Case Q118

Members: HP Stevens Ch
BR Pape M

TJ McCarthy M

Tribunal:
No. 1 Board of Review

Decision date: 22 November 1983.

T.J. McCarthy (Member)

On 27 June 1980 X Pty. Ltd. paid ``retiring allowances'' of $85,500 and $60,000 to A and his wife, B, respectively, who had previously been employees and directors of the company. In its return of income for the year ended 30 June 1980 X Pty. Ltd. claimed a deduction of $145,500 in respect of those payments, but by notice of assessment issuing on 17 September 1981 the Commissioner allowed a deduction for only $86,200 under sec. 78(1)(c) ($85,700 incorrectly shown on adjustment sheet), treating the excess as unreasonable for the purposes of sec. 109, at least according to the strange terms of the Commissioner's reg. 35(1) statement - see the Chairman's observations in Case M57, 80 ATC 389 at para. 4 of his reasons. The amount of $85,500 was incorrectly shown as $85,000 in sch. 26 of the company's return and also in A's 1980 return of income; however by letter of 24 April 1981 (attaching copy of relevant minute of meeting of directors) the company's tax agent advised the Commissioner of the correct amount of $85,500. In their returns for the year ended 30 June 1980 A and B included 5% of the amounts of $85,000 and $60,000 in their assessable income pursuant to sec. 26(d), but the Commissioner applied sec. 26(d) only to amounts of $64,100 and $21,600 respectively and assessed A and B in full on amounts of $20,900 and $38,400. In the case of B this took the form of an amended assessment, but counsel for the taxpayers did not submit that the amended assessment was not authorised by sec. 170. Following the disallowance of objections, in which A and B claimed that the amounts received fell wholly within the positive terms of sec. 26(d) and the company claimed that the amount of $145,500 was deductible in full under sec. 78(1)(c), the Commissioner's decisions thereon were referred to this Board for review. By consent the three references were heard together, evidence in one being treated as evidence in the others. At the hearing oral

ATC 615

evidence was given by A and B, their accountant, C, the company's office manager, D, and an assessor from the Taxation Office. A considerable amount of documentary evidence was also tendered.

2. In 1958 A and a partner began a business of cutting glass to size and installing it in timber-frame windows. Subsequently A bought out his partner and carried on the business on his own. In 1962 he acquired a shelf company and transferred the assets of the partnership to that company. The shelf company, originally called B.H. Pty. Ltd., was incorporated in New South Wales on 22 June 1962 with an authorised share capital of £ 10,000 of which there were two issued shares of £ 1 each. The name of the company was changed to X Pty. Ltd. on 12 October 1962 and the two issued shares were transferred to A and B and registered in their names on 14 January 1963. Redeemable preference shares were also allotted to their children. In 1963 the employees of X Pty. Ltd. totalled five, including A and B. Turnover was around £ 2,000 per month. As managing director A worked very hard, attempting to ensure the business did not fail. In summer he started around 5 - 6 a.m. and in winter time at 7 a.m. He left his office around 5 p.m. but business activities such as quoting prices to customers and communicating with builders also occupied his time at night for an hour or so. He always worked on Saturday mornings, coming into the office around 7.30 - 8 a.m. and working until at least 12 noon. Saturday afternoons were commonly used for maintenance work or ongoing construction work. He also worked on some Sundays, particularly if there was an urgent job for Monday. Over the years this pattern basically continued. The number of employees of X Pty. Ltd. went from 5 in 1963 to 18 or 19 just prior to 1974, was reduced to 12 in 1974-1975 and went to 15 in 1980.

