FC of T v AMWAY OF AUSTRALIA LTD

Judges:
Hill J
Sundberg J
Kenny J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2004] FCFCA 273

Judgment date: 12 October 2004

Hill, Sundberg and Kenny JJ

The Commissioner of Taxation (``the Commissioner'') appeals from a judgment of a Judge of this Court (Gyles J) [reported at
2003 ATC 5153] which in effect allowed as a deduction to the respondent, Amway of Australia Limited (``Amway'') amounts expended by it for accommodation, travel and other incidental expenditure incurred in relation to the holding of certain seminars held by Amway for distributors of its products. Amway cross-appeals against the same judgment to the extent that it operated to disallow to Amway the costs of meals and drink in connection with the seminars.

2. As appears from the judgment, the parties had agreed that points of principle would be decided by his Honour by reference to the expenditure incurred by Amway in connection with what it is referred to as the Australian Leadership Seminar (``ALS'') held in Bangkok in 1993. As his Honour records, the parties had agreed that following judgment the assessment

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for all years in dispute, namely the years of income ending on 31 August 1989 to 31 August 1996 inclusive would be remitted to the Commissioner for amendment in accordance with the findings in principle his Honour made. Accordingly, the orders made by his Honour were that the objection decision in dispute be set aside and the matters the subject of them be remitted to the Commissioner to be amended. There is a dispute about the detail of that agreement to which reference will be made later in the reasons.

The background facts

3. The learned Primary Judge adopted as containing a brief description of the business of Amway in the relevant years of income the following description taken from the judgment of the Full Court of this Court in
Amway of Australia Pty Ltd v FC of T & Anor 99 ATC 4359 at [5]:

``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.''

4. The network of individuals to which the Full Court refers comprises new distributors who are recruited by existing Amway distributors and those who have been distributors for a longer period of time. New distributors who are recruited become sponsorees of the distributor who recruited them.

5. The distributors provide two forms of services to Amway being respectively the selling and consequent ordering of Amway products at Amway retail prices on behalf of Amway and the sponsoring of new distributors. The distributors do not sell or purchase Amway products as principal. An essential part of the distributorship system is the need for training of distributors by Amway and its direct distributors, and the provision of product information and support by Amway. Amway also guarantees money back satisfaction to customers. The distributors earn commissions by reference to their own sales to consumers and also receive a portion of the commission payable to distributors they sponsor. The commission structure is, as his Honour records, complex. Distributors earn points for sales at different rates according to the category of product sold. A distributor becomes eligible to be a direct distributor when he or she has earned a specified number of points. Direct distributors become eligible, subject to points they earn, to reach higher levels such as ``Founders Direct Distributor, Sapphire, Emerald, Diamond and Executive Diamond.'' For their part, direct distributors have the responsibility to train, supervise and foster those distributors who are down line from them and with these Amway has little contact. A range of rewards and incentives are offered to encourage distributors to develop their business and thereby increase their purchase of Amway products. There are three categories of Amway products, respectively, core line products, catalogue products and locally sourced non catalogue products.

6. Each year Amway organises an exclusive conference or seminar for its direct distributors known as the Australian Leadership Seminars. These are held generally in good quality venues at a holiday destination. The majority of the ALSs in question in the years of income were held overseas, although two were held in Australia during the relevant period, one in 1991 at Hamilton Island and another in 1994 at Alice Springs. Attendance was by invitation only. To be eligible for an invitation distributors had to qualify by achieving a specified number of points based on the distributor's performance during the previous year. The ALS was, as his Honour found, held around October, November or December each year and lasted for about six days. Amway paid for the cost of accommodation and travel for all those distributors who were invited. Seminars consisted of a number of business sessions, although those invited had the opportunity to enjoy other activities such as golf, tennis and swimming as well as a gala dinner held on one of the nights of the conference. Topics covered in the business sessions included business image and business presentation skills, sales and marketing, the current state of the Amway business and new initiatives. There were also recognition ceremonies during which Diamond

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distributors gave speeches at business sessions about their success. One of the activities during each seminar was referred to as the ``coffee shop'', and it 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.

7. In addition to the ALSs there were in the relevant period what were referred to as Go- Diamond seminars 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. His Honour found that these seminars were held to encourage distributors who had reached the Emerald level to qualify for Diamond level. At the Go- Diamond seminars Emerald distributors were exposed to higher ranking distributors in the hierarchy. These seminars were held at a higher level of luxury than the ALS. The 1995 Go- Diamond seminar was held in Hollywood and the 1996 seminar was held in Hawaii. There were business sessions during these seminars but attendees also had the opportunity to undertake other activities such as helicopter flights, rafting or scuba diving.

8. It was common ground between the parties that subject to the provisions of s 51AE of the Income Tax Assessment Act 1936 (Cth) (``the Act''), the outgoings incurred by Amway in connection with the seminars were allowable deductions to Amway under s 51(1) of the Act. The Commissioner however disallowed all deductions for food, drink, transport and accommodation in connection with the seminars, relying upon the provisions of s 51AE(4) of the Act.

9. Section 51AE required his Honour to make detailed findings in connection with the ALS seminar held in Bangkok which the parties treated as representative of ALS seminars and the Go Diamond seminars.

10. His Honour's judgment was so structured that his Honour first set out a summary of the evidence given by each of seven witnesses. Of these witnesses his Honour noted that he regarded all of them as ``essentially truthful''. However, his Honour qualified that comment by saying, ``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.'' His Honour did not directly indicate to what extent that exaggeration and diminution required qualification to be made to the summary in the judgment of each witness's evidence. However, after the summary and an account of the cross examination of the witnesses, his Honour proceeded to make findings based upon the evidence called and documentary material in evidence. These findings are largely in the form of conclusions and are the subject of criticism by the Commissioner.

The findings made and conclusions of fact drawn by the Primary Judge

11. The Primary Judge commenced his discussion under the heading ``Findings'' with the observation that, although the Commissioner had submitted that the evidence adduced by Amway was ``limited and selective'', he was ``satisfied that the evidence which was called and the documents which are in evidence are quite adequate to enable findings to be made''. His Honour did not, however, make many findings of primary fact. Instead, in the main, his statements of fact were in the nature of conclusions about facts that were designed to answer the questions raised by an application of s 51AE.

12. In relation to an ALS, his Honour found that, from Amway's point of view, ``an ALS was solely for business purposes''. More generally, he found that ``an ALS was a serious business occasion for all concerned''; ``there were serious business purposes served by an ALS''; and ``an ALS is an important business occasion for a distributor in various ways''. According to his Honour, an ALS 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''; and an ALS was ``a means by which 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''. He found that each distributor was an agent of Amway to receive orders.

13. His Honour also held that ``[t]he existence of seminars was designed to (and did) motivate the network of distributors by acting as a reward for and an incentive towards success''. He remarked that, ``Amway certainly publicised the seminars on that basis'' and that

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``[a] powerful message of wealth and prestige which could be aspired to with success in the business was conveyed in various ways''. His Honour said:

``[A]n ALS was designed to be, and was seen to be, an attractive event because of the exotic location, the standard of the 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.''

14. In summary, his Honour accepted 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,... 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.''

As between these purposes, his Honour said ``I am satisfied that business is the principal purpose of an ALS and that the other purposes are ancillary, although significant''.

15. His Honour observed that ``[g]iven the decentralised nature and indirect structure of the Amway business, it [was] difficult to conceive of a better method of achieving [Amway's] objectives''; and that ``[f]rom a business point of view, criticism of the exotic overseas locales and the lavish scale of the accommodation and the hospitality is misplaced''. This was apparently because, as his Honour put it:

``The more people sharing information the better and the more people being motivated the better. A well attended event assists in motivation as it will be perceived as the place to be. A poorly attended event would send the opposite message.''

