Case V25

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 January 1988.

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P.M. Roach (Senior Member)

The issue to be determined upon this reference is whether an assessment of income tax for the year of income ended 30 June 1984 in the sum of $71 is excessive by reason of the refusal of the Commissioner of Taxation to allow some carry-forward losses as a deduction to a taxpayer. In the previous year of income, that ended 30 June 1983, the taxpayer had claimed a deduction in the sum of $180,000 for what was described in its return of income as ``retiring allowances'' - moneys paid to two employees on the occasion of their retirement as employees from the service of the taxpayer on 28 March 1983. But for those payments, the taxable income for the taxpayer for 1983 would have been $152,164; because of the payments so made, the company returned a loss for the year of $27,836 giving rise to accumulated losses to 30 June 1983 of $28,276 ($440 for the previous year). The entitlement to a deduction for the sums claimed is in no way disputed. Both the taxpayer and the Commissioner agreed that the payments were made in circumstances which would have satisfied the provisions of sec. 78(1)(c) of the Act if they did not satisfy the requirements of sec. 51(1) of the Act. Section 78(1)(c) provides, so far as is material:

``78(1) The following shall, subject to... 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.''

2. The difference between the parties is that the Commissioner contends that, within the meaning of sec. 78(1)(c), the payments were ``not otherwise allowable deductions''. But the taxpayer contends that the amounts so paid were in their entirely allowable as deductions by force of sec. 51(1) of the Act which provides:

``51(1) All losses and outgoings to the extent to which they are incurred in gaining

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ATC 249

or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

3. Because the Commissioner has the view that in the circumstances which existed no amount is allowable as a deduction other than pursuant to sec. 78(1)(c) of the Act, in consequence he also takes the view that, in the following year, the taxpayer is not entitled to an unlimited deduction for carry-forward losses and not to any deduction at all in so far as carry-forward losses are attributable to the operation of sec. 78 of the Act. That arises because it is provided by sec. 79C that:

``79C. The aggregate of the deductions allowable under sections... 78,... shall not exceed the amount of income remaining after deducting from the assessable income all other allowable deductions except deductions allowable under section 80, 80AAA or 80AA in respect of losses of previous years and any deduction allowable under Division 10, Division 10AA, Division 16B or Division 16C.''

4. In this instance the taxpayer (SAVELOSS) is a registered company. That being so, for the general purposes of the law, it is regarded as a legal entity in its own right: distinct from the persons who are its members; its directors; and its employees. Even so the controlling mind and will of SAVELOSS, as it is for any company, of necessity, is to be found in natural persons (cf. Gibbs C.J. in
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at p. 4039; (1982) 150 C.L.R. 355 at p. 370). Recognition of that distinction has resulted in the fact that some income tax laws have been enacted to introduce specific rules to deal with practices whereby the persons who control a company might manipulate it to their personal advantage: Div. 7 - regulating the practice of dividend distribution by closely-held ``private'' companies; sec. 108 - loans to shareholders; and sec. 109 - payments to shareholders and directors of ``remuneration for services rendered'' or by way of ``an allowance, gratuity, or compensation, in consequence of the retirement'', only allowable so far as they do not exceed amounts which, in the opinion of the Commissioner, are reasonable.

5. Even so, the question which arises for determination on this reference does not directly turn on any such provision of the Act. It depends primarily upon sec. 51(1). If the payments are deductible by that test, and not disallowed by any other, the applicant will be entitled to succeed.

6. SAVELOSS was incorporated in 1969 on the application of a husband (J.B.) and his wife. J.B. was born in August 1924. Upon incorporation, it took over the business previously conducted by Mr and Mrs J.B. in partnership. It carried on that business at all material times. The business was built around the provision of consulting services by J.B. and, later, others. The opportunity to provide those services was due to the personal goodwill engendered by J.B. It was sustained by the capacity of J.B. and later others to provide effective consulting services. Other staff, under the direction and supervision of Mrs J.B., provided the administrative support necessary for the fee-earning activities of J.B. and his fellow fee-earners. Having regard to the nature of the business, and having had an opportunity to assess the personal characteristics of J.B., I am satisfied that it was always substantially dependent for its opportunities to earn fees on the personal goodwill generated by J.B.