3. The nature of the company's business changed in the period from 1974 to 1980. The advent of aluminium windows reduced the glazing side of the business and by 1976 the main part of the business involved cutting and delivering glass to aluminium window manufacturers. Business became very competitive and the size of glass sheet so large that many small firms could not cope. In order to handle the larger sheets the factory was rebuilt in the period from 1976 to 1980, necessitating much after hours work. Hours worked by A always exceeded 60 hours per week, considerably more when Sundays were included. Over the years A took a holiday of only one week a year, often using it for business purposes, such as to attend a glass convention. A spent about one-quarter of his time in the office and about three-quarters in the factory. He always did the purchasing, most of it automatic but some of it requiring special knowledge. He also was involved with stock control, quoting prices and the usual managerial decisions. In the factory he supervised the glass-cutting and developed new systems, one of which was patented world-wide.

4. B also gave evidence of her hours of work in a straightforward manner. In the early 1950s she attended business college courses and in 1963 acquired one of the ordinary shares in X Pty. Ltd., becoming a director and secretary. B's activities included typing, answering the telephone (98% of orders being by phone) and making calls, banking, signing cheques, making up wages, parcelling glass and making urgent deliveries of glass and other items. Initially there was no full-time accountant employed and B did the general accounting work and had a year-end arrangement with an accounting firm. She also worked into the night at home on pricing and preparing invoices and as well worked in the office on Saturday mornings. Except for illness in 1971 this pattern continued until around 1975 when an accountant was employed. A new accounting machine was installed and B worked on this machine for about 12 hours per week. In the period 1975 to 1980 her hours at the office were basically from 9 a.m. to 4.30 or 5 p.m. on week-days with as much as 12 hours per week after-hours work, including Saturday mornings and some Sundays. The office manager, D, also testified as to the work performed by B. Even when the factory was closed around Christmas, B and her husband often used the time for maintenance work and other activities. In the period from 1963 to 1980 B, like her husband, did not take a holiday of more than one week per year.

5. The following table sets out some details in respect of the company's turnover

ATC 616

and net profits and the remuneration paid to A and B: 
                Net profit                                        Director's

                  after            A's                    B's       fees

       Company  provision  A's  director's  B's   B's  director's allocations

Year  turnover   for tax salary   fees    salary bonus   fees       unknown

         $          $      $       $        $      $       $           $

1963     4,000             2,560   1,000    1,000            400

1964                       2,564   1,000    1,560            400

1965                       3,024   1,000    1,560            400

1966                       3,174            1,560                      2,500

1967                       3,402            1,560                      2,000

1968                       5,200            1,560                      2,000

1969                       4,818

1970                       5,200            1,560                      2,000

1971   106,497    1,528    5,720            1,560                      2,000

1972   151,747      974    5,720            1,560                      2,000

1973   178,474    7,188    5,740            1,560                     10,000

1974   191,855   10,004    6,586            1,560                     10,000

1975   253,989   14,425    8,593   2,500    1,560          2,000

1976   305,960   11,191   10,980            1,840   2,500  2,000

1977   513,769   58,309   13,292            4,068   3,000  2,000

1978   602,120   58,309(?)14,214   2,500    6,400   2,000  2,500

1979   855,779   43,979   14,372   2,500    6,459   2,000  2,500

1980 1,000,905   13,233   14,079            5,939

6. From 1974 a public accountant, C, who was in sole practice, was the company's auditor and he also gave business advice to A and B. At a meeting held between A and C in A's office in August 1979, C presented A with interim figures for X Pty. Ltd. in respect of the year ended 30 June 1979. A also brought up a subject which he said he had previously raised with C. In his evidence A said that he told C of his concern about large firms in the industry swallowing up smaller firms as well as the intense competition from these larger firms. If the business ran into difficulties and did not survive, A felt he would not have received compensation for the hours he had put into the business - he had received less remuneration than some of the company's employees who worked less hours than he did. He asked C what could be done. C replied that he would give it some thought. C later came back to A with the suggestion that A and B should retire as employees and as directors and receive lump sum retirement allowances based on past services, with the company's business being taken over by another company. C also suggested that a solicitor should be consulted in relation to this proposal.

