1990.

Davies J.

This is an appeal from a decision of the Administrative Appeals Tribunal given on 1 June 1989 [reported as Case W50,
89 ATC 475] by which the Tribunal affirmed the decision of the respondent, the Commissioner of Taxation, on an objection lodged by the taxpayer, Temples Wholesale Flower Supplies Pty. Ltd. (``Temples''), under sec. 221U of the Income Tax Assessment Act 1936 (``the Act''). The subject of the objection was a decision of the Commissioner that Temples had failed to make deductions from payments of salary or wages as required by sec. 221C of the Act and a consequential decision of the Commissioner as to remission of the penalty resulting therefrom.

Before turning to the issue which was argued before the Tribunal and in the appeal, namely the liability of Temples to make deductions from salary and wages in accordance with sec. 221C of the Act, I should mention that that issue may not be one on which it was open to the Tribunal to rule. Section 221EAA provides for a penalty for failure to deduct from salary or wages the amount required to be deducted under Div. 2 of Pt VI. Section 221F provides for the payment by a group employer of the amount of the deductions required from salary or wages and for a penalty where the amount outstanding remains unpaid. Section 221G provides for the payment by an employer other than a group employer of an amount deducted from salary or wages and for a penalty when the amount remains unpaid. Section 221R provides that an amount payable under the provisions of Div. 2 of Pt VI (the Division in which these sections appear) shall be a debt due to the Commonwealth. Section 221N provides that, where penalty payable under these provisions has not been paid, the Commissioner may, in accordance with the section, remit the penalty or a part thereof. Section 221U then provides:

``(1) Where a person who has been notified of a decision of the Commissioner made under subsection 221N(2)... is dissatisfied with the decision, the person may, within 60 days after service on the person of notice of the decision of the Commissioner, lodge with the Commissioner an objection in


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writing against the decision stating fully and in detail the grounds on which the person relies.

(2) The provisions of Division 2 of Part V (other than section 185) apply in relation to an objection made under subsection (1) in like manner as those provisions apply in relation to an objection against an assessment.''

Those provisions show that the only matters with which the Tribunal is concerned are matters of discretion under sec. 221N as to the remission by the Commissioner of the whole or a part of a penalty which the Act imposes. An amount under Div. 2 of Pt VI is a debt due to the Commonwealth and is recoverable in any court of competent jurisdiction. The recoverability of the sum is not dependent upon the making of any decision by the Commissioner or the issue by him of an assessment. The sum is recoverable by virtue of the application of the Act to the facts of the case. The Administrative Appeals Tribunal has no jurisdiction in respect thereof, for it is not a court of law. What sec. 221N does is to empower the Commissioner to remit the whole or a part of a penalty imposed by the Act and sec. 221U authorises the lodging of an objection to the decision on remission and, by incorporating the provisions of Div. 2 Pt V, empowers the Administrative Appeals Tribunal or the Court to review that decision.

When the present matter came before the Administrative Appeals Tribunal, no argument was put as to the matter of discretion. The sole point raised was that no penalty was payable for the reason that there was no obligation upon Temples to make deductions as was alleged by the Commissioner. That was not a matter upon which the Administrative Appeals Tribunal had jurisdiction to rule.

Nevertheless, having regard to the argument which proceeded before the Administrative Appeals Tribunal and before this Court, I should make some observations upon the issue upon which the Administrative Appeals Tribunal based its decision.

The Administrative Appeals Tribunal found the following facts (at p. 476):

``2. The sole shareholders in and the only directors of Fam-co. were a married couple and their three sons. The parents, the three sons and the wives of the sons (`the employees') were all employees of Fam-co. Each of them at all material times maintained a loan account with Fam-co. which was maintained with credit balances due to the account-holder. Each account-holder was entitled at all material times to draw on the loan account.

3. On Saturday 6 June 1986 at a meeting of directors Fam-co. resolved as follows:

  • `Directors fees:
  • Resolved that the following director's fees and bonuses be and are hereby payable from the profits of the year ended 30 June 1986.'

There followed a schedule identifying each of the eight employees and fixing upon $17,000 as the appropriate amount [for each employee].

4. At some time thereafter which was unspecified, a written resolution to that effect was prepared and it was later adopted as the company's record of the passing of the resolution. Similarly, at some time unspecified, a journal entry was prepared in the books of account of the company to give effect to the resolution. The journal entry provided for the debiting of one account - presumably that for `salary and wages' or `directors fees' - with $136,000 and the crediting to the loan accounts of each of the eight employees previously mentioned of $17,000.