7. Although no detailed evidence was presented to the Tribunal - neither side was represented by professional advocates - I am satisfied that, as with many small business operations, success comes - if it comes at all - by dint of consistently skilful performance over long hours and many years. Even then it only comes slowly. I also accept that payment for the fee-generating work was often received by SAVELOSS only some months after the work was done. However, it follows that, under all ordinary circumstances, once work was done, revenue flows could be projected quite precisely for some time ahead. In this instance, the significance of the long hours is attested by the fact that even the rates of remuneration to the fee-earners other than J.B. did not increase by reason of their hours of work rising from a typical 40 hours per week to 50 hours per week or more.

8. As to J.B. I accept that over a long period he had worked very long hours and had done so

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ATC 250

successfully. I also accept that, from the time of incorporation of SAVELOSS, he had done so as an employee of that company. I also find that holidays had been virtually unknown to him, involving not a great deal more than a few weekends away. I accept that, apart from those brief absences, he was ``on call'' at all times and, having regard to the nature of the business and his evidence, I am satisfied that he was called out quite often, although irregularly and not so often as to be frequent. I accept his evidence that, prior to the year 1974, annual leave entitlement for the employees of SAVELOSS was two weeks per annum; from then until 1979, three week per annum; and thereafter four weeks per annum. In addition, employees such as J.B. and Mrs J.B. became eligible for long service leave. SAVELOSS made no provision for superannuation.

9. I also accept that the lot of Mrs J.B. was not essentially different, but I find that, although not confined to ``ordinary'' office hours, her hours of work were significantly less than those for J.B. and her responsibility concerned only with administration. I say ``only'' because, without the efforts of the fee-earners, there would have been nothing to administer: a matter which was to assume significance in the affairs of SAVELOSS.

10. Notwithstanding the principles establishing the company as a separate legal personality, it would be wrong to think that there was disparity of interest between Mr and Mrs J.B. on the one hand and SAVELOSS on the other. Mr and Mrs J.B. were the sole shareholders in SAVELOSS. One result was that any gain or loss for SAVELOSS which was reflected in share values was a gain or loss to Mr and Mrs J.B. With that came the further consequence that the advantages to Mr and Mrs J.B. would ordinarily be greater if derived as a reward for services rendered to SAVELOSS, provided it was paid to them in circumstances which would qualify SAVELOSS for a tax deduction. I also find that, as between themselves, Mr and Mrs J.B. worked together in common interest and that, in that common interest, it was to their joint advantage to draw directors' fees and salaries from SAVELOSS when funds were available up to the limits of deductibility available to SAVELOSS.

11. That being so, it is not surprising to find that, as at 30 June 1981, SAVELOSS had in fact suffered accumulated losses which then stood at $15,097. In the year of income ended 30 June 1982, although gross fees stood at $304,377, profit on the year's trading was limited to $1,157, leaving accumulated profits to 30 June 1982 of $440. That result was achieved after providing for directors' fees of $30,000 and salaries to directors claimed at $71,926. There was no evidence as to how either directors' fees or salaries were apportioned in that year. There was no suggestion that the remuneration so paid was excessive (cf. sec. 109).

12. The 1983 financial year was remarkably different in two significant respects. First, by reason of factors well beyond the control of SAVELOSS and its officers, there was a large increase in demand for the services of the fee-earners of SAVELOSS. As a result, gross fees rose (by over 50% for the year) to $452,088. (I note that at the same time accounts receivable, ``(as stated by directors)'' according to the balance sheet, fell from $25,710 to $9,525.) I also note that the upsurge in fee-earning activity upon the evidence occured in the December 1982-February 1983 period. By March 1983 the prospect of a huge increase in gross fees by 30 June 1983 must have been obvious. In consequence, SAVELOSS was also standing in prospect of deriving a very substantial taxable income for the year of income ended 30 June 1983.

