AMWAY OF AUSTRALIA v FC of T
Judges:Gyles J
Court:
Federal Court
MEDIA NEUTRAL CITATION:
[2003] FCA 1533
Gyles J
These proceedings concern the deductibility of certain costs and expenses incurred by the applicant Amway of Australia (Amway) in relation to the conduct of conferences or seminars for its distributors. The applicant appeals against the appealable objection decision of the Commissioner dated 21 January 2001 to disallow of the applicant's objections for eight years of income ending between 31 August 1989 and 31 August 1996.
2. The appeals are now limited to outgoings which the applicant claimed it incurred in conducting seminars known as the Australian Leadership Seminars (ALS) in each of the eight years of income and other seminars known as Go Diamond in the 1995 and 1996 years of income. The appeals involve the application of a complicated set of provisions relating to entertainment expenses which have escaped
ATC 5156
judicial consideration since introduction in 1983.3. It was agreed between the parties that the points of principle would be decided by reference to the expenditure on the 1993 ALS held in Bangkok. If the dispute were to be resolved to any extent in Amway's favour, the assessments for all the years in dispute will be remitted to the Commissioner for amendment in accordance with that finding.
4. Evidence was given on behalf of Amway by its former Managing Director, Bruce Shankland, four successful distributors (Brice Douglas, Peter Light, Peter Ross and Vivienne Edwards), the Events Manager, Christopher Prouting, and the Finance Manager, Glenn Tunley. The Commissioner did not call any witnesses. It is useful to set out some general details of the Amway business and the seminars in question, before addressing the evidence given by each witness.
The Amway business in general
5. The applicant commenced business in Australia in 1971. During the relevant period, Amway was a retailer of health, beauty, home care and home living products. It was accepted that the following brief description of the Amway business given by the Full Court
Amway of Australia Pty Ltd v FC of T & Anor 99 ATC 4359 at 4361 [5] is correct:
``Amway sells a variety of products directly to the public through a network of individuals who sell as its agents on a commission basis. It does not sell any products by wholesale, nor does it sell through its own shopping outlets. To the extent that it sells the same or equivalent merchandise as retail stores it can be said to be in competition with those stores. But of necessity, its cost structure is entirely different from such stores. It has none of the overhead costs associated with retail stores, but incurs other costs peculiar to its maintenance of a distributorship network.''
6. New distributors were recruited by existing Amway distributors. The existing distributors became the ``sponsors'' of the new distributors. This system produced a chain of distributors in which a more senior distributor was described as ``upline'' from the distributors they had recruited (and from those recruited in turn down the chain). The recruits were known as ``downline'' distributors from those ``upline''. Materials produced by Amway were used to explain the business structure to the new distributors. These documents, which were updated over the relevant period, explained the methods by which the distributors earned commission on the sale of Amway products, built business groups, achieved rewards and rose within the Amway distributorship hierarchy. As part of their agreement with Amway, the distributors were required to comply with certain rules of conduct.
7. The Amway distributors provided two forms of service to Amway - the selling and consequent ordering of Amway products at Amway's retail price on behalf of Amway, and the sponsoring of new distributors. The distributor did not sell or purchase Amway products as principal. Amway provided services such as training, product information, support and a money-back satisfaction guarantee. Amway's income from products sales increased as each distributor increased its orders. The distributors increased their orders by increasing their own sales to consumers and by sponsoring new ``downline'' distributors.
8. During the relevant period, there were three categories of Amway products: coreline products, catalogue products and locally sourced non-catalogue products. The earnings of distributors on sales of products were based on a complex commission structure which recognised both direct sales and those made by downline distributors. Distributors earned points for sales at different rates according to the category of product. A distributor was eligible to become a Direct Distributor when they achieved a specified points value. As they increased their business, and met the relevant qualification requirements (which included both points, and downline distributor groups), the Direct Distributors became eligible to reach higher levels such as ``Founders Direct Distributor'', Sapphire, Emerald, Diamond and Executive Diamond.
9. Distributors generally ordered products by telephone or mail sent to their upline Direct Distributor. A Direct Distributor was the only type of distributor authorised by Amway to order products directly from Amway's warehouse. Direct Distributors had the responsibility to train, supervise and foster their downline distributors with whom Amway had little contact.
ATC 5157
10. The distributors were free to build their own business, subject to certain standards required by Amway, but without minimum purchase requirements. Amway offered a range of rewards and incentives in order to encourage distributors to develop their business and thereby increase their purchase of Amway products.
Amway Seminars
Australian Leadership Seminars
11. The ALS was an exclusive seminar hosted annually by Amway for Direct Distributors. The ALS was generally held at a good quality venue at a holiday destination. The majority of the ALSs in question were held overseas, although two of the ALSs during the relevant period were held in Australia: 1991 at Hamilton Island, and 1994 at Alice Springs. Invitees travelled and stayed at Amway's expense, attended various business sessions at the venue, and had the opportunity to enjoy other activities such as golf, tennis, swimming, and gala dinners. Attendance was by invitation only. To be eligible for an invitation, Direct Distributors had to qualify by achieving a specified number of points based on the distributor's performance during the previous year. The ALS was held around October/ November/December each year, and lasted for about 6 days. There was generally a fancy dress dinner held on one of the nights. In the months leading up to the ALS, it was advertised to all distributors through Amway newsletters and magazines, such as Amagram.
12. The formal schedule for each ALS included a number of Business Sessions. Examples of the topics covered at these sessions included: business image and business presentation skills; sales and marketing; the current state of the Amway business and new initiatives. The ALS schedule also included Recognition Ceremonies - where Diamond distributors gave speeches about their success at business sessions. The ``Coffee Shop'', which also appeared on the schedule, was a room set aside as a venue for distributors to meet with Amway corporate staff to discuss business problems and issues. The corporate staff were rostered on and the roster appeared on the ALS schedule.
Go Diamond Seminars
13. ``Go Diamond'' seminars were held in the lead-up to the ALS in 1995 and 1996. These were attended by qualified Emerald Direct Distributors in the five days preceding the ALS. These seminars were held to encourage distributors who had reached the Emerald level to qualify for Diamond level. The Emerald Distributors were exposed to higher ranking distributors in the hierarchy. They were at a higher level of luxury than the ALS. The 1995 Go Diamond was held in Hollywood. In 1996, the Go Diamond seminar was held in Hawaii and, together with some business sessions, offered the attendees the opportunity to take helicopter flights, and go rafting or scuba- diving.
Witnesses
14. I shall give an account of the evidence given by the witnesses, although this will not attempt to be comprehensive. I regarded all witnesses as essentially truthful, although there was exaggeration by all to a greater or lesser degree as to the significance of the business purposes of an ALS and a diminution of the recreational aspects of them.
Bruce Shankland
15. Bruce Shankland (Shankland) was a former Director and Managing Director of Amway. He had also held other senior executive roles in the Amway business both in Australia and overseas. Shankland became the Managing Director of Amway Australia in about 1975. He gave evidence as to the structure of the Amway business and the requirements for progression within the Amway hierarchy of distributors. His evidence was that Amway sought to promote its business by promoting the businesses of its distributors by fostering and maintaining the Direct Distributors. Direct Distributors enjoyed certain privileges and assumed certain responsibilities. He explained that because Amway did not retail its products itself, the continuing success of the Amway business was dependent on the continuing success of distributors in both selling products and sponsoring new distributors. According to Shankland, the success of its product ranges depended on ensuring that the distributors who purchased and sold the products to consumers were trained and able to differentiate them from product ranges sold in supermarkets and shops.
16. The objectives of the ALSs included discussing the business of Amway and the distributors and disseminating information
ATC 5158
about that business and its products. As stated in the manual provided to each distributor upon achieving the status of Direct Distributor, the Direct Distributor Manual, and as confirmed by Shankland in cross-examination, the purpose of each ALS was to provide the opportunity to:``a) facilitate meaningful business discussion between currently active field leadership and corporate staff;
b) facilitate an exchange of information between the field leadership and the company at the formal business sessions;
c) facilitate an exchange of information between participants at the informal business sessions;
d) lay the foundations for the future strategic direction of the Amway business;
e) develop and strengthen business relationships between corporate staff and field leadership;
f) improve working relationships between the individual qualifiers; and
g) foster a `climate' in which the philosophy of the co-founders of Amway is accepted, understood and promoted by the field leadership to their respective organisations.''
17. In cross-examination, Shankland acknowledged that Amway paid for the meals and hotel accommodation at the ALS, and arranged and paid for musical accompaniment at various events. Shankland noted that there were free days included in each ALS schedule, and that some distributors used this time to enjoy the recreational facilities of the venue, but most distributors occupied their time and attention with Amway business discussions during both ``free'' time and meal time. Amway staff did not have free days, as they were involved in organisation.
18. According to Shankland, Amway designed the mixture of formal and informal business and social events deliberately to ``provide a stress free environment for the dissemination and sharing of information about the business''. In Shankland's opinion, distributors attending ALSs spoke about business at every opportunity, including meal times, and ``did not engage in small talk to any significant extent''. His evidence was that during dinners the topic of conversation was invariably the Amway business and the operation of a distributorship, and following the meal, distributors usually listened to guest speakers for up to three hours. Counsel for the Commissioner challenged this evidence submitting that none of the other witnesses referred to guest speakers at the dinners. The respondents submitted that it was clear from the cross-examination that Shankland had no independent recollection of any of the events. Shankland also gave evidence of the importance of the ALS as an opportunity for Amway staff to meet Direct Distributors and provide them with information about Amway products and how to sell them.
