Raymor Contractors Pty Ltd v Commissioner of Taxation
[1990] FCA 377
•19 JULY 1990
Re: RAYMOR CONTRACTORS PTY LIMITED
And: COMMISSIONER OF TAXATION
Nos. NG319 to 323 of 1988
FED No. 377
Taxation
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Spender J.(1)
CATCHWORDS
Taxation - claim for deductions pursuant to s. 82AAC Income Tax Assessment Act 1936 - whether payments made to a fund for the purpose of providing superannuation benefits for an eligible employee or dependant thereof - adequacy of evidence - whether the benefits were fully secured.
Income Tax Assessment Act 1936 ss. 82AAC; 82AAE.
HEARING
BRISBANE
#DATE 19:7:1990
Counsel for the applicant: Mr D. Bloom QC and Mr R. Edmonds
Solicitors for the applicant: Baker and McKenzie
Counsel for the respondent: Mr A. Slater QC and Mr M. Brabazon
Solicitors for the respondent: Australian Government Solicitor
ORDER
The appeals Nos. NG319 to NG323 (incl.) be dismissed with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
These are five appeals relating to the disallowance by the Commissioner of Taxation of the objections by the applicant, Raymor Contractors Pty Ltd ('Raymor Contractors'), to assessments of income tax in respect of the years of income ended 30 June 1973, 1974, 1975, 1976 and 1977 respectively.
The issues on the appeal are whether amounts of $7,759.00, $13,908.00, $23,473.00, $34,875.00 and $32,244.00 claimed by the applicant as allowable deductions in the relevant tax years were set apart or paid in each of those years of income to a fund for the purpose of making provision for superannuation benefits for or for dependants of employees of the applicant; whether the right of the said employees or dependants to receive the benefits were fully secured; whether the Commissioner formed or reached any opinion as to whether there were special circumstances that justified the allowance of a greater deduction or of deductions of a greater sum than the amount ascertained in accordance with paragraph 82AAE(a) of the Income Tax Assessment Act 1936 ('the Act'); whether the additional tax for incorrect returns imposed in respect of each of the relevant tax years, namely, $4226.00, $10,653.00, $15,764.00 and $20,537.00 was validly imposed; and what, if any, part of the amounts claimed as allowable deductions fall within the terms of paragraph 82AAE(a). It is accepted by the taxpayer that the issue of additional tax is dependent on, and would follow, the result on deductibility.
In the relevant tax years, subdivision AA of Division 3 of the Act dealt with the contributions to superannuation funds for the benefit of employees. Section 82AAC provided:
"Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount or the sum of the amounts, as the case may be, so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction."
Section 82AAE provided:
"The deduction, or the sum of the deductions, allowable under this Subdivision in an assessment or assessments of a taxpayer or taxpayers in respect of income of the year of income in respect of amounts set apart or paid by the taxpayer or taxpayers as or to a fund or funds for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee-
(a) shall not exceed whichever is the greater
of the following amounts:
(i) Four hundred dollars; and
(ii) five per centum of the total remuneration paid to the employee by taxpayers during the year of income of the employee that, in the opinion of the Commissioner, corresponded to the first-mentioned year of income in respect of his employment by those taxpayers; or
(b) if the Commissioner is of the opinion that
there are special circumstances that justify the allowance of a greater deduction, or of deductions of a greater sum, than the amount ascertained in accordance with the last preceding paragraph - shall be such amount, being greater than the amount so ascertained, as he considers reasonable."
It is common ground that the Commissioner did not form the opinion referred to in 82AAE(b). The applicant says he should have.
So far as is presently relevant to these proceedings the requirements of s. 82AAC are:
(i) that the taxpayer in the year of income pay an amount;
(ii) for the purpose of providing for superannuation benefits for (or for dependants of) an eligible employee;
(iii) to a fund from which the benefits are to be provided and under which members' rights are fully secured.
If those requirements are met, the sum of the amounts meeting them is, subject to certain provisions including s. 82AAE, deductible. The limits which s. 82AAE imposed on the deduction for amounts paid are expressed as limits in respect of amounts paid "for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee". Both ss. 82AAC and 82AAE are concerned with the provision of superannuation benefits for individual employees. The limits in s. 82AAE in particular indicate that the sections are directed to the paying or setting aside of funds which provide for benefits in relation to a particular individual, and not with the setting aside or paying of funds which provide general or impersonal benefits which do not have a relation to particular individuals. A taxpayer is entitled to a deduction for the cumulative total of such payments; a global sum to cover an undifferentiated group of employees is, in my opinion, not within the section.
As will become apparent, there are real difficulties concerning the evidence in each of these appeals.