13. However, there was another very serious and less happy development. J.B., then in his 59th year, was suffering from a rapid deterioration in his physical condition which made driving a motor vehicle extremely difficult and, by night, impossible. As extensive driving was essential to the work of the fee-earners, as a result the capacity of J.B. to contribute to the fee-earning activities of SAVELOSS rapidly and seriously diminished. The difficulty was later rectified by surgery but, before that occurred, the relevant developments involving the company and its present claim had occurred.

14. As a result of the health problem of J.B., a number of things became clear. First, the fee-earning capacity of J.B. was so reduced that he was no longer worth the remuneration which was being paid to him. Secondly, the company could not dismiss him without his consent because he, in common interest with Mrs J.B., controlled the company. Thirdly, even if the company could maintain its fee

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ATC 251

income by employing additional skilled staff, that would be unlikely to improve the profitability of the company so long as it was employing J.B. at a remuneration level such as had obtained for the year ended 30 June 1982. Fourthly, J.B. had a claim, which was at least bona fide, and may well have been sound, that he was entitled to be paid very substantial amounts by way of and in respect of unpaid holiday pay, and long service leave. Fifthly, J.B. was not entitled to the benefits of a long-term contract of employment with the company as there was no formal agreement to that effect. But, sixthly, nor was he bound to the company to so act as to preserve to the company the value of his substantial personal goodwill. As a consequence, if control of SAVELOSS were to fall into other hands during his life, the new owners might exercise their control over the company so as to discharge J.B. from its service but the price of doing so could have been substantial claims for moneys due to J.B. as an employee and the risk of having the all-important goodwill lost to it by reason of J.B. attracting goodwill elsewhere. Conversely, upon any sale it was likely that the purchaser would take steps to ensure that that goodwill was not lost to SAVELOSS. Finally, without a sale it was likely that SAVELOSS would be out of business either because it could not afford to ``carry'' J.B. or would lose all its fee-earners and, with that, its principal source of income and profit.

15. So far as Mrs J.B. was concerned, SAVELOSS faced a less serious situation. She did not have the benefit of any long-term contract of employment but, so long as she remained of the one mind with J.B. and they controlled SAVELOSS, no decision could be taken by the company to dismiss her. However, if she had been dismissed following the passing of control of the company to another, I find that she would have had claims against the company, but not of the same magnitude in relation to matters of holiday pay and long service leave. Nor would she have had the same potential to diminish the fee-earning capacity of SAVELOSS by the exercise of any personal goodwill. I find that her influence lay in unity of purpose with J.B. That is quite understandable. While he was controlling the business, understandably she was willing to handle its administration. Conversely, I accept the evidence of J.B. that she had decided that, when he retired from employment in the business, she would also retire. She had no wish at her age to become the servant of a company controlled by newer and younger masters who would no doubt wish to introduce, and in the event did introduce, new ideas as to the management of SAVELOSS.

16. In face of all those circumstances, Mr and Mrs J.B. looked for a purchaser of the company who would be prepared to take control of the company and permit them both to retire from its service; and they were investigating these possibilities, no doubt with increasing anxiety, as the physical condition of J.B. deteriorated. Attempts to find purchasers amongst strangers to the business failed and a solution was then sought closer to home.

17. By early 1983 two fee-earners (Malcolm and Ronald), who had been employed by the company for about seven years and four years respectively, became interested. By a series of steps they came to be the sole shareholders and controllers of SAVELOSS. The first formal steps to that end occurred on 28 March 1983 when, in the presence of Mr and Mrs J.B., Malcolm and Ronald, two meetings were held at the registered office of SAVELOSS. Minutes of both meetings were signed by J.B. as having been ``read and confirmed''. I accept them as being in substance accurate. The minutes of an extraordinary general meeting recorded that those present were Mr and Mrs J.B. and, by invitation, Malcolm and Ronald. The minute provided:

      ``Retirement       It was resolved that in
      Allowance        consequence of their
                       retirement and conditionally
                       thereon that a lump sum of
                       $120,000 be paid to (Mr J.B.)
                       and $60,000 be paid to (Mrs
                       J.B.) as retirement
                       allowances.