...

6. On 30 September 1987 officers of the Commissioner investigated the records of Fam-co. and then discovered that no amounts had been withheld on account of income tax to become due by the individuals when they were credited with $17,000 each. In consequence the officers considered Fam-co. to have been in breach of its obligations under the Act.''

As can be seen, the Board of Directors of Temples had resolved that a total of $136,000 be paid as remuneration to the directors and their wives out of the profits of the year ended 30 June 1986, which resolution was given effect by the signing of a formal written resolution to that effect and the making of an appropriate journal entry in the books of account of the company. I assume that the loan


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account of each employee was credited accordingly. The Administrative Appeals Tribunal proceeded on that basis. The issue therefore is whether each credit of $17,000 constituted a payment by Temples to the employee of salary or wages for the purposes of Pt VI, Div. 2 of the Act.

Relevant provisions of the Act read as follows:

``221A(1) In this Division, unless the contrary intention appears -

  • ...
  • `employee' means a person who receives, or is entitled to receive, salary or wages, and -
  • ...
  • `salary or wages' means salary, wages, commission, bonuses or allowances paid (whether at piece-work rates or otherwise) to an employee as such, and, without limiting the generality of the foregoing, includes any payments that are excepted payments for the purposes of section 23AD, any payments of amounts to which paragraph 26(eb) or section 26AC applies, any payments of amounts that are assessable retirement amounts for the purposes of this definition, eligible termination payments and any payments made -
    • (a) under a contract that is wholly or principally for the labour of the person to whom the payments are made, where -
      • (i) the person making the payments under the contract is not a natural person; or
      • (ii) the payments under the contract are not wholly or principally of a private or domestic nature;
    • (b) by a company by way of remuneration to a director of that company;
  • ...

221C(1) For the purpose of enabling the collection by instalments from employees of income tax, the regulations may prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive or are entitled to receive in respect of a week or part of a week.''

No argument was directed to the words in sec. 221C(1) ``in respect of a week or part of a week'', the effect of which was considered in
F.C. of T. v. Steeves Agnew & Co. (Vic.) Pty. Ltd. (1951) 82 C.L.R. 408. As counsel for Temples placed no reliance on these words, the issue considered by the Tribunal was whether or not the journal entry and the credits to the separate loan accounts constituted payments of salary or wages.

The term ``payments of salary or wages'' in sec. 221C(1) must be read in the context in which it appears. We are not here concerned with legislation that requires payment by an employer to employees of award wages or with any such context. If an employer and an employee have agreed that payment of a bonus or other remuneration will be effected by a crediting to a loan account, and that is done, payment will be so effected, notwithstanding that neither cash nor a cheque is handed over.

Whether the crediting of an amount to a loan account amounts to a payment of the underlying obligation depends on the agreement between the parties. As Beaumont J. said in
F.C. of T. v. P. Iori & Sons Pty. Ltd. 87 ATC 4775 at pp. 4788-4789:

``It is accepted by the respondent, correctly I think, that a payment could be established only if the journal entries relied upon were underpinned by a valid agreement to the effect that payment of its contributions be accepted by the trustees in a form other than by actual cash or by cheque (see
Whin Creek Consolidated N.L. v. F.C. of T. 77 ATC 4503 at p. 4507; (1977) 17 A.L.R. 421 at p. 425).''

Mr A. Slater, counsel for Temples, submitted that:

``Payment means, in our submission, payment in cash or equivalent, either in cash or by way of a cheque which effects conditional payment.''

But ``payment'' is not so limited, unless the context so requires and may include the passing of a benefit in discharge of an obligation for services performed.

Mr Slater further submitted:


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``... the journal entry does not discharge the debt, all it does is to record it.''

But again, whether the book entries crediting each $17,000 constituted payment of remuneration depends upon the agreement between the parties.

In support of his submission Mr Slater relied upon dicta in
Manzi v. Smith (1975) 132 C.L.R. 671; F.C. of T. v. Steeves Agnew & Co. (Vic.) Pty. Ltd. (supra);
Re Associated Electronic Services Pty. Ltd. (1965) Qd.R. 36;
Re Harry Simpson & Co. Pty. Ltd. (1963) 81 W.N. (Pt 1) (N.S.W.) 207, on appeal (1966) 84 W.N. (Pt 1) (N.S.W.) 455; Whim Creek Consolidated N.L. v. F.C. of T. 77 ATC 4503: (1977) 17 A.L.R. 421;
Brookton Co-operative Society Ltd.. v. F.C. of T. 81 ATC 4346; (1980-1981) 147 C.L.R. 441; F.C. of T. v. P. Iori & Sons Pty. Ltd. (supra).