His Honour considered that ``[t]he decentralised nature of the Amway business model and relevant isolation of individual distributors led to [an ALS] being regarded by distributors as of greater importance than might have been judged by others not in the same kind of business''.

16. As to the importance of the business sessions at the ALS, his Honour found that ``[t]he content was appropriate to the Amway business''; and these ``sessions were an integral and significant part of the event, although much business was done outside those sessions''. His Honour concluded that ``no ALS was a social event or entertainment, with some token business tacked on''; and that, from Amway's point of view, ``the hospitality [was] ancillary to the business purposes of an ALS''.

17. His Honour went on to hold that ``[t]he fares and accommodation were expended to bring distributors to a business seminar, not in order to provide the participants with food, drink and recreation''. He therefore concluded 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''. Further, according to him, ``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''.

18. As to the distributors who gave evidence, his Honour found that they ``attended the ALS because the events were considered genuinely useful in carrying on their own business although they were also influenced to attend because the ALS was a subsidised visit to a desirable location in desirable surroundings with something of a holiday atmosphere''. He inferred that ``most attendees'' at an ALS ``would have had a similar mix of motives''.

19. The Go Diamond seminars, so his Honour held, ``performed similar functions to an ALS''; and ``[t]hey enabled communication between high level distributors themselves and with Amway whilst concurrently motivating that group of distributors''. The Go Diamond seminars also ``motivated lower order distributors who aspired to attend the even more impressive Go Diamond seminars''.

The submissions of the Commissioner on factual findings

20. The Commissioner challenged virtually all the Primary Judge's findings and conclusions of fact. At the hearing of the appeal, counsel for the Commissioner referring to
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 (``Branir'') and, in written submissions, said that ``the Commissioner made a broad challenge to the way in which his Honour approached the

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matter'', as well as specific submissions as to the relevance of some of these factual findings. The gist of the Commissioner's challenge was that his Honour erred in not finding as a fact that an ALS was in the nature of a reward given by Amway to certain distributors, for their performance achievements over the 12 month period to 31 August, in the October, November or December of the calendar year in which the ALS was held. Likewise, according to the Commissioner, his Honour should have held that the Go Diamond seminars were also in the nature of rewards to the distributors invited to attend. The Commissioner submitted that his Honour should have held that the reward was a package comprised of free travel to an exotic location where lavish hospitality and accommodation would be provided free of charge to chosen distributors. According to the Commissioner, (a) the package was held out to distributors during the financial year as an object of desire that could be attained by achieving prescribed levels of sales in the financial year; (b) the location was selected because it would be perceived as an attractive place to visit by distributors; and (c) the travel and accommodation was to facilitate the distributors taking up the opportunities for recreation, and the enjoyment of hospitality provided by way of food and drink free of charge. The Commissioner noted that Amway treated the expenditure as referable to the prior year in which the reward was earned and made provision in its books of account on this basis.

21. During the hearing of the appeal, the Commissioner sought to identify for the Court the findings that were specifically under challenge. At least one such matter was in the nature of an evaluation of the evidence, rather than a finding of fact. Other challenges were to factual conclusions, rather than findings of primary fact. For the reasons stated below, however, none of this affects the outcome of our consideration of the Commissioner's challenge to the fact-finding at first instance.

22. The Commissioner contended that the Primary Judge had erred in his evaluation of the evidence. Referring to his submission at first instance that the evidence called by Amway was limited and selective, the Commissioner contended that his Honour had not weighed the evidence before the Court in conformity with the principle stated in
Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970, referred to in
Vetter v Lake Macquarie City Council (2001) 202 CLR 439 (``Vetter''). In Vetter, at 454, Gleeson CJ, Gummow and Callinan JJ observed that:

``As long ago as 1774 Lord Mansfield said that all evidence is to be weighed according to the proof which is in the power of one side to have produced and the power of the other to have contradicted.''

[Citations omitted]

23. The Commissioner noted, for example, that his Honour did not make any findings concerning the relative significance of an ALS as a means of communication compared with the other means of communication used by Amway to communicate with distributors and the other methods by which distributors communicated with each other.

24. Acknowledging, in written submissions, that his Honour apparently relied on the evidence of Mr Prouting for ``some of the higher level findings... later in his judgment'', the Commissioner submitted that the Judge did not identify ``what parts and to what extent Mr Prouting `exaggerated' the `significance of the business purposes' and `diminished' the `recreational aspects' of the ALS events''. The Commissioner further submitted that his Honour's survey of Mr Prouting's evidence was ``based almost wholly upon his affidavit evidence'', paying little regard to, or misunderstanding, his evidence in cross- examination and, in one case, overlooking a concession actually made by Amway. The Commissioner's submission concerning the Primary Judge's evaluation of the evidence of Mr Tunley was to similar effect. There was said to be misattribution of Mr Tunley's evidence to Mr Prouting. The Commissioner complained that his Honour made no reference to the Commissioner's submissions at first instance on the effect of Mr Shankland's evidence as to the objectives of an ALS or concerning ``the evolution of the ALS over the years from 1973 when the first Leadership Seminar was held in Canberra, and its incorporation into Amway's incentive scheme''.

25. The Commissioner also contended that the findings made at first instance (1) did not require or permit the conclusion of law that the Judge reached; (2) were irrelevant to the application of s 51AE; (3) were too vague and of little utility in addressing the statutory questions; and (4) were not supported by

ATC 4900

evidence (for example, his Honour's reference to an ALS being a ``subsidised'' visit to a ``desirable location'' when in fact Amway paid for the visit entirely). In this regard, the Commissioner said that:

``The Appellant challenges the reason his Honour ascribes for the choice of exotic overseas locales... namely, to encourage attendance at the event. This was not the subject of any evidence. It is not the most probable inference nor deduction. The location was chosen to maximize the value of the prize, its efficacy as an incentive to performance.

...

The finding as to the distributors' reasons for attendance is challenged by the Commissioner. There was no evidence from any of [the distributors] as to their reason for attending any event. It can only be a matter of deduction on his Honour's part. It is... a most improbable finding, and could readily bear the epithet `glaringly improbable'. The events were attended by distributors because they were the opportunity to travel to an exotic locale and to enjoy yourself in fabulous resort location, all expenses paid. It was a prize they had each striven for and won.... Attendance depended upon performance during the previous income year.''

26. At the hearing of the appeal, the Commissioner invited the Court to consider some of the evidence, which, so the Commissioner said, supported the contention that an ALS was in the nature of ``a reward for past services''. The Commissioner provided the Court with a summary of the evidence and referred to the business program in relation to each of the seminars up to 1994, the affidavit evidence and the evidence in cross- examination. In particular, the Court was asked to examine parts of the Amway Business Directory current as at 1990, a magazine called the ``Amagram'' published by Amway and sent to its distributors, correspondence and other documentary material concerning the ALS held at the end of 1996 in Hawaii (for example, 1996 Australian Leadership Seminar General Information). The Commissioner compared and contrasted an ALS with various merchandising events that were held throughout Australia on a regular basis in a calendar year, including a national convention, a state convention, meetings and demonstrations in order to support the Commissioner's contention that as ALS was in the nature of a reward to distributors for their past performances.