19. In cross-examination, Shankland explained the reference in certain Amway business documents to ``free time'' at the ALSs as being ``free time to spend with their distributors and with corporate employees, which they did''. The ALSs were attended by a team of corporate staff. Referring to the Coffee Shop at the Bangkok ALS, Shankland explained in cross-examination that the while the Coffee Shop was scheduled from 10 pm to 12 midnight, it ``goes through until 2 and 3 o'clock in the morning''. While each evening of the Bangkok ALS, Amway provided alcohol for the consumption of the Direct Distributors at dinner, Shankland said in cross-examination that ``Amway distributors are not `let your hair down' [people]... 50 per cent are more than religious and probably 60 per cent don't drink''.
20. In response to counsel for the Commissioner's suggestion that Amway wanted to reward the Direct Distributors who were the best performers, Shankland responded that Amway wanted ``the leaders to be there... they were the ones worth communicating with and those were the one[s] worth spending the time and the effort so they could go back into the field and pass that information on to their distributors''. In cross-examination, counsel for the Commissioner also suggested that information was free flowing between direct distributors and the company at all times independently of any ALS event. Shankland rejected the suggestion, saying that most of the information that is passed on is a ``one on one thing''. Counsel for the Commissioner also suggested that at least one of the ALSs did not provide any information which could not have been obtained by a Direct Distributor attending a meeting in Australia. Shankland disagreed, explaining that counsel had ``totally
ATC 5159
misunderstood'' what the Amway business is about and that ``[i]t is a people, it's a relationship thing''.
Vivienne Edwards
21 In the relevant period, Vivienne Edwards (Edwards) and her husband were Amway distributors. They were invited to, and attended, every ALS since 1986. They also attended a ``Go Diamond'' Seminar in 1995. At the time of the hearing, Edwards was an Emerald level distributor.
22. According to Edwards' evidence, during the relevant period, a person became an Amway distributor by application to Amway. Upon acceptance of the application, Amway provided a starter kit, which included some Amway products. In the relevant period, there were no minimum sale requirements. After a distributor had earned a sufficient number of points, they qualified to become a Direct Distributor.
23. In cross-examination, counsel for the Commissioner took Edwards through the information she provided to new distributors she sponsored, and the need for distributors, below the level of Direct Distributor, to have good knowledge of the Amway products. Counsel for the Commissioner also sought to show through cross-examination that Edwards was able to communicate with her downline distributors without face-to-face meetings. Edwards rejected this proposition. Edwards also rejected the description of the Amway trips as ``holidays''. Edwards agreed with counsel for the Commissioner that before becoming a Direct Distributor, assistance and information was available to her from Amway, and from her own sponsor. In particular, her attention was drawn to the meetings held with Amway staff in Hobart, the availability of Amway video material on new products such as the Amguard security system, the Amagram magazine, Amway's national conventions and other Amway meetings, Amway product expos and showcases where all Amway coreline products were displayed.
24. Edwards gave evidence that she and her husband attended every business session of the events schedule at the ALSs, and that they were in constant contact with other Direct Distributors from Australia and New Zealand, as well as Amway corporate staff. Her evidence was that the Amway business was a constant topic of conversation during all the activities at the ALS, including meals and social events. In cross-examination, she clarified that she used the word ``constant'' as meaning continual throughout the day, not at every moment, but she maintained that the activities she engaged in at the Fiji ALS in 1989 involved constant discussion about business matters.
25. In her evidence in chief, Edwards described the ALS as a unique opportunity to meet upline distributors and successful distributors outside of her own business group, and to discuss business with them. The ALS was also an opportunity to discuss business with downline distributors and to introduce them to other distributors. She also said that the ALS was an opportunity to meet with Amway staff and discuss business with them. Edwards discussed topics such as new products, the cancellation of products from the range and bonus schemes and promotional ideas.
26. Edwards claimed to have gained information about existing and new Amway products at the ALS. She explained that on each ALS schedule there would be at least one product information session, sometimes more. Counsel for the Commissioner cross-examined Edwards to draw attention to the lack of detail in her evidence in chief, given by affidavit, (her affidavit did not give any evidence about a number of the ALSs which she claimed to have attended), and to show that she was already senior in the distribution hierarchy by 1992. Edwards gave more specific evidence in relation to a number of the ALS events.
27. Edwards said that she made regular use of the Coffee Shops at each ALS, and that the discussions held during the Coffee Shop were not social discussions. She noted that in addition to the rostered attendance at the Coffee Shop by Amway staff, it was possible to make informal appointments to meet Amway staff or upline distributors for a discussion at the Coffee Shop.
28. Edwards and her husband attended every function for the duration of the ALS in Fiji in 1989. The first Business Session in the schedule included a product presentation of Positrim, an Amway weight loss product. They received materials about the product at the business session, successful users of the product spoke, and a taste test of the product was held. Edwards said that following the 1989 ALS her sales of the product Positrim increased. In cross-examination, it was revealed that she also participated in recreational activities including
ATC 5160
swimming, dancing and sightseeing during the 1989 ALS.29. During the 1992 ALS at Las Vegas, Edwards was taken on a guided tour of the Amway ``Nutrilite farm'' (located between Las Vegas and Los Angeles), where she saw the processing plant and listened to lectures. After this experience, Edwards claimed to have felt more confident presenting the Nutriway health products to customers and distributors in her business group.
30. The second Business Session at the Bangkok ALS in 1993 included a product presentation of the Amway Artistry range of cosmetics where Amway product specialists spoke. The Artistry logo was used on items such as the table napkins, chocolates and pillow covers at the conference. In cross-examination, Edwards was asked about the elaborate presentation of the relaunch, including a laser light show and people dressed up as robots delivered to stage in a mock space ship. Counsel for the Commissioner suggested that Edwards was already aware of the information presented at the 1993 ALS. Edwards rejected the suggestion that the Artistry range (with minor occasional changes) was a range of products she had sold for years, explaining that there was a total revamp of the range.
31. Edwards and her husband qualified for, and attended, the 1995 Go Diamond seminar in Hollywood, which was held immediately before the 1995 ALS in Las Vegas. At the four evening dinners, senior Amway distributors from the United States of America gave presentations which were held during the dinners and lasted for some hours afterwards.
32. Edwards gave evidence of an ALS Business Fair held at the 1995 Las Vegas ALS, which consisted of a mock market place with various stalls presenting different Amway products and providing leaflets and product samples.
Brice Douglas
33. Brice Douglas (Douglas) and his wife joined Amway in 1971. Within eighteen months, they had become Direct Distributors. He was one of the leading distributors in Australia. By the time of swearing an affidavit in the proceedings, Douglas had been involved in Amway for over 30 years. His involvement had been at the ``Executive Double Diamond'' level for approximately 18 years. Douglas gave evidence of his progression through the different levels of the business, from Ruby Direct, Pearl Direct, Emerald Direct, and Diamond Direct, to reach Double Diamond Direct. He gave evidence that the Sydney-based Amway head office staff would travel to Adelaide, where Douglas lived, from time to time and attended distributor meetings. Douglas explained that he felt that ``such meetings were very important to the distributors, because there was limited contact in the field between distributors and Amway''.
34. Distributors received commission for sales. Distributors also recruited new distributors and sponsored them. Introductory information (such as the Amway business Directory) would be provided to new distributors. The new distributors learned from other distributors as well as the material provided by the company. Amway published a monthly magazine, called Amagram, throughout the relevant period, which included bulletins explaining the ordering and distribution processes, and legal and other articles. The sponsor has a vested interest in the new distributor's success and therefore an interest in providing the new distributor with adequate information. Douglas agreed with counsel for the Commissioner that by the time a person achieved the necessary status to receive an invitation to the ALS, they would have a good understanding of the Amway merchandising and mentoring. In cross- examination, counsel for the Commissioner suggested that the distributors had ample opportunity to learn about Amway, and Amway products, without attending the ALSs and challenged the value of the ALSs. Douglas did not agree, pointing in particular to those occasions when product demonstrations were required.
35. Douglas attended Amway's first National Leadership Seminar for Direct Distributors in Canberra in 1973. He claims to have learnt a great deal from this and subsequent seminars. Douglas has since attended every ALS, as they subsequently became known. Amway established formal qualification requirements for invitation to the seminars - only Direct Distributors achieving the specified sales volume in their group during a set period were eligible to receive an invitation.
36. According to Douglas, the Amway staff used the ALS to disseminate information to
ATC 5161
Direct Distributors on topics such as new procedures and legal developments. While Amway provides information to its distributors throughout the year, Douglas noted that the type of information distributed at ALSs was ``geared to the leadership within Australia''. The ALSs provided a forum for business issues affecting multiple Direct Distributors to be raised and discussed (such as shipping, distribution or the motivation for the return of products). Douglas also attended meetings of a ``Direct Distributors Club'', which was set up to discuss issues at the ALSs, and make recommendations to Amway on behalf of Direct Distributors.37. According to Douglas, the ALSs provided important product training from specialists, including demonstrations of both the products and the techniques used for selling the products. Douglas later communicated this information, and gave demonstrations to his downline distributors.
38. In addition to the business sessions, there were activities such as the ``Positrim mini Olympics''. A regular feature of the ALS was recognition ceremonies for new qualifiers where distributors would speak publicly on stage about their achievement. According to Douglas, these sessions sometimes occurred over dinner.
39. Douglas gave evidence about the Bangkok ALS including fireworks on the first night, and, as discussed previously, a laser light show which formed part of the promotion of the Amway range of cosmetics known as Artistry.