On behalf of the taxpayer, evidence was given by Richard George Cooke, who is the Finance Director of the applicant. Raymor Contractors is one of a number of related companies in the Raymor Group of companies. Since 1973 the Raymor Group has included Raymor Pty Limited Employees' Superannuation Fund ("the Fund"), Raymor Pty. Limited ("Raymor") and Raymor Illawarra Pty Limited ("Raymor Illawarra"). Minutes of a meeting of directors of Raymor Contractors on 20 December 1967 resolved to enter into a partnership styled Raymor Consolidated Industries ('R.C.I.') to operate as from 1 January 1968. An unexecuted partnership agreement suggests that there were seventeen members of the Raymor Group of companies in the partnership R.C.I.
That partnership was dissolved on 31 January 1979 and a new partnership was formed with all save two of the earlier partners.
Mr Cooke joined the Raymor Group as its Financial Controller in 1979, i.e. after the tax years with which these appeals are concerned. Prior to that time he was an audit partner in a firm of chartered accountants and from about 1973 was involved in the auditing of the Raymor Group. Subsequent to 1973, his involvement in the affairs of the Raymor Group as one of its auditors increased, until he joined the Group in 1979.
Mr William Kelly was at all relevant times the Managing Director of Raymor Contractors, Raymor, and Raymor Illawarra, and the other companies in the Group, and Miss Joy Mawson was the Secretary of those companies as well as other companies in the Group. She became a director of, inter alia, Raymor Contractors in 1977. Raymor Illawarra was trustee of the Fund until it was replaced as trustee of the Fund by Mitexa Pty Limited ('Mitexa'), which was incorporated about January 1981.
A trust deed which bears date 25 June 1973, about which more must be said, was executed under seal by Raymor and signed by Mr W. Kelly and Miss Mawson. Minutes of a meeting of directors of Raymor dated Tuesday, 26 June 1973 record a resolution that Raymor join with a number of members of the Raymor Group, including the applicant, to establish a non-contributory superannuation fund for the benefits of its employees forthwith. The minute noted that Mr W. Kelly and Miss Mawson were authorised to sign documents establishing the Fund and were also authorised to effect payment of contributions due to the Fund prior to 30 June 1973. There is a similar minute for a meeting of directors of Raymor Contractors.
Minutes of a meeting of the directors of Raymor Illawarra on 25 June 1973 record the tabling of a trust deed for the establishment of a superannuation fund with Raymor Illawarra as trustee, and a resolution that a bank account for the Fund be opened at the Bank of New South Wales, Rockdale Branch
Mr Cooke exhibited a letter headed "Dear Employee" advising that:
" . . . we have recently completed negotiations with Estate Planning Co. (Aust.) Pty. Ltd. to organise a Superannuation and Life Assurance Plan within our Companies."
The document bears date 27 June 1973 and bears the signature of Mr W. Kelly over the title 'Managing Director'. Mr Cooke says that he saw a copy of the letter headed "Dear Employee" and signed by Mr Kelly in about September or October 1973 on the noticeboard in the Rockdale premises of the Raymor Group. He says that a copy of this letter was on the board until 1979. There is also a letter dated 26 February 1974 addressed to supervisors enclosing an open letter to employees.
Mr Cooke, from the records of the Raymor Group, produced a copy letter dated 17 July 1973 addressed to Estate Planning Associates (Aust.) Pty. Limited ('Estate Planning') which refers to, inter alia, detailed schedules covering Raymor Group employees as at 30 June 1973, totalling 260 persons. The copy letter which bears Miss Mawson's name ends:
"In the absence of Mr W.M. Kelly, I would mention that these items are submitted to you for quotation purposes and that your quotation would need to be accepted by him before the whole matter could be proceeded with."
A letter from Estate Planning dated 14 September 1973 refers to a letter of approval from the Taxation Department which commences:
"Referring to your letter of 1 August 1973 you are advised that contributions made by the company in accordance with the deed governing the abovenamed fund will be allowable deductions under Subdivision AA of Division 3 of Part III of the Income Tax Assessment Act, subject to the limitations expressed in the Subdivision."
The letter of Estate Planning dated 14 September 1973 includes a "list of Annual Deductions for each Company" and there is in respect of Raymor Contractors an amount of $7,759.00.
Mr Cooke identifies a copy document which lists the group certificates of the employees of Raymor Contractors for the financial year ended 30 June 1974. These total twenty-five as well as the name of one further employee. The total gross salary for the twenty-six employees is $57,474.56. The named employee against whom no group certificate number appears is shown as having a gross salary of $15.00.
Mr Cooke says that he has searched and has been unable to locate any other document which sets out the employees of Raymor Contractors for the financial years 1973-77 inclusive. He swears that he believes they have been destroyed.
