Telecasters North Queensland Ltd v Commissioner of Taxation of the Commonwealth of Australia
[1989] FCA 265
•25 MAY 1989
Re: TELECASTERS NORTH QUEENSLAND LIMITED
And: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Nos. QLD G121 and G225 of 1988
FED No. 265
Income Tax
COURT
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Spender J.(1)
CATCHWORDS
Income Tax - assessment - allowable deductions - retiring allowances paid by company to former directors - retirement on account of age required by Companies Code - "losses and outgoings incurred in gaining or producing assessable income" - "losses and outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing such income" - whether expressed policy of generous payment to past directors so as to encourage directors in the future affects characterisation of payments.
Income Tax Assessment Act 1936, s. 51(1)
HEARING
BRISBANE
#DATE 25:5:1989
Counsel for applicant: Mr. P. Hall
Instructed by: Roberts, Leu & North
Counsel for respondent: Mr. F. Clair
Instructed by: Australian Government Solicitor's Office
ORDER
The appeals be dismissed.
The applicant pay the respondent's costs, to be taxed if not agreed.
NOTE: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.
JUDGE1
These two appeals are from the disallowance by the respondent of the applicant's objections to the disallowance of deductions claimed by the applicant.
The first relates to a claimed deduction of $100,000.00 paid to Mr. Cecil Krebs Carmody, a former director of the applicant, and the second relates to a claimed deduction in an amount of $7,500.00 paid to Mr. Norman C. Schwartzkoff, a former director of the applicant.
The issue in each case is whether the payment involved is an allowable deduction pursuant to s.51(1) of the Income Tax Assessment Act 1936, which provides:-
"All losses and outgoings to the extent to which they are incurred in gaining 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."
In large measure, the parties are agreed as to the relevant facts, although in one significant respect there is a factual matter to be resolved.
Telecasters North Queensland Limited is a public company incorporated on 18 September 1959. Its principal activity has been and remains the operation of television stations TVQ7 in Townsville and FNQ10 in Cairns, as well as various radio stations.
The applicant was granted a broadcasting licence in respect of TVQ7 on 1 June 1962 and commenced transmission on 1 November 1962. Pursuant to the applicant's Articles of Association, the business of the applicant was managed by its directors. Mr. Carmody was a director of the applicant from its incorporation until 29 October 1981. At a directors' meeting held on 8 September 1981, Mr. Carmody, who was then aged 72 and was then the Chairman of Directors, advised the Board that he would retire, in accordance with s.121 of the Companies Act 1961-81 (Qld.), at the conclusion of the applicant's annual general meeting which was to be held on 29 October 1981.
In relation to the payment made by the applicant of $100,000.00 to Mr. Carmody, the directors of the applicant at the meeting on 8 September 1981 resolved:-
"(1) That the Company pay to Mr. C.K. Carmody C.B.E. Chairman of Directors on his retirement at the conclusion of the Annual General Meeting being held on 29th October, 1981, a retiring allowance of $100,000.00 in consideration of the services granted by Mr. Carmody to the Company since its formation and in the light of the Company's spectacular growth under Mr. Carmody's leadership and in recognition of his guidance and contribution to the Company's growth.
(2) That the Shareholders be advised of the resolution of the Directors to pay the amount of $100,000.00 to Mr. C.K. Carmody as a retiring allowance and that a resolution be put to the next Annual General Meeting of shareholders seeking the shareholders' approval of the Directors' action."
The factual question earlier referred to concerns a resolution recorded in the minute book of the applicant as having been passed at the meeting of directors on 7 and 8 September 1981, immediately prior to the two resolutions just set out. The minute book records alongside a marginal note which reads "Future company policy in relation to payment to directors during their term of office and upon retirement", the following:-
"It was resolved on the motion of Mr. Gleeson, seconded by Mr. Roberts that in view of the need to encourage persons of outstanding competency and of recognised ability to join the Board of Directors in the future that the Company adopt the policy of making adequate additional payments during their term of office and upon retirement to those persons who as members of the Board demonstrate such competency and ability. Mr. Carmody vacated the Chair in favour of Mr. Gleeson."
