Stewart v. Federal Commissioner of Taxation.

Judges:
Menzies J

Court:
High Court

Judgment date: Judgment handed down 27 March 1973.

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Menzies J.: The appellant is one of a partnership of three doctors. The partnership income tax returns for the years 1966, 1967, 1968 and 1969 claimed as deductions, moneys paid to the wife of each partner for her services in being on duty to answer the telephone and to assist patients during the times when her husband was rostered for out-of-hours' duty. The amount paid and the deduction claimed in each year was at the rate of $40 per week. The Commissioner, applying sec.65 of the Income Tax Assessment Act, only allowed $20 per week as a taxation deduction. It was accepted by the parties that the wife was, at all times material, ``an associated person'' for the purpose of sec.65 of the Act. The taxpayer appealed to the Board of Review and the question for the Board was whether the Commissioner was wrong in not accepting the deduction claimed as one that was reasonable. The Board affirmed the assessment of the Commissioner. The taxpayer has appealed and I was informed that this appeal will determine the appeals of the two other partners. It is therefore possible to speak in terms of the partners and their wives.

At first I was not disposed to think that the decision of the Board involved any question of law but it did emerge that the Board had been invited by counsel for the partners to put a particular construction upon sec.65; namely, that any sum paid to the wives which did not exceed any applicable Wages Board determination could not have been regarded by the Commissioner as otherwise than as reasonable. This contention the Board did not accept. In these circumstances, I have been persuaded that the decision of the Board did involve a question of law and that the appeal lies.

The primary case for the appellants was, in substance, that the wives were paid less than they were entitled to have been paid by virtue of one or other of two Wages Board determinations: firstly, that of the Doctors Wages Board, and secondly, that of the Ironmongers Wages Board, and accordingly, the Commissioner was bound to accept what was paid as reasonable.

I am far from being satisfied that either Wages Board determination applied to the doctors and their wives by reason of the arrangement between them but I can and do decide this appeal without exploring that intriguing problem. To resolve this appeal, it is sufficient to say that if (1) either determination did apply, and (2) what was actually paid to the wives was less than the determination required should be paid, nevertheless the Commissioner was required, under sec.65 of the Act, to consider for himself whether the payments actually made to the wives were more than was reasonable

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ATC 4009

in the particular circumstances and to allow as a deduction no more than was, in his opinion, reasonable in those circumstances. The circumstances are obviously so far removed from anything which could have been in the contemplation of the Wages Board in making the determinations relied upon that it appears to me that the determinations could not control the Commissioner. Section 65 assumes a legal liability to pay the amount which has been claimed as the deduction, but denies to that amount the character of a deduction except to the extent that it is, in the opinion of the Commissioner, reasonable. The section is an exercise of Commonwealth legislative power which operates regardless of the law under which the liability to pay is said to have arisen. It was therefore necessary for the Commissioner to make up his own mind in the light of the particular circumstances as to the reasonableness of what was paid by the partners to their wives.

Next it was contended that, in the circumstances, it was an error on the part of the Commissioner not to accept what was actually paid as reasonable. Section 65 commits the decision as to the amount to be allowed as a deduction to the opinion of the Commissioner and it would, I think, be a special case in which either the Board of Review or the Court could be satisfied that the Commissioner's opinion was mistaken. This is not such a case.

In the first place, the Commissioner might well think that there should be some reasonable proportion between what the doctors earned and what they were paying their wives. In the year 1966 - which, it seems, was a broken year - the total net income of the partnership according to its taxation return was $4,993, entitling each partner to $1,571. Under the arrangement, each wife was to be paid at the rate of $2,000 a year for her time on duty which corresponded merely with her husband's out-of-hours' duty. It appears that surgery hours, during which all three doctors were working, were roughly forty hours per week and out-of-hours' duty when one doctor was on call amounted roughly to thirty hours weekly, mostly at night. In the year 1967, the total net income of the partnership according to its taxation return was $29,761, entitling each partner to $9,921. Again, each wife was paid $2,000 for being on duty during the time that her husband was on after-hours' duty. In the year 1968, the total net income of the partnership according to its taxation return was $34,012, entitling each partner to $11,377. Again, each wife received $2,000. In the year 1969, the corresponding figures were $39,311, $13,003, and $2,000.

These figures overall lend no support to the contention that, in confining the deduction to $20 per week, the Commissioner was acting less than reasonably. To pay an amount equivalent to about one-sixth of the doctors' net income for the whole of their work to their wives for their services in respect of the times when the doctors were but on call could appear to the Commissioner as going beyond what was reasonable.

The matter can be looked at in another way. The wives were living normal lives in their homes subject only to their being at home during certain hours - mainly at night - to answer the telephone, etc. It was, I think, open to the Commissioner to form the opinion that the $40 per week was too much to allow as a deduction for services that had a character all of their own.

The reasonableness of what was paid is substantially a matter of impression and it is the Commissioner's opinion that has been made decisive. To succeed, the appellants must show that that opinion was erroneous and this they have failed to do. By what standard - if actual Wages Board determinations are not decisive - could the Board of Review conclude that the Commissioner was in error in allowing but $20 per week? It is certainly not apparent that he was.

In my opinion, therefore, the appeal must be dismissed.

ORDERS:

Appeals dismissed with costs. Usual orders as to exhibits.