W Nevill & Co Ltd v Federal Commissioner of Taxation

56 CLR 290
1937 - 0308B - HCA

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(Judgment by: Rich J)

W Nevill & Co Ltd
v Federal Commissioner of Taxation

Court:

Judges: Latham CJ

Rich JDixon J
McTiernan J

Subject References:
Taxation and revenue
Income tax
Deduction
Contract of service
Termination
Income or capital expenditure
Allowance paid during two income years
When deductible

Legislative References:
Income Tax Assessment Act 1922 (Cth) No 37 - ss 23(1)(a); ss 25(e)

Hearing date: SYDNEY 1 December 1936;
Judgment date: 8 March 1937;

Melbourne

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Judgment by:
Rich J

RICH J. Case stated by Evatt J. The question propounded involves two distinct inquiries. The first is whether the sum which the taxpayer claims to deduct was an expenditure of an income or of a capital nature, and the second is whether within the meaning of s. 25 (e) of the Income Tax Assessment Act 1922-1932 this sum was wholly and exclusively laid out or expended for the production of assessable income. In my opinion the sum constitutes an expenditure on account of income and it was wholly and exclusively laid out for the production of assessable income. The sum in question was a payment made to one of two joint managing directors of the taxpayer company in consideration of his agreeing to the rescission of a contract entitling him to retain that office for another four years or more at a salary of PD1,500. The company's purpose in effecting the transaction was to save the salary and at the same time to put an end to joint control. In such an expenditure I can see no characteristics which would make it referable to capital account. There is nothing analogous to the acquisition of a fixed asset, to the enlargement of the goodwill of a company or, as in Ward's Case ^[F12] , to the rescue of the business from annihilation. The question in the present case arose in relation to the staff and although, owing to the superior position of the officer, it was an important one and unlikely to recur, in other respects it was of a description which must arise over and over again in the conduct of any business where there is a large staff many of whom have a fixed tenure under contract. The expenditure was made as an incident in the organization of the company's officers. The case law dealing with such matters will be found in Van Den Berghs Ltd v Clark ^[F13] and in Anglo-Persian Oil Co v Dale ^[F14] . The sum is not an expense which fulfils any of the tests laid down in those authorities for an expenditure of a capital nature. The second inquiry depends upon the purpose for which the expenditure was made. The contention for the Commonwealth is that, as admittedly the object of making the lump sum payment was to save the future expenditure of the joint managing director's salary, it could not be exclusively and wholly laid out for the production of assessable income. For it was said to avoid expenditure is not to obtain assessable income. This argument seems to me to confine the investigation of the purpose to a stage later than that to which the taxpayer is entitled to go back. The taxpayer had committed itself at an anterior date to an expenditure on salaries for its managing directors. Its sole purpose in doing so was to earn income; but later the company found that in the prosecution of this purpose it had committed itself to a future expenditure unnecessarily large. It then negotiated what may be described as a commutation of the excess future expenditure it had otherwise incurred. So regarded, the purpose of the whole transaction was to gain assessable income. The commissioner cannot rivet attention on the last stage to the exclusion of the earlier stage of the course of dealing which leads to the total expenditure.

The interesting question to which year or years the expenditure should be allocated in view of the fact that it was secured by promissory notes maturing over two years was not raised by the commissioner or argued by counsel. I do not propose to consider it and am content to adopt the course proposed by the Chief Justice without deciding the question of law.

The question in the case should be answered in the affirmative.