W Nevill & Co Ltd v Federal Commissioner of Taxation
56 CLR 2901937 - 0308B - HCA
(Judgment by: Dixon J)
W Nevill & Co Ltd
v Federal Commissioner of Taxation
Judges:
Latham CJ
Rich J
Dixon JMcTiernan J
Subject References:
Taxation and revenue
Income tax
Deduction
Contract of service
Termination
Income or capital expenditure
Allowance paid during two income years
When deductible
Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - ss 23(1)(a); ss 25(e)
Judgment date: 8 March 1937;
Melbourne
Judgment by:
Dixon J
DIXON J. The deduction claimed by the taxpayer company is for a payment made, in cash or by negotiable instrument, during the year of income in order to obtain the resignation of one of its two joint managing directors. He had been appointed at a salary of PD1,500 for a term of five years of which more than four were unexpired. The system of joint managership proved undesirable, if not unworkable, and when in the depression the question arose whether the two managing directors should not consent to a reduction of salary, it was made the occasion for negotiating an arrangement with one of them for his retirement. He agreed to resign in consideration of a sum of PD2,500, of which PD1,500 was paid immediately and the balance of PD1,000 was secured by ten promissory notes of PD100 payable at intervals of a month.
The question is whether the sum of PD2,500, or any part of it, should be deducted from the assessable income. The question is governed by s. 23 (1) (a) and s. 25 (e) of the Income Tax Assessment Act 1922-1932. Under the first of these provisions it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income. This is explained in Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [F15] .
The expenditure upon the retiring allowance of the managing director appears to me to fulfil this test, except for the circumstance that some of the promissory notes fell due outside the financial year.
But s. 23 (1) (a) imposes another and a negative condition. The expenditure must not be of a capital nature. For the commissioner it is contended that in, so to speak, buying out the managing director, the taxpayer company, in effect, commuted its loss on his future salary for an immediate capital payment. Some of the reasons given in support of the argument treated the question whether the payment of the retiring allowance by the company should be considered as part of its capital expenditure as interdependent with the question whether its receipt by the managing director should be considered part of his assessable income or as an addition to his capital. In my opinion there is no necessary connection between the two questions and, indeed, an attempt to obtain guidance in the solution of one by considering the other is not without danger. The question whether a receipt or expenditure is to be treated as on account of income or capital depends upon the relation of the taxpayer to the payment in question. If a company conducting an organized business of buying land and selling it in subdivision happens to purchase an area of land hitherto held for the purpose of agriculture, the purchase money will undoubtedly be capital in the hands of the vendor, but it will be treated as expenditure of an income nature in making up the profit and loss account of the company.
In the present case the payment of a lump sum to secure the retirement of a high executive officer may have been unusual. But it was made for the purpose of organizing the staff and as part of the necessary expenses of conducting the business. It was not made for the purpose of acquiring any new plant or for any permanent improvement in the material or immaterial assets of the concern. The purpose was transient and, although not in itself recurrent, it was connected with the ever recurring question of personnel.
In my opinion it was not an outgoing of a capital nature.
Under s. 25 (e) a different question arises. That provision forbids the deduction unless it consists of money wholly and exclusively laid out or expended for the production of assessable income. It is unnecessary that the assessable income for the production of which the expenditure was made should be that of the given year or accounting period (See De Bavay's Case [F16] ). But, according to the language of the paragraph, the money must be laid out for the production of assessable, not taxable, income. Upon this distinction the commissioner bases a contention that no expenditure is deductible which has for its purpose the reduction or avoidance of outgoings as distinguished from the gaining of gross income. This statement may be literally true, but its application does not necessarily lead to the consequences the commissioner deduces. For it is fallacious, in my opinion, to draw a distinction between the purpose of reducing or avoiding outgoings and the purpose for which the outgoings so to be reduced or avoided are incurred. Thus, in the present case, if attention is confined to the purpose for which the lump sum payment was made to the retiring director, it may be true that it was in order to save his future salary. Indeed, the case stated says that the main object of the directors was to effect a saving of that salary, although at the same time they believed that by abolishing the system of joint control they would increase the efficiency of the company. But it is not correct to look only to the purpose actuating the expenditure in the state of facts in which it was resolved upon. The whole course of the transaction must be regarded. When an agreement was made by the company committing it to an annual expenditure for five years of PD1,500 upon the managing director's salary, that obligation was undoubtedly incurred "for the production of assessable income." The company thus undertook an expenditure which, if it had gone on, would have been deductible. The purpose appears to me to govern the entire course of the transaction. On reconsideration, it appeared that the purpose would be better fulfilled by a rearrangement involving an expenditure made in commutation of that undertaken. Why should the original purpose be excluded from view and the immediate purpose alone be considered? A wide view should be taken of the meaning of s. 25 (e). For it is intended to apply to an infinite variety of sources of income. When the expenditure avoided or reduced has been or would be incurred for the production of income, it appears to me that the substituted expenditure comes fairly within the description money exclusively laid out for the production of income.
In my opinion the retiring allowance is a deductible outgoing. But I do not think that so much of it as was represented by promissory notes payable after 30th June 1931 can be deducted in the assessment for the financial year ending 30th June 1932.
In my opinion the question in the case stated should be answered: Yes, PD1,900 thereof.