Case Q19
Judges:KP Brady Ch
JE Stewart M
Court:
No. 2 Board of Review
K.P. Brady (Chairman) and J.E. Stewart (Member)
The issue in these references relates to the quantum of deductions claimed by a private company under sec. 51(1) of the Income Tax Assessment Act in its returns of income for the years ended 30th June, 1976, 1977 and 1978, for outgoings on directors' fees, superannuation contributions and motor vehicle expenses. A further claim for deduction of losses of previous years against the company's assessable income in respect of the year ended 30th June, 1976 was withdrawn at the hearing.
2. It seems that the Taxation Office, subsequent to the lodgment of the 1976 and 1977 returns, requested further information from the taxpayer as to the basis of the above claims and, because of the correspondence which subsequently ensued, assessments for all of the years of income covered by these references did not issue until 14th August, 1979. Accordingly, as a matter of convenience, the references were consolidated into the one hearing.
3. The company has only two shareholders, a husband and wife whom we shall call X and Y. Each owns 1,500 $2 shares of the total issued capital of 3,000 shares, and they are its sole directors. An examination of the taxpayer's returns for the years of income in issue (which were tendered as Exhibit A) revealed that X is also its manager, and Y its secretary. The same source of information showed that the company's business is that of property owners and that its registered office was in the capital city of A. The company was incorporated in 1961 and was purchased by X and Y some time in 1972.
4. The company's principal asset is a factory building of some 15,000 sq. ft. which was constructed by X in 1973, assisted by sub-contractors, at a cost of $49,400. It came out in the evidence that X had been engaged in the building industry for some 54 years. The factory was built as an investment, and the rental from leasing it provided the company with its sole source of revenue, other than sundry interest income received on moneys placed on deposit with a building society. Some vacant land was purchased early in 1977 with a view to constructing a further building for leasing, but the matter was not proceeded with and the land was sold
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in 1978. Apart from that transaction, the company's fixed asset position remained unchanged for the years under review.5. The claims made by the company which are now in dispute, or which are relevant to the dispute, are as follows:
1976 1977 1978
Directors' fees: $ $ $
paid to X 2,500 2,500 1,300
paid to Y 2,500 2,500 1,300
Superannuation 800 800 800
Motor vehicle lease rental 2,421 4,035 4,927
Motor vehicle running expenses 370 1,954 832
Salary paid to X Nil Nil 5,200
------ ------- -------
$8,591 $11,789 $14,359
------ ------- -------
Of the above amounts, the Commissioner disallowed the following:
1976 1977 1978
$ $ $
Directors' fees 1,880 1,880 -
Superannuation 488 488 270
Motor vehicle lease rental and
running expenses 2,093 4,491 4,319
------ ------ ------
$4,461 $6,859 $4,589
------ ------ ------
and increased the company's taxable income by the above amounts.
6. In regard to the directors' fees, we were advised by the Commissioner's representative that the Commissioner formed the opinion, pursuant to sec. 109, that in each of the years 1976 and 1977, fees of $1,560 only for each of X and Y were reasonable.
7. Also, pursuant to sec. 82AAD, the Commissioner formed the opinion that the following amounts only were reasonable as deductions for amounts paid to a superannuation fund:
1976 1977 1978
$ $ $
In respect of X 156 156 400
In respect of Y 156 156 130
We noted that, with the exception of the 1978 amount for X, the above amounts represented 10% of the directors' fees considered allowable.
8. Finally, the Commissioner considered that the deductions allowable for motor vehicle lease and running expenses should not exceed the following:
1976 1977 1978
$698 $1,498 $1,440
We noted that the above represented 25% of the total amounts claimed.
9. The taxpayer company objected to the Commissioner's action, and upon those objections being disallowed the matter has come before this Board for review.
10. At the hearing the company was represented by its tax agent, and X gave evidence on behalf of the company. Y did not attend, due, we were told, to illness. The Commissioner was represented by one of his officers.
11. It is convenient to first examine the matter of the directors' fees claims and the application to those claims of sec. 109. That section permits the assessment of a taxpayer to be affected by an opinion formed by the Commissioner. To the extent it is relevant, it reads as follows:
``So much of a sum paid or credited by a private company to a person who is or has been a shareholder or director of the company or a relative of a shareholder or director, being, or purporting to be -
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- (a) remuneration for services rendered by that person; or
- ...
as exceeds an amount which, in the opinion of the Commissioner, is reasonable, shall not be an allowable deduction and shall, for the purposes of this Act other than the purposes of Division 11A of Part III and Division 4 of Part VI, be deemed to be a dividend paid by the company on the last day of the year of income of the company in which the sum is paid or credited.''