In the tax return of Raymor Contractors for the year ended 30 June 1973 there was claimed as a deduction an amount of $7,759.00 paid to the Fund and the return states that the company's contribution for any eligible employee did not exceed the statutory maximum. There was a similar endorsement in the return for the next financial year. The claims in the five returns were for the amounts presently in dispute. For the year ended 1975 the return indicated that the company's contribution does exceed the statutory maximum and said:
"In the case where the contribution does exceed the statutory maximum, the benefits will not exceed seven times the members' average annual remuneration for the last three years of his service or $125,000, whichever is the lesser."
And further that:
"No contribution was made on behalf of a director, shareholder or associated person."
The endorsement is the same for the following years, 1976 and 1977.
I am puzzled to reconcile those endorsements with two letters from the Australian Taxation Office which are in evidence.
The first is dated 14 April 1976. It is addressed to Raymor Administration Pty Ltd and is ambiguously headed
" INCOME TAX : RAYMOR INDUSTRIES PTY LTD KEY MAN SUPERANNUATION FUND
RAYMOR PTY LTD EMPLOYEES' SUPERANNUATION FUND"
It commences:
" A deduction for superannuation contributions on behalf of Messrs William M. Kelly and Paul R. Kelly has been claimed in the company's return of income for the year ended 30 June 1975.
After careful consideration of the circumstances surrounding the employment of each it has been decided that a reasonable benefit for each on his retirement or death would be:-
$ William M. Kelly 188,500 Paul R. Kelly 165,400 "
Paul R. Kelly was also a director of at least some of the companies in the Raymor Group.
A further letter of 27 September 1976 addressed to Raymor Administration Pty Ltd commenced:
" In a letter from this office on 14 April 1976 and reminder dated 9 July 1976, it was brought to your notice that excessive superannuation benefits were being provided for Messrs W M and P R Kelly at retirement or death.
There is no record in this office of the receipt of a reply indicating that action has been taken to ensure compliance with section 23F(2)(h) of the Income Tax Assessment Act. "
These letters are annexed to Mr Cooke's affidavit but no explanation was offered, nor any resolution of the ambiguity given.
The income tax return for the Fund for the year ended 30 June 1973 includes a Balance Sheet which shows as at 30 June 1973 there were current assets of cash at bank of $751.00 and Loan Account Raymor Consolidated Industries $384,198.00. However, having regard to an undated schedule claiming to show contributions by employer companies to the Fund, under the heading "28 June, 20 August and 3 September 1973" are amounts against various companies which total $384,948.00. The total appearing in the Balance Sheet as at 30 June 1973 seems to reflect the combined sums of the various amounts paid on the nominated dates in the calendar year 1973. The correctness of the figures shown in the balance sheets is therefore shown, at least in this respect, to be illusory. On the evidence available, I have not attempted to perform a 'verification audit', which would in any event be a daunting task.
However, Mr Cooke has prepared a schedule on the basis of information contained in the balance sheets and profit and loss accounts of the Fund for the relevant financial years. These show that in 1973, 1974, 1975 and 1977 no amount was paid out to any member on retirement. In 1976 an amount of $23,250.00 appears under that heading.
The evidence establishes that this payment was made to Mr Newton. Mr Newton was a director who had been with the Group as long as Mr Cooke knew anything about it.
Under the deed, a male employee is entitled to superannuation benefits on reaching the retiring age of 65 years, and a female employee similarly entitled at age 60. If an employee ceases employment before reaching retiring age, the benefits standing to that employee's credit may be forfeited. The trustee of the fund may make a discretionary payment to that employee. Mr Cooke's Schedule shows that, over the relevant five year period, no discretionary payments were made. It also shows that in that period benefits totalling $675,469.47 were forfeited.
Mr Slater QC, senior counsel for the Commissioner, relies on a memo. from Miss Mawson to Mr Kelly dated 21/2/77, which commences:
"Bill,
The following employees are within 5 years of retirement age in Superannuation Fund",
and there is set out a schedule of eight male employees, aged from 60 to 63, whose 'balance' varies from $17,206.00 to $31,803.00, and three female employees aged 56 or 57, whose 'balance' ranges from $24,015.00 to $27,634.00.
A Schedule in evidence shows payments to members subsequent to the relevant period here. Most payments occur after the litigation involving the trustee of the fund later referred to. From this Schedule it seems only one of the eleven employees referred to in the memo. of 21 February 1977 reached retiring age, or received a discretionary payment.
A bank account of the Fund, No. 20082, indicates that a deposit of $111,601.00 was made on 28 June 1973 and an amount of $111,600.00 was withdrawn on 31 July; an amount of $247,340.00 was credited on 21 August 1973 and withdrawn on 29 August 1973. An amount of $26,008.00 was credited on 3 September 1973, and $25,258.00 withdrawn on 4 September 1973. On 27 June 1975 there was credited a total of $373.210.00 and withdrawn on the same day, a total of $370.500.00, and on 1 July 1976 there was credited $21,080.00 and shortly thereafter $24,541.00 was withdrawn. The account was closed on 7 July 1976.