7. Around November 1979 A and C went to see a solicitor in his office, after C had previously seen the solicitor on his own. The reasonableness of various possible payments was discussed, as well as other business problems. All three agreed that retirement allowances could be paid to A and B and at some subsequent stage the amounts of $85,500 and $60,000 were determined. By letter dated 24 April 1981 C informed the Commissioner that these amounts had been calculated on the following basis: 

      ``Average salary for last three

      years x 7 x 18

                  --

                  20
        
      Average salary A

                   $

      1977       13,292

      1978       16,714

      1979       16,872

                 ------

                 46,878    $15,606

                 ------

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         Average salary B

                                  $

         1977                   9,068

         1978                  10,900

         1979                  10,959

                               ------

                               30,927     $10,309

                               ------''

It will be noted from the table set out at para. 5 that A's salary as shown included director's fees. Furthermore, the formula supplied would have produced an amount of $98,318, and if director's fees had been omitted would have produced an amount of $87,816. The salary as shown for B also included director's fees and the formula supplied would have produced an amount of $64,947, and if director's fees had been omitted an amount of $50,249. I think the above calculations show that the basis supplied to the Commissioner was merely a guide to the amounts actually paid.

8. The solicitor had suggested to A that he (the solicitor) and C should be appointed directors of X Pty. Ltd. in lieu of A and B. Apparently this advice was given on the basis that A and B should not resolve as directors to pay retirement allowances to themselves. In any event this advice was accepted. At a meeting of directors of X Pty. Ltd. held on 30 April 1980 at 10 a.m., A and B passed the following resolutions:

``Sale of business (to X N.S.W. Pty. Ltd.)

Resolved that the Company sell on the terms set forth in an unexecuted document attached hereto the going concern business carried on by the Company and including all patents presently granted or subject of application for grant owned by it including debtors, plant, stock, fixtures and fittings.

Lending of money

Resolved that the Company lend the purchase price payable to it in respect of the foregoing to [X N.S.W. Pty. Ltd.] interest free repayable on demand.

Lease of premises

Resolved that the company lease to [X N.S.W. Pty. Ltd.] at a rental to be determined prior to 30 June next the real estate known as - ''

and also appointed the solicitor as a director and C as a director and secretary, whereupon A and B resigned their positions. Appropriate consents to act by the new officers are recorded in the minute book. At 11 a.m. on the same day the new directors consulted by telephone and resolved as follows:

``Retiring allowances:

Consequent upon the resignations of [A] and [B] as directors of the Company, the Directors resolved that in consideration of the past services of both of them to the Company generally and especially having regard to the great contribution which they had both made to the profitability of the Company in its various business operations producing assessable income the payment of a retiring allowance because of those past services be made as set out hereunder. The Directors took into consideration in quantifying the amounts next stated that the former directors were not receiving moneys additionally from the Company's Superannuation Fund: 

      A       $85,500

      B       $60,000.''

The relevant minute recording the above resolution also records the acceptance of resignations from the solicitor as a director and from C as a director and secretary, as well as the appointment of new directors, about whom the Board was told nothing. A and B and their children remained shareholders of X Pty. Ltd. and A and B also remained signatories on the company's bank account. At the time the payments were made, A was 45 years of age and B was 46 or 47.

9. The bank statements of X Pty. Ltd. show the balance of the bank account to be nil immediately prior to 27 June 1980. On that day the company drew cheques for $85,500 and $60,000 in favour of A and B respectively, who then lent the company exactly the same amounts - interest free, repayable on demand - by virtue of cheques drawn on their personal bank accounts. Thus the company's bank account balance still stood at nil. The company's journal records the following entries dated 30 June 1980: 

        



                                  $         $

      Retirement allowances    145,500

        Bank                             145,500

      Bank                     145,500

        Loan account A                    85,500

        Loan account B                    60,000

In the company's return of income for the year ended 30 June 1980 the retirement allowances paid were included in salaries $186,342.69 in the profit and loss statement and in sch.26 of the return the amount paid to A was incorrectly shown as $85,000. It may be noted that, if the retirement allowances were to be excluded, the taxable income of the company for the year would have been shown as $172,112 instead of $26,612, and that this amount would have been a very substantial increase on previous years.