40. Douglas described the Coffee Shop at the ALSs as a room set aside for distributors to approach Amway staff and discuss certain business topics. According to Douglas, either he or his wife would be in attendance whenever the Coffee Shop was open.
41. In cross-examination, the Commissioner suggested that the ALSs were in fact an opportunity for a holiday in an exotic location, and that much time was spent on leisure activities. Amway's Amagram magazine included advertisements about the location and details of the next ALS. The event was publicised in such a way as to offer it as an incentive to people to qualify. Douglas recognised that attendance at the ALSs gave a ``sense of reward'' which was provided by both the luxurious venue, with high quality facilities and food, and the ability to associate with the leadership of Amway and the distributor networks. He described the Amway policy as being to provide an experience for the distributors which was ``out of the ordinary''.
42. However, for Douglas as a senior Double Diamond Direct Distributor, the ALSs also involved significant responsibility. He acted as a mentor to his downline distributors, finding out what their problems were and making them welcome at the ALS, and meeting their downline distributors. Douglas also gave evidence of the formal schedule of events at the ALS. His obligations at the event included rostered time at the Coffee Shop, speaking at and supervising support network meetings, and involvement in the Australian Diamond Advisory Council (``ADAC'') (which superseded the ``Direct Distributor's Club''). Some of these activities did not appear on the schedule of events. Computer terminals were available during ALSs to allow distributor organisations to check on their organisation while they were at the ALS. In addition to the business activities scheduled, opportunities for golf and tennis were provided. According to Douglas, all his time at an ALS was taken up in talking to his associates, including meal time where he would normally discuss issues with someone.
43. Douglas added that in addition to the support and information provided by Amway, new distributors could be part of one of four bodies, independent from Amway, namely INA, Network 21, Interlink and IDA. These groups provided additional assistance to new distributors.
44. Douglas was cross-examined about his attendance at events adjacent to the ALSs. These events included a trip on the Orient Express and a cruise, and were only available to very high level distributors (for example in 1993, approximately 15 distributors attended), unlike ALSs, which (to use 1993 as an example again) were attended by around 550 people.
45. The ALSs were, at least for the most part, held at five star hotels. The meals were substantial and alcohol was provided with the evening meal. Douglas recognised that the ALSs were used as incentives. He said that he attended fancy dress parties held at ALSs. In addition to the standard ALS program, there was sometimes a function restricted to higher level distributors only.
ATC 5162
Peter Light
46. Peter Light (Light) joined the Amway business with his wife in 1987. His evidence was that the time of making his affidavit, their business was at the Diamond level, and their distributorship had an ``overall membership exceeding 10,000''. Light was also a member of the ADAC.
47. Light was cross-examined extensively as to his initial introduction to the business, and his contacts within the business. The Lights were introduced to Amway by the Smarts - Mrs Light had previously known Mrs Smart. Light explained that he had been to several seminars within the first 12 months of joining Amway. Those seminars were paid for by the attendees. The ALS was advertised through the Amagram and from the beginning of his distributorship, Light was aware of the possibility of receiving an invitation to an ALS.
48. Initially, Light was not particularly concerned with Amway seminars, although he noted that reference was made to them in the Amway Business Manual which new distributors received at the commencement of a distributorship. His awareness of Amway seminars, in particular the ALSs, grew through reading Amway newsletters, and through descriptions of the ALS from upline distributors who attended monthly business group meetings. The monthly meetings were held through IDA (Interactive Digital Alliance), one of the four distributorship support networks in Australia. IDA was an organisation running training independently from Amway, to educate, motivate, and inspire distributors from the initial stages. This training was conducted in person. Light said the ALS was, by 1989 or 1990, a goal for their distributorship. He described the ALSs as ``free overseas trips to attractive locations combined with the opportunity to meet and mix with the leadership of Amway networks in an environment where personal relationships can be developed and the business discussed in a constructive way with experienced distributors''. They attended their first ALS in 1990, and since then have attended all but one.
49. Light described his first ALS in 1990 as having a ``tremendous impact'' on him, and as giving him ``new insights into the nature both of Amway as a corporate business and into the distributorship networks operating in Australia''. At that ALS, Mr and Mrs Light spent time with their sponsors, the Smarts, with whom they discussed ways to improve their business. In cross examination, Light said that he recalled a sightseeing trip taken at that ALS, and a game of golf both with their sponsors (the Smarts) and the Smarts' sponsors. Through the Smarts, they met other people in Amway, including Amway executives, with whom the Lights would not usually have the opportunity to develop relationships, or even meet.
50. Once the Lights became more senior in the Amway organisation, they attended ALSs as mentors for their own downline distributors, introducing them to upline distributors and Amway executives, ``and attending constant appointments with them''. Such appointments would be made informally, at a time outside the scheduled activities. The meetings sometimes took place over meals or during sightseeing events, or sometimes in a more formal fashion. Following ALSs, Light could offer their business organisation new information from Amway about the directions in which the overall distributorship network was moving, new business developments, new product releases and improvements in technology. The Amway catalogue was constantly being updated, and information about new products and services was always released to Direct Distributors first at an ALS.
51. Light said that the facilities, food and accommodation at ALSs were of a high quality. In cross examination, Light was asked about the parties held during the ALS, the provision of alcohol by Amway at such events, the organised sightseeing trips, the recreational facilities available at the venue, and the Amway reward and bonus system.
Peter Ross
52. Peter Ross (Ross) and his then wife (Angie Powers) became Amway distributors in partnership in August 1984. At the time of swearing his affidavit, Ross was a shareholder in a company which operated as an Amway independent business operator (``IBO'' a form of distributorship introduced after the relevant period). By the time of the hearing, Ross had sold his share in the company to his former wife. Their business achieved ``Silver Producer'' status in 1984, and ``Direct Distributor'' status in 1985, at which stage their distributorship had sponsored 21 other distributorships, and their business organisation consisted of about 70 distributorships. The
ATC 5163
business achieved various other levels before reaching ``Double Diamond Direct'' status in August 1997. Although their distributorship was invited to every ALS after 1986, due to Ross's separation from his wife in 1992, he did not attend every seminar - it was decided that Powers would attend a number of the seminars on her own. Ross explained that in any event, he was unable to attend a number of the relevant ALSs, as he was overseas developing his Amway distributorships at the relevant times.53. In cross-examination, Ross explained that the Amway business was ``based on people relations and leadership'', and described it as a ``relationship business''.
54. Ross explained that there were four main support networks or associations of distributors with common interests, run by distributors independently from Amway. He belonged to the support network ``Network 21'', whose members had a particular interest in developing Amway distributorships overseas in places such as South America, South Africa and Eastern Europe. Leaders of the support networks would meet at the ALSs and discuss issues and problems affecting distributors. The role of the support network was also to represent distributors on distributor issues in discussions with Amway. Ross also became involved with the Australian Diamond Advisory Council, which was a steering committee of Diamond Direct distributor representatives.
55. Ross gave evidence that when he attended the ALSs in 1986, 1987, and 1988, he used his attendance to meet leaders in the Amway business and to learn from Amway staff and senior distributors about the business. He attended all the business sessions and product launches, carefully collecting samples and training materials provided for him to use back in Australia. He also attended the Coffee Shop sessions, and took the opportunity at meal times and during tours to discuss the business and its development. He claims that he almost always took notes of such discussions and observed other participants doing the same. He gave evidence about the introductions and discussions which were made possible by attendance at ALSs, and his belief that these opportunities contributed to the continuing success of his Amway business. In cross- examination, he agreed that by the time he attended an ALS, and in order to reach the qualification requirements, he already had considerable involvement with his upline and downline distributors. Ross emphasised that his focus was not on products, but on leadership. Ross also rejected the suggestion that the seminars were ``holidays''. In cross- examination, Ross agreed that there was generally a fancy dress party held on at least one of the nights of the ALS.
56. Ross's distributorship qualified for and attended the 1986 ALS in Hamilton Island. He and Powers attended every function and activity and spent a lot of time with their upline distributors, talking most of the time about the business and their future with Amway. At later ALSs, Ross was more interested in discussing business with his own downline distributors.
57. Ross attended the 1989 ALS in Fiji. Ross referred to the launch of the Positrim line of products occurring at that ALS. According to Ross, the launch included sampling sessions and discussions on selling and training downline distributors. He stated that they learned how to conduct weight loss training seminars, and that in subsequent years his business organisation successfully sold large quantities of the Positrim product. In cross- examination, counsel for the Commissioner referred Ross to various activities at the so- called Positrim mini Olympics at the ALS. Ross responded that it was ``excellent team building''.
Glenn Tunley
58. Glenn Tunley (Tunley) was the Finance Manager of Amway, and Amway of New Zealand. He was first employed by Amway of New Zealand in December 1992 as the Management and Systems Accountant. In 1997 he was appointed to his position as Finance Manager of Amway of Australia. He has had management responsibility for the preparation of accounts, including preparation of budgets, budget forecasts and review and analysis of financial performance. He had not attended any of the Amway seminars. He had little, if any, involvement with them but he gave evidence that he had taken steps to familiarise himself with the accounting procedures which applied in the relevant period.