Amway's response to the Commissioner's submissions on factual findings

27. In response, counsel for Amway submitted that, in the circumstances of the case, it was inappropriate for an appellate court to undertake an examination of the evidence with a view to overturning the findings of fact made by the trial judge. In support of this submission, Amway referred to
Dearman v Dearman (1908) 7 CLR 549 at 561 per Isaacs J;
S.W. Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466 at 478 per Gibbs CJ;
Pledge v Roads and Traffic Authority (2004) Aust Torts Reports ¶81-734 at 65,509-65,511; (2004) 205 ALR 56 at 67-70 (``Pledge'') per McHugh ACJ, Kirby, Hayne, Callinan and Heydon JJ; Branir at 432-439 per Allsop J; and
FC of T v Chubb Australia Ltd 95 ATC 4186 at 4191-4192; (1995) 56 FCR 557 at 572-573 per Hill J. Amway submitted that this was a very different case from
State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (1999) 160 ALR 588 (``State Rail'') and
Fox v Percy (2003) 214 CLR 118 (``Fox v Percy'').

28. On the hearing of the appeal, counsel for Amway emphasised the very broad nature of the Commissioner's challenge to the facts found at first instance. Indeed, it was not until the second day that the Commissioner stated what facts were specifically under attack. Amway maintained, and the Commissioner denied, that some of these facts were not identified in the Commissioner's Notice of Appeal. For the reasons appearing below, it is unnecessary to resolve this question. For the purposes of these reasons, it may be assumed that all the pertinent factual findings or conclusions under challenge were sufficiently raised in the Commissioner's Amended Notice of Appeal.

29. Counsel for Amway contended that the Commissioner's approach to the evidence was selective and misleading, focussing on part only of the documentary evidence (especially the ``Amagrams'') and making very limited reference to the evidence given by the relevant witnesses. As Amway noted in written submissions, this evidence included ``extensive coverage of the extent to which the respondent's business was the topic of

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conversation at the [ALS and Go Diamond seminars], including during breakfast, lunches, dinners and recreational occasions and evidence as to [the] respondent's business being a `people business' to which relationship building of the kind undertaken at the [ALS and Go Diamond seminars] was essential''.

30. Amway contended that, to the extent that his Honour may have discounted the significance of the ``Amagrams'':

``he was right to do so in favour of the affidavit and oral evidence as well as the other documentary evidence.''

The other documentary evidence was said to include the transcript of a talk given by one of the witnesses, Mr Light, at the conclusion of the 1990 ALS in Las Vegas and three versions of the Direct Distributor's Manual, which supported his Honour's findings about the purposes of an ALS. In written submissions, Amway further contended:

``Pressed in cross-examination to concede that those purposes were, by the time of the [ ALS and Go Diamond seminars] in question `no longer operative in Amway's mind in relation to the purpose of an ALS' Mr Shankland, the author of this section of the Direct Distributors' Manual, replied:

`They are the sole purpose of an ALS.'

It was not put to Mr Shankland or any other witness, that the statement as to purpose which he had drafted for inclusion in the Manual was composed with anything in mind other than to inform Direct Distributors of the purpose of the ALS. Nor was it suggested that Mr Shankland or any other witness had a financial or any other interest in the respondent which might have influenced the evidence they gave. The trial judge obviously ignored the 'evolutionary theory' of the ALS events put forward by the appellant as an explanation for the description contained in the three editions of the Direct Distributors Manual. His Honour was right to do so.''

31. Amway maintained that the witnesses whom it called at trial included four distributors who attended the ALS and the Go Diamond seminars in the period in question and, in this period, they rose from the ranks of first-time Direct Distributors to the upper levels in the respondent's hierarchy. Their evidence, so Amway submitted, covered ``the whole range of the attendees''. In written submissions, Amway observed that:

``It is clear that many hundreds, indeed thousands of the respondent's distributors attended the [ALS and Go Diamond seminars]. The appellant apparently made no attempt to call any of these other distributors to give a different account of what occurred at the [ALS and Go Diamond seminars] nor provided any explanation for the absence of any such evidence.''

32. Amway submitted that his Honour was ``right to conclude that the fact that attendance may have been seen both by [it] and the distributors as a `reward,' was by no means inconsistent with the primary purpose of the [ ALS and Go Diamond seminars] being a business one from the point of view both of the respondent and of the distributors who attended''.

Consideration of the parties' submissions concerning the factual findings

33. In the joint judgment of Gleeson CJ, Gummow and Kirby JJ in Fox v Percy at 124, their Honours said:

``Appeal is not, as such, a common law procedure. It is a creature of statute. In Builders Licensing Board v Sperway Constructions (Syd) Pty Ltd [(1976) 135 CLR 616 at 619-22], Mason J distinguished between (i) an appeal stricto sensu, where the issue is whether the judgment below was right on the material before the trial court; (ii) an appeal by rehearing on the evidence before the trial court; (iii) an appeal by way of rehearing on that evidence supplemented by such further evidence as the appellate court admits under a statutory power to do so; and (iv) an appeal by way of hearing de novo. There are different meanings to be attached to the word `rehearing'. The distinction between an appeal by way of rehearing and a hearing de novo was further considered in Allesch v Maunz [(2000) 203 CLR 172]. Which of the meanings is that borne by the term `appeal', or whether there is some other meaning, is, in the absence of an express statement in the particular provision, a matter of statutory construction in each case.''

[Some citations omitted]

34. In Branir, Allsop J (with whom Drummond and Mansfield JJ agreed) held at 434-435 that
Duralla Pty Ltd v Plant (1984) 2 FCR 342

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should not be followed in so far as it is authority for the proposition that an appeal to this Court is one stricto sensu. Instead, an appeal to this Court is by way of rehearing. Speaking of an appeal by way of rehearing under the District Court Act 1973 (NSW) and the Supreme Court Act 1970 (NSW), the High Court in Fox v Percy said at 125-127:

``On the one hand, the appellate court is obliged to `give the judgment which in its opinion ought to have been given in the first instance'. On the other, it must, of necessity, observe the `natural limitations' that exist in the case of any appellate court proceeding wholly or substantially on the record. These limitations include the disadvantage that the appellate court has when compared with the trial judge in respect of the evaluation of witnesses' credibility and of the `feeling' of a case which an appellate court, reading the transcript, cannot always fully share. Furthermore, the appellate court does not typically get taken to, or read, all of the evidence taken at the trial. Commonly, the trial judge therefore has advantages that derive from the obligation at trial to receive and consider the entirety of the evidence and the opportunity, normally over a longer interval, to reflect upon that evidence and to draw conclusions from it, viewed as a whole

...

Within the constraints marked out by the nature of the appellate process, the appellate court is obliged to conduct a real review of the trial and, in cases where the trial was conducted before a judge sitting alone, of that judge's reasons. Appellate courts are not excused from the task of `weighing conflicting evidence and drawing [their] own inferences and conclusions, though [ they] should always bear in mind that [they have] neither seen nor heard the witnesses, and should make due allowance in this respect'. In Warren v Coombes [(1979) 142 CLR 531 at 551] the majority of this Court reiterated the rule that:

`[I]n general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge but, once having reached its own conclusion, will not shrink from giving effect to it.'

As this Court there said, that approach was `not only sound in law, but beneficial in... operation.'''

[Citation omitted]

In Pledge at Torts 65,509; ALR 67, Callinan and Heydon JJ (with whom McHugh, Kirby and Hayne JJ agreed) began their consideration of the obligations of an appellate court in relation to contested findings of fact by adopting these observations.

35. In Branir, Allsop J sought to bring together the authorities in so far as they related to this Court's appellate consideration of challenges to fact-finding at first instance. His Honour said, at 435-438:

``What is error in any given case depends, of course, not only on the evidence, but also on the nature of the findings or conclusions made by the primary judge. The demonstration of error may not be straight- forward where findings or conclusions involve elements of fact, degree, opinion or judgment or when the findings or conclusions in question can be seen as made with the advantage of hearing the evidence in its entirety, presented as it unfolded at the hearing with the opportunity over the course of the hearing and adjournments for reflection and mature contemporaneous consideration and assessment, in particular in a long and complex hearing:...