10. The minutes of the meeting of directors of X Pty. Ltd. held on 30 April 1980 at 11 a.m. also included a resolution whereby X Pty. Ltd. as trustee of the X Staff Superannuation Fund transferred all of the fund's assets to a new superannuation fund settled by X N.S.W. Pty. Ltd. which had acquired the whole of the business operations previously conducted by X Pty. Ltd. The minutes record: ``this decision was made because the same persons who are now members of this new fund were members of the X Staff Superannuation Fund''. Members of this fund included employees, other than A and B. The balance sheet as at 30 June 1979 of the X Superannuation Fund (a separate fund with A and B as trustees) shows the contributions and accumulated income in respect of A and B to total $17,962.79 and $19,839.40 respectively. On 30 June 1980 X Pty. Ltd. made further contributions in respect of A and B amounting to $2,500 and $4,400 respectively. The written resolution dated 30 June 1980 which records this contribution is headed ``resolution signed by all directors'' and is signed by A and B, notwithstanding the acceptance by X Pty. Ltd. of their resignations as directors on 30 April 1980.

11. In cross-examination neither A nor B could remember the amount for which the business of X Pty. Ltd. was sold to X N.S.W. Pty. Ltd. on 30 April 1980. They said they relied completely upon their accountant, C. Whilst both tendered written resignations as directors, neither tendered a written resignation as an employee. However, I accept that both ceased work as employees of X Pty. Ltd. on 30 April 1980. Other employees were not told their employment by X Pty. Ltd. had been terminated; they were merely told ``we were changing our activities, that is all''. Apart from one exception the employees of X N.S.W. Pty. Ltd. were the same as were employed by X Pty. Ltd. Suppliers, bank and premises used remained the same; however, the glaziers stopped glazing and became glass-cutters. The sale of the business made no difference to the day-to-day activities of A and B; they still put in very long hours. A's remuneration increased from $16,526 in 1979-1980 to $18,946 in 1980-1981 and to $19,665 in 1981-1982. A and B were unable to say why the payment of the retirement allowances was delayed until 27 June 1980. Because the company did not have the cash at that time to make those payments, they both chose to immediately lend the money back to the company to enable the payments to be made.

12. In examination-in-chief C testified that in August 1979 A said to him: ``how can I get some money out of the business to adequately compensate me for the past service I have given the business?'' But, when pressed in cross-examination, C agreed that A did not put it quite that way and did not use the words ``past service''. C admitted that he had suggested to A the payment of retirement allowances to A and B and the transfer of the assets (other than land) of X Pty. Ltd. to another company. At pp. 103-107 of the transcript appear the following passages of cross-examination of C by counsel for the Commissioner:

``Q. Did you explain to [A] the tax consequences to the company?

A. Would you explain what you mean by tax consequences to the company please?

Q. The tax consequences to the company of making the payments?

A. Yes, it would be a deduction under sec. 78(1)(c), I think it was.

...

Q. I put it to you that the reason you did not recommend an increase in salary was the tax consequences that would flow?

A. No, that is not true at all. The reason why I did not recommend an increase in

ATC 619

salary, was I do not think an increase in salary would adequately cover past services. Tax consequences were only purely a by-product in the situation. [A] made the remark that he would like some recompense for past services and I was the one that came up with the suggestion. I was the one who has obviously considered the tax consequences.''

At p. 105 -

``Q. But am I right in looking at the bank accounts that there was no new money introduced into the business, no new actual money, it was just a round robin of cheques that took place?

A. That is correct. I agree with you there. But as an accountant looking at the whole broad picture and trying to do what [A] wanted I am trying to get it clear in my mind, I could see that it would be obvious which was an outcome of what we did would be a saving in cash flow.

Chairman - You may like to take that up, Mr. Fisher.

Mr. Fisher - How would that improve cash flow?