      Special          The following resolution was
      Resolution       passed as a special resolution:

                       That article 98 be amended to
                       read:

                       `A director shall not be
                       required to hold any shares as
                       a qualification for his
                       directorship.'''
        

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The latter resolution was necessary if the next step was to be taken.

A meeting of directors, attended by the same persons, was then held and the minutes record:

``Directors It was unanimously resolved that (Malcolm) and (Ronald) be elected as directors of the Company.''

18. The retiring allowances were paid and thereafter J.B. and Mrs J.B. were no longer employees of SAVELOSS although both continued as directors of the company for some time. Contemporaneously with their retirement, the rates of remuneration for Malcolm and Ronald were increased. In the three months following, day-to-day control of the company was in the hands of Malcolm and Ronald, but neither, on the evidence before me, had any entitlement to acquire control of the share capital in the company or any obligation to purchase the shares in the company. None the less, I am satisfied that there already existed a clear understanding shared between all parties concerned, and a common expectation and hope that Malcolm and Ronald would purchase.

19. I find that it was in accordance with that expectation that, in due course - probably on 1 July 1983 - Mr and Mrs J.B. (as vendors) and Malcolm and Ronald (as purchasers) entered into an agreement in writing conferring on Malcolm and Ronald an option to purchase the entire shareholding in SAVELOSS (4,876 shares held by J.B. and 4,100 held by Mrs J.B., all being $2 ordinary shares) with each purchaser having the option to purchase 4,488 shares at a purchase price of $100,000 each: a total of $200,000. The price was to be payable at the rate of $2,500 per month, the first payment to be made on or before 31 July 1983. The option was to be exercised by the payment of $2,500 on or before 31 July 1983 and the granting by the purchasers of an equitable charge over the shares within the period of 31 days thereafter. The terms of the proposed purchase were such as might be expected but, in particular, it was provided:

``(e) That the accounts of the Company as at 30th June, 1982 and 30th June, 1983, give a true and fair view of the assets, liabilities (including contingent liabilities whether for taxation or otherwise) and state of affairs of the Company as at 30th June, 1983.

...

(g) That the Company is not indebted in any way to the Vendors or either of them except in the sum of FIFTY THOUSAND DOLLARS ($50,000.00) due to (J.B.) which sum is repayable by the Company on the 30th June, 1985 and bears interest at the rate of 10 per cent per annum from the 1st January, 1984...

...

(k) That between the 1st July, 1983 and the date of this Deed there has been no material adverse change in the financial position or prospects of the Company.

...

(r) That the Company is under no liability to pay pensions or similar or other retiring allowances to any of its former or present employees or to any of the Company's former or present Directors except those which have been disclosed...

(s) That none of the present employees nor any of the present Directors hold or have the benefit of a service contract (of any kind)...

...

(aa) That full disclosure has been made to you of all information within the knowledge of the Vendors which would be material to a prudent purchaser of shares.

...

(15) In consideration of your exercising this option (the Vendors) covenant that we shall not nor shall either of us as principle [sic] or employee directly or indirectly be engaged in the business of a......... for a period of 5 years within a radius of 300 kilometres of the post office at... other than at the request of (SAVELOSS).''

(In the circumstances, the distance of 300 km would seem to be reasonable.)

20. The option was exercised by the purchasers with such enthusiasm that, to the surprise and amusement of J.B., they paid the first $2,500 on 1 July 1983. They have continued to pay the purchase price since and, according to the evidence of Malcolm, they have been well pleased with their purchase. As was not unreasonably to be expected, being younger men, they were keen to revamp office systems; to introduce the technology of the

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1980s; and to set to and expand the operations of the business. As appears from the tables appearing later, they also later introduced their respective wives to the business as employees. No evidence was placed before me directly as to the remuneration packages post the purchase, and the figures presented in the tables have merely been drawn from the copy income tax returns of SAVELOSS which were tabled in evidence. For that reason I draw no inference that the claims in relation to the later years were allowed or are allowable. Although neither Malcolm nor Ronald prior to 30 June 1986 had cost the company anything approaching the amount drawn by J.B. in the 1982 year, none the less it seems that one significant advantage available to both of them was the provision of superannuation benefits which commenced with the 1984 year of income.