The existence of this resolution is the subject of submissions by counsel on behalf of the Commissioner. That the board of directors did so resolve is important to this appeal, because it is the submission made on behalf of the taxpayer both in relation to the payment of $100.000.00 to Mr. Carmody and the payment of $750,000.00 to Mr. Schwartzkoff, that those payments are properly to be characterised not as retiring allowances paid as a reward for past services but as payments made in furtherance of the policy expressed in that resolution; and that the payments made to Mr. Carmody and Mr. Schwartzkoff were payments whose object was to ensure that persons of outstanding competency and recognised ability would join the board of directors, and whose commitment to the company's success would result in the company's prosperity.
On 23 September 1981, the secretary of the applicant, Mr. Errol Wenck, wrote to the Deputy Commissioner of Taxation in these terms:-
"RE: Retiring Allowance - Chairman of Directors At a meeting of the Directors of the Company early in September it was resolved that subject to the approval of the shareholders in general meeting that the Company in consideration to the services granted by Mr. Carmody to the Company since its formation and taking into account the growth of the Company under his leadership that the Company proposes to pay Mr. Carmody a retirement allowance of $100,000 and seeks approval from the Taxation Department for a deduction for this payment under Section 51 of the Income Tax Assessment Act. Mr. Carmody is entitled under the Director's Superannuation Scheme to a payment of $70,000 but in light of the Company's spectacular growth under Mr. Carmody's leadership in formulating company policies the Company itself was desirous of making this payment in recognition of his guidance and contribution to the Company's growth."
This letter was forwarded to the Deputy Commissioner under a covering letter dated 29 September 1981 by Messrs. C.E. Smith & Co., Chartered Accountants. The covering letter said, in part:-
"A Resolution will be put to shareholders seeking approval for the payment, and subject to the Resolution being passed by the shareholders general meeting, confirmation is sought that a tax deduction will be available for the payment."
On 21 October, Mr. Edward Gibbs, then employed in the Australian Taxation Office, made a diary note of a telephone call he made to Mr. C. Rains of C.E. Smith & Co., and it records that Mr. Rains was advised that, on the information supplied, the view was held that a deduction would not be allowable to the company in respect of the $100,000.00 retirement allowance proposed to be paid Mr. Carmody, and the diary note continues:-
"In relation to the provisions of s.51(1) Mr. Raines attention was directed to Union Trustee Co.Ltd. v. FC of T (1935) 3 ATD 224 and the principle established therein i.e. that it must be shown that the outgoing was incurred in gaining or producing assessable income NOT of the past but in respect of future income - per Rich J."..the further pursuit of gain...
It was conceded that removal of a director with a motive to better the business of the company and thus earn more profit would fall within the requirements of the section (Maryborough Newspaper Co.Ltd. v. FC of T 43 CLR 450), but the situation in the subject case certainly did not come under this heading."
And later the diary note records:-
"He was informed that the deduction was dependent upon demonstration of the necessary nexus and this had not been shown.
Mr. Raines asked me to defer a reply to his firm's request until tomorrow to enable him to contact the barrister and if possible submit further information and argument. This I agreed to do."
There is no evidence to suggest that any such steps were taken and the basis of the unnamed barrister's advice is not in evidence before me.
On 29 October 1981, at the annual general meeting of the applicant, the minutes record, under the rubric "Retirement Allowance Mr. C.K. Carmody, C.B.E.", the following:-
"Mr. Carmody vacated the Chair in favour of Mr. J.F. Gleeson.
Mr. J.F. Gleeson moved that the company pay to Mr. C.K. Carmody, C.B.E., Chairman of Directors, on his retirement at the conclusion of the Annual General Meeting being held on the 29th October 1981, a retiring allowance of $100,000 in consideration of the services granted by Mr. Carmody to the company since its formation and in the light of the company's spectacular growth under Mr. Carmody's leadership and in recognition of his guidance and contribution to the company's worth. In seconding the motion, Mr. G.V. Roberts expressed the appreciation of the Directors, shareholders and himself, as without the guidance and personal contribution, the company would not have been as successful as it had been as was demonstrated by the fact that there was no company as well established as this company in country television.
Mr. Roberts expressed the hope that this payment, which was richly deserved by Mr. Carmody, would encourage other persons of outstanding competency and recognised ability to join the Board of Directors of Telecasters North Queensland Limited in the future and the company would adopt a policy of making adequate additional payments either during their term of office or upon their retirement from the Board, to those persons, who as members of the Board, demonstrate such competency and ability."