59. Tunley gave evidence that the qualifying period for potential attendees at the ALS had been, and continued to be, 1 September to 31 August (Amway's accounting and taxation year) in the year preceding the year in which
ATC 5164
the seminar was to be held. He explained that Amway made provision in the accounts of the preceding year for the seminar to be held in the following year, and that therefore, the charge in the accounts for a particular ALS largely reflected amounts which were actually spent in the following year.60. Tunley gave more specific evidence in relation to the 1993 ALS in Bangkok. Tunley used the Amway General Ledger to extract a list of the entries he considered relevant, which he summarised by expense and by category. In his evidence in chief, he noted that in a few instances, in relation to relatively small amounts, the available records ``did not make it absolutely clear how the allocation should be made''. In such cases, Tunley made a judgement based on the available information. Based on the General Ledger accounts, Tunley allocated the expenditure for the ALS to the following categories of expenditure:
- (a) Airfares, including the costs of travel for attendees, to and from the conference location. Where a distributor attended more than one event, the cost of the flight was allocated on a proportionate basis across the individual events;
- (b) Accommodation;
- (c) Meals, which includes 95% of meal costs for attendees taken from the cost of catering in the General Ledger. Tunley described the process whereby it was decided to exclude 5% of the costs allocated to catering, other than meals costs already included in the ``Non-Deductible Entertainment'' and allocated it to the category of Non- Deductible Entertainment. According to Tunley, the decision to exclude 5% of the meals costs was made by Christopher Prouting, Amway's Special Events Manager. In cross-examination it was exposed that the ``Meals'' category included, not exclusively, food and drink, but also ``things associated with the meals'', including decorations such as flowers and an ``Ice Bridge'';
- (d) Freight, Stationery, Meeting Room Expenses included all costs directly associated with conducting the conference meetings, including meetings held in conjunction with meals;
- (e) Gifts and Product Samples; and
- (f) Non-Deductible Entertainment, which included the cost of meals taken away from the venue, sight-seeing tours, sporting and shopping excursions amongst other things, and a proportion of the catering expenses shown in the General Ledger (see (c) above).
61. The following figures resulted from Tunley's calculations:
ALS Bangkok October 1993 Costs
+----------------------------------------------------+
| Airfares | 576,923 |
|----------------------------------------------------|
| Accommodation | 302,849 |
|----------------------------------------------------|
| Meals | 444,923 |
|----------------------------------------------------|
| Freight, Stationery, Meeting Room Exp | 46,289 |
|----------------------------------------------------|
| Gifts & Product Samples | 14,909 |
|----------------------------------------------------|
| Non-deductible Entertainment | 40,723 |
|----------------------------------------------------|
| Total | $1,426,615 |
+----------------------------------------------------+
62. The ALS at Bangkok in 1993 was held for 5 nights at the Shangri La at a cost of $1,426,615, with 550 attendees. Tunley gave evidence that this was an average cost of $2,594 per head.
63. Counsel for the Commissioner challenged the adequacy of the calculations made by Tunley, in particular because the calculations were based on the General Ledger without Tunley having considered any of the primary documentation and as he had no direct involvement or knowledge as to the event. Tunley was thoroughly cross-examined including by reference to the quotations and bills which were in evidence, and by reference to certain internal spreadsheets which became
ATC 5165
Exhibits E and F. He continued to assert the reliability of this system. Tunley was unable to identify where some particular items had been allocated in the General Ledger.
Christopher Prouting
64. Christopher Prouting (Prouting) was the Special Events Manager of Amway of Australia. He was first employed by Amway in June 1991 as the Special Events Co-Orodinator, and became Special Events Manager in 1995. In these capacities, he attended each ALS from 1991 to 1996. Between 1991 and 1996, he was involved in the operational aspects of organising Amway incentive seminars, and worked primarily on New Direct Distributor Forums (``NDDFs'') and the ``Go Diamond'' seminars in 1994 and 1995. From 1995, he became directly responsible for arranging and booking the ALS, and Prouting was therefore responsible for the last two ALSs during the relevant period. By the time of the hearing, Prouting was no longer employed by Amway and had no connection with the company, having left Amway on 31 March 2003.
65. Prouting gave evidence that Amway prepared materials for dissemination to the Direct Distributors at ALSs on topics such as products, changes to the Amway Sales and Marketing Plan or Rules of Conduct, new business developments and current business issues. Prouting produced examples of such Amway material. The 1995 ALS Welcome Pack contained information on the Nutrilite/ Nutriway brand, the Nutriway products, and ``Lifestyles Change Program'' material. Welcome packs supplied at each ALS also included a welcome letter from Amway, a seminar program, and one or more small gifts, such as a hat, shirt, or other memento.
66. Prouting explained that at each ALS a particular product or group of products was selected. The selected products were either entirely new, were a range of products recently expanded, or were existing products that had been repackaged or presented in a different way. Prouting identified the following products for the period between 1991 and 1996:
+----------------------------------------------------------------+
| Repackaged core line products | Hamilton Island 1991 |
|----------------------------------------------------------------|
| Newly launched Nutriway health products | Las Vegas 1992 |
|----------------------------------------------------------------|
| Relaunched Artistry 5 cosmetic products | Bangkok 1993 |
|----------------------------------------------------------------|
| Super-concentrate cleaning products | Alice Springs 1994 |
|----------------------------------------------------------------|
| Artistry and Nutriway products | Las Vegas 1995 |
|----------------------------------------------------------------|
| Rebranded core line products | Hawaii 1996 |
+----------------------------------------------------------------+
The Artistry Launch Pack at the 1993 ALS in Bangkok included a product manual. Launch packs also included a letter from the Product Marketer, media promotion details, a price list, a schedule of available training courses and specimens of promotional material distributors could buy from Amway to use in selling the products. The packs also usually contained samples of the products.
67. The selected products were displayed on one or more stands at each seminar. Prouting explained that attendees were able to get more information at these stands - including glossy handouts. Prouting gave examples of other materials supplied to attendees including copies of materials shown on screen during presentations (Women's Health, and Lifestyles Change Program presentations), brochures distributed before presentations (such as the Lifestyles Change Program brochure), and other training manuals (such as the Artistry Advanced Training Maunal).
68. Prouting's responsibilities included keeping records of attendances. He gave evidence that in his experience distributors participated in every event and meeting which took place at a seminar, and that it was rare for a distributor not to attend an event or meeting, including any of the meals taken during the seminar.
69. Prouting said that over the years he had observed distributors at business sessions and at meal times. According to his evidence, at business sessions the whole focus was on Amway business, and at meal times the topic of discussions was invariably some aspect of the Amway business, including growth strategies,
ATC 5166
business development, sponsor and sponsorship promotions and ``up line'' success stories.70. In relation to the meals provided, Prouting explained that the breakfast was always served in a specific place and room service was unavailable. Similarly, if a distributor did not attend the scheduled breakfast or lunch, Amway did not provide or pay for an alternative meal. At the evening meal, there was often a guest speaker or business presentation. Occasionally, formal events or dinners were scheduled which might be followed by music or dancing. Prouting's evidence was that ``except when participants are enjoying these activities it has been [his] observation that the business of Amway continues to be almost the only topic of conversation''.
71. Prouting also gave evidence in relation to some of the activities provided by Amway. Golfing days could be scheduled from time to time ``so as to provide distributors and senior management with the opportunity to `network' in an informal and relaxed environment''. Amway subsidised the green fees and a member of senior management was always a member of each ``four'', but attendance was voluntary. While tennis, squash, shopping or tours could also be available during an ALS, and although some of these activities were included in the venue's charges for accommodation, no corporate funding was provided for such activities which were regarded as ``leisure'' activities only. In a subsequent affidavit, Prouting identified a number of activities held at each ALS during the 1991-1995 calendar years, for which Amway incurred expenses not incorporated in the accommodation charges:
``a November 1991 Hamilton Island - 2 themed dinners, `Island Night' and `Under the Sea', on 5 and 7 November;
b November 1992 Las Vegas - Hollywood Star themed dinner and entertainment on 3 November; optional excursion to Lake Mead, Hoover Dam, Grand Canyon and Lake Perris on 4 November; Siegfried and Roy dinner and show on 5 November;
c October 1993 Bangkok - Rose Garden tour and dinner on 24 October; tours to Katchanaburi and Ayutoyah on 24 October;
d November/December 1994 Alice Springs - tours to Palm Valley and Kings Canyon on 28 November and 5 December; balloon trips; the Ghan Dinner on 29 November and 6 December; Telegraph Station dinner on 28 November and 5 December;
e November/December 1995 [Las Vegas] - Starlight Express dinner and show on 28 November; Grand Canyon and Shopping Shuttle on 27 November; EFX show at MGM Grand on 27 November.''
72. Prouting explained that Amway sometimes provided meals (for example packed lunch boxes) in connection with these activities. Prouting, having examined the General Ledger with Tunley, and in relation to the 1993 ALS at Bangkok only, acknowledged that it was ``possible that the General Ledger account for Catering include[d] some meals, for example packed lunchboxes... which ha[d] not already been included in the General Ledger account for entertainment''. If so, Prouting estimated that these expenses would account for no more than 5% of the total Catering expenses. This was the 5% figure used by Tunley, as described above. Counsel for the Commissioner cross- examined extensively as to the apportionment of particular items and the general method of apportionment. Counsel sought to impugn the process followed by Prouting and Tunley by reference to earlier statements by Prouting which were inconsistent with his evidence in chief.
73. In cross-examination, Prouting agreed there was a distinction between ``business programs'' including NDDFs, ``Amway incentive seminars'' which included ``Diamond Invitationals'' and Executive Diamond forums.
