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Administrative Appeals Tribunal of Australia |
377 
-378/1984 and Commissioner of Taxation [1987] AATA 8; 87 ATC 209 (16 January 1987)
Last Updated: 8 July 2009
ADMINISTRATIVE APPEALS TRIBUNAL
Income Tax : applicant (a company) involved in a number of syndicates and deductions claimed by it in respect of its share of syndicate losses and a number of individual expense items of the applicant itself : rebates also claimed in respect of certain syndicate expenditure on basis it qualified as export market development expenditure : reference in argument (but not in objections or evidence) to "criminal" activity or "deception" by or on behalf of the Commissioner : reference in argument (but not in objections)' that if not allowable in one year certain claims should be allowed in another year:
General issues whether -
(a) assessments void;
(b) syndicates carrying on business in relevant years;
(c) syndicate expenditure qualifies as EMDE;
(d) amounts that might be allowable in another year of income can be "allowed" by the Tribunal.
Specific issues whether -
(i) syndicate expenditure paid "in advance" immediately prior to 30 June qualifies as a deduction (assuming (b) above' answered in the affirmative - some of such amounts actually used for purposes other than what stated in claim);
(ii) provisions for bonuses allowable;
(iii) bonuses paid and used to acquire shares from principal shareholder of applicant allowable;
(iv) director's fees to then wife of principal shareholder reasonable;
(v) various miscellaneous expenses allowable.
Income Tax Assessment Act (Cth): Sections 51(1), 65, 160 AC, 190
Texas Co (Australasia) Ltd v FC of T [1940] HCA 9; (1939-40) 63 CLR 382
F J
Bloemen Pty Ltd v FC of T 81 ATC 4280
Southern Estates Pty Ltd v FC of T [1967] HCA 16; (1967) 117 CLR 481
John
Fairfax & Sons Ltd v FC of T [1959] HCA 4; (1959) 101 CLR 30
Softwood Pulp and Paper Ltd v FC of T 76 ACT 4439
FC of T v
James Flood Pty Ltd [1953] HCA 65; (1953) 88 CLR 492 Case P 101 82 ATC 520
DECISION AND REASONS FOR DECISION
Re: 377 -378/1984
APPLICANT
And: COMMISSIONER OF TAXATION
RESPONDENT
No. 377 -378 of
1984
AAT Decision No 3156
Mr H P Stevens and Mr P M Roach (Senior Members)
16 January 1987
ADMINISTRATIVE APPEALS TRIBUNAL )
) NO. 377 -378 of 1984
TAXATION APPEALS DIVISION
)
Re: 377 -378/1984
Applicant
And: COMMISSIONER OF TAXATION
Respondent
REASONS FOR DECISION
Mr H P Stevens (Senior Member)
The issues in these applications arise out of a number of syndicate operations and relate to the allowability of losses incurred by two syndicates and of deductions claimed by the recipient of fees from one of those syndicates and some of the other syndicates. As argued there also arises the question of the Commissioner's bona fides. A appeared on behalf of the applicant.
2. As indicated there have been a number of syndicates involved and, in respect of members of some syndicates, there have been earlier references to a Board of Review in relation to which A was involved. The decisions in those references, given by that Board, were against the members concerned and, although an appeal was lodged to a Supreme Court against at least one decision, it was not proceeded with. A did not (and still does not) agree with those decisions and is very bitter, inter alia, in respect of his treatment by the Commissioner and his "deception" by a senior counsel briefed in one of those references on behalf of the Commissioner. Accordingly arguments were raised asserting there had been "criminal" activity such as to void the applicant's assessments - alternatively whilst, if not void, then as it had been contended in the earlier references that the syndicates were not carrying on business the Commissioner should accept the fees received by the applicant did not constitute assessable income (even though not a ground of objection). A was also concerned we would have regard to the findings of the other Board.