A. Well, the obvious outcome of the retirement allowances would be to minimise taxation, although that was not [A's] intent in the initial stages; obviously as an accountant I studied the consequences of the tax which we mentioned before and that was an outcome where I could see there would be a tax saving and would allow an additional saving in cash flow.

Q. The tax saving would be a very important factor in this?

A. It was not an important factor in what we did, it was an important factor in the way, in a way, for [A] to continue on and develop the business into what it is now, if he had desired.''

At p. 107 -

``Q. But that transaction itself, did it increase the net assets of the company?

A. It would have eventually of the very fact that, as a consequence, there would be some tax savings, as a consequence.''

13. It is convenient to set out now the provisions of sec. 78(1)(c) and 109 of the Income Tax Assessment Act:

``78(1) The following shall, subject to section 77B, sub-section 77D(11) and section 79C, be allowable deductions -

  • ...
  • (c) Sums which are not otherwise allowable deductions and are paid by the taxpayer during the year of income as pensions, gratuities or retiring allowances to persons who are or have been employees or dependants of employees, to the extent to which, in the opinion of the Commissioner, those sums are paid in good faith in consideration of the past services of the employees in any business operations which were carried on by the taxpayer for the purpose of gaining or producing assessable income.''

``109. So much of a sum paid or credited by a private company to a person who is or has been a shareholder or director of the company or a relative of a shareholder or director, being, or purporting to be -

  • (a) remuneration for services rendered by that person; or
  • (b) an allowance, gratuity or compensation in consequence of the retirement of that person from an office or employment held by him in that company, or upon the termination of any such office or employment,

as exceeds an amount which, in the opinion of the Commissioner, is reasonable, shall not be an allowable deduction and shall, for the purposes of this Act other than the purposes of Division 11A of Part III and Division 4 of Part VI, be deemed to be a dividend paid by the company on the last day of the year of income of the company in which the sum is paid or credited.''

14. Counsel for the taxpayer advanced the following submissions:

15. Counsel for the Commissioner made the following submissions:

  • ``To withdraw to or into a place or way of life for the sake of seclusion, shelter or security.
  • ...
  • To withdraw from office or an official position; to give up one's business, occupation, in order to enjoy more leisure or freedom (esp. after having made a competence or earned a pension).''

16. I turn first to the submission made by counsel for the Commissioner that there was no relevant retirement by A and B and to the Canadian case of Lorenzen v. The Queen which was relied upon by the Commissioner. In that case the facts as stated in the headnote were as follows:

``The taxpayer was the President and a director of a company which offered advice on tax planning and related financial matters. He caused that company to cease business and sell its assets to a new company which continued to carry on the same business. The taxpayer was the President and a director of the new company. The old company paid the taxpayer $20,000. He treated this sum as a retiring allowance and contributed it to an R.R.S.P. [registered retirement savings plan] and claimed a deduction for the contribution. The tax department disallowed the deduction on the ground that the taxpayer had never retired and the taxpayer appealed to the Federal Court - Trial Division.''

Section 248 of the Canadian Income Tax Act defined ``retiring allowance'' as follows -

``Retiring allowance means an amount received upon or after retirement from an office or employment in recognition of long service or in respect of loss of office or employment (other than a superannuation or pension benefit) where the recipient is the officer or employee or a dependant, relation or legal representative.''

17. The judgment of Grant D.J. in the Canadian Federal Court records the submissions of the parties and the learned Judge's reasons as follows:

``Mr. McDougall for the taxpayer urges that the term `retirement' as used in such sec.248(1) must be read in a specific sense rather than generally. In other words he submits that one may retire from a position with one company and even though he thereafter carried on the same occupation with another company he comes within the meaning of such section and is entitled to the benefit of such sec. 60(j). He says the leaving or parting with the first company is a retirement within the meaning of the section and that this interpretation is made clearer by the fact that it is referred to in the section as a retiring allowance as distinguished from a retirement allowance. If this interpretation of the two sections is adopted it follows that one could take advantage of sec. 60(j) on each occasion that he changed his employer.