The minutes then note some comment from the floor, that the motion then was put and carried, and that Mr. Gleeson then vacated the chair in favour of Mr. Carmody.
By letter dated 2 November 1981, the Deputy Commissioner of Taxation wrote to Mr. Raines of the chartered accountants acting for the applicant. That letter made reference to a letter of 14 October 1981, the terms of which is not in evidence, but it seems from the body of the letter of 2 November 1981 that it is in response to the letter of 29 September 1981.
The letter of the Deputy Commissioner reads in part:-
"In your letter you have sought the opinion of this office as to the deductibility of a proposed retiring allowance to the Chairman of Directors of Telecasters North Queensland Limited. Telephonic advice to you of 21 October 1981 is confirmed as hereunder."
After reference is made to s.51(1), the letter continued:-
"In determining whether a deduction is allowable to a company under that provision regard must be had to the decisions handed down by Courts and Boards over the years. In the main the view has been taken that a deduction is not allowable if the payment is solely in respect of the director's past services. In that regard the following references are thought to be pertinent. The words of Rich J. in the case of Union Trustee Co Australia Ltd v. FC of T (1935) 3ATD 224 at page 235 are of telling importance. The principle he enunciated was ...'it must appear that it is an outgoing incurred for the production of assessable income. There must be a connection between the purpose of the payment and the further pursuit of gain, the production of income.'"
Later the letter said:-
"The reason for the proposed payment to Mr. Carmody is set out in an earlier communication by Telecasters North Queensland Group Limited. This letter stated that the payment would be ...'in consideration to the services granted by Mr Carmody to the company since its formation and taking into account the growth of the Company under his leadership...'.
On this basis as the payment is being made in respect of Mr. Carmody's past services it is considered that a deduction under section 51(1) would not be available to the company."
The letter also noted that s.78(1)(c) was not applicable and, on the appeal, deductibility on that basis was not pursued.
It is to be noted that none of the correspondence between the company and its accountants and the Australian Taxation Office refers at all, as the basis for the payment, to a policy of encouraging outstandingly competent and able directors.
The minutes of the annual general meeting attribute to Mr. Roberts the hope that the payment to Mr. Carmody would encourage other persons of outstanding competency and recognised ability to join the board, and the hope that the company would adopt a policy of making adequate additional payment either during their term of office or on their retirement to those persons who, as members of the board, demonstrate such competency and ability. Mr. Roberts said in evidence that the minutes are inaccurate: that he in fact spoke to the general meeting of the policy of the company which had been resolved by the directors at the September meeting of the board.
The submission on behalf of the Commissioner was that the court would not be satisfied that the directors did so resolve as the minutes of 7 and 8 September indicate. Apart from the expressions attributed to Mr. Roberts in the minutes of the annual general meeting, reliance is placed on the condition of the book recording the minutes of the board of directors of the applicant and on the inferences to be made from that condition.
The minute book consists of a bound volume of blank pages on which the typed minutes of the meetings of the directors are glued. The minutes for the meeting of 7 and 8 September and for the meeting of 27 September indicate that pages have been removed from the blank sheets and pages reglued to those pages. The minutes for each of those meetings contain a typewritten note glued over the typewritten minutes, which reads:-
"In error these Minutes were originally glued in to the Minute Book in the incorrect page order and were subsequently removed and re-glued in the correct order. This is the reason it is apparent that Minutes have been removed and reglued."
It was submitted on behalf of the Commissioner that the court should infer that, in the light of the recorded comments of Mr. Roberts and the correspondence, the details of which have been earlier set out, the minutes have been recast as to permit an argument for the deductibility of the payment to Mr. Carmody based on considerations other than that the payment was as a reward for past services.
Mr. Wenck, Mr. Gleeson, and Mr. Roberts have all given sworn evidence that the resolution recorded as having been passed by the directors at the meeting of 7 and 8 September 1981 was so resolved. All were cross-examined. Mr. Wenck has been secretary of the applicant since 1978. Mr. Gleeson was instrumental in the formation of the applicant and is a prominent businessman. Mr. Roberts has been a solicitor of the Supreme Court of Queensland for more than fifty years, now a consultant to Messrs. Roberts Leu & North, Solicitors of Townsville.