3. Although it was pointed out to A on a number of occasions it would be as well to reiterate that the function of the Tribunal is to find the facts as revealed by the evidence placed before it in its hearing of a particular application and to apply the law to the facts as found. It cannot, unless the parties agree, adopt findings of fact made in any other hearing (Board or Court) and it cannot find there has been "criminal" activity or "deception" unless there are primary facts introduced into evidence before the Tribunal from which the necessary ultimate findings can be made. Another point that should be mentioned at the outset is that the Tribunal, although given all the powers of the Commissioner, can only use them for the purpose of reviewing the decision of the Commissioner upon the objection lodged by the applicant. It is not given carte blanche to ignore everything and simply make a completely fresh assessment. As stated by Dixon J in Texas Co (Australasia) Ltd v FC of T [1940] HCA 9; (1939-40) 63 CLR 382 - a decision much referred to by A - at p 475:-
"It is to be noticed that the board's power to assess is limited to the purpose of reviewing the decisions of the Commissioner... That means that insofar as it is incidental to giving effect to the decisions of the board, which must be confined to the grounds of objection, the board may assess".
A further matter not appreciated by A is that each applicant's case has to be considered separately and it is open to the Commissioner, despite adopting one argument in the case of Joe Blow to advance a different argument in relation to Jill Brown. Each case will be determined however by the respective tribunal according to how it sees the merit of the particular argument in law - both arguments (assuming identical facts) could not be right but they could if there were not identical fact situations.
4. With these opening remarks I indicate that I do not propose to mention further the "criminal" activity or "deception" arguments. It is sufficient to state there was no evidence before the Tribunal to establish the charges (in so saying I do not doubt the sincerity of A in holding such beliefs) although, even if it had been established, it is difficult to see how commencing an investigation as a result of information from a third party ("insane" or not) could be termed "criminal". As stated at the hearing, if an investigation arising from such information does reveal "discrepancies", these "discrepancies" can be challenged, the applicant's rights are fully protected and there is no warrant for saying the "insane" information itself vitiates the adjustments. Additionally even if there were "criminal" acts, the decision of the High Court in F J Bloemen Pty Ltd v FC of T 81 ATC 4280 stands in the taxpayer's path. Admittedly there was in Bloemen no suggestion of "criminal" activity as distinct from harassment but I cannot see it would have made any difference. In Case P101 82 ATC 520 it was alleged the assessments resulted, inter alia, as a part of a "vendetta" but it was my view therein that, even if such had been established, it would not have assisted - the overall answer turning on the merits of the assessment. I also indicate that I will not further mention the contention set out in para 2 that the fees received did not constitute assessable income. It is sufficient to state that there was virtually no evidence before the Tribunal in relation to the particular syndicates from which fees were received and that it is not uncommon in taxation matters for items not allowable to the payor to be assessable in the hands of the payee. I turn now to the "facts".
5. In 1960 the applicant was incorporated by A as a family company. A had overall control through a governing share and he and his now ex-wife B were directors of the company. In 1968 A decided to become a full-time exporter and in 1969 went to America, and became a consultant for another firm in his individual capacity. Later A decided to operate through the applicant company, it being "activated quite fully in about May 1972". It would seem the applicant became the "consultant" to a number of syndicates receiving fees from them. However none of the relevant syndicate agreements were produced to the Board and the precise terms relevant to the payments to the applicant are unknown. For the 1972 year fees of $20,000 came from the Y syndicate, for 1973 $73,000 Y syndicate and $65,000 P syndicate and for 1974 $18,200 AD syndicate, $18,900 AV syndicate, $56,250 S syndicate, $18,500 V syndicate and $2,600 N Importers. The 1973 and 1974 returns of income described the amounts totalling $138,500 and $114,800 respectively as "Fees - Export Market Consultants" and therein claimed the following deductions:-
1973 1974
$ $
Accounting Fees 85 575
Advertising 408 188
Air & Train Fares, Accommodation, Meals, etc
(Salesmen - Local, Interestate, Overseas) 10,822 12,034
Bank Fees and Charges 187 116
Depreciation (Motor Vehicle, Office
Machines,
Equipment & Furniture) 189 429
Directors' Fees 12,000 6,000
Entertainment 256 1,035
Freight on Consignment Stocks 309
Interest - Deposit at Call 811 1,802
Insurances on Consignment Stocks 6,291
Office Expenses 148 116
Overseas Selling Expenses & Commissions 16,052 10,754
Printing and Stationery 649 1,760
Motor Vehicle Expenses 466 1,395
Rent, Light and Power 658 1,060
Share of Net Loss ((X) Syndicate) 10,868 1,530'
Telephone and Postages 1,794 2,194
Wages, Salaries & Commissions (Staff) 46,950 21,933
Repairs and Maintenance (Property) - 260
Share of Net Loss ((Z) Syndicate) - 26,346
Freight on Samples for Export Orders - 216
Samples (Goods to Obtain Export Orders) - 2,866
$108,943 $92,599
Export market development expenditure rebates based on figures of $10,546 and $27,404 respectively were also claimed. These figures represented for 1973 the relevant share of the X Syndicate $21,600 as per para 9 ie $10,546 and for 1974 the combined share of X $2,263 as per para 11 ie $1,103 and share of Z $34,513 as per para 12 ie $26,301.