ATC 622

The Minister takes the position that the plaintiff never retired and that such payment to him of $20,000 was not a retiring allowance within the meaning of sec. 248 of the Act and consequently he is not entitled to a deduction of such amount from his taxable income under sec. 60(j) of the Act. The plaintiff in his testimony stated that his salary from the company had been inadequate for many years and the evidence bears out the fact that at least one of the reasons for such payment was to remunerate him for past services rather than providing him with a retirement allowance. The other reason the said amount was paid to him was to provide him with advantages in the calculation of his income tax.

It cannot be said that such amount was paid to him for loss of office or employment as he arranged to change to Lorenzen Associates Ltd. himself voluntarily and it cannot be said to be a loss particularly by reason of the fact that he retained the same business in the same premises and he sustained no loss thereby. He also remained a director of International Tax Services Ltd. Retirement implies a complete cessation of one's profession or business. In reality the plaintiff continued to carry on the same business with the only change being the transfer of assets to a limited company bearing the same name as that under which he carried on such business to 31 December 1971.''

18. In my opinion the Canadian decision was decided in a different context inasmuch as sec. 60(j) of the Canadian Income Tax Act allowed a deduction not to the company, but to an employee in respect of a contribution made by him to a registered pension fund or by way of premium under a registered retirement savings plan. In my view the contexts of sec. 78(1)(c) and 26(d) are quite different. Whatever the position may be where there is a temporary break in employment in relation to the same company, in the situation here where there is a new company formed, and where, as I have found, A and B ceased to be employees of X Pty. Ltd. on 30 April 1980, I do not think there is any basis on which it could be said that there was no ``retirement'' for the purposes of sec. 26(d) or no ``retiring allowance'' paid for the purposes of sec. 78(1)(c). In this regard I refer to the decision of the Full Court of the Federal Court of Australia in
Federal Coke Co. Pty. Ltd. v. F.C. of T. 77 ATC 4255 and to the observations of Bowen C.J. at p. 4263 where his Honour said:

``However, in taxation matters, the Court is obliged to have regard to the actual facts and not their equivalents. In cases where it is appropriate the Court may apply a statutory provision such as sec. 260 to get rid of a contract, agreement or arrangement and deal with the case in disregard of that element, but, where there is no statutory warrant for doing so, the Court cannot disregard certain of the facts or rearrange the facts or decide the case according to its view of the substance of the matter. It is not legitimate to disregard the separateness of different corporate entities or to decide liability to tax upon the basis of the substantial economic or business character of what was done.''

19. It was common ground that the payments made by the company were not allowable deductions under sec. 51(1) and I therefore proceed to sec. 78(1)(c). That provision contains the word ``consideration'', but this is obviously not used in its technical sense as meaning the body of technical rules whereby the courts distinguish a bargain from a purely gratuitous promise. As I see it, the question to be asked here can be put in various ways: Were the payments made in good faith in consideration of the past services of the employees? Were the payments made at the time with the honest intention of recognising or rewarding the past services of the employees, or were they made with an ulterior purpose? Was the combination of expected tax benefits to the company and to A and B the predominant factor which really moved the payments, or was this merely a minor or incidental factor or outcome or consequence or by-product (most of which terms C disingenuously used in his evidence)?

20. I am unable to accept the submission of counsel for the Commissioner that a factor which really moved the payment was the service given to the company by A and B in their capacity as directors. In my view this was an incidental consideration,

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notwithstanding the terms of the relevant minute recording the decision to pay the retiring allowances and notwithstanding an answer which counsel for the Commissioner obtained from A in cross-examination.