Cross-examination in general
74. There were recurrent themes in cross- examination. Counsel for the Commissioner went in detail over the schedules for the events, with a view to showing that the events were recreational in essence. Other objects of the cross-examination included showing that the meals and beverages provided were more than sustenance and indeed were lavish; and that the recognition ceremonies consisted simply of people talking about how they attained wealth and how it felt to be wealthy. Counsel also put that the materials provided at the ALS were not new, and in any event were available outside the ALS event during the year in the ordinary way. For example, counsel suggested to Edwards that the excursion to the Nutrilite farm during the Go Diamond seminar in 1992 did not
ATC 5167
give her any information that she had not already learned, and suggested that the Positrim product presentation at the Fiji ALS did not provide her with any information that she could not have obtained at another time.75. The cross-examination also focused on the provision of alcohol by Amway at meal times, and the dinner ball held at ALSs. Cross- examination exposed the luxurious surroundings, and decorations provided at the Masquerade Ball in Bangkok. Counsel for the Commissioner also sought to show that the content of the business sessions was not in fact serious business matters - for example, there was a session on Clean Up Australia at the Bangkok ALS. In cross-examination, witnesses were also asked about the content of specific business sessions, which they often did not recall. For example, counsel suggested to Edwards that there was little if any business element to the ALS events and that anything about Amway business was something that she already knew well and truly before attending the ALS. The suggestion was rejected by Edwards.
76. In cross-examination, the Commissioner's counsel drew attention to Amway's use of award and bonus systems for distributors to suggest that an ALS was a reward for past efforts. The Amway witnesses recognised that in order to qualify to attend an ALS a distributor had to have already achieved a significant level of success in the business, and to have had considerable involvement with upline and downline distributors and Amway staff. However, Shankland rejected the proposition that to attain direct distributor status a distributor had to have already developed a thorough knowledge of the operation of an Amway distributorship - Shankland explained that they were ``still learning''. Shankland agreed that on one night of the Bangkok ALS, Direct Distributors were given money by Amway, so that they could have a meal away from the hotel.
Documents
77. Many of the witnesses referred to documents which directly or indirectly related to the seminars in question and to the business of Amway during the relevant period. In addition, many such documents were tendered independently. These documents, particularly those directly relating to the seminars in question, have been carefully scrutinised and analysed during cross-examination and in final address.
78. Because of the way in which the argument for the Commissioner was developed, it is useful to set out some passages from the documents which related to the 1993 ALS which serve as a sample of the material which was relied upon. The 1993 ALS in Bangkok was promoted in the following terms:
``Tropical delicacies tempt the palate. Taste the difference at the floating markets in Taling Cha, Bang Yai or Damnoen Saduak. Sample succulent pummelo, grape or sweet rose apple, whilst floating in your own longtail boat!
Tantalize your taste buds with the delicate flavour of coconut milk and the aroma of fresh ginger so typical of Thai cuisine. Traditionalists can whet their appetites in Western style with gourmet foods prepared by perfectionist hands.
Pointing gracefully ever skywards are the distinctive spires of the Grand Palace. Bangkok's major landmark dominates the city with majestic grace. Expanded by the monarchs of the Chakri Dynasty this is a glittering example of Italianate architecture embellished with golden Thai adornment. It is also the site of the ancient Wat Phra Keo, the Chapel housing the image of the `Emerald Buddha'.
Delicately encrusted with gold leaf, by dedicated Buddhist hands. Each square inch of the Golden Temple, Wat Phra Kaeo, faithfully maintained in its original splendour. Awe inspiring splendour - a masterpiece of sculpture.
The world's richest metal is delicately applied in weightless gold leaf by the hands of the faithful. Angels guard the treasures and protect the Buddha images within the Royal Palace walls. Dazzling in their splendour, foreboding in their manner, the imposing spires and intricate carvings are an impressive sight that is uniquely Thai.
Nothing so elegant as the dance. An intimate expression of emotion. The controlled swirl of silk, a delicate manouvre [sic] of the hands. The dance possesses mysterious charm and narrates a tale with it's [sic] own unique expression.
ATC 5168
Delicately embellished with gold leaf, richly decorated with a traditional flair. Ancient heroes and villains, madmen and maidens carry on the masquerade yet beneath the gilt exterior of the mask is the patient hand of the craftsperson - a labour of love that has been passed down through generations. A unique Thai art.
Welcome... to the `City of Angels' and the magnificent Shangri-La Hotel! 1993 Leadership Seminar promises to unlock the secrets of the Orient with plenty of western flair! Over the next five days savour the taste of Thai cuisine, tour the lush countryside and cosmopolitan centres, enjoy some of the best shopping in the world, all after handling the business of the day during informative leadership sessions.
Whether this is your first, or one of many, ALS has something for everyone and is an apt reward for the hard work you have endured in the past. Rekindle some old friendships and make new acquaintances. ALS is your Seminar, the culmination of your hard work. So sit back, relax and be pampered!''
79. The distributors were encouraged to qualify for the events in various Amway materials:
``Australian Leadership Seminar
An invitation to The Australian Leadership Seminar is provided to Direct Distributors as an extra incentive to reach higher levels of achievement. The seminar provides the opportunity to discuss the Amway business with colleagues and corporate staff, plan future business strategies, strengthen business relationships and, most of all, enjoy yourself in a fabulous resort location; all expenses paid.''
``Your just reward for the leadership you provide.
As a Direct Distributor you are now in a position to begin qualifying for an exceptional range of awards and rewards.
This chapter gives you an overview of all these awards. The next chapter provides the in-depth detail on the rewards and qualification criteria that accompany these, and all Amway achievement levels.
This performance-based bonus program has been designed to maintain and increase the profitability of productive distributorships - which are those who have the leadership to service, motivate, and train new leaders. As with all compensation provided under the Amway Sales and Marketing Plan, the bonus program is based on performance, and paid with funds generated through retail sales of Amway products in Australia.
For the purpose of recognising achievement within the Amway organisation, you can use whatever additional titles you earn with the organisation. Lapel pins and bonus payments are awarded by Amway to signify the following achievements:''
80. Amway congratulated the 1993 ALS qualifiers:
``WELCOME
Congratulations!
Welcome to the exotic world of Leadership Seminar 1993.
Amway looks forward to hosting you and to ensuring that the event will be more exciting and fulfilling than you could have ever imagined.
As you read through your itinerary, you will notice the variety of activities, the abundance of meals, the plentiful free time and, of course, the scheduling of important business sessions.
This year, as Australia's top leaders, the business sessions will treat you to a comprehensive preview of the new ARTISTRY Range and an insight into the success of newly qualified Diamonds and Executive Diamonds.
The excellent relationship, both between yourself and other Distributors and between yourself and the Company will continue to strengthen during this Seminar.
As we head towards the year 2000 and the achievements of our mutual goal - $1 billion in sales - it will be our respect for, and understanding of, one another, which provides the solid foundation for a business of this magnitude.
Congratulations again on your qualification to attend ALS 93.
Amway looks forward to making it the best ever.''
ATC 5169
``Dear
Sawasdee Krup! The `City of Angels' awaits you!
A very sincere CONGRATULATIONS on your qualification to attend Amway of Australia's 1993 Leadership Seminar in Bangkok, Thailand.
The world-renowned Shangri-La Hotel will play host to, what I am confident will be, the most memorable event of its type ever staged by Amway. The Hotel stands majestically on the banks of the Chao Phraya River the focal point of Bangkok's colourful past. It is recognised as one of the leading hotels in the world and offers a standard of service which has to be experienced to be believed.
This year's Seminar will focus on many important aspects of the Amway business but in particular will highlight the Artistry Product Group and specifically, the launch of the new Artistry Range.
To those Distributors joining us for the first time, I extend a very warm welcome. For those who have enjoyed previous Seminars, I welcome you back and promise that the time we have together is motivating, productive and worthwhile.
Once again, congratulations! Your qualification to attend the 1993 Leadership Seminar is clear evidence of your significant contribution to the growth of the Amway business in Australia this year.
I very much look forward to seeing you in Bangkok.
Warm personal regards,''
Findings
81. Counsel for the Commissioner submitted that the evidence called by Amway was limited and selective, particularly that from distributors. In a sense this is correct, but I am satisfied that the evidence which was called and the documents which are in evidence are quite adequate to enable findings to be made.
82. From the point of view of Amway, all of the expenditure was a legitimate business expense as an ALS was solely for business purposes. It was a means by which Amway management communicated directly with the network of distributors in order to both impart and receive relevant information as to products and processes, including the way of doing business. It was a means by which the distributors communicated with each other, formally and informally, in order to both impart and receive relevant information as to products and processes, including the way of doing business.
83. In addition to receiving information, the format was designed to (and did) motivate the distributors to greater efforts for the period ahead. A powerful message of wealth and prestige which could be aspired to with success in the business was conveyed in various ways. The existence of seminars was designed to (and did) motivate the network of distributors by acting as a reward for and incentive towards success. The more attractive the event, the greater the motivation to attend. Amway certainly publicised the seminars on that basis.
84. Given the decentralised nature and indirect structure of the Amway business, it is difficult to conceive of a better method of achieving these objectives. From a business point of view, criticism of the exotic overseas locales and the lavish scale of the accommodation and the hospitality is misplaced. Such an event needs to be well attended to be successful. The more people sharing information the better and the more people being motivated the better. A well attended event assists motivation as it will be perceived as the place to be. A poorly attended event would send the opposite message.
85. Counsel for the Commissioner stressed that the business sessions took up a small proportion of the overall time of an ALS. He also criticised the insubstantial nature of the conduct of those sessions. In my opinion the content was appropriate to the Amway business. The sessions were an integral and significant part of the event, although much business was done outside those sessions.