6. Upon assessment the claimed EMDE rebates and the shares of the syndicates' net losses were disallowed whilst for 1973 the following items were also disallowed:-
Provision for Bonuses 6,000
Bonuses Paid 10,500
Interest - Deposit at Call 811
Half Share German Trip 1,048
Hire of Caravan 100
Sydney Trip' 92
Bank Fees of (A) 95
Private Telephone Expenses 95
Home Insurances 45
Registrar of Company Fees 10
Postage on Behalf of Another Company 13
Directors' Fees (B) 3,000
For 1973 the applicant objected to each item of disallowance claiming, in summary, the losses were allowable (no section mentioned), the rebates were allowable (section 160AC) and the other items satisfied section 51(1) and section 65. A final ground claimed "all of the above items of expenditure were losses or outgoings wholly incurred by the Company during the said year of income in gaining or producing assessable income for the Company or were necessarily incurred in carrying on a business for that purpose and, not being losses or outgoings of capital or of a private or domestic nature nor incurred in gaining or producing exempt income, are wholly allowable deductions under Section 51 of the Act". For 1974 the objection was limited to the syndicate losses and the EMDE rebates. Both the 1973 and 1974 objections concerning the EMDE rebate referred also to the provisions of section 260 but these did not become an issue before the Tribunal.
7. Although no syndicate agreements were "produced" (copies of X and Z documents attached to syndicate returns) it would seem that the arrangement was that sales people would be sent overseas and a syndicate would be charged "$100 for each call made on an overseas party". A said the Act did not provide for commissions (for rebate purposes) so he calculated what it would cost to have people making calls trying to sell products and this was the basis of the charges. However the syndicates "paid up-front" (this way it was calculated the syndicate members could claim EMDE rebates as well as the shares of loss) in advance of the calls being made - although there were some differences basically 10% of the money subscribed was held back for ordinary running costs and 90% of the money subscribed "paid up-front" (it then being A's or the applicant's responsibility to make "the calls to match the fees"). The sales people when sales were made invoiced in the name of a particular syndicate and initially "each syndicate had its own bank pay-in book" and banked whatever money came in. Some confusion however developed when another company 0 was formed to take over the running of the syndicates. There was no dispute that the applicant received the amounts of fees returned in the years concerned. A indicated that because he used "hungry sales people" who make lots of calls it actually cost less that $100 per call and "in fact I was setting out at all times to make about 50 per cent profit". These sales people took with them "consignment stock" and some purchased by the a-pplicant (apparently syndicates did not purchase stock) and, as indicated, sales made were invoiced to the particular syndicate concerned which presumably was also invoiced by someone for the cost of the product sold.