I am satisfied that the resolution recorded in the minutes of 8 September under the heading "Future Company policy in relation to payments to Directors during their term of office and upon retirement" was resolved by the directors at that meeting. In particular I accept the evidence of Mr. Roberts. He was the author of that motion. I accept that he believed that by paying retiring directors additional payments, there might be a spin off "down the track" in respect of current directors.
From the context of that resolution and the resolutions in relation to the retirement allowance to be paid to Mr. Carmody, I can not help but think that the possible tax implications were not far from Mr. Roberts's mind.
The payment to Mr. Schwartzkoff, for present purposes, is indistinguishable from the payment to Mr. Carmody.
In Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47, in the joint judgment of Latham C.J., Rich, Dixon, McTiernan and Webb JJ., at p 56 the following appears:-
"For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words 'incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income. Their operation has been explained in cases decided under the provisions of the previous enactments: see particularly Amalgamated Zinc (de Bavay's) Ltd. v. Federal Commissioner of Taxation
(1935) 54 CLR 295, at pp 303-304, 307, 309, 310 and W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 CLR, at pp 300, 301, 305-306, 308.
Notwithstanding the differences in other respects in the present provision, the expression 'incurred in gaining or producing the assessable income' has been left unchanged and bears the same meaning. In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. It is by this standard that the question raised by the present cases must be determined."
For the Commissioner it was submitted that the expenditure was not incurred in the course of gaining or producing assessable income, and is not incidental and relevant to that end, nor can it be said to have been necessarily incurred for the purpose envisaged by the second limb of s.51(1).
I am satisfied that the two payments are not within the first limb of s. 51(1). Whether the payments were "necessarily incurred in carrying on a business for the purpose of gaining or producing" assessable income, is more difficult.
In Charles Moore & Co. (WA) Pty. Ltd. v. Federal Commissioner of Taxation (1956) 95 CLR 344, the appellant carried on the business of a departmental store and banked the daily takings, which were taken by a cashier accompanied by another employee to a bank a short distance away from the store. While on their way to the bank, the two employees were robbed at gunpoint. The High Court concluded that the loss was incurred in gaining or producing the assessable income of the year in question for the meaning of s.51(1), and was not a loss or outgoing of capital or of a capital nature and was consequently a deduction from assessable income in that year. The High Court, (Dixon C.J., Williams, Webb, Fullagar and Kitto JJ.) having referred to the passage in Ronpibon Tin N.L.. earlier set out, said at p 350-2:-
"Properly understood the place which the banking of money takes in a merchandising business brings the operation within the principle thus stated. It is an essential, or at all events highly expedient, part of the conduct of the business, a necessary or recognised incident or concomitant, and is relevant as well as incidental to the end in view, the gaining of the assessable income. The 'occasion of the loss' in the present case was the course pursued in banking the money. In Commissioner of Taxation (NSW) v. Ash (1938) 61 CLR 263 at 267, Rich J. said: 'There is no difficulty in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognized incident of a particular trade or business the profits of which are in question. These are characteristic incidents of the systematic exercise of a trade or the pursuit of a vocation'. Even if armed robbery of employees carrying money through the streets had become an anachronism which we no longer knew, these words would apply. For it would remain a risk to which of its very nature the procedure gives rise. But unfortunately it is still a familiar and recognised hazard and there could be little doubt that if it had been insured against the premium would have formed an allowable deduction. Phrases like the foregoing or the phrase 'incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income."
In my opinion, a retiring allowance paid as a reward for past services does not have the requisite connection.
In Union Trustee Company of Australia Ltd. v. Federal Commissioner of Taxation (1935) 53 CLR 263, a taxpayer had voluntarily made a retiring allowance in the form of Commonwealth bonds and a cheque to a business manager who, by reason of old age and ill health, had become incapacitated and had been replaced by a younger man. It was held that the taxpayer was not entitled to a deduction under s.23(1)(a) of the Income Tax Assessment Act 1922-1930, there being no connection between the payment and the production of assessable income. Rich J. said at p 269:
"...it is not enough that the payment sought to be deducted was made as a superannuation or a retiring allowance for an employee serving in a business. It is not enough that it was made in the course of business. It must appear that it is an outgoing incurred for the production of assessable income. There must be a connection between the purpose of the payment and the further pursuit of gain, the production of income. There must be some facts which justify the inference that the outgoing was incurred to conduce to that end. But there is nothing in the facts appearing in the case stated to show or to support the payment as an exemption under that sub-section. The facts do not show that the payment was incurred in gaining or producing the assessable income."