21. In due course, in October 1983, SAVELOSS presented its income tax return for the year ended 30 June 1983 to the Commissioner clearly disclosing payment of the retiring allowances; the appointment of Malcolm and Ronald as directors; the continued shareholding of J.B. and Mrs J.B.; the comparative figures for the 1982 year of income; a loss for the year of $27,836; accumulated losses to 30 June 1983 of $28,276. No assessment issued. It was unnecessary in view of the acceptance of the loss returned. In December 1984 SAVELOSS presented its return of income for the year ended 30 June 1984, disclosing the total change of shareholding ``during the twelve months ended 30 June 1984''; continued service by J.B. and Mrs J.B. as directors without remuneration; a profit for the year of $260 and, in consequence, closing accumulated losses of $28,016.

22. At some date an alert assessor identified the issue which has been presented in this hearing. As a result, in September 1985, notice of assessment issued against SAVELOSS for the year of income ended 30 June 1984, assessing its taxable income at $71. The adjustment sheet which accompanied the notice of assessment disclosed the following:

      ``Taxable income as per return ...          $260

      DEDUCT
      SECTION 80 LOSSES NOW
        FULLY RECOUPED
      (SECTION 80 LOSSES REDUCED
        TO $189 AS PREVIOUSLY
        ADVISED IN THE 1983
        ADJUSTMENT SHEET)                        189
      ADJUSTED TAXABLE                          ----
        INCOME                                    71
                                                ----''
        

The previous adjustment sheet referred to was not placed in evidence.

23. The following table sets out some of the significant figures as to the trading history of SAVELOSS:

TABLE A

Year ended 30 June:           1982      1983      1984      1985      1986
                                $         $         $         $         $
Gross fees                   304,377   452,088   411,442   452,688   456,404
Accounts receivable           25,710     9,525     5,953    11,053     9,936
Profit for the year            1,156   (27,836)      259       274    (3,190)
Directors' fees               30,000              20,000    16,000
Directors' salaries
& allowances                  71,926    67,992    49,842    56,680    62,480
Other salaries &   allowances wives*                                         62,889    37,798
Superannuation
  (directors' wives)                              26,140    26,156    25,115
Retiring allowances                    180,000
Other salaries & wages       100,716   102,027   178,584   129,788   155,577
    

^* There is no evidence that the wives of Malcolm and Ronald were remunerated by SAVELOSS prior to the year of income ended 30 June 1985.

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24. The cost to SAVELOSS of securing the services of its directors and shareholders and their spouses appears from the records of the company as follows:

TABLE B

                                1982       1983      1984      1985       1986
                                  $          $         $         $          $
      J.B./Director's fees
      Salary                              18,118
      Superannuation
      Mrs J.B./Director's fees
      Salary                              13,120
      Superannuation

                              xx101,926   31,238
      Malcolm/Director's fees                       10,000      8,000
      Salary                              19,480    26,195     27,560   30,460
      Superannuation                               x13,737    x13,725   x7,959
      Mrs Malcolm/Director's fees
      Salary                                                   18,413   18,451
      Superannuation                                                    x4,821
      Bonus                                                    13,000
      Ronald/Director's fees                        10,000      8,000
      Salary                              17,274    23,648     24,960   27,860
      Superannuation                               x12,403    x12,431   x7,279
      Mrs Ronald/Director's fees
      Salary                                                   18,476   19,347
      Superannuation                                                    x5,056
      Bonus                                                    13,000
                              ---------  -------   -------    -------  -------
      Total                   xx101,926   67,992    95,983    157,565  121,233
      Retiring allowances                180,000
                              ---------  -------   -------    -------  -------
                                101,926  247,992    95,983    157,565  121,233
                              ---------  -------   -------    -------  -------
    

x Contributions have been apportioned in the proportions in which salary was paid.

xx No detail is known as to apportionment of directors' fees ($30,000) and salaries ($71,926) between Mr and Mrs J.B.