This is not to elevate ordinary factual findings to the protected position of those based on credit, but it is to make clear, first, the advantages of the trial judge and, secondly, the need for demonstration of error. The inability to identify error may arise in part from the unwillingness of the appeal court to be persuaded that it is in as good a position as the trial judge to deal with the issues, because of the kinds of considerations referred to... above.

...

[T]he appeal court must make up its own mind on the facts. Secondly, that task can only be done in the light of, and taking into account and weighing, the judgment appealed from. In this process, the

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advantages of the trial judge may reside in the credibility of witnesses, in which case departure is only justified in circumstances described in Abalos v Australian Postal Commission [(1988) 171 CLR 167]; Devries v Australian National Railways Commission [ (1993) 177 CLR 472] and [
State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) (1999) 160 ALR 588]. The advantages of the trial judge may be more subtle and imprecise, yet real, not giving rise to a protection of the nature accorded credibility findings, but, nevertheless, being highly relevant to the assessment of the weight to be accorded the views of the trial judge. Thirdly, while the appeal court has a duty to make up its own mind, it does not deal with the case as if trying it at first instance. Rather, in its examination of the material, it accords proper weight to the trial judge's views. Fourthly, in that process of considering the facts for itself and giving weight to the views of, and advantages held by, the trial judge, if a choice arises between conclusions equally open and finely balanced and where there is, or can be, no preponderance of view, the conclusion of error is not necessarily arrived at merely because of a preference of view of the appeal court for some fact or facts contrary to the view reached by the trial judge.

The degree of tolerance for any such divergence in any particular case will often be a product of the perceived advantage enjoyed by the trial judge. Sometimes, where matters of impression and judgment are concerned, giving `full weight' or `particular weight' to the views of the trial judge might be seen to shade into a degree of tolerance of divergence of views.... In such cases the personal impression or conception of the trial judge may be one not fully able to be expressed or reasoned.... However, as Hill J said in
Commissioner of Taxation v Chubb Australia (1995) 56 FCR 557 at 573 `giving full weight' to the view appealed from should not be taken too far. The appeal court must come to the view that the trial judge was wrong in order to interfere. Even if the question is one of impression or judgment, a sufficiently clear difference of opinion may necessitate that conclusion.''

36. In order to make findings of fact in this case, the trial judge was obliged to, and plainly did, consider and weigh a large body of documentary and oral evidence, including videos of the events in question. In weighing this evidence, he had necessarily to form a view about a number of central matters, including the dominant purpose of an ALS. Some of these matters may fairly be described as matters of impression and judgment.

37. The Commissioner's challenge was a broad-ranging one. The appeal was not limited to challenging discrete findings of fact and merely inviting the Court to examine an issue or issues in light of a circumscribed body of evidence. Nor was this a case in which the majority of facts were undisputed, with the consequence that the court on appeal was in as good a position as the court at first instance to draw inferences of fact. Rather, many of the primary facts were strongly disputed, as, for example, the extent of business discussions at meal times during an ALS.

38. We accept that, as counsel for Amway submitted, this case is very different from State Rail and Fox v Percy, where the evidence compelled an appellate court to conclude that the trial judge had erred. In the instant case, his Honour's findings were not ``glaringly improbable'' or ``contrary to compelling inferences'': compare Fox v Percy at 128. Nor was this a case where, as in State Rail, there was no evidence led by the party seeking to support the trial judge's decision (apart from an affidavit sworn by a solicitor).

39. Plainly enough, there was evidence in support of the Commissioner's case that an ALS was in the nature of a reward for past services, but there was also evidence that an ALS had a distinct and important business function. His Honour's findings and conclusions of fact were open on the evidence before him. In particular, it was open to his Honour to find, as he did, that the overall impression conveyed by the evidence was that, although held at a desirable holiday location, an ALS or a Go Diamond seminar was primarily concerned with business matters, bearing in mind what his Honour found to be appropriate business programs, the nature of Amway's business, and the way in which the distributors and Amway used the seminars to further their business opportunities. We accept, as the respondent submitted, that it was for his Honour

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to form an overall impression of the significance of the evidence, and that is what his Honour has done.

40. It should be borne in mind that we do not have his Honour's advantage in hearing the evidence of the witnesses from their own mouths and, in consequence, we are not in the same position as his Honour was to appreciate what the High Court in Fox v Percy at 126 called the ``feeling'' of the case, including, for example, the circumstances in which the respondent's accountant, Mr Tunley, gave evidence.

41. The example of Mr Tunley illustrates the disadvantageous position of an appellate court in this case. It was not disputed that at the time of trial Mr Tunley was very ill and that he has since died. As discussed below, the respondent's counsel maintained that there was an agreement between the parties that only a portion of Mr Tunley's evidence would be read and that was the portion that related to the 1993 ALS in Bangkok. In considering the findings of fact made by the trial judge, any concession of this kind must be borne in mind. We accept, as the respondent's counsel submitted, that it is appropriate to consider his Honour's findings, having regard to the fact that the parties agreed that Mr Tunley's evidence would be made available to his Honour for such assistance as it might provide in relation to the questions of principle; and that, if the questions of principle were resolved to any extent in the respondent's favour, then the matter should return to the Commissioner. We interpolate that this matter is discussed at greater length below under the heading ``The Estimates of Quantum''. Since an appellate court does not see, as the trial judge did, how the case was run at trial, it cannot always be confident that it fully appreciates in what way the conduct of the trial has properly affected the trial judge's fact- finding. Further, as counsel for the respondent noted, it was also apparent that Amway made various other concessions in the course of the trial that diminished the scope of its claim. His Honour was evidently cognisant of this, but it would be difficult for this Court on appeal to put itself in the same position as his Honour, as he saw the trial unfold before him.

42. The Commissioner has not persuaded us that his Honour's findings manifest error or that they were based on any relevant misapprehension of the evidence. We do not accept that, as the Commissioner contended, anything turns on his Honour's reference to ``subsidised'' visits. Plainly enough, his Honour fully appreciated the financial basis on which an ALS was conducted. It is, moreover, apparent from his Honour's reasons that he was not under any misapprehension about the level of hospitality involved in an ALS.

43. The Commissioner's submissions give little credit to the experience of the Primary Judge. Further, his Honour examined the evidence of each witness with some care. Whilst it is true, as the Commissioner submitted, that his Honour did not make absolutely clear what evidence he accepted and what he rejected, nothing ultimately turns on this. It is clear from his reasons, including his conclusions of fact, that he found that the primary facts supported the respondent's case; and that, having regard to the way the case was conducted before him, his Honour made sufficient findings of fact to answer the questions properly raised by s 51AE. It must be borne in mind that the trial judge found that each of Amway's witnesses was ``essentially truthful'', although given to varying degrees of exaggeration as to ``the significance of the business purposes of an ALS and a diminution of the recreational aspects of them''. As Amway submitted in written submissions, ``[r]ejecting the trial judge's findings would... involve accepting that much of the witnesses' evidence was not `essentially truthful'''. We are in no position to do so; and there is nothing that indicates that his Honour failed to have proper regard to any evidence that was before him.

44. In the circumstances of the case, bearing in mind what has been said of the advantages enjoyed by a trial judge in making findings of fact and, more particularly, that no relevant error has been shown in his Honour's approach to finding the facts, the findings of fact made at first instance must stand. The issues arising on the appeal fall to be examined with these findings in mind.