(my emphasis)
Dixon J. at p 270 said:-
"The first question arising is whether this payment ...can be considered an outgoing actually incurred ...in gaining the assessable income within sec. 23
(1) (a) of the Income Tax Assessment Act 1922-1930, and money wholly and exclusively laid out or expended for the production of assessable income within sec. 25(e)...Subject to the cautions which these authorities contain English cases such as Smith v. Incorporated Council of Law Reporting for England and Wales (1914) 3 KB 674 and Mitchell v. B. W. Noble Ltd. (1927) 1 KB 719, at p 725, suggest the test to be applied, a test which was formulated by Rich J. in the Maryborough Case (1929) 43 CLR 450. Tried by that test, the claim to bring the payment within the deduction allowed as a result of secs. 23 (1) (a) and 25 (e) must fail. 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 is nothing to establish a connection between the payment and the production of income."
In Federal Commissioner of Taxation v. Robinson and Mitchell Pty. Ltd. (1941) 64 CLR 612, the company paid an annual sum by way of retiring allowance to a former managing director, who still retained his shares in the company. There was evidence leading to the inference that he required the retiring allowance to be paid in order that he should get a return from his shares in the company as soon as he ceased to draw his salary as managing director. McTiernan J. held that the allowance was not a loss or outgoing "incurred in gaining or producing the company's assessable income, or necessarily incurred in carrying on the company's business for the purpose of gaining or producing such income within the meaning of sec. 51(1) of the Income Tax Assessment Act 1936-37." The respondent had income from commissions for work done by it as an insurance broker and underwriting agent. It had paid a sum to a person who had been the managing director of the company since its incorporation to the time he ceased being managing director to enter a new field of business. The sum was entered in the company's profit and loss account as "a retiring allowance". McTiernan said at p 613-4:-
"This description does not suggest a payment the tendency of which is to produce income, but rather a payment made out of income after it has been earned. It suggests that the recipient has withdrawn from any participation in the operations by which income is earned. But yet such a payment might in special circumstances be part of the expenditure incurred in producing a taxpayer's income. The question whether any retiring allowance is a payment of that nature is one of fact: See Maryborough Newspaper Co. Ltd. v. Federal Commissioner of Taxation (1929) 43 CLR 450, and cases cited by Rich J. at p 452."
Two directors who voted on the resolution that the former managing director be paid a retiring allowance at a certain rate for a three year period gave evidence of the motive with which they were actuated in bowing to the former managing director's proposal that the amount of the retiring allowance be 800.00 pounds. McTiernan J. said at p 617:-
"The motive was determined by their appreciation of W. Mitchell's influence with the company's customers. They realized that if he exercised that influence against the company, or refrained from exercising it in its favour at a critical time, the result would be disastrous to the business. They were anxious not to alienate W. Mitchell and to avoid any possibility of arousing in him any antagonism. This evidence of the motive which the directors had in accepting W. Mitchell's entire proposal is relied upon by the company to show that the retiring allowance was an outlay incurred to ensure that the company's income would be kept up to its normal level, notwithstanding his retirement. This view, if at all tenable, could be taken only of so much of the allowance as exceeds the amount to which the two directors would have agreed without objection."
He later said:-
"The motive which the directors had in agreeing to the payment of the allowance cannot affect the purpose or the tendency of the payment. The evidence of their motive merely shows why they voted, perhaps reluctantly, for the payment of a retiring allowance of a larger amount than they thought was warranted by the financial position of the company."