25. I have referred to the mutuality of interest between Mr and Mrs J.B. on the one hand and SAVELOSS on the other while the individuals were the only shareholders in the company. That is a matter of particular significance in fixing the amounts which were paid by way of retiring allowance. The evidence persuades me that both Mr and Mrs J.B. had substantial claims against SAVELOSS for recreation and long service leave; and that, in the early years of the company, they were probably underpaid by reference to award rates and market conditions, particularly having regard to hours of overtime worked. However, so far as the 1982 year is concerned, when the remuneration of Mr and Mrs J.B. exceeded $100,000 for all services provided by them, I am not persuaded that that was inadequate. On the other hand, in the 1983 year, in the nine months during which they were employed by SAVELOSS, their combined remuneration was only running at a rate of less than $42,000 per annum compared with nearly $72,000 per annum in salaries in the previous year and over $100,000 in all. Nothing was paid for directors' fees after 30 June 1982, although $30,000 was paid in the year ended 30 June 1982. I take into account the possibility that, upon the evidence, claims for recreational leave might have approached 40 weeks each and that long service

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leave, which arose directly out of service with SAVELOSS, would have been of the order of 15 weeks each and, on taking into account service with the pre-existing business, would have been even greater. However, taking a liberal view of all of those factors, I am not persuaded that any amount exceeding $90,000 was necessary or appropriate to satisfy any outstanding claims by Mr and Mrs J.B. as employees. I am confirmed in that view by recognition of the fact that J.B. frankly acknowledged that the amount to be paid was fixed by reference to the capacity of the company to pay, although he saw the claims as exceeding that capacity. I am not persuaded that he was correct as to that. One consequence of using that approach was that the amount which was paid had the effect of eliminating entirely the prospect at hand in March 1983 that SAVELOSS would have a substantial taxable income for the current year.

26. But those considerations only open up further questions. SAVELOSS was a distinct entity from Mr and Mrs J.B. Further, although prior to 1983 it was wholly and exclusively under their control, that was to change so that today SAVELOSS is wholly under the control of Malcolm and Ronald. In 1983, if SAVELOSS was to continue to trade in the business in which it was engaged - as it was planned by all concerned that it should do - it was necessary that it be rid of the costs of having Mr and Mrs J.B. as employees and as directors. That alone could account for a saving of over $100,000 per annum based on the 1982 figures - a consideration which weighed heavily in the deliberations of the purchasers. It was also essential that the company be assured of the continued goodwill of J.B. and, to a lesser degree, Mrs J.B. Perceived as an ongoing entity SAVELOSS was something of substantial value. That value, according to the information available from the balance sheet, was not to be found in the assets disclosed by the balance sheet - shareholders' funds stood at $18,655 and ($9,180) at 30 June 1982 and 1983 and the only disclosed assets which might have had a higher value than book value were accounts receivable ($9,525 at 30 June 1983) and goodwill ($30,000). It had to lie in goodwill and that goodwill was controlled by Mr and Mrs J.B. who were at the one time employees, directors and only shareholders. One test of the value of that goodwill is that Mr and Mrs J.B. were able to claim payment interest free by instalments over more than six years of a purchase price of $200,000. An even better test is the fact that Malcolm and Ronald were prepared to pay that purchase price. However, the most significant test is that, according to the evidence of Malcolm, the purchasers, more than four years after taking control of the company, were well content that they had purchased well.