The relevant legislative provisions

45. The relevant statutory provision, s 51AE of the Act was introduced in 1985 and continued in force until it was repealed and replaced by new provisions in the Income Tax Assessment Act 1997 (Cth) (``the 1997 Act''). Accordingly the issues of interpretation which here fall for decision no longer arise.

ATC 4905

46. In the almost 15 years during which s 51AE applied, it received no judicial consideration, although there were some cases dealt with by the Administrative Appeals Tribunal. Those cases do not, however, bear upon the matters to be decided in the present appeal.

47. The section, it must be said, is inelegantly and somewhat confusingly drafted. It was designed to operate to disallow as deductions amounts otherwise deductible under s 51(1) of the Act spent on entertaining clients and others. The policy underlying s 51AE is explained in extrinsic material to which his Honour referred in the course of his judgment. Thus in a statement made by the then Treasurer, Mr Keating, to Parliament in September 1985 entitled ``Reform of the Australian Taxation System'', the following appears:

``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)

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.

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The broad effect of section 51AE will be that activities of the type that would 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 subsection 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) entertainment 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)

48. The operative subsection is s 51AE(4) which provides:

``[Non-deductible losses and outgoings] 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.''

49. The expression ``provision of entertainment'' is defined in s 51AE(3) in the following terms:

``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.''

50. Certain losses or outgoings described in subsection (5) are excluded from the application of subsection (4), that is to say, they are, subject

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to subsection (10) allowable deductions. Relevant for present purposes are paragraphs (f) and (g) of subsection (5) which are in the following terms:

``(f) the loss or outgoing is incurred by the taxpayer in respect of:

(i) the provision of food and drink (not being food or drink provided at a party, reception or other social function) on working days to persons in an in-house dining facility of the taxpayer in respect of which the taxpayer has not made an election under subparagraph (ii) in relation to the year of income;

(ii) in a case where the taxpayer elects that this subparagraph shall apply to the taxpayer in relation to an in-house dining facility of the taxpayer in relation to the year of income, the provision of food and drink (not being food or drink provided at a party, reception or other social function) on working days-

(A) in any case - to employees of the taxpayer; or

(B) if the taxpayer is a company - to employees of the taxpayer or of a company that is related to the taxpayer,

in that in-house dining facility of the taxpayer;

(iii) the provision, in an eligible dining facility of the taxpayer, of food and drink (not being food or drink provided at a party, reception or other social function) on working days:

(A) in any case - to employees of the taxpayer; or

(B) if the taxpayer is a company - to employees of the taxpayer or of a company that is related to the taxpayer,

being employees the duties of whose employment consist of, or consist principally of, duties to be performed in, or in connection with:

(C) that eligible dining facility; or

(D) a facility for the provision of accommodation, recreation or travel of which the eligible dining facility forms part;

(iv) the provision of entertainment to a person (including the taxpayer) that:

(A) is reasonably incidental to the person's attendance at an eligible seminar; and

(B) is not by way of, or in connection with, the recreation of the person;

(v) the provision of an in-house recreational facility of the taxpayer; or

(vi) the provision of food or drink to an employee of the taxpayer pursuant to the provisions of an industrial instrument relating to overtime;

(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;''