A different account, No. 760963, was opened on or about 1 July 1976, the balance of moneys in the earlier account in the sum of $267.05 being transferred to this account in early July 1976. This account was closed about 9 October 1981. There are bank statements for the period 22 November 1974 to 31 December 1976, and 27 July 1977 to 3 August 1977 for Account No. 760840. Mr Cooke says, enigmatically, "this was one of the Fund's bank accounts."
Mr Cooke says during the relevant years, the partnership (R.C.I.) was the "bank" for all the companies in the Raymor Group. The capital of each company was provided by R.C.I., each company, including Raymor Contractors, had a loan account with R.C.I. and movements of working capital were entered as debits and credits in that company's loan account with R.C.I.. Mr Cooke swears that the vast majority of the business and financial records of the Fund for the financial years 1973-1977 can no longer be found.
In 1981, Raymor appointed a new trustee, Mitexa, in place of Raymor Illawarra as trustee of the Fund. This appointment was the subject of proceedings in the Equity Division of the Supreme Court of New South Wales brought by Mr Paul Kelly, the brother of Mr William Kelly. In the course of that litigation, which commenced in 1981, Mr William Kelly and Miss Mawson gave evidence and each was cross-examined concerning, inter alia, matters relevant to the establishment and operation of the Fund. In the course of those proceedings the members of the partnership were added as eighth defendants pursuant to leave granted on 21 October 1982. This was after Mr W. Kelly and Miss Mawson had given evidence.
Mr Cooke claims that many documents were produced to the court in connection with those proceedings. He says that so far as he is aware and to the best of his knowledge not all of the documents returned following the proceedings. There is in evidence a Memorandum of Fees from Messrs Sly and Russell directed to Mitexa, which recites discussing the return of the exhibits with Miss Mawson and later reciting an "approach to his Honour in chambers to obtain a release of the exhibits, attending to obtain release of exhibits, attending to uplift same and returning same to you."
Neither Mr William Kelly nor Miss Mawson, who were available as witnesses to be called on behalf of the taxpayer, gave evidence in these proceedings. On a number of occasions in the course of his oral evidence, Mr Cooke indicated his lack of knowledge of matters put to him, and indicated that either Mr W. Kelly or Miss Mawson would be the person who would know.
The evidentiary difficulties were further compounded in that Mr Cooke spoke in general terms of the practice which he observed "in relation to the recording of entries in the business and financial records of the Fund, R.C.I. and the employer companies, including Raymor Contractors, for the financial years 1973-1977 in relation to superannuation matters." That practice which he said he observed included:
"(a) the work sheets were prepared which
calculated the contributions to be made by each company on behalf of its employees to the Fund;
(b) cheque or cheques were drawn by RCI in favour
of the Fund and banked by the Fund for approximately the contribution of the year in question and the amount would then be dissected as to contribution or loan. There was no actual transfer of money from each employer company to the Fund or from each employer company to RCI as RCI acted as the banker of the Fund;
(c) RCI then debited each employer company's
current account with the total amount of contributions made in that financial year. There was in turn a corresponding entry as a credit to RCI's bank account; . . ."
He then further described what he said the practice was.
Were the payments for the purpose of providing superannuation benefits for (or for dependants of) employees of the applicant?
Implicit in this question is a number of subsidiary questions: as to the purpose of payments made in June of each year in dispute, as to the amount which was paid in respect of any eligible employee, and as to what, if any, amounts fell within the limits imposed by s. 82AAE(a).
Mr Slater QC, senior counsel for the Commissioner, sought to tender in evidence in these proceedings portions of the evidence given by Mr William Kelly and Miss Mawson in the 1981 New South Wales Supreme Court proceedings. Mr Bloom QC, senior counsel for the taxpayer, objected to the reception of this material. At the time of giving the evidence Raymor Contractors was not a party to that litigation, although it was subsequently joined as a party. Evidence before me established that Mr William Kelly was the Managing Director of each of the Raymor Group of companies and Miss Joy Mawson was, at the time of giving her evidence, a director of Raymor Contractors but, more importantly, was the person who had had control over the administration of the affairs of the superannuation fund from its inception. It was submitted on behalf of the Commissioner that the statements sought to be put into evidence were relevant to the purpose of the payments made by Raymor Contractors to the Fund. The evidence was directed to the formation of the Fund, and when, and the conduct of the companies of the Raymor Group in relation to the superannuation fund. The making of the statements by Mr William Kelly and Miss Mawson was proved by the evidence of Mr G.A. Palmer QC, who appeared for the plaintiffs in the proceedings between Mr Paul Kelly and Raymor Illawarra and Ors.
