W Nevill & Co Ltd v Federal Commissioner of Taxation

56 CLR 290
1937 - 0308B - HCA

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(Judgment by: McTiernan J)

W Nevill & Co Ltd
v Federal Commissioner of Taxation

Court:

Judges: Latham CJ
Rich J
Dixon 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:
McTiernan J

McTIERNAN J. I agree that the answer to the question should be as stated in the judgment of the Chief Justice. The assessable income of the company was necessarily gained through the agency of its employees and it follows that the expense of providing and maintaining such an organization is to be attributed to the operation of producing the company's income. The maintenance of this income-earning agency involves its adjustment to conditions which arise such as those mentioned in the stated case. The expense incurred in effecting these adjustments is also to be attributed to the earning of the company's income. Upon the facts appearing in the stated case I think that the expenditure with regard to which the present question arises is within the scope of s. 23 (1) (a). These facts show that the expenditure was incurred to adapt the managerial part of the company's organization for making profits to conditions affecting its business and as such was incidental to its income-earning activities.

The expenditure was made in the relevant accounting period, but it is not necessary that the assessable income for the gaining of which the expenditure was made was income of that period (De Bavay's Case ^[F17] ).

There is no substance in the contention that the deduction claimed was an outgoing of capital. The only ground on which it was sought to support that contention was that the moneys were capital in the hands of the recipient. Even if that view were correct it would furnish no reason for ascribing to the expenditure the character of a capital payment by the company.

The result aimed at by the company in expending the moneys now in question was to obtain the resignation of the recipient, he having been appointed at an annual salary for a term which had not expired. Although money expended may be within s. 23 (1) (a), it is provided by s. 25 (e) that a deduction shall not in any case be made in respect of money not wholly or exclusively laid out or expended for the production of assessable income. It is true, as contended by the commissioner, that the payment of the compensation resulted in the production of taxable income because it removed the salary formerly payable to the recipient of the compensation from the list of allowable deductions. But it does not follow that the amount of the compensation itself cannot be allowed as a deduction for the reason that it was not wholly or exclusively laid out or expended for the "production of assessable income." It is a very narrow view of the facts to confine the purpose of the payment of the compensation to the elimination of the salary of its recipient from the expenses of the company. That was a practical consequence, but the fair view on all the facts is that the purpose of such payment was to adjust and reorganize the income-earning agency of the company to meet the conditions which it found affecting its operations. In this view of its purpose the deduction is not prohibited by s. 25 (e).

I agree that the deduction for the year ending 30th June 1932 should be limited to PD1,900.