51. The expression ``seminar'' and ``eligible seminar'' as used in s 51AE(5)(f) is defined in s 51AE(1) as follows:

```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.

`eligible seminar' means 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

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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;''

52. However, as already noted, the exclusions in s 51AE(5)(g) and (h) are by subsection (10) not to apply in relation to certain losses or outgoings. In other words, cases falling within s 51AE(10) will not be allowable deductions and will be excluded from deductibility by s 51AE(4). The losses or outgoings to which subsection (10) relevantly applies are as follows:

``(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

(b) a loss or outgoing incurred by the taxpayer to the extent to which the loss or outgoing is in respect of the purchase of food or drink in connection with overtime worked by the taxpayer as an employee.''

53. Finally s 51AE(11) provides:

``[`deductible travel'] 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.''

The findings of the Primary Judge on the issues of law

54. His Honour reached the following conclusions:-

55. (1) All expenditure by Amway on food, drink and recreation in the course of an ALS came within the meaning of the words ``provision of entertainment'' and therefore was not an allowable deduction but subject to any applicable exceptions in subsection 51AE(5).

(2) Section 51AE(3) required a purposive link between accommodation and travel on the one hand and entertainment by way of food, drink or recreation on the other. Having regard to his Honour's finding that an ALS was a serious business occasion for all concerned, notwithstanding that it was held in an exotic location in a quality hotel and provided an opportunity for combining business with pleasure and having regard also to the fact that hospitality to distributors was ancillary to the business purposes of Amway who paid for the fares and accommodation to bring distributors

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to the seminar but not in order to provide them with food, drink or recreation, it followed that the cost of travel and accommodation was not excluded from deductibility pursuant to s 51(1).

(3) But for the operation of s 51AE(10), s 51AE(5) would operate to allow to Amway a deduction for the cost of food and drink provided at an ALS. In his Honour's view distributors were persons who performed services for Amway within s 51AE(5)(g)(iii). Had distributors paid the expenses themselves they would have been entitled to a deduction under s 51(1) because an ALS was an important business occasion for a distributor. It was not, his Honour said, ``the purpose'' of either Amway or the distributors to provide entertainment to any person other than a distributor. It followed, so his Honour said, that the elements of subsection (5) were satisfied. In so concluding his Honour rejected an argument that subsection (5) did not apply to a case where the relevant loss or outgoing involved the provision of entertainment to more than one person.

(4) However subsection (10) operated to render s 51AE(5)(g) inapplicable. In relation to subsection (10) and (11), his Honour found:

1) that a distributor attending an ALS would have been undertaking deductible travel within subsection (11);
2) an ALS was clearly a seminar within the extended definition of that word within s 51AE(1);
3) an ALS was a seminar to which paragraph (a) of the definition of eligible seminar applied because inter alia, business was the principal purpose of an ALS and other purposes were ancillary;
4) however, the food or drink provided at an ALS was not deductible because the food or drink did not form part of the business sessions of the seminar with the consequence that s 51AE(10)(a)(D) applied.

56. We turn to consider now the various statutory provisions having regard to the findings of fact made by his Honour.

The meaning of ``provision of entertainment'' in s 51AE(1)

57. The Macquarie Dictionary, 3rd edition defines ``entertain'' as meaning:

``1. to hold the attention of agreeably, divert; amuse. 2. to receive as a guest, especially at one's table; show hospitality to.''

58. The same dictionary defines ``entertainment'' 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.''

59. Among the many and now unusual definitions of entertain and entertainment given in the Shorter Oxford English Dictionary is ``that which affords interest or amusement''.

60. In modern Australian usage it may be said that the concept of ``to give pleasure'' and ``hospitality'' underlie the meaning of the word ``entertainment'' when used in connection with matters such as food or drink. Whether the provision of food or drink falls within the definition of the ``provision of entertainment'' is not, in our view, to be determined by reference to subjective matters such as the purpose of some person. Rather, it involves a matter of characterisation. What is required is that regard be had to the essential character of what is provided. Regard will need to be had to all the relevant circumstances such as the locale where the food or drink is provided, the quality of the food or drink, the occasion for its provision, its cost and its nature. Clearly expenditure on the gala dinner would be entertainment. Indeed counsel for Amway did not suggest otherwise. By contrast the provision during a working session by an employer of sandwiches or coffee and tea to an employee would not be. Each item of expenditure would need to be considered having regard to all the circumstances. However, we agree with the learned Primary Judge, having regard to the locale at which food and drink was provided and what one would infer was the cost and quality of what was provided that in the facts of the present case the cost of food and drink was not deductible under s 51AE(4) unless excluded from that subsection by the operation of s 51AE(5).

61. The question of deductibility of accommodation and travel expenses is perhaps more difficult.

62. Clause (b) of s 51AE(3) has two limbs. The first requires consideration of whether the

ATC 4910

provision of accommodation or travel is ``in connection with'' the entertainment or perhaps the provision of entertainment by way of food, drink or recreation. Only the second limb requires consideration of purpose. The relevant purpose is the facilitation of such entertainment.

63. The first limb requires, as already noted, a connection. The Commissioner submits that the word ``connection'' requires merely that there be a relationship of some sort between the provision of the accommodation or travel and the relevant entertainment. For Amway, it is submitted that the connection must be one which is substantial and not remote.

64. As the learned Primary Judge pointed out, the meaning of the word ``connection'' will always depend upon the context in which it appears. His Honour referred to
Workers Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654,
FC of T v Scully 2000 ATC 4111 at 4121; (2000) 201 CLR 148 at 171 and
Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477. We agree.

65. In its broadest sense connection signifies any relationship between two subject matters no matter how remote. If the word connection is used in a very broad sense there would seem little point in the alternative limb of paragraph (b) as accommodation or travel for the purpose of facilitating the entertainment, could be seen to have at least a remote connection with that entertainment. It may be accepted, as the Commissioner submits, that the connection must be proximate. A remote connection will not suffice. Rather what is required is a substantial connection between the provision of accommodation or travel on the one hand and entertainment on the other.

66. It may be noted here that the legislature has made it clear that the provision of accommodation or travel may fall within the definition whether or not the travel is at or in connection with a seminar. Clearly, however, not all travel or accommodation which is at or in connection with a seminar was intended to be excluded from deductibility. Were it otherwise the subsection would be differently drafted. What is required is that there be a real relationship between the provision of accommodation or travel on the one hand, and the entertainment by way of food, drink or recreation which is provided to the recipient of the accommodation or travel to a seminar on the other hand. It is arguable that that connection exists in the present case. However, as will be seen, we do not find it necessary to decide the question.

67. The second limb is concerned with the purpose of the provision of accommodation or travel. With respect to the learned Primary Judge, we do not see that purpose is relevant to the first limb. It is only relevant to the second limb. We think the better view is that the purpose referred to in paragraph (b) is to be ascribed objectively rather than subjectively, that is to say that the relevant purpose is to be inferred from the objective circumstances. It is not necessary for the Commissioner to reach into the mind of the provider to ascertain purpose.

68. Prima facie, a reading of paragraph (b) suggests that the enquiry is to be directed at ascertaining the sole purpose of the provision of accommodation or travel. However, the fact that the subsection continues to provide that expenditure may fall within the definition whether or not it is ``for the purposes of promotion or advertising'' would suggest that the words ``the purpose'' do not signify sole purpose but rather something less than that, unless paragraph (e) was not intended to apply to a case falling within paragraph (b). In the present case, there is much to be said for the view which his Honour took that Amway's provision to distributors of accommodation or travel was not for the purpose of facilitating either the entertainment by way of food or drink or entertainment which was by way of recreation. Again, however, it is not necessary to reach a final conclusion on this question.

The application of s 51AE(5) apart from s 51AE(10)

69. As already noted s 51AE(5) operates, but subject to s 51AE(10) as an exclusion from the prohibition on deductibility in s 51AE(4). In other words, but subject to s 51AE(10) losses or outgoings to the extent they are in respect of the provision of entertainment and fall within s 51AE(5) will, subject to s 51AE(10) remain deductible.

70. For present purposes the only relevant paragraph in s 51AE(5) is paragraph (g). The policy underlying that paragraph is to be found in the Supplementary Explanatory Memor- andum issued in connection with the Amendment to the Taxation Laws Amendment

ATC 4911
Bill No 4 of 1985 which is in the following terms:

``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)

71. That paragraph requires that the relevant provision of entertainment be to a person who relevantly ``is performing certain services for the taxpayer''. The Commissioner submits that Amway distributors do not answer this description because ``the distributors were not performing services for Amway at either the ALS or Go-Diamond seminars''. The submission proceeds on the basis that during the seminar the distributors are participating in the seminars for their own benefit, notwithstanding that the criteria upon which their invitation depends is that they perform services for Amway as distributors.