(Division 11A of Pt. III deals essentially with dividends paid to non-residents and Div. 4 of Pt. VI deals with withholding tax on dividends and interest.)
12. It has been established that sec. 109 is applicable only where the outlay is deductible under sec. 51(1) (or sec. 78(1)(c)) - ref.
W.J. & F. Barnes Pty. Ltd. v. F.C. of T. (1957) 96 C.L.R. 294 at p. 310. Section 51(1) speaks of outlays being deductible to the extent to which they are incurred in gaining the taxpayer's assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining such income; additionally, they must not be of a capital, private or domestic nature. In the instant case we consider that the directors sought to obtain an adequate income return by way of lease rentals on the funds invested in the factory building and sought to maintain that income producing asset in good order and condition. We therefore regard the outlays on directors' fees, putting aside for the moment all considerations of sec. 109, as properly deductible under sec. 51.
13. In Barnes' case it was stated by the High Court that sec. 109 does not deal with the title to deduct expenditure but seeks to place a restraint on the amount deductible under that heading, and does so by reference to the Commissioner's opinion of what is a reasonable amount. In the instant case, the Commissioner considered that the duties performed by the directors were minimal, and it was on that basis that he viewed the amounts of $2,500 paid to each of X and Y as unreasonable.
14. Section 190(b) of the Act provides that ``the burden of proving that the assessment is excessive shall lie upon the taxpayer''. This means, in the context of sec. 109, that a decision favourable to the taxpayer can only be reached by the Board receiving evidence of such particularity that it can make a sensible and just substitution of its opinion for that of the Commissioner. In such a situation as this, therefore, a positive case must be made out by the taxpayer if he is to succeed, and the taxpayer's representative sought to make out such a case.
15. We were told that regular directors' meetings were held, and that minutes were kept of all meetings; however, the number of meetings that were held in any one year remained unclear.
16. In giving his evidence, X contended that he did much more than carry out the formal functions of a company director. He informed us that he carried out regular maintenance work on the building, and when it was pointed out to him that such work (other than that on the exterior of the building) was the responsibility of the lessee under the terms of the two lease agreements which operated consecutively during the years of income in issue, he reiterated that he still had to do it, otherwise it would not have been done.
17. It seemed that Y's duties also extended beyond those normally performed by a director. X informed us that she was a dedicated gardener and, with his assistance, she planted many of the shrubs and small trees in the factory grounds, and generally maintained the garden areas with a view to improving the site. However, it seems that, at least for the 1976 year, payments of $250 each described in the company's accounts as ``Gardening and Maintenance'' were made to them for that work.
18. The hours per week which each spent on the company's affairs remained unclear. It was conceded that the hours reflected in the three years returns as applicable to each of X and Y, viz.:
1976 1977 1978
25 40 40
were too high, and were due to office error, and perhaps the most valid estimate was that X spent up to 20 hours per week and his wife up to 10 hours per week. Whether or not any evidence that could have been given by Y as to the range of duties and time taken up by
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her would have improved the taxpayer's case is a matter of speculation, but we cannot help but feel that, despite the taxpayer's representative's best endeavours, the evidence made available at the hearing did not adequately cover the material aspects of the matters in issue.19. We do not doubt that both X and Y took great pride in maintaining the building and its surrounds. But it must also be said that their involvement as directors was perhaps necessarily limited because the taxpayer company, in a practical sense, had one only income-producing asset and the income so produced was secure because of the leasing contracts which it had entered into with seemingly reputable lessees. X placed considerable emphasis on the fact that he had spent considerable time in supervising the insulation of the factory roof, but there existed no arrangement with either the taxpayer or the lessees that he should do so, and his involvement seemed to stem from a private interest.
20. Basically it seems to us that the involvement of both X and Y in the company's affairs was mainly in connection with handyman type tasks not requiring great skills. We agree with the Commissioner's finding that both X's and Y's duties as directors were minimal and we therefore see no reason why the Commissioner's assessment should be varied.