21. Although my note of the evidence of A records a significant change in his demeanour when he was questioned about his discussions with C and I therefore do not think he was completely frank as to the content of those discussions, I would be inclined to accept that A wanted something from the company to compensate for his past services as an employee. However, upon the advice of the solicitor, C and the solicitor were appointed as directors and it is their intentions which I consider are the relevant intentions of the company so far as sec. 78(1)(c) is concerned. I find that C and the solicitor were very much concerned with the combination of expected tax benefits to the company and to A and B. It is noteworthy that, although the initial discussions were held in August 1979, the decision to make the relevant payments was not taken by the company until 30 April 1980. The sales revenue in the 10 months to 30 April 1980 exceeded the previous year's turnover by around $150,000 and this suggests it was then known that the company's profitability had considerably increased. The minute recording the directors' decision to pay the retiring allowances to A and B referred to ``the great contribution which they had both made to the profitability of the company in its various business operations producing assessable income''. I draw attention to the words ``assessable income''.

22. I readily accept that in appropriate cases the tax benefits of paying a retirement allowance may be merely a minor or incidental factor. This may very well be so even though the retirement allowance would not otherwise be paid unless the company were able to obtain a tax deduction. But, in my view, such is not this case. In the whole of the circumstances I find that the combination of expected tax benefits to the company and to A and B was the predominant factor which really moved the payments to be made. The directors who resolved to make the payments were the very people who had suggested or recommended the proposal and who had the tax benefits uppermost in their minds. I therefore am unable to accept those portions of the evidence of C which suggested that the tax benefits were merely a by-product or consequence or outcome of the decision made. I should add that I do not draw any adverse inference from the absence from the witness box of the solicitor, who in fact attended the hearing; I take it that C spoke on behalf of both of them in relation to their actions as directors of the company.

23. In relation to the deductions amounting to $145,500 claimed by the company under sec. 78(1)(c), the Commissioner in fact allowed the company deductions totalling $86,200. In the circumstances I am not able to say that a higher amount than $64,600 in the case of A, or $21,600 in the case of B, could be said to have been paid in good faith in consideration of the past service of each of them as an employee. I therefore would reject the argument of counsel for the company that it should have been allowed deductions under sec. 78(1)(c) for the full amount paid and I need not consider the alternative arguments in relation to the construction of sec. 109. It was common ground that Barnes' case was authority for the proposition that sec. 109 did not begin to operate unless a deduction was otherwise allowable under some other section of the Act. To the extent (if any) to which the payments fall to be considered under sec. 109, my conclusion in para. 25 disposes of this issue. So far as increasing the company's assessment is concerned, I expressed my views on this question in Case Q50,
83 ATC 241 at p. 264 para. 9 and 10 and I adhere to what I there said.

24. It was held by the High Court in Reseck's case that the retirement need not be the dominant cause of the payment for sec. 26(d) to apply. I therefore have no difficulty in concluding that the amounts of $85,500 and $60,000 paid to A and B, respectively, came within the positive terms of sec. 26(d) and should be assessed accordingly.

25. In case I am wrong in my construction of sec. 78(1)(c) or in its application to the facts, it is, I think, desirable to indicate my view on whether the amounts of $85,500 and $60,000 paid to A and B respectively, or some part of those amounts, are not reasonable for the purposes of sec. 109. In the light of the evidence and having regard to the factors mentioned in para. 14(d) above

ATC 624

(but not having regard to the National Salary Surveys tendered, which I think are unhelpful, even if they are relevant), having some regard also to the superannuation entitlements referred to in para. 10 above, and having particular regard to the eighteen years of dedicated service of each of A and B in building the company's business, I am of the opinion that if the whole of each amount paid fell within the terms of sec. 78(1)(c), then no part thereof exceeds what is reasonable for the purposes of sec. 109.

26. For the above reasons I would uphold the Commissioner's decision on the company's objection and confirm the company's assessment for the year ended 30 June 1980. I would reverse the Commissioner's decisions on the objections lodged by A and B against their individual assessments, with the effect that the amount paid to each of them should be assessed in accordance with the positive terms of sec. 26(d) such that only 5% thereof is to be included in assessable income.

Claims allowed in part

 

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