It was submitted by Mr Bloom QC that evidence of motive of the taxpayer was completely irrelevant. Of course, the true question concerns the purpose of the payments, which is different from any motive that may have prompted the payments.
However, on the view I took of the matter, the necessary element of deductibility under s. 82AAC is the purpose with which the payment was made and evidence of the context in which the payments were made and the way in which the Fund was formed and conducted seemed to me to have a relevance to the characterisation of that purpose. It seemed to me that that evidence might also have a relevance to what in fact was the nature of each payment.
The relevant purpose is the purpose of the payment by the taxpayer to the Fund.
Counsel for the applicant submitted that the purpose of the payment is the purpose of the Fund to which the payment is made and that the purpose of the Fund is to be ascertained by looking at the document which establishes the Fund. Reference was made to Mahoney v. Commissioner of Taxation of the Commonwealth (1965) 39 ALJR 62, where Owen J. held that once it is conceded or proved that a payment was made to a fund and that the deed of trust executed by the employer was not a mere sham but a document intended to create rights and obligations, the onus of showing that a fund was established is discharged and it is not open to the court to go behind it and investigate the motives of the employer. That case concerned s. 23(j) of the Income Tax Assessment Act which exempted from tax -
"the income of the following funds, provided that the particular fund is being applied for the purpose for which it was established:
(i) a provident, benefit or superannuation fund established for the benefit of employees
(ii) . . ."
His Honour also held that, in determining whether a fund was during a year of income being applied for the purpose of benefiting employees, it is permissible to look at the circumstances leading up to the establishment of the fund, the terms of the deed under which it was managed and controlled, the use made of the powers and discretions conferred by the deed, the extent to which employees received benefits from the fund and the extent to which it was used to benefit persons who were not employees. This enquiry was not limited to the particular year of income in respect of which the exemption is claimed.
The statutory regime which included the then ss. 23(j) and 66 is not the same as that which contains ss. 82AAC and 82AAE; in particular, s. 23(j) focuses attention on whether a fund is being applied for a specified purpose. Even so, the circumstances which his Honour found might permissibly be looked at in reaching that determination suggests that one might, in the present case, look at the circumstances concerning the formation of the fund, and the manner of its operation including what benefits were in fact paid, and to whom.
From the statements proved to have been made by Mr William Kelly and Miss Mawson in the 1981 New South Wales Supreme Court proceedings, it was submitted by counsel for the Commissioner that the principal purpose of the applicant and other Raymor Group companies in making payments into the fund was to preserve the working capital of the group by establishing a fund relieved of tax which could be lent back at nominal interest. For instance, Mr Kelly had said:
"The whole point of the fund really was the funds, if you can say that, were to be lent back to the operating companies or the contributing companies or key people in the company."
He said that:
"It was necessary for all the monies in the fund to be lent back and kept within the Raymor Group."
He commented:
"I think that the whole basic concept of the fund - there was no way we would have put $3m in the fund on the basis that we had to either secure it or get commercial interest rates back on it. There would have been very little in the fund at all. We probably would not have even been here."
Miss Mawson, when asked about any understanding as to whether an equivalent sum would be loaned back to the Raymor companies, said:
"I understand it had to be lent back because it was our working capital. I have known that right from the beginning. We could not afford to disperse ourselves into something that was not able to be lent into our working funds."
And she acknowledged that the agreement concerning the fund was that the money could be lent back to the company for working capital.
Mr Slater QC submitted that so far as the fund was set up to benefit anyone, it was only genuinely intended to benefit the very small number of key employees. Mr William Kelly indicated in his evidence that ordinary workers who left before their retirement date would receive consideration as to a benefit if they had contributed long and meritorious service, but he did not think that an ordinary process worker could fulfil that qualification. Mr Kelly was asked:
"You have earlier told us that this fund was set up for the key people. You recollect saying that?
A. Yes."
And he was asked:
"Apart from the question of meritorious service, you were not going to permit ordinary workers before their retirement date to walk away with large sums from the fund? A. As a general rule, no."
Mr Slater QC submitted that the confident expectation of those concerned with the operation of the fund was that the vast bulk of over 1000 employees would leave before attaining retiring age and so automatically forfeit their benefits. Wootten J. asked Miss Mawson:
"What did you see as the reasons for instituting the fund?"
She replied:
"I saw there was a long term fund and a benefit to employees, but I saw it specifically with regard to the retirement age and, of course, I saw it also in its other side as being a taxation scheme, a taxation advantage to the companies within the group."
She did not regard it as part of her duties to talk to employees about the fund and she acknowledged that she did not tell Joan Pike, one of the subjects of her memorandum of 21 February 1977, whom she knew quite well, that if she stayed a few years more in the employment of the company, she would have a large sum on leaving. She said:
"It was not my practice to mention the superannuation fund generally to employees."