There are cases in which a retiring allowance or similar payment has been allowed as a deduction. Those cases do indicate that there is an immediately identifiable benefit to the taxpayer which prompted the payment. In Maryborough Newspaper Company Limited v. Federal Commissioner of Taxation (1929) 43 CLR 450, an editor of a newspaper was unwilling to retire except on payment of an adequate allowance. Directors and shareholders considered his retirement was in the interests of the newspaper and, by agreement with the company, the editor retired on an allowance, and a new editor was appointed resulting in an increase in circulation and profits. It was held by Rich J., the question being one of fact, that the allowance paid to the editor was an outgoing wholly and exclusively laid out or expended for the production of the assessable income of the company. Rich J. said at 454:-
"In my opinion they were not actuated, in giving the allowance, by any other motive than by a desire to better the business of the Company, and thus earn more profits. It may have been possible for them to adopt ruthless measures, but they doubtless realized that the unfair treatment of an editor who had long been in their service and who was a fellow-director and was held in high esteem in the community in which the newspapers circulated would be the worst means of increasing the papers' circulation and the best means of deterring suitable persons from aspiring to the editorship so rendered vacant. It is generally recognized that such payments ensure loyalty and efficiency in the service of undertakings, and enable a company to supersede a servant whose usefulness is diminishing by one whose usefulness is increasing, without an unconscientious use of powers of dismissal which would destroy the confidence of employees and suitable candidates for service with the Company. No doubt these considerations were not expressly canvassed by the directors, but they are instinctively felt by business men in such situations. At any rate, I am satisfied that no other purpose than the production of more income prompted the agreement to pay the retiring allowance."
In the present case, it is clear that the "incentive" aspect of the payments was quite secondary to the primary desire to reward Mr. Carmody and Mr. Schwartzkoff for their services to the company; it certainly was not the sole purpose prompting the payment.
It seems to me that a failure to pay a retiring allowance, of the kind that was paid in the Union Trustee Case (supra), might be regarded as unfair, and tend to diminish the reputation or image of a company, with deleterious consequences for future income. A recognition of that possible consequence at the time of the payment, and a desire to avoid it by the payment, does not, in my opinion, alter the nature or character of the payment, so as to bring it within the second limb of s. 51(1).
In W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 CLR 290, a company previously managed by one managing director, introduced a system of joint management. The latter system did not work out satisfactorily and, in the belief that its abolition would lead to increased efficiency and with a view to saving the salary of the second joint manager, an arrangement was made that a payment be made in consideration of the resignation of the additional managing director. It was held that the payment was a loss or outgoing incurred in gaining or producing assessable income within the meaning of s.23(1)(a) of the Income Tax Assessment Act 1922 and was not prohibited by s.25(e) of that Act, because it was money wholly and exclusively laid out in production of such assessable income. Latham C.J. said at p 300:-
"The payments in question were actually made bona fide in the course of business in the interests of the efficiency of the business. In my opinion they fall within the terms of the proposition of Viscount Cave L.C. in British Insulated and Helsby Cables v. Atherton (1926) AC, at p 212: 'A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade'."
He later said:-
"The facts stated in this case show that the expenditure was actually incurred in gaining or producing the assessable income of the year in question. The expenditure was made for the purpose of increasing the efficiency of the company and therefore increasing its income producing capacity. It was not a capital expenditure, it was, in my opinion, an expenditure incurred in the course of gaining or producing assessable income (See Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation
(1935) 54 CLR 295)."
He said at p 301:-
"No expenditure, strictly and narrowly considered, in itself actually gains or produces income. It is an outgoing, not an incoming. Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well-conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessable income. If it is not a capital expenditure it should be deducted in ascertaining the taxable income of the taxpayer."
In Mitchell v. B.W. Noble, Limited (1927) 1 KB 719, the directors of a company, in order to save the company from scandal, found it necessary to get rid of a director and, to do so, paid him a sum of money. It was held by the Court of Appeal that the money was "wholly and exclusively laid out and expended for the purposes of the trade" of the company.
In Smith v. Incorporated Council of Law Reporting for England and Wales (1914) 3 KB 674, the Council of Law Reporting gave a gratuity of 1500.00 pounds to one of their reporting staff on his retirement after long service. The payment was not made under any contract, but it was within the power conferred on the respondents Memorandum and Articles of Association, and it was the habit of the respondents to give gratuities to reporters on retirement after long service. The item was included as an item of expenditure. It was held by the Commissioners that the payment was allowable as a business expense, and on a case stated, Scrutton J., as he was then, in dismissing the appeal said at p 683:-
"If the facts stated are such that it is not possible from them to come to the particular conclusion of fact found, the Court is not bound by the conclusion of fact which the Commissioners have found with no evidence to support it; but if the facts stated are such that you may come to one conclusion or the other, the fact that the Court itself would have come to a different conclusion from that which the Commissioners have come to is no reason for disturbing the decision of the Commissioners. Therefore, the question which has to be considered in this case appears to me to be this: First of all, have the Commissioners come to a finding of fact; secondly, was there evidence on which they could come to that finding?"