27. In face of all those considerations, the question is whether the retiring allowances were only deductible by reason of sec. 78(1)(c). That provision of the Act operates to make allowable amounts which do not satisfy the deduction requirements of sec. 51(1). Paragraph (c) is but one of numerous provisions within sec. 78 allowing for deductions applied to what I shall refer to loosely as ``charitable purposes''. The section deals with charities in general terms (``a public benevolent institution''); with charities particularly identified (e.g. Amnesty International); and to charities recognised as such by the Commissioner. In relation to charities generally within those three classes, the section is concerned that the donees should have something of a public character - identifiable with institutions and funds operating in the public interest or arena. The charitable gifts of individuals in the service of other individuals or groups do not satisfy those requirements (cf. Decision TT.87/9 and TT.87/167 - 27 November 1987 - unreported). However, by para. (c) of sec. 78(1), the Act does make provision for private benevolence to individuals although only with respect to payments which are conditioned upon the individual donees being persons ``who are or have been employees or dependants of employees'' of the donor and of the payments being made ``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''. In that way the section works to allow deductions in circumstances in which in
Union Trustee Co. of Australia Ltd. v. F.C. of T. (1935) 53 C.L.R. 263 the High Court denied the donor a deduction. In that case an employee who, for some 32 years, had been business manager, secretary and accountant to an individual was retired by reason of old age and ill-health when, at the age of 71, he had

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ATC 256

become incapacitated. In disallowing the claim Dixon J. at p. 271 said:

``There is nothing to show that it was not a purely voluntary grant to Lecky made by Black out of proper feelings of gratitude for long service of a confidential nature.''

There was no prospect in that case of future benefit to the business of Lecky arising from the making of the payment.

28. In construing sec. 78(1)(c), it is appropriate to recognise it in its context within the Act as being one of the headings under which tax deductibility is available in respect of payments occasioned only by benevolence and, for that reason if for no other, outside the scope of sec. 51(1) of the Act. On the other hand, in construing sec. 51, it is appropriate to consider the approach adopted by a Full Bench of the High Court in
W. Nevill and Co. Ltd. v. F.C. of T. (1936) 56 C.L.R. 290. In that case a company was held entitled to a deduction for moneys it expended in order to secure the retirement of a senior executive whose resignation was sought in the interests of promoting the business.

29. Even though in this instance the company was wholly under the control of the payees whose retirement was effected, I am satisfied that the payment was, at least to some extent, due to each of several factors: satisfying outstanding obligations in the way of recreation leave and long service leave; procuring their resignations so as to rid the company of a burdensome charge for personal services; and also to ensuring the future viability of the business by preserving the goodwill of employees who were not bound in law to promote the interests of SAVELOSS in that regard.

30. However, I have been most troubled by the question as to whether in either case the quantum of what was paid was excessive. For the Commissioner, any contention that the amounts paid might have been excessive by the standards of sec. 78(1)(c) was abandoned. That concession having been made, it was not necessary in relation to the 1983 year to consider whether, independently of sec. 78(1)(c), the deduction would have been allowable pursuant to sec. 51(1), notwithstanding the provisions of sec. 109. Had the payment been excessive by the standards of sec. 109 and there been no sec. 78(1)(c) then, had the payments been excessive by so much as $30,000, SAVELOSS would have had a taxable income for the year of income ended 30 June 1983. But that proposition cannot stand in isolation in relation to that year because sec. 78(1)(c) was available and, in the circumstances, was seen to be satisfied. However, even so, it might have been contended in the proceedings before me that, to the extent to which any amount was allowable at all pursuant to sec. 51(1), it was not to be wholly allowed because of the provisions of sec. 109. There was no such contention advanced before me. The case was argued on the basis that only sec. 78(1)(c) provided for the deductibility of any portions of the amounts paid.

31. In those circumstances, I consider that I should not now embark upon a consideration of questions as to whether sec. 109 should be applied. Rather, I should accept that, at least in this instance, ``it is not for the Commissioner... to say how much a taxpayer ought to spend in obtaining (its) income but only how much (it) has spent'' (
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 60).

32. Accordingly, the order of the Tribunal will be that the determination by the Commissioner of the objection to an assessment of taxable income in the sum of $71 for the year of income ended 30 June 1984 be reversed and that the objection be wholly allowed.