86. I am satisfied that those distributors who gave evidence attended the ALS because the events were considered genuinely useful in carrying on their own business although they were also influenced to attend because an ALS was a subsidised visit to a desirable location in desirable surroundings with something of a holiday atmosphere. No doubt the precise weighting of these factors differed from person to person. I infer that most attendees would have a similar mix of motives. The decentralised nature of the Amway business
ATC 5170
model and the relative isolation of individual distributors led to those seminars being regarded by distributors as of greater importance than might have been judged by others not in the same kind of business.87. The Go Diamond seminars performed similar functions. They enabled communication between high level distributors themselves and with Amway whilst concurrently motivating that group of distributors. They also motivated lower order distributors who aspired to attend the even more impressive Go Diamond seminars.
88. By the conclusion of the hearing, Amway accepted that in addition to the cost of sightseeing tours, sporting and shopping excursions, variety performances and the like, as well as the cost of meals taken away from the conference venue, the non-deductible entertainment category should include:
- • the cost of a proportion of evening meals taken at the conference venue, which the applicant suggested should be 50 per cent, (to account for the ``non-business'' aspects of dinners like the dinner at the Masquerade Ball at the Bangkok ALS);
- • the cost of one night's accommodation at the venue (to account for the one full day of leisure allowed at each ALS); and
- • the cost of additional accommodation, if any, after the conclusion of the formal ALS (to account for any instances where the applicant paid for accommodation after the conclusion of the formal ALS).
89. Amway conceded that this suggested apportionment between deductible and non- deductible expenditure was ``somewhat arbitrary in certain respects''.
Decision
90. The starting point for legal analysis is s 51(1) of the Income Tax Assessment Act 1936 (Cth) (the Act), which was as follows:
``51 Losses and outgoings
...
51(1) 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.''
(emphasis added)
It is accepted that, by and large, the costs and expenses of an ALS were losses and outgoings within the meaning of that section.
91. Section 51AE(4) was as follows:
``51AE Deductions not allowable for entertainment expenses
...
51AE(4) A deduction is not allowable under section 51 in respect of losses or outgoings incurred after 19 September 1985 to the extent to which they are in respect of the provision of entertainment.''
92. This is expanded as follows:
``51AE
51AE(3) A reference in this section to the provision of entertainment is a reference to the provision (whether to the taxpayer or to another person and whether gratuitously, pursuant to an agreement or otherwise) of:
- (a) entertainment by way of food, drink or recreation; or
- (b) accommodation or travel in connection with, or for the purpose of facilitating, entertainment to which paragraph (a) applies (whether or not the accommodation or travel is also in connection with something else or for another purpose);
whether or not:
- (c) business discussions or business transactions occur;
- (d) in connection with the working of overtime or otherwise in connection with the performance of the duties of any office or employment;
- (e) for the purposes of promotion or advertising; or
- (f) at or in connection with a seminar.''
93. The following definitions are relevant:
``51AE
51AE(1) ...
`recreation' includes:
- (a) amusement;
- (b) sport or similar leisure-time pursuits; and
ATC 5171
- (c) recreation or amusement provided on, or by means of, a vehicle, vessel or aircraft;
...
`seminar' includes a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, `question and answer session', training session or educational course.''
94. Section 51AE was introduced following the statement by the then Treasurer to Parliament in September 1985 entitled ``Reform of the Australian Taxation System''. The section which dealt with entertainment expenses was as follows:
``One of the greatest difficulties in recent years in determining legitimate expense claims has been in the area of entertainment.
A good deal of so-called `business' entertainment tends to be done on a reciprocal basis and is often undertaken for predominantly social or personal benefit rather than business purposes.
In practice it is almost impossible for the Tax Office to separate those social activities from genuine commercial activities but it appears that the major part of expenses claimed have little or no genuine relevance to business activity.
It is the Government's view that the general public should not have to subsidise through the tax system the social activities of higher income earners who seek tax deductions for entertainment expenses.
Accordingly it has been decided to deny deductions for all entertainment expenses incurred after today.
Reflecting the lagged nature of business tax payments, this measure will produce $310 million in revenue in 1986-87 and $330 million in 1987-88.
The disallowance of deductions for entertainment will apply across-the-board and will include business meals, drinks, cocktail parties, tickets or boxes at sporting or theatrical events, sightseeing and hostess allowances.
It will include entertainment claimed to be associated with an advertising or promotional purpose, and it will cover the entertainment expenses of all taxpayers.
However, the measure cannot be directly applied to a tax exempt organisation which pays entertainment expenses which confer a personal benefit on its employees or associates or reimburses them for such expenses.
In such cases, it is intended that entertainment expenses be subject to the tax on non-cash fringe benefits.''
(emphasis added)
95. The Explanatory Memorandum in relation to the Bill which introduced s 51AE included the following:
``Clause 9 proposes to insert new section 51AE in the Principal Act to introduce a general prohibition on the deduction of entertainment expenses.
Under the existing law, losses or outgoings incurred in entertaining existing or prospective clients, business associates, employees, etc., may qualify for deduction provided the expenditure in question is incurred in the course of gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing such income.
The effect of the amendments proposed by Clause 9 will be that, apart from the exceptions outlined below, entertainment expenses incurred after 19 September 1985 will no longer be deductible for income tax purposes. Typical kinds of entertainment that will no longer attract deductibility include business lunches and drinks, dinners, cocktail parties, and staff social functions. Similarly, expenditure incurred in entertainment of staff, business associates, clients, etc., by way of sightseeing tours, access to sporting or theatrical events and hospitality provided to invited guests at such events as product launches or film premieres will not be deductible. In addition, deductions will be denied for hostess allowances paid by employers to the spouses of employees such as senior executives to offset the cost of attending or assisting with company-sponsored functions.
The broad effect of section 51AE will be that activities of the type that would
ATC 5172
generally be considered to constitute entertainment will be treated that way irrespective of any actual or claimed connection with business activities, discussions, etc....
Sub-section 51AE(4) is the operative provision which will deny deductions otherwise allowable under section 51 of the Principal Act for losses or outgoings incurred after 19 September 1985 for the provision of entertainment. The sub-section also authorises an apportionment of expenses incurred only partly in respect of the provision of entertainment, to disallow that part.
In being expressed to apply to losses or outgoings incurred in respect of the provision of entertainment, sub-section (4) is designed to apply widely so as to include incidental expenses (e.g., taxi fares incurred in taking guests to a luncheon ) and to the expenses of the host in participating in the particular function. As a further example, it would also embrace allowances paid to spouses of executives to offset their costs in having to attend company sponsored functions and the like.''
(emphasis added)
The explanation of subs 51AE(3) included the following:
``Proposed sub-section 51AE(3) defines entertainment for the purposes of the operation of the entertainment expense prohibition. By paragraph (3)(a) entertain- ment is defined to be the provision of entertainment by way of food, drink or recreation. As explained in the notes on the definition of that term in sub-section 51AE(1), `recreation' includes amusement, sport and leisure- time pursuits generally.
By paragraph (3)(b) accommodation or travel is to be treated as entertainment to the extent to which it is incidental to the provision of entertainment. As such the cost of travel and accommodation associated with, for example, entertaining a client over a weekend at a tourist resort would be subject to the operation of the entertainment expense prohibition. Costs associated with the use of aircraft, boats or vehicles directly in providing entertainment (e.g., by way of joy flights or sightseeing tours) are brought within the meaning of entertainment through the definition of recreation.
...
In effect, paragraphs (3)(c) to (f) will ensure that activities of a type that would generally be considered to constitute entertainment will be treated that way irrespective of any actual or claimed connection with business activities , etc.''
(emphasis added)
96. It is clear enough, both from the text of the legislation and from the explanation of it, that the purpose of s 51AE(4) was to impose a blanket ban on entertainment as defined. Exceptions are dealt with by later subsections.
97. It is submitted for Amway that the prohibition is not upon the provision of food, drink and recreation but, rather, on the provision of entertainment by way of food, drink or recreation. ``Entertainment'' is not defined. It thus bears its ordinary meaning. It is submitted that the provision, for example, of meals consisting of food and drink at a location away from home is hardly the provision of entertainment. There is no element of diversion or amusement in it. It is submitted in response for the Commissioner that the provision of hospitality, including hospitality by way of food and drink, is properly to be regarded as entertainment.
98. These respective submissions reflect dictionary definitions exemplified by the Macquarie Dictionary, 3rd ed, the first two meanings of ``entertain'' being:
``1. to hold the attention of agreeably; divert; amuse.
2. to receive as a guest, especially at one's table; show hospitality to.''
``Entertainment'' is defined in that Dictionary as:
``1. the act of entertaining; agreeable occupation for the mind; diversion, or amusement.
2. something affording diversion or amusement, especially an exhibition or performance of some kind.
3. hospitable provision for the wants of guests.''
Neither counsel has suggested that there is any particular guidance to be obtained from
ATC 5173
cases which have discussed the meaning of ``entertainment''.99. In my opinion, the statutory definition is intended to pick up both concepts of entertainment. Thus, I reject the primary submission made on behalf of Amway.
100. The primary submission of counsel for the Commissioner was that each ALS was an entertainment in itself, in which the guest was hospitably provisioned, diverted and amused, and that it was not necessary to go further to justify the disallowance of all of the deductions claimed. It was submitted by counsel for the Commissioner that any substantial function at which food or drink is provided is plainly covered by the term ``the provision of entertainment''. Even if there may be occasion where food and drink is provided which is not an entertainment, then a line should certainly be drawn at the point where, as here, the provision of food and drink moves beyond what is required for sustenance. I am satisfied that there were serious business purposes served by an ALS, and that it is too facile to describe it as ``an entertainment'' simpliciter. I thus reject the primary submission on behalf of the Commissioner.