He concluded that the question whether money is wholly and exclusively laid out or expended for the purposes of a trade is a question of fact. His Honour then considered whether there was evidence upon which the Commissioners could make that finding. He said at p 685:
"One cannot help using one's ordinary knowledge of human nature to know that in some cases the expectation of gratuities may materially affect the amount of salary. If I may compare a very small and insignificant profession with a very great and dignified one, waiters, to the common knowledge, take much less salary because of the gratuities they expect to receive; and when I find that the Commissioners have found that it is the habit of these employers to give their reporters gratuitous pensions or gratuities of lump sums I cannot help seeing that there is evidence upon which the Commissioners judging facts may find that those payments were made in the way of their trade because they at any rate may affect the amount of ordinary salary which they pay to their reporters."
He stated his opinion as follows:-
"...their decision of fact, there being evidence on which they could have decided it, is not a matter which can be reversed on appeal."
As earlier indicated, I reject the suggestion on behalf of the Commissioner that the minutes of the applicant were somehow contrived to reflect other than what actually occurred, or was meant.
In Magna Alloys & Research Pty.Ltd. v. Federal Commissioner of Taxation; (1980) 49 FLR 183; (1980) 33 ALR 213; 80 ATC 4542; the Full Court of the Federal Court held that the taxpayer's motive in incurring the expenditure was not the critical criterion for deductibility under s. 51(1). The test in that case whether legal expenses incurred in defending criminal charges relating to the payment of secret commissions in the course of the taxpayer's business was whether the expenditure was apt to serve the business purposes of the taxpayer.
Brennan J. said at 196:-
"Given a sufficient identification of what the expenditure is for and the character and scope of the taxpayer's income-earning undertaking or business, the question whether expenditure is incurred for the purpose of carrying on a business or for the purpose of gaining or producing assessable income does not depend upon the taxpayer's state of mind. The relationship between what the expenditure is for and the taxpayer's undertaking or business determines objectively the purpose of the expenditure."
He said at 185:-
"Both motive and subjective purpose are states of mind and they are to be distinguished from objective purpose, which is an attribute of a transaction. An objective purpose is attributed to a transaction by reference to all the known circumstances; whereas subjective purpose and motive, being states of mind, are susceptible of proof not by inference alone but also by direct evidence, for a state of mind may be proved by the testimony of him whose state of mind is relevant to a fact in issue.
Though references to motive and purpose are to be found in cases arising under s. 51, neither motive nor either kind of purpose is a criterion of deductibility."
Deane and Fisher JJ. said, at 209:-
"The outgoings in the present case were not involuntary. They achieved the immediate purpose of those responsible for incurring them. That purpose was to provide legal representation for directors and agents of the taxpayer in respect of criminal prosecutions arising out of their actions in their respective capacities as directors and agents. The actions in question were performed on behalf of the taxpayer in the course of carrying on the taxpayer's income-earning business and were plainly directed towards earning assessable income for the taxpayer."
The payment to Mr. Carmody was made as a reward for past services.
I make a similar finding in respect of Mr. Schwartzkoff. The quantum of the amount in his case reinforces my view that the amount in his case, as admitted by Mr. Gleeson, was calculated on the basis of the amount Mr. Schwartzkoff would have earned had he been a director in his own right during that period when he was a director as the nominee of A.W.A.. The connection between the payment and his past services is, in his case, even clearer.
In my opinion, the fact that the board perceived that such payments would have the additional desirable effect "pour encourager les autres" does not bring the payments within s. 51(1).
I do not regard this as a case for apportionment between a payment having different components. (cf. Buckley & Young Ltd. v. Commissioner of Inland Revenue 78 ATC 6,019, particularly at 6,029, 6,030).
The appeals are dismissed, with costs.
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