72. In our view, the submission should not be accepted. It is clear from the context of paragraph (g) that each of the subparagraphs identifies a class of person to whom the relevant entertainment is provided, being either the taxpayer, an employee of the taxpayer or a person who, although not employed by the taxpayer, is performing services for the taxpayer. There is no reason to read subparagraph (iii) as requiring the services to be actually performed at the seminar itself. Rather the person to whom the entertainment is provided must at the time be a member of a class of persons who may be described as ``persons performing services for the taxpayer''. A distributor of Amway falls within that class.

73. The next question is whether a deduction would be allowable to a recipient in respect of the relevant loss or outgoing if, by hypothesis, that expenditure was incurred by him or her. The hypothetical question to be asked is whether the expenditure, if incurred by the recipient would be deductible under s 51(1). So put that is not contentious. However, the Commissioner submits that there can be no apportionment of expenditure where that expenditure related to the provision of entertainment to more than one person. If that is correct then clearly, if the total expenditure on a seminar was incurred by one only of the distributors, that distributor would not be entitled to a deduction for the total expenditure. The submission places particular emphasis upon the use of the word ``recipient'' in the singular in the subparagraph as requiring in a case such as the present that the subject of a deduction is to be considered in the hands of each recipient irrespective of how many recipients may be covered by the total expenditure. In our view, there is no reason why the paragraph should be so construed. In a case such as the present, the amount paid by Amway by way of providing for the cost of travel and accommodation or for that matter food and drink is capable of being apportioned to the specific recipients of the provision. It is quite probable that in respect of travel the amounts would in fact be payable separately in any event as one would hardly expect that each distributor lived in the one place so that the cost of travel was the same for each. Be that as it may, we agree with the learned Primary Judge that the Commissioner's submission should be rejected with the consequence that the case is one both in respect of the cost of meals and drinks as well as the cost of travel and accommodation where it can be said on the findings of fact made by the learned Primary Judge that a deduction would but for s 51AE be allowable to a distributor if incurred by that distributor. It would be a working expense of the distributor incurred in his or her business and not expenditure which is private.

74. The next issue which arises is whether it would be concluded that a purpose of the taxpayer or the distributor in incurring the expenditure was to enable or facilitate the provision of entertainment to a person other than the recipient. Clearly that question must be answered in the negative.

75. Counsel for the Commissioner, however, submitted that the learned Primary Judge erred in law when considering this question by making a finding of the purpose of Amway or of the recipient, as the case may be, rather than as the section requires, a finding of there being ``a purpose'' of the kind referred to in the paragraph. That submission would have strength were it otherwise the case that paragraph (v) had any application to the facts of the present case because the provision of entertainment was to a person other than the distributor.

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76. This appeared at first to be accepted by counsel for the Commissioner. However, after consultation with his client, he submitted that because the distributors did not fall within subparagraphs (ii) or (iii) of paragraph (g) it followed that the provision of entertainment in the seminars was necessarily provided by Amway to enable or facilitate the provision of entertainment to a person other than the recipient. Since we are of the view that the distributors fell within the class of persons performing services for the taxpayer the submission can not be accepted. Alternatively, it was submitted that even if the distributors did fall within category (iii) they failed the hypothesis of deductibility in subparagraph (5)(g)(iv). We have already indicated why this submission, which depended on the supposed inability to apportion composite expenditure, should be rejected.

77. It follows, in our view, that both the outgoings on food and drink and the outgoings on accommodation and travel satisfy s 51AE(5) and therefore qualify for deduction unless falling within subsection (10) of the section.

Subsection (10) must be read together with subsection (11)

78. Relevantly, a loss or outgoing will not fall within subsection (5)(g) if the relevant entertainment is provided to a person and is in respect of or incidental to that person's attendance at a seminar while undertaking ``deductible travel''. The expression ``deductible travel'' is defined in subsection (11). Stated shortly, the expression ``deductible travel'' will be satisfied in circumstances where, if the relevant person, here the distributor, incurred this expenditure in taking meals by himself or herself, in the course of undertaking that travel, the distributor would be entitled to a deduction under s 51(1) of the Act.

79. It is apparent that the definition requires the formulation of a double hypothesis to test whether the expenditure would be deductible. The first part of the hypothesis is that the person (the distributor here) incurred the expenditure. The second part of the hypothesis is that the expenditure was incurred in taking meals by himself or herself in the course of undertaking the relevant travel. It may be assumed that the restriction of the hypothesis to the incurring of expenditure on food or drink in taking meals by himself or herself was thought necessary because otherwise if the person incurred the cost of a meal for another person as well as himself or herself s 51AE(4) would deny the deduction.

80. For the Commissioner it is submitted that the findings made by his Honour were not sufficient to permit the statutory question to be answered in the respondent's favour. With respect, we disagree. It is true that his Honour's findings are brief. However, they are sufficient. It is clear from his Honour's judgment that his Honour rejected the submission of the Commissioner that the event in question was really just a social or entertainment occasion with some token business tacked upon it. Rather his Honour found that the seminar was ``a serious business occasion for all concerned'', that is to say, for Amway on the one hand and the distributors on the other. Indeed, at paragraph [108] his Honour repeated his conclusion that, ``an ALS is an important business occasion for a distributor in various ways''. Having regard to this finding and his Honour's findings as to the content of the ALS, we are of the view that his Honour's findings provided sufficient basis for determining that the distributors would be entitled to a deduction on the basis of the statutory hypothesis. The cost of meals, if met by a distributor would be a business expense and not to any extent of a private nature.

81. It is necessary now to return to subsection (10). In so doing we proceed upon the basis that the cost of food, drink, accommodation and travel all fall within the exclusion from deductibility under paragraph (4) of the section.

The application of s 51AE(10)

82. As has already been noted s 51AE(10) operates to remove certain kinds of expenditure from paragraphs (5)(g) and (h), those paragraphs in turn operating to remove certain kinds of expenditure from the absolute prohibition of deductibility in s 51AE(4). The double negatives involved are compounded by exclusions to be found in paragraph (a) which having regard to the words ``not being the provision of entertainment consisting of'' which precede sub-subparagraphs (C) and (D) result in triple or perhaps quadruple negatives. The confusion is not assisted by the lay-out of the subsection. The confusion, however, arises largely with sub-subparagraphs (C) and (D). It does not cause difficulty in construing sub- subparagraphs (A) and (B).

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83. Section 51AE(10)(a)(i)(A) and (B) have the effect that expenditure on the provision of entertainment that is in respect of or incidental to attendance at a seminar of the kind referred to in sub-subparagraphs (A) or (B) will be deductible if otherwise within paragraph (5)(g) and ``deductible travel'' as defined in sub-s 11 is being undertaken. Accordingly, the first question to be determined on the facts of the present case is whether the expenditure in question related to a distributor's attendance at a ``seminar'' falling within paragraphs (A) or (B) of s 51AE(10)(a)(i).

84. It is not in dispute that the ALS was a ``seminar'' as defined. It is also not in dispute that the ALS was not an exempt training seminar. The issue to be resolved is whether the ALS was a seminar to which paragraph (a) of the definition of ``eligible seminar'' in s 51AE(1) applies, irrespective of the duration of the seminar. For the Commissioner it was submitted that the learned Primary Judge erred in law in that rather than considering what the sole or dominant purpose of the seminar was, his Honour instead considered only whether the purpose described in paragraph (a) was satisfied having regard to his Honour's finding of ``principal purpose''. It is submitted further that a finding of dominant purpose required identification of each purpose of the seminar and an assessment of the relative strengths or significance of each purpose so found.

85. With respect, once the learned Primary Judge's findings are accepted, it is clear that his Honour did apply the correct test of dominant purpose. Further we see no reason why such a finding could not be made without identifying specifically such other purposes as may exist. On the question to be decided his Honour said:

``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 contest 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.''

86. We thus reject the submission.

87. The more difficult question which then arises is the role which sub-subparagraphs (C) and (D) play. Taking sub-subparagraph (C) first, one possible interpretation is that expenditure on accommodation or travel is to be removed from consideration under paragraph (g) altogether even if in respect of, or incidental to attendance at a seminar which falls within sub-subparagraphs (A) and (B). That is the interpretation propounded by the Commiss- ioner. Another is that expenditure on accommodation or travel at or to a seminar (otherwise qualifying under paragraph (g) of s 51AE(5)) will be deductible even if the seminar does not qualify as a seminar falling within sub- subparagraphs (A) or (B). That is the interpretation propounded by Amway. There are also two further difficulties of construction which arise in subsection (10).

88. As a matter of policy it would be strange if accommodation or travel relating to a seminar of the kind referred to in sub-subparagraphs (A) or (B) would be excluded from the deductibility reinstated by paragraph (5)(g) while the food, or drink provided at the seminar was deductible. Of course, if that is what Parliament intended then there is no reason why it could not do so. However, it is the plethora of double, triple or quadruple negatives and the layout of s 51AE(10) which creates the confusion and ambiguity and hence the somewhat strange policy result which a first reading of s 51AE(10) may suggest. It might be thought that if Parliament had intended that the cost of accommodation and travel at or to seminars of the kind referred to in sub-subparagraphs (A) and (B) were not to be deductible then this could be more easily expressed if in s 51AE(10)(a)(i) there had been inserted after the word ``entertainment'' the words, ``not being the provision of entertainment consisting of accommodation or travel''. That would have made the interpretation of subparagraph (C) quite clear. However that is not what the paragraph says.