101. However, I can see no escape from the proposition that all expenditure on food, drink and recreation in the course of an ALS is for the provision of entertainment as defined, even if restricted to that which is necessary for sustenance, and that s 51AE(4) requires that, to that extent, a deduction is not allowable, subject to any applicable exception.
102. On this view of the section, all expenditure attributable to the provision of food, drink and recreation is to be disallowed. Nothing else is disallowed by virtue of s 51AE(4). Apportionment is thus required. It is true, as pointed out by counsel for the Commissioner, that s 51AE(3) does not contemplate apportioning that which is found to be entertainment. Once it is decided that such a loss or outgoing is in respect of the provision of entertainment as defined, then, to that extent, the loss or outgoing is disallowed. However, there is no reason why, where part of a loss or outgoing can be attributed to entertainment, it may not be apportioned accordingly pursuant to s 51AE(4). It is the expenditure - the loss or outgoing - which is to be scrutinised and apportioned pursuant to s 51AE(4).
103. The next question is whether expenditure for travel and accommodation to and at an ALS is ``in connection with'' or ``for the purpose of facilitating'' the provision of entertainment by way of food, drink or recreation. The language of s 51AE(3)(b) is somewhat awkward. The taxi fare to a restaurant paid for a client who is to attend a dinner, or the fares to and accommodation at the Grand Prix motor racing in Melbourne provided to a Sydney client of a business, are obvious enough examples which might be caught. What, however, of a mixed event, such as a seminar, which is very widely defined in the Act, if high-powered and expensive speakers, with expertise in the appropriate commercial area, are provided, together with coffee and sandwiches? Is the hire of buses to take the delegates to the venue the provision of entertainment because of the provision of food and drink? If the delegates are provided with overnight accommodation and buffet breakfast, would the accommodation be the provision of entertainment because of the provision of breakfast?
104. Counsel for the Commissioner has stressed the width of the words ``in connection with'' and ``or for the purpose of facilitating'', and the effect of the words in parentheses in s 51AE(3)(b). The phrase ``in connection with'' is of wide import, but, as with a phrase such as ``in respect of'', gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends' (per Deane, Dawson and Toohey JJ in
Workers' Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654; see also
FC of T v Scully 2000 ATC 4111 at 4121; (2000) 201 CLR 148 at 171 per Gaudron ACJ, McHugh, Gummow and Callinan JJ; and
Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477; [28] and [29] per Black CJ, Sundberg, Katz and Hely JJ). In my opinion, in the context of this legislation, the subsection requires what may be described as some form of purposive link between the accommodation and travel, on the one hand, and the entertainment by way of food, drink or recreation, on the other. The mere fact that an event may include entertainment by way of food, drink or recreation does not mean that accommodation or travel connected with, or for the purpose of facilitating the event, is
ATC 5174
necessarily in connection with or for the purpose of facilitating that entertainment. It might be, or it might not be. A good example of what the subsection is aimed at would be a client, whose fare to and from accommodation in Melbourne in connection with and in order to facilitate his attendance at the Grand Prix, takes advantage of the visit to make some extraneous business calls or, whilst at the Grand Prix, has business discussions with other colleagues and customers. The collateral business arrangements would not make the fares and accommodation deductible. In my opinion, the same would not be said of the bus trip to the seminar in the other example I gave above.105. The present case is more difficult to resolve than the examples I have discussed. I am satisfied that no ALS was a social event or entertainment, with some token business tacked on in relation to which it could comfortably be said that the travel and accommodation was in connection with or for the purposes of facilitating the provision of entertainment, notwithstanding that some business might be done. I am satisfied that an ALS was a serious business occasion for all concerned. On the other hand, an ALS was designed to be, and was seen to be, an attractive event because of the exotic location, the standard of venue and the opportunity it provided for combining business with pleasure. The element of hospitality afforded to a distributor (and, so, entertainment) was not slight or insignificant.
106. I am satisfied that, from the point of view of the taxpayer, Amway, the hospitality is ancillary to the business purposes of an ALS. The fares and accommodation were expended to bring distributors to a business seminar, not in order to provide the participants with food, drink and recreation. I therefore conclude that the travel and accommodation provided to distributors to attend an ALS was not in connection with, or for the purpose of facilitating, the entertainment provided by way of food, drink and recreation, and is therefore not deemed to be the provision of entertainment for the purposes of the s 51AE(4), notwithstanding the width of those expressions. The expense of doing so therefore is deductible pursuant to s 51.
107. It is then necessary to consider the application of the exceptions to the non- deductibility of entertainment by way of food, drink and recreation. Section 51AE(5)(g) (so far as is relevant) was as follows:
``51AE(5) Subsection (4) does not apply to a loss or outgoing incurred by the taxpayer in a year of income to the extent to which:
- ...
- (g) the loss or outgoing is incurred by the taxpayer in respect of the provision of entertainment to a person (in this paragraph referred to as the `recipient' ) being:
- (i) the taxpayer;
- (ii) an employee of the taxpayer; or
- (iii) a person who, although not employed by the taxpayer, is performing services for the taxpayer;
where:
- (iv) in a case to which subparagraph (ii) or (iii) applies - a deduction would, but for this section, be allowable to the recipient under section 51 in respect of the loss or outgoing if it were incurred by the recipient; and
- (v) in any case - it would not be concluded that a purpose of the taxpayer or, in a case to which subparagraph (ii) or (iii) applies, of the taxpayer or the recipient, in relation to the provision of the entertainment, is to enable or facilitate the provision of entertainment to a person other than the recipient.''
108. Argument at the hearing concentrated upon the distributors, but the position of employees also needs to be noted in due course. There is no real dispute that a distributor ``is performing services'' for Amway in the relevant sense. Each distributor is an agent of Amway to receive orders. There is also little doubt that if a distributor paid all of the expenses attributable to attendance at an ALS, it would be deductible pursuant to s 51. I have held that an ALS is an important business occasion for a distributor in various ways. It is also fairly clear that it is not the purpose of either the taxpayer (Amway) or the recipient (the distributor) to provide entertainment to a person other than the recipient (distributor). Thus, the elements of the subsection appear to be satisfied.
ATC 5175
109. The argument for the Commissioner is that the subsection does not apply where the relevant loss or outgoing involves the provision of entertainment to more than one person. It is submitted that some of the outgoings cannot readily be made subject to the hypothetical test required by sub-par (iv), eg, payment of the dance band at the Masquerade Ball. It is further put that sub-par (v) focuses upon the recipient and excludes the provision of entertainment to a group, as for that subparagraph to be satisfied the purpose must be the purpose of a particular recipient.
110. It is submitted that the limited domain of the subparagraph is confirmed in the Explanatory Memorandum which accompanied the Bill in its original form, and included the following:
``New paragraph (5)(g) is designed to ensure that [1] expenditure on entertainment that does not involve the entertainment of another person and [2] which would otherwise be deductible to the person benefiting from it will continue to be deductible''
(page 42) (numbers and emphasis added)
The Supplementary Explanatory Memorandum includes a similar statement:
``Broadly, paragraph 51AE(5)(g) means that [ 1] expenditure on entertainment that does not involve the entertainment of another person, and [2] which would otherwise be deductible to the person benefiting from it, will continue to be deductible.''
(page 1) (numbers and emphasis added)
111. It is also submitted that the omission of a similar provision in Div 32 of the Income Tax Assessment Act 1997 (Cth) is indicative of the small scope of operation of it. The Explanatory Memorandum accompanying the original Tax Law Improvement Bill 1996 states:
``This provision [paragraph 51AE(5)(g)] has very limited if any application. Meals while travelling overnight on business are not excluded from deduction under section 32-5 because they are not entertainment. Similarly the meal of a restaurant reviewer or the ticket of a theatre critic would not constitute entertainment.''
(page 94)
112. It is submitted that the exception which relates to seminars is subs (f)(iv). It was not contended by Amway that an ALS was an eligible seminar.
113. I do not accept that ingenious argument on behalf of the Commissioner. It depends upon not reading the singular as the plural - a difficult argument (Acts Interpretation Act 1901 (Cth) s 23). There is no particular problem in applying the paragraph to a multi-person event. Many overseas seminars are conducted on a cost recovery basis or, indeed, on a profit- making basis, whereby all participants pay a share of the common expenses. The terms of subs (10) are not consistent with the submission for the Commissioner that subs (5)(g) was restricted to an individual event. Subsection (10) expressly relates to subs (5)(g) and expressly refers to seminars which are, of course, multi-person events. In the present case, each distributor could have been charged a registration fee sufficient to cover joint expenses, and would then have met its own individual expenses otherwise. The test which is posed is, after all, hypothetical. It was upon this hypothesis that a distributor in those circumstances could have claimed the registration fee, fares and accommodation and meals pursuant to s 51.
114. Furthermore, it is apparent that the provision is aimed at the practice referred to in the initial Treasurer's statement, and repeated later, of business people inviting acquaintances with some business connection to lavish entertainment, and then being invited back. It is also aimed at situations where an occasion is devised as a front for giving hospitality or entertainment to another party. Thus, the exception is limited to those who are either under a contract of service or have a contract for services with the taxpayer, limited to a situation where nobody is getting a deduction which would not have otherwise been available, and where the situation is genuine and not devised to assist a third party. In my opinion, an ALS falls squarely within this exception. I should add that, in my view, the same reasoning would apply to the employees who attend an ALS. Upon the hypothesis that an employee was required to attend the ALS and pay his or her own expenses, including the notional registration fee, then I see no reason why the employee would not be entitled to a s 51 deduction for those expenses.