Sales Nil
Less Purchases 438
Less Stock at 30/6/73 200 238
(used to sample wine and select 40 types to send to USA)
Less Operating Expenses
Accounting Fees 50
Bank Fees 6
Accommodation & Meals 266
Stationery 100 422
Less Export Market Promotion Costs
Sales Promotion Costs (Overseas Tastings) 2,234
Advertising (Printing Special Labels, etc) 2,400
Air Fares 5,806
Packaging of Samples 7
Postage of Direct Mail Advertising Letters 681
Overseas Salesmen's Retainer (USA Residents) 2,400
Wines for Samples (Including Shipping
and Customs Charges) 8,072 21,600
$22,260
10. Wine tastings in order to select wines commenced before the agreement was executed - the idea put forward about February - and would have been nearly over by 6 June. Late in June A arranged for the purchase of "the wines that were to be sent away for samples" but in some cases "the wineries did not have it ready for delivery" and he found himself "with money but not immediately enough wine to match the money" so he paid some wineries amounts in advance. No details of specific orders to support the payments in advance were given. The $8,072 also included an amount of $1,500 to a firm for the transport of wines and no details re these were given by A. In fact none of the wine had left Australia by 30 June 973 - it left in July, arrived in August and A went across to have it cleared through USA customs. A in order to meet the future costs of tastings in the USA had an amount of $2,500 paid to Diners Club as at 30 June, 1973. The Direct Mail letters were apparently not all sent until July and the $681 basically represents $600 cheque for stamps drawn on 29 June and which were mostly on hand at 30 June 1973. The retainer $2,400 represents two cheques drawn on 29 June but still held as at 30 June 1973 and later taken to the USA by A and handed over "myself when I was across there". The air fares $5,806 represent two cheques - one to ANZ Travel $2,519.44 and one to Hans Lee Travel $1,724.60 - in respect of which A agreed that as at 30 June 1973 the applicant had credits totalling $5,806. The $2,519.44 was used to meet costs in August 1973 of $1,638.11 with the balance $881.33 refunded in September 1973. The $1,724.60 was used to meet costs in relation to New Zealand trips (not USA) in March 1974 of $1,409.96 and the balance of $152.14 was refunded. There was a need for a special label to put on the wine bottles when A had them cleared in USA and on 29 June 1973 an amount of $2,500 was paid to Creative Services - split $100 stationery and $2,400 advertising. The statement of account from the firm shows debits on 30 June 1973 of $325.28 (Stationery) and $380.07 (Label) respectively leaving a credit balance of $1,794.65. Further debits occurred in July, August, October and November 1973 (still credit $25.95) whilst a debit on 30 June 1974 for stationery $84.69 finally put the account into an overall debit of $58.74.
11. After the wines arrived in the USA and were cleared tastings were held in Los Angeles and San Francisco and two containers of wine were subsequently sold. The syndicates 1974 return of income disclosed a loss of $3,130 calculated as follows:-
Sales wine USA 20,253
Less Cost of Goods Sold
Stock 1/7/73 200
Purchases 13,790 13,990
Less Stock 30/6/74 200
Plus Freight and Customs
Charges 6,529 20,319
Gross Loss 66
Add Operating Expense
Accounting Fees 52
Bank Fees 23
Interest on Loans 644
Stationery 82 801
Add Export Market Promotion Costs
Salary 500
Entertainment 178 678
Packaging Samples 8
Wine Samples 377
Overseas Salesmen's Retainers 2,081
3,144
Less Refund Air Fares 881 2,263 $3,130
The salary $500 was in respect of an individual who had assisted in Australia in relation to the preliminary tastings and who subsequently went to the USA in about August 1973 and also was involved in tastings there as well as phoning people or firms to interest them in Australian wines. He was a member of the syndicate but A said he paid him because "when he was in the United States he was working as a professional salesman". No details were able to be supplied in relation to the figure of $178. The amount of $2,081 was in respect of a US individual who "obtained the first orders for two containers full of wine but, previous to that, he got the label approval through. ... He was employed to work full-time...". Due to had luck - the French adulterated their wine and publicity damaged all imported wines -it turned out to be a bad venture (market ruined) and was apparently abandoned.