89. Paragraph (10) took its present form by virtue of amendments made to s 51AE by the

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Taxation Laws Amendment Act (No 4) (1985) (Cth). We obtain no assistance from the previous form of the subsection which was in quite different terms. The Memorandum circulated in connection with the Taxation Laws Amendment Bill No 4 1985 made the following comment:

``New paragraph 51AE(10)(a) will introduce modified rules for expenses incurred while undertaking business-related travel (i.e, `deductible travel' - see notes on new sub- section (10A). These are embodied in sub- paragraph 51AE(10)(a)(i). By virtue of that sub-paragraph meals incidental to a person's attendance at ordinary business discussions (sub-sub-paragraph (B)) including at an employer-organised training session or management conference (sub-sub-paragraph (A)) while undertaking business-related travel will continue to be deductible to the extent that they fall within the exclusion provisions of paragraph 51AE(5)(g) already described.

New sub-paragraph 51AE(10)(a)(i) will also ensure that accommodation and travel costs (sub-paragraph C) and costs of meals incidental to, but not taken as part of an ordinary seminar - ie one unrelated to a particular business - (sub-paragraph D) will continue to be deductible where provisions of paragraph 51AE(5)(g) otherwise applies. The deductibility of the cost of meals actually forming part of a seminar will be subject to compliance with the specific seminar rules.''

90. This memorandum makes it clear that sub-subparagraph (C), was intended not to exclude the deductibility of expenditure on accommodation or travel altogether from paragraph (5)(g) (and paragraph (5)(h)) but rather to ensure that the provision of entertainment of the kind referred to in sub- subparagraph (C), that is to say for accommodation and travel will continue to be deductible even if not related to a seminar of the kind referred to in sub-subparagraphs (A) and (B) so long as the provisions of paragraph (5)(g) were satisfied.

91. It could not seriously be suggested that s 51AE(10)(a)(i) is free from ambiguity. That ambiguity permits recourse to be had to extrinsic material, here the language of the Supplementary Explanatory Memorandum quoted above as a guide to the interpretation of the sub-subparagraph (C). It follows in our view that, contrary to the submissions of the Commissioner, accommodation or travel is not totally to be excluded from paragraph (5)(g).

92. The same difficulty arises with sub- subparagraph (D). Consistent with the interpretation contended for sub-subparagraph (C) the Commissioner would be required to argue that sub-subparagraph (D) operates to exclude from deductibility altogether even if subparagraph (5)(g) is satisfied all expenditure on food or drink otherwise than where that expenditure related to food or drink at a meal during which, or during part of which, the whole or a part of any seminar, whether or not within sub-subparagraphs (A) or (B) the seminar occurs even if the seminar is one falling within sub-subparagraphs (A) or (B). Such an interpretation would produce absurdity. No doubt it was for that reason that the Commissioner did not seek to support that interpretation.

93. The learned Primary Judge construed sub-subparagraph (D) as permitting a deduction for food and drink at a seminar falling within sub-subparagraphs (A) or (B) where the food or drink was served at a meal during which or during part of which, the whole or a part of the seminar occurred. This required his Honour to consider whether the seminar here in question was one where the meals occurred during the seminar or whether the meals during the seminar fell outside the seminar. His Honour was of the view that the meals fell outside the seminar. Reduced to absurdity such an approach would have it that a seminar which extended over a number of days would stop immediately before each meal and start again afterwards. It would mean that only seminars actually involving technical sessions held during the mealtime would qualify for deduction and this would be the case whether or not the seminar was one falling within sub- subparagraphs (A) and (B).

94. We do not need to consider whether sub- subparagraph (D) requires such a narrow approach to when a seminar occurs. This is because we do not consider that sub- subparagraph (D) has any operation on the facts of the present case.

95. Again it is necessary to have regard to the extrinsic material to which reference has already been made to interpret sub- subparagraph (D). That makes it clear that

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expenditure on food and drink at a seminar to which sub-subparagraphs (A) or (B) apply will be deductible, whether or not the meal is one at or during which the seminar occurs so long as paragraph (5)(g) applies. It is unnecessary to decide what other operation sub-subparagraph (D) is intended to have. On one view, as supported by the extrinsic materials, it would seem that where the seminar does not fall within sub-subparagraphs (A) or (B) the costs of meals incidental to but not taken as part of an ordinary seminar (and the seminar will need to have a business connection so that the cost will be deductible under s 51(1) of the Act) will be deductible so long as the provisions of paragraph (5)(g) applies.

96. It follows therefore, in our view, that the whole of the amount expended for meals (which includes drink) other than the gala dinner expenditure conceded not to be deductible, and the amounts expended for accommodation or travel in respect of the seminar will continue to be deductible to Amway under the provisions of s 51(1) and not precluded from deductibility under s 51AE(4).

The estimates of quantum

97. In the course of the proceedings below there was considerable cross-examination of Mr Tunley, the Finance Manger of Amway, who gave evidence from the records of Amway concerning allocation of the cost of food, drink, accommodation, transport and other expenses such as recreation activities. For present purposes the significance of this matter lies in the fact that expenditure for recreation of distributors was not deductible. That included by concession the cost of one night's accommodation and the cost of the gala dinner.

98. In his reasons, his Honour referred to the evidence of Mr Tunley and noted that he had conceded that the available records, ``Did not make it absolutely clear how the allocation should be made.'' The estimates made by Mr Tunley were apparently based by him on his judgment having regard to general ledger accounts. Commenting on Mr Tunley's evidence his Honour said:

``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 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.''

99. Counsel for the Commissioner criticised his Honour's judgment on the basis that Amway had made what was said to be an admission through the events organiser Mr Prouting in his evidence to the following effect:

``It is clear that the figures for airfares included the cost of travel to venue of the relatively small number of attendees who also attended the preceding Go-Diamond or similar seminar [in this case the local Diamond Forum] but, as the ALS was clearly the main event, this would not seem to be inappropriate.''

100. It may be conceded that there was a difficulty in apportioning the amount outlaid by Amway among particular categories of expenditure even so far as concerned the 1993 Bangkok seminar. The question is what significance that difficulty has, having regard to the way the case was, by agreement, run.

101. Before the learned Primary Judge it was noted that the purpose of the evidence of allocation was:-

``to assist your Honour so far as you Honour's able to derive assistance from the figures in resolving the point of principle. It is agreed... that if your Honour is in favour of the applicant on the point of principle, to any extent then the assessments for all of the years in dispute will need to go back to the Commissioner to be amended in accordance with you Honour's rulings.''

102. Senior counsel for Amway continued:-

``I understand that my learned friend's intention is to cross examine Mr Tunley about the 1993 Bangkok figures using the general ledger... If Mr Tunley's figures effectively survive cross examination with sufficient integrity to assist your Honour then your Honour will use them, otherwise...''

103. The transcript does not record the consequence following from the word ``otherwise''.

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104. With respect, it would seem that neither party required his Honour to decide mathematically how much was incurred in the relevant years even in respect of the Bangkok ALS, or to allocate total amounts among different categories. What the parties contemplated was not a finding by his Honour which might be affected by whether Amway had satisfied the burden of proof but rather only a conclusion on the deductibility of different kinds of expenditure. The matter would then, if Amway was wholly or partly successful, be remitted to the Commissioner to reassess and for this purpose it would be for the Commissioner, ultimately, to determine the quantum of deduction in each year of income having regard to his Honour's decision on the matter of principle.

Conclusion

105. In our view, the Commissioner has been unsuccessful in his appeal and Amway has been successful in its cross appeal. However, the orders made by the learned Primary Judge setting aside the objection decisions and remitting the matters the subject of them to the Commissioner for amendment of the assessments in accordance with the Court's reasons for judgment are unaffected by the success of Amway in the appeal. By that we mean that the Commissioner is to amend the assessments in accordance with these reasons.

106. Accordingly, the Court merely orders that the appeal of the Commissioner and cross appeal of Amway will respectively be dismissed and allowed and the Commissioner will be ordered to pay Amway's costs of both the appeal and of the cross-appeal. The remaining orders which are concerned with particular cost matters, not having been the subject of any appeal or cross appeal, should not be set aside but remain in force.

THE COURT ORDERS THAT:

1. The appellant's appeal be dismissed.

2. The cross-appellant's cross-appeal be allowed.

3. Order 2 of the Primary Judge, made on 10 February 2004 be set aside, and in its place substitute an order that the matters be remitted to the appellant for amendment of the assessments in accordance with the Full Court's reasons for judgment and the concessions made by the respondent at first instance.

4. The appellant pay the respondent's costs of the appeal and cross-appeal, and of the proceedings below, with the exception of those costs mentioned in paragraphs 3(a), (b) and (c) and the costs associated with the affidavit of Mr Curruthers and the application on 16 April 2003 mentioned in paragraph 3(d) of the orders made by the Primary Judge on 10 February 2004.

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