115. The conclusion that a deduction for a loss or outgoing on entertainment at an ALS is excluded from the operation of s 51AE(4) by
ATC 5176
virtue of subs (5)(g) is subject to s 51AE(10), which was as follows:``51AE(10) Paragraphs (5)(g) and (h) do not apply in relation to:
- (a) a loss or outgoing incurred by the taxpayer to the extent to which the loss or outgoing is:
- (i) in respect of the provision of entertainment to a person (including the taxpayer) that is in respect of, or incidental to, the person's attendance, while undertaking deductible travel, at a seminar other than:
- (A) an exempt training seminar; or
- (B) a seminar to which paragraph (a) of the definition of eligible seminar in subsection (1) applies (whether or not the seminar has a continuous duration of not less than 4 hours),
not being the provision of entertainment consisting of:
- (C) accommodation or travel; or
- (D) entertainment by way of food or drink otherwise than at a meal during which, or during part of which, the whole or a part of the seminar occurs; or
- (ii) in respect of the provision of entertainment to a person (including the taxpayer) that is in respect of, or incidental to, the person's attendance, otherwise than while undertaking deductible travel, at a seminar; or
- ...''
116. ``Deductible travel'' is defined by s 51AE(11), which is as follows:
``51AE(11) A reference in subsection (10) to deductible travel is a reference to travel undertaken by a person in circumstances where, if the person incurred expenditure in taking meals by himself or herself in the course of undertaking that travel, a deduction would, but for this section, be allowable to the person under section 51 in respect of that expenditure.''
117. ``Eligible seminar'' is defined in s 51AE(1) to mean:
``... a seminar that has a continuous duration of not less than 4 hours, but does not include:
- (a) a seminar (other than an exempt training seminar) where it would be concluded that the sole or dominant purpose of the seminar was to enable participants, or prospective participants, in a particular business to:
- (i) give information relating to the business to;
- (ii) receive information relating to the business from; or
- (iii) discuss matters relating to the business with,
other participants, or prospective participants, in the business or other persons;
- (b) a seminar where it would be concluded that the sole or dominant purpose of the seminar was the promotion or advertising of a business or of goods or services provided by a business; or
- (c) a seminar where, having regard to:
- (i) the content and location of the seminar; and
- (ii) any food, drink, accommodation, travel or opportunities for recreation connected with the seminar,
it would be concluded that the sole or dominant purpose of the seminar was the provision of entertainment at, or in connection with, the seminar.''
118. ``Seminar'' is defined in s 51AE(1) as including:
``... a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, `Question and answer session', training session or educational course.''
119. The meaning and effect of s 51AE(10) is obscure because of the structure of it. My attention has been drawn to the passage of the relevant Bill through the legislature and to the Explanatory Memoranda relating to subss (5)(g) and (10). Neither those sources nor the Ministerial statements give particular assistance in construing subs (10) in circumstances like the present. Reference to the statements made at the time of the introduction of the new set of provisions does not give me any assistance,
ATC 5177
even if it is permissible to take them into account. It follows from views that I have already expressed that a distributor attending an ALS is undertaking deductible travel within the meaning of s 51AE(11). An ALS is, clearly enough, a seminar within the extended definition in s 51AE(1).120. Counsel for the Commissioner submits that if, contrary to his submission, each attendee is undertaking deductible travel, the ALS is not a seminar within either s 51AE(10)(a)(i)(A) or (B). It plainly is not within (A). The question is whether it is within (B) which incorporates the definition of eligible seminar in s 51AE(1). That description needs to be supplemented by the definitions of ``business'', which includes a prospective business, and ``participant'', which, in relation to a business, means ``a person involved in, or associated with, the carrying on of the business, whether as an agent, employee, partner, shareholder, provider of finance, adviser or otherwise'' (s 51AE(1)).
121. It can be safely concluded that each distributor is a participant in what might be called the Amway business in the extended defined sense. At the least, each was an agent. I am also satisfied that a purpose of the seminar was to enable the participants to give information relating to the business to, receive information relating to the business from, and discuss matters relating to the business with other participants in the business. However, I have held that another purpose of the seminar from Amway's point of view was to provide both a reward and an incentive to the distributors who attended and to those who had not yet attended but aspired to do so.
122. It is interesting, in this connection, to look at (a) of the definition of ``eligible seminar'' in its context as part of that definition. The three defined limbs are exclusions from the definition of ``eligible seminar''. The broad categories of exclusion are in-house seminars (widely defined), promotion of a particular business or goods or services provided by that business, and a seminar which is a pretext for provision of entertainment. Only the first of those excluded categories is then picked up in s 51AE(10), where it is an exception to the exception to the exception from the prohibition, and so ``qualifies'' for a deduction.
123. If the question were asked whether an ALS is an eligible seminar, the real issue would be whether it fell within (a) of the definition. In my opinion, it would not fall within (b), which is concerned with external promotion or advertising, or within (c) for reasons already explained. As I have said, the evident purpose of (a) is to exclude in-house seminars (widely defined) from being an eligible seminar. Looking at the actual substance of the event, an ALS was in-house in the defined sense. I would have no difficulty in concluding that a significant purpose of the seminar was as described in (a). What is the significance, in that context, of the incentive and reward element? As I have said, in my opinion it would not be sufficient to bring the event within (c) of the definition of ``eligible seminar''. Does it detract from information sharing etc being the sole or dominant purpose of the seminar within the meaning of (a)?
124. The structure of the definition of eligible seminar refers to sole or dominant purpose in (a) and (c) and does not refer to a situation in which there are two purposes, neither of which is dominant. I am satisfied that business is the principal purpose of an ALS and that the other purposes are ancillary, although significant. The question is whether what I have described as the principal purpose is to be regarded as the dominant purpose. ``Dominant'' is defined by the Macquarie Dictionary, 3rd ed, to mean ``ruling; governing; controlling; most influential''. It seems to me that the meaning which best fits this context is ``most influential''. That enables (a) and (c) to cover the field, except in circumstances where no purpose can be seen as most influential. In my opinion the most influential purpose of an ALS was that described in (a) of the definition of eligible seminar. It is thus not caught by the first part of s 51AE(10).
125. It is then necessary to consider the proviso to s 51AE(10), and, in particular, (D), the effect of which is that the provision of food and drink at a meal during part of which the whole or part of a seminar occurs is deductible. Application of that principle requires close attention to the particular ALS - which I shall undertake in relation to 1993.
126. The program which was promulgated for the 1993 ALS included what were described as three business sessions - 10.30 am-1.00 pm on Saturday 23 October, 9.00 am-1.00 pm on Monday 25 October and 9.00 am-11.00 am on Tuesday 26 October. On one view the whole
ATC 5178
event is a seminar within the intended definition in s 51AE(1) - it could be likened to a conference. I accept that occasions other than business sessions, including social occasions, were intended to be utilised for the business purposes of those present, and so the business purposes of Amway, and that they were extensively so utilised. I accept that the peculiar nature of the Amway business means that this activity is of particular importance to it and the distributors. It is somewhat artificial to segment an occasion such as an ALS. However, in my opinion, a seminar, even according to the extended definition, requires a certain focus, formality and structure which is provided here by the business sessions. In my view it is only during those sessions that part of the seminar occurs for the purpose of s 51AE(10)(D). No meal was included in any of those sessions. That subsection therefore has no practical operation in relation to the 1993 Bangkok ALS.127. In the result, the whole of the amount expended for meals (which includes drink) is not deductible. I would accept the estimate of Tunley for the purpose of identifying that amount, even allowing for the absence of primary receipts. Tunley was subjected to a searching cross-examination including a detailed examination of the documents which became Exhibits E and F and of the accounts which appeared in relevant parts of Volume 1 of the Commissioner's Tender Bundle. One discrepancy appears to be that some amounts expended in connection with the ALS were not accounted for under that heading but have not been claimed as deductions as such and so are irrelevant to the case. Overall, I am satisfied that the amount allocated for meals by Tunley is more than sufficient to account for food and drink and, indeed, includes ancillary expenditure which might fall within recreation.
128. Amounts expended upon recreation are not deductible. Assessment of that amount is more difficult. According to the Macquarie Dictionary, 3rd ed, the principal meanings of ``recreation'' are:
``1. refreshment by means of some pastime, agreeable exercise, or the like;
2. a pastime, diversion, exercise, or other resource affording relaxation and enjoyment.''
I am satisfied that the criteria applied by Tunley were appropriate to isolate expenditure under this heading, and constitute a reasonable endeavour to dissect the expenditure accordingly. Although all primary records are not available, and those that are are not always dissected in the most useful manner, the general ledger system should have been reliable.
129. Tunley was not able to say from the records whether the amount claimed for accommodation included amounts for what was described as an extra day after the close of the ALS, but said that no such amount should have been included. It is also accepted by Amway that the cost of one night's accommodation should be deducted.
130. Tunley said that the system required that fares be properly apportioned where that was required. Again, I am prepared to infer that the system worked, and that only fares incurred for the relevant ALS have been claimed.
131. The items of freight, stationery, meeting room expenses, gifts and product samples are not entertainment by way of food, drink and recreation and expenditure incurred is deductible.
132. The expenditure in relation to Go Diamond seminars should be treated in accordance with the foregoing.
133. The proceeding will stand over to enable the parties to consider these reasons and then bring in short minutes of order to give effect to them. I will hear further argument if there is no agreement as to the form of orders.
THE COURT ORDERS THAT:
The proceeding stand over to a date to be fixed to enable the parties to bring in short minutes of order.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.