12. Turning now to the Z syndicate, a business name was registered on 6 May, 1974 with an agreement of the same date,. There is some doubt concerning this date for a letter of 2 July, 1974 to A stated, inter alia, -
"Enclosed are re-typed copies of Head Agreements for (Z). I re-worded paragraph 6 as the way you had it inferred that 20% would be added... Please sign and return immediately as ..., a lawyer, is champing at the bit after signing a Memorandum of Agreement when he has not been sent a Head Agreement."
This agreement was between A (not applicant as for X) and was in the same form as the previous agreement except that it was provided "that the activities of the venture shall include the manufacture and selling of the game called (C) and such other projects as may from time to time be decided upon for export from Australia to overseas countries...". The applicant was to be the manager and promotor of the joint venture and to receive therefore the 20% as previously - seemingly consistent with the re-wording referred to above. In this syndicate the applicant contributed $30,000 out of total contributions of $42,700. Its return of income for the period to 30 June 1974 disclosed a loss of $34,572 calculated in the following manner:-
Gross Sales of Opal Tokens Nil
Less Purchases
Opals (Y & P syndicates $3,000
each and applicant $350) 6,350
Dice (taxpayer) 150 6,500
Less on hand 6,500 Nil
Nil
Less Administrative Expenses
Accountancy 50
Bank Fees 4
Registration Business Name 5 59
Less Export Market Promotion Costs
Payment NZ Advertising Agency -for
Promotion of Sale of Opal
Tokens and Game Copyright 29,382
Artwork on Advertising Material 1,249
Printing of Components of Game
(Playing Boards, Money, Cards,etc.) 3,870
Application Fee for Patent 12 34,513
$34,572
13. The venture had its origins with an American who had bought 30 ton of rough opal for $3,000 which he wanted to dispose of - finally achieved by 0 "swapping" the remainder of its opal stocks in USA for the rough opal. A wanted a way of utilizing this material and suggested to a colleague they should make up a game like Monopoly using the rough opal as tokens. An individual G made up a game and another started producing tokens before the syndicate came into being. Difficulties arose with G and A "produced a game myself and I put the copyright on it for" 0. It was designed in the Easter of 1974 and A said the syndicate was formed not "to be selling a game" but to be "a method of selling opal". Around this time A was having problems with the tax office (G blamed) and the investigator talked of "prepayments in" the X syndicate. As a result A said he phoned an accountant in New Zealand saying "I have to make a payment to an advertising firm that is quite clearly not returnable, so that it cannot be said that it is a prepayment" and asking if he know of anyone. As a result contact was made with a firm which sent a telegram to Z dated 27 June 1974 setting out, inter alia, a suggested total recommended budget of New Zealand $30,000. On 30 June 1974 a cheque was drawn for A$29,382 and forwarded to the firm. A and his family left Australia arriving in New Zealand early in July for the purpose of supervising affairs over there. He met with the firm and a report dated 3 July 1974 set out the planned programme of requirements. Paragraph 1 referred to a decision to call the New Zealand company "C ... Games" - Ltd handwritten in - for components to be airfreighted from Australia, the agency to design and have finished artwork for the boxes by 5 July, A to complete by 12 July production estimates "so we have a basic cost per unit selling", by 26 July sufficient ident orders to have been notified by A so initial production run can be started for September sell in to stores and the like. Difficulties subsequently ensued with A writing on the letterhead of C Games Ltd dated 27 July pointing out certain matters including they were "making our retail TWICE Monopoly" and stating "All of the above was showing up about 10 days ago so I announced ... that I would go home with the balance of my $30,000 unless we could get our costs down".
14. The Ledger Card of the firm headed C Games Ltd contained 18 debits (July to December) totalling $6,729.66 and the firm's analysis for the period July - December 1974 was as follows:-
D Cr Balance
July 3 Remittance 30,000
5 Purchase Landrover 6,155
26 Customs Agency 500
29 Payments to A 1,000
Aug 9 Payment to Accountants 5,000
Oct 22 Payment to A 1,000
Nov 29 Payment to A 7,000
Dec
10 Precision Packaging 1,006.02 8,338.98
Amount owing to
firm 6,729.66
Balance $1,609.32
The landrover/caravan was for the use of A in New Zealand. The $7,000 was apparently a loan at A's direction to 0 whilst the two $1,000 to A were unexplained. All in all the facts are difficult to reconcile with a complete commitment of the $30,000 to the firm for its work on behalf of the Z syndicate. The facts show A had the use of much of the funds whilst it seems the firm regarded C ... Games Ltd as its client not the syndicate.