She later said:
"I had no right or obligation to give them any amounts at any time that were confidential to the management of the group."
And she was asked who had decided that, to which she replied:
"I think it was a policy we had agreed upon."
Clause 13 of the deed confers a discretion in the trustee to pay benefits to persons who retired prior to reaching retiring age but the evidence suggests that at the time of contributions there was no bona fide policy of considering the exercise of that discretion. Miss Mawson was asked:
"Would you agree with me that what you did as far as writing off forfeited benefits for ordinary workers was concerned it was part of a general policy in relation to ordinary workers?"
To which Miss Mawson replied:
"I have had no reason to feel otherwise up to that moment but I can't say it would be 100 per cent policy."
And she admitted that, without consulting anybody further in respect of the understanding in the early days of the fund that persons who left the services of the companies before retirement should have their benefits forfeited, those benefits were forfeited. Mr Slater QC submitted that the memorandum of Miss Mawson to Mr W. Kelly of 21 February 1977 leads to the inference, which the applicant has chosen not to attempt to rebut, that there was a policy of preventing ordinary workers from reaching retirement age in employment. Mr Slater QC submitted that the admission of infant children of Mr Kelly disclosed a contempt for the rights of the ordinary workers.
Of this evidence, counsel for the applicant pointed to the firm denial by Mr William Kelly of the suggestion that the only people to receive any benefit out of the fund were himself and those whom he designated as key people. Mr Kelly said:
"I absolutely deny that. If somebody got to retirement age, they were entitled to get whatever was due to them."
And to the suggestion that "you ensured by some means or other by instructing to your staff that people who were to retain their retirement date were to be dismissed before that time", said "No, that is incorrect."
Counsel for the Commissioner then submitted that the conclusion to be drawn from this evidence was that payments to the fund which purported to have been made to provide benefits for a large number of employees and not just a few key workers, were not in fact paid or attributed for that purpose.
As to purpose, in Magna Alloys and Research Pty Ltd v. Federal Commissioner of Taxation 49 FLR 183, which was the case in the context of s. 51, Brennan J. at 192 said:
"When s. 25(e) of the 1922 Act required a test of purpose to be applied, the test was objective. In Robert G. Nall Ltd. v. Federal Commissioner of Taxation (1937) 57 CLR 695 Dixon J. applied a test of purpose which may be taken to give the meaning of purpose in the objective sense: 'But, in matters of income tax, purpose is an elusive and indefinite criterion. The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind in some actual person . . . . when it is said that gaining or producing assessable income must be the purpose of the expenditure if its deduction is to be allowed, no more can be meant than that the circumstances of the transaction must give it the complexion of money laid out in furtherance of a purpose of gaining income' (1937) 57 CLR at pp 711-712."
He referred to the observation of Dixon J. in Federal Commissioner of Taxation v. Midland Railway Co. of Western Australia Ltd. (1952) 85 CLR 306 where, having referred to the "business purposes for which the outgoing was incurred from the point of view of the taxpayer company", Dixon J. said:
"The controlling factors are those which arise from the character of the business or undertaking and the relation which the expenditure or the liability to make it bore to the carrying on of the business or the gaining of assessable income (1952) 85 CLR at p 313."
Brennan J. continued at page 193:
"Once the 'controlling factors' are ascertained, the business purposes for which an outgoing is incurred may be determined. In that step towards characterization, the taxpayer's state of mind has no part to play. His purpose or motive is not a controlling factor of the purpose to be attributed to the incurring of the expenditure. But in ascertaining the controlling factors, the taxpayer's state of mind may have a significant evidentiary role to play, and by leading to the ascertainment of the controlling factors, it may even be the determinative element in characterizing expenditure in a particular case. Nevertheless, the taxpayer's state of mind-whether intention, or purpose, or motive - is evidentiary only."
See also the discussion of purpose in the judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. in John v. Commissioner of Taxation (1989) 63 ALJR 166 at 170.
It seems to me that the approach of the Commissioner in seeking to draw inferences as to purpose from the attitudes or subjective states of mind disclosed by the evidence in the 1981 proceedings, involves a mistaken view of how the purpose of a payment in respect of which a deduction is claimed might be identified. The evidence however is of some assistance in categorising the nature of the payments. Miss Mawson in her evidence in the Supreme Court said that the Deed was executed some time after 30 June 1973. She agreed that the establishment of the superannuation fund was really conditional upon the Commissioner's approval of the availability of deductions. She was asked:
"If he (the Commissioner) did not approve the fund, the fund would not have come into existence at all?
She replied:
"I understand that to be so."
The following exchange took place between Wootten J. and Mr Kelly:
"Q. Are you talking about individual contributions?