21. In regard to the taxpayer company's claim for superannuation payments made in respect of X and Y, the taxpayer's representative suggested that the issue would be resolved automatically upon the Board arriving at its finding on the directors' fees issue. Whilst the two claims are interwoven, they are discrete, and thus the superannuation payments claim is deserving of separate consideration. It will be recalled that the Commissioner invoked sec. 82AAD to reduce the taxpayer company's claims. Under that section, the amount of contributions to a superannuation fund paid by a taxpayer for the benefit of an associated employee allowable as a deduction is limited to the extent to which, in the opinion of the Commissioner, the amount would have been so set apart or paid if the employee had not been associated with the taxpayer. Both X and Y are associated employees (see sec. 82AAA(2)(a) and sec. 82AAB(b)(i) and (ii)), and we content ourselves with saying that had not both X and Y been associated with the company there may well have not existed sound business reasons (mainly on account of their ages as well as the duties performed by them) for providing superannuation benefits for them. Again we see no reason to say that the Commissioner's opinion is mistaken.
22. We turn now to the matter of the car leasing and car running expenses. In Case C63
(1953) 3 T.B.R.D. 335, this Board as then constituted stated at p. 336:
``Upon any review, sec. 190... casts upon the taxpayer the burden of proving that the assessment he challenges is excessive. Upon this review, discharge of this burden involves proof to the satisfaction of the Board of the quantum of the outgoings incurred by the taxpayer... in gaining or producing his assessable income or carrying on a business for that purpose and that those outgoings were not of a capital or private nature.''
We agree with that statement of principle.
23. It is true that it is not for the Commissioner or for a Board of Review to determine how a taxpayer should conduct his business (ref.
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186 at p. 190, and
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 60), but that is not to say that the nature of an outgoing claimed as a deduction is not to be examined for the purpose of determining its deductibility.
24. In giving his evidence, X stated that the taxpayer company leased a Toyota sedan at $237.49 per month from 9th October, 1975 to 9th July, 1976, when it was traded-in on a new Mercedes sedan in respect of which the lease rental was $403.85 per month. He contended that both vehicles were used for business purposes only and that non-company motoring encompassing his pastimes and private pursuits was done in a Valiant sedan or Toyota utility which he himself owned. It seems that all vehicles were garaged at his home in the suburb of L, situated some 18 kilometres from the capital city, A, and that he was the sole driver.
25. In answer to a request for further information from the Taxation Office made
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in June 1978 in relation to the car expenses claims for 1976 and 1977, the Office was advised that the Toyota sedan travelled 7,000 kilometres in 1975/76, and the Mercedes 8,000 kilometers in 1976/77, and as it was contended that both vehicles were used wholly on business, the total outlays on both cars, so it was said, were properly fully deductible. Obviously the Commissioner did not accept those assertions as being completely factual in taking the action that he did.26. X advised us that he used the Toyota, and subsequently the Mercedes, in first travelling to and from his home to the factory (a total distance of approximately 24 kilometres), secondly, inspecting blocks of land as potential factory sites, and finally in doing the banking, visiting the Titles Office, having discussions with his accountant and in similar administrative and operational pursuits.
27. We consider that the expenses incurred in using a company car as between X's home and the taxpayer company's factory could not be said to be necessarily incurred in carrying on the company's business for the purpose of gaining its assessable income. Also, we would view the expenditure on inspecting the blocks of land as expenditure of a capital nature (see Case No. 29,
15 C.T.B.R. (O.S.) 239 at p. 244, and Case C71,
71 ATC 315 at p. 316). Those expenses represented a cost associated with obtaining ``a profit-yielding subject'' to adopt the phrase used by Dixon J. (as he then was) in
Sun Newspapers Ltd. and Associated Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 at p. 360. From the evidence given by X, it would seem that the kilometers travelled in the above pursuits would represent a significant proportion of the total distances travelled by the Toyota and Mercedes in 1975/76 and 1976/77 respectively. No evidence was led in relation to the 1977/78 car usage, but as there was nothing to suggest that the level of business activity had materially varied in that year, we can only assume that use of the Mercedes remained much the same as in the previous year. Accordingly, it is our view that the taxpayer company has failed to show us that as a result of the Commissioner disallowing portion of the lease rentals and vehicle running expenses, its assessments are excessive.
28. For the reasons given above, we uphold the Commissioner's decisions on the objections and confirm the assessments for each of the years ended 30th June, 1976, 1977 and 1978.
Claims disallowed
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