The Tribunal, however, held that there had been payment of salary or wages, the crediting of the sums to the loan accounts being the agreed means by which the remuneration would be paid. That was also the conclusion reached by Walton J. in
Garforth (Inspector of Taxes) v. Newsmith Stainless Ltd. (1979) 2 All E.R. 73, which I need not discuss as the Tribunal's decision accorded with it.

It was open to the Tribunal to conclude that the means of payment had been agreed upon. The employees were the directors of the company and their wives and they had control of the affairs of Temples. In addition, each of the employees returned the remuneration as assessable income for the year ended 30 June 1986 and therefore on the basis that it had been received in that year. There was therefore material before the Tribunal upon which it was open for the Tribunal to find, as it did, that the crediting of the sums to the individual loan accounts constituted the payment of the remuneration to the employees.

Re Harry Simpson & Co. Pty. Ltd. cited above is of interest in this respect. At first instance, Jacobs J. had held that a dividend credited to a shareholder's loan account had not been paid notwithstanding that, after the crediting, interest was paid on the sum credited. At p. 209 of 81 W.N. (Pt 1) (N.S.W.), his Honour said:

``There is no minute or authority of the company for the crediting of that interest... I do not think that an unexplained payment of interest can convert what is in its origin a dividend into a loan of money at interest to the company.''

On appeal, further evidence was received and the contrary view was taken. The further evidence was described by Wallace J. as follows at p. 458 of 84 W.N. (Pt 1) (N.S.W.):

``It established broadly two matters, firstly that the trustees of the settlements not only paid income tax on the dividends which were declared annually, but also on the interest credited annually (but of course in the year following declaration of the respective dividends) to the redeemable preference shareholders account; secondly that the company itself recognized in its returns to the Commissioner that the dividends had been capitalized and that interest was being paid annually on the redeemable preference shareholders account.''

Note the importance given to the way in which the company and the shareholders dealt with the matter in their respective income tax returns. From this an agreement between the parties that the dividend be capitalised and interest paid thereon was inferred. The mere crediting of a sum to a loan account in the books of a company will not discharge an underlying obligation unless the parties have arranged that payment is to be made in that manner.

Mr Slater particularly relied upon F.C. of T. v. Steeves Agnew & Co. (Vic.) Pty. Ltd. (supra). In that case, a manager had been employed by a company upon the footing that he was entitled to draw monthly in anticipation of remuneration which was to consist of a share of profits calculated as defined in certain agreements. The profits were to be calculated after each half-yearly balancing of the employer's accounts and any necessary adjustments were then to be made in respect of the remuneration. Dixon J. held that the employer had not been liable to make P.A.Y.E. deductions from the drawings made by the manager, for although the manager was an employer and his remuneration was salary or wages as defined in sec. 221A of the Act, he was not entitled to receive salary or wages ``in respect of any week or part thereof'' and the drawings which he made were advances made in anticipation of


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salary and were not themselves salary or wages. Dixon J. also held that the half-yearly ascertainment of remuneration did not constitute a payment of salary or wages and that there was no definite transaction which would serve to fix a ``time of making payment'' within sec. 221C(1). It will be observed that Steeves Agnew was a very different case from the present.

Although Dixon J. discussed the issue of what amounted to a payment in discharge of a liability when an account was taken in respect of cross-liabilities, his Honour did not consider the present issue. It is true that, at p. 421, his Honour said:

``Section 221C appears to be directed to the making of deductions from sums of money paid over and not to the discharge of an obligation for salary or wages by other means.''

But this observation must be read in its context and does not assist to say that the crediting of remuneration to a loan account in the name of the employee, being the agreed means of payment, does not constitute payment of the sum credited.

The issue which was before the Administrative Appeals Tribunal was primarily an issue of fact for the Tribunal's determination. The Tribunal was correct in its view that, in appropriate circumstances, the crediting of a sum to an account may constitute a payment of salary or wages for the purpose of sec. 221C. As the facts found by the Tribunal were open to it, I see no error in law in the Tribunal's conclusion that, in the circumstances of the case, the amounts credited to the individual loan accounts were payments of salary or wages for the purposes of sec. 221C.

Accordingly, the application by way of appeal must be dismissed with costs.

THE COURT ORDERS THAT:

The application be dismissed with costs.


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