A. I dealt mostly in totals. Q. You were concerned how much went out of the companies?
A. Right
Q. Into the fund, not allocations to individuals?
A. Right."
As Dixon J. as he then was, said in Robert G. Nall v. Federal Commissioner of Taxation (supra):
"The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind in some actual person."
He instructed that:
"The circumstances of the transaction must give it the complexion of money laid out in furtherance of a purpose of gaining income."
In the light of these crucial observations it is necessary to enquire in some detail into the relevant transactions.
Mr Bloom QC submitted on behalf of the taxpayer that the evidence of Mr Cooke as to the practice followed permitted the conclusion that what was paid across was the estimate of the contributions for individual employees. Reliance was placed on Sun Insurance Office v. Clark (1912) AC 443, where the House of Lords held that where a fire insurance company carried forward a certain percentage of its premium receipts as an allowance to meet unexpired risks on outstanding policies, and where this percentage was a fair and reasonable allowance for the purpose, it is competent for the company to make an allowance in respect of unexpired risks, and the increase in the allowance formed no part of the profits or gains of the year.
Fullagar J. in Ballarat Brewing Co Ltd v. Federal Commissioner of Taxation (1951) 82 CLR 364 at 369 quoted the observations of Lord Loreburn in the Sun Insurance Case (supra):
"There is no rule of law as to the proper way of making an estimate. There is no way of estimating which is right or wrong in itself. It is a question of fact and figures whether the way of making the estimate in any case is the best way for that case."
Fullagar J. held it was proper to take into account in determining the "sales" of a brewer, the discounts and rebates which, in the light of experience, would almost certainly be allowed.
Those cases involved making an estimate for contingent events. At the respective times of payment in the present case, the evidence does not suggest any contingent circumstance. Employees were not eligible to be a member of the Fund until after six months' service, and the identity and number of eligible employees as at any date of payment was ascertainable.
What these observations in these cases indicate is that, where there are contingent factors and absolute precision is not consequently possible, a substantially correct and bona fide estimate of the contributions may be made.
In Commonwealth Aluminium Corporation Ltd. v. Federal Commissioner of Taxation 77 ATC 4151, Newton J. said:
"The authorities also establish that for this purpose (for the 'incurring' of a liability) a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation: see Texas Company (Australasia) Ltd. v. Federal Commissioner of Taxation (1940) 63 CLR 382 at 465-6 per Dixon J."
Does the evidence permit the conclusion that what was paid was a reasonable estimation of the aggregate of the amounts to be paid in respect of each eligible employee? Mr Bloom QC says that "it is true that we do not seek to claim the entirety of that amount". He said that "when we had worked out the precise figures we went back and just claimed that part which we said was the precise figure."
The evidence in this case is quite insufficient to permit any conclusion that any amount paid to the Fund on behalf of any of the partner companies was paid in respect of any particular eligible employee. Even accepting that a reasonable estimate of the aggregate of such payments for eligible employees would be sufficient, the evidence in this case demonstrates that the payments bore no correlation with any such possible estimate of aggregations of individual amounts paid for the benefit of eligible employees.
The payments to the bank accounts of the fund were in lump sums. At the time of payment that sum was undifferentiated. At the earliest, entries in respect of it were processed after the close of that taxation year, but in my opinion it is likely that they were made when the accounts for the group were prepared probably in October of each year. The amounts, if any, that could be attributed to particular employees was not known at the time when the payment was made. Any such allocations were not made until after the end of the taxation year, and it cannot be said that the payment made was, as to any part or parts of it, to provide benefits for employees as a whole or for any one or more particular employees.
Exhibit 4 in these proceedings is a crucial document. It provides a schedule indicating the contributions and part repayment of loans which the applicant says were made in each of the relevant taxation years; the second page of it indicates the breakdown of the amounts said to have been paid in those taxation years.
In Exhibit 4, each of the three payments making up the total of $384,948.00 was claimed to be qualifying payments by members of the Raymor Group. Insofar as the financial year ending 30 June 1973 is concerned, the bank account of the Fund indicates a payment prior to 30 June 1973 of $111,600.00. However, the amount claimed in the income tax return for that year by Raymor Contractors is $7,759.00 as a component of a total payment of $384,948.00.
Mr Bloom QC submitted that "in respect of the 1973 year we worked out that Raymor Contractor's proportion of the amount paid prior to 30 June 1973 was $2,243.16." He submitted that what was not paid in 1973 will have been paid in 1974 and, "insofar as your Honour's task is to determine what amounts were paid, that alternative may be open to your Honour."
Exhibit 4 indicates in respect of the amount of $354,000.00 paid on 27 June 1974, $178,724.00 constituted payment in respect of eligible employees and $175,276.00 is designated "Part Repayment of Loan". In the taxation year ending 30 June 1975, the amount paid was $560,000.00 of which the amount paid in respect of eligible employees was said to be $490,324.00. There is a close correspondence in respect of the amount paid in the taxation year ending 30 June 1976 of $768,594.00 with the amount claimed as payments in respect of eligible employees of $764,886.00 but in the following year, of an amount paid of $1,125,000.00 on 28 June 1977, the amount claimed to be payments in respect of eligible employees is $955,765.00. These variations, some of which are staggering, some of which are less so, are wholly unexplained on the evidence before me.
I am unable to conclude that the amounts paid to the Fund were amounts paid in respect of eligible employees. The evidence does not permit a conclusion that these payments represented a reasonable estimate of the amounts in respect of eligible employees. As a consequence, I am unable to consider what amounts are prima facie deductible or the question under s. 82AAE, namely, whether in respect of any employee the limit imposed by that section is exceeded.
As to the payment of $111,600.00 in June 1973, the trust deed had not been executed notwithstanding the date it bears. The commitment of the members of the partnership to the superannuation fund was contingent on the approval of the Commissioner. As at the date of payment, I am unable to see what part of the amount of $111,600.00 can on this material be allocated to the applicant and a fortiori to particular employees of the applicant. The lump sum payment in the last few days of June bears no apparent relationship to the amount available as a deduction, being the aggregation of the amounts paid in respect of given employees.
The view I have on this aspect of the matter is confirmed by the absence of evidence indicating who were the various employees of the applicant in respect of whom payments have been made, or indeed how many of them there were, or any evidence to permit the calculation of the amount which is deductible to the applicant under s. 82AAC in respect of them.
The only evidence of this kind is annexure "K" to Mr Cooke's affidavit. Of the twenty-five employees there specified with group certificates, six in all probability had terminated their employment during the year of income. If one takes $400.00 each, the amount is approximately $7,600.00. If the payment is based on 5% of their earnings, then it is considerably less than $3,000.00. Having regard to the statement in the income tax return for that year that none of the employees was the subject of a claim greater than the statutory amount, there is no rational basis on which a claimed deduction of $13,908.00 can be supported.
In the view I take of the matter, if any amount at all is deductible, it cannot be quantified on the evidence before me.
There is no evidence that anything was ever put before the Commissioner of Taxation to suggest the occasion for the exercise of the power in s. 82AAE(b) fell to be exercised.
Were the benefits fully secured?As to whether the right of the employee or dependants to receive the benefits is fully secured, the fact is that almost the entirety of the superannuation fund was loaned back at call to the employer companies at low interest rates. In those circumstances, are the employees' rights 'fully secured'?
In Driclad Pty Ltd v. Federal Commissioner of Taxation 10 AITR 207, the superannuation fund was established consisting of two parts. The amount received in the A fund was for all employees, while the amount in the B fund was allocated to four persons who were directors. Most of the contributions and dividends received by the trustees were lent to Marine Plastics and Driclad Pty Ltd, the contributing employer company. Taylor J. said at 217, in speaking of a requirement that the benefits be 'fully secured':
"The intention of this provision found as it is, in the Income Tax and Social Services Contribution Act, is to deny the character of a deduction to any employer's contribution to such a fund if the fund itself remains, either directly or indirectly, under his control or within his disposition so that the rights of his employees and their dependants to receive the benefits provided by the scheme are liable to be defeated at his option."
Then at p 218, Taylor J. said:
". . . it is contended that the rights of members of the A section to receive the benefits provided by the deed were not 'fully secured' because of the magnitude of the loans made by the trustees to Driclad and Marine Plastics. It was pointed out that these loans were unsecured, that one or both companies had other creditors and, therefore, that an element of risk was involved. In my view, this submission fails. What s. 66 requires to be fully secured are the rights of the members of the fund to receive the benefits given, in this case by the deed, and this is to be determined upon consideration of the manner in which the fund has been constituted. It is true that very substantial loans were made to the companies in question by the trustees. Indeed, it seems they exercised their powers of investment exclusively in this fashion, except with respect to moneys required for premiums on policies of insurance taken out for the benefit of members of the A section, and, which from 1957 to 1962 amounted to 15,249 pound. But I am unable to see how the right of a taxpayer to a deduction pursuant to s. 66 can, in any way, be affected by the manner in which the trustees, in the exercise of their discretion, choose to invest the moneys which constitute the fund. Nor do I think that the question whether the rights of members to receive the benefits provided are fully secured calls for an assessment of the stability of the investments which they had made."
The investments by the fund, which were loans at low interest back to the Raymor companies, were within the investment powers of the trustees: cl. 31 of the Trust Deed. In conformity with the judgment of Taylor J., the rights of the employees or dependants to receive the superannuation benefits were fully secured.
In my opinion, each of the appeals should be dismissed with costs.
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