17. Dealing now with, the other items disallowed in the applicant's 1973 assessment as set out in para 6 above the total wages, etc figure para 5 of $46,950 comprised cash payments during the year of $19,757.87 less $6,000 transferred to Directors Fees by journal entry plus fees and commissions to A by journal entry $27,192 and another journal entry "Provision for bonuses" $6,000 - A $3,000 and B $3,000. This last journal entry represents the first item at issue and it seems clear from the evidence that such did not come into existence until sometime late in 1974 when the books were written up. The minutes of a shareholder's meeting of 31 December 1973 record that the accounts had not been prepared and that following discussion on the question of setting aside an amount for bonuses A "undertook to discuss this matter with the Company's Accountants, as soon as that firm was in a position to submit a draft of the financial statements". This clearly demonstrates the position. Also A's personal income tax for 1973 bearing date 5 April 1974 disclosing only the $27,192 plus directors fees is consistent with the provision occurring later. In the circumstances I am unable to find there was, as at 30 June 1973, any outgoing incurred in respect of this $6,000 "Provision for Bonuses".
18. Insofar as the next item $10,500 is concerned the cash payments figure of $19,757.87 includes two cheque amounts - May 22 1973 $10,000 and May 31 $500 - and these comprise the sum in dispute. The first cheque was to one K and the other to one E.
On 23 May 1973 K "paid" in $7,500 and E "paid" in $400 on 4 June, 1973 - both to acquire shares in 0 and pursuant to prior agreement to exchange cheques. A agreed that "in both cases the people did not have money and I had to pay them the bonus before they could buy the shares" - the 25% retained by each presumably to cover tax on the bonus. E was employed by the applicant but K was employed by 0 and the $10,000 represented the only amount "received" by him from the applicant. A agreed the "bonuses would not have been paid unless they had also agreed to purchase shares from" him.
19. The item $811 is one I found rather difficult to understand. Apparently on 30 June 1971 another company loaned $25,000 to the applicant which enabled a third company (later B) to lend a total of $20,000 to one syndicate and a further company - no interest has been paid to the applicant in respect of this $20,000 - with a further $3,000 going to A and $1,400 to another individual - balance left seemingly $1,100. On or about 30 June 1971 the applicant loaned $500 each to two individuals V and W (whether from the $1,100 is unknown) and it seems interest was received from them by the applicant. However the $811 relates to the initial $25,000 loan and, even if the $1,000 came therefrom, the amount cannot be applicable in total to income producing activities of the applicant unless it be regarded as acting in a "holding company" capacity.
20. Next is the half share German trip $1,048. One K and a mining company of which A was the principal shareholder had been associated for several years in the mining of opal and there came into existence a joint venture between K and A. Pursuant to this joint venture K went to Germany with a supply of stones application for Licence to Export in name of A and signed by A on 19 January 1973 - and in a letter of 1 February 1973 K reported to A that the sales already made were "more than we paid for the whole parcel plus the rest of the stones". In a letter of 11 April 1973 to his accountant A, inter alia, referred to the venture as being a 50/50 venture between the mining company and a company of K. Expenses in relation to the venture were paid by the applicant but the balances (sales not shown as income of the applicant) were treated by the accountant in the books as sundry debtors due to the company. A thought this was "because it is an accounting way of doing it". I consider it reflects the actual factual situation as being a transaction having nothing to do with the applicant's income producing activities.
21. The item hire of caravan is applicable to a caravan taken to the mining company's mine for two weeks in which A and his family lived whilst working there. Reference was made to discussions with others in the mining area in an attempt to relate the expenditure back to the applicant's operations but, in my view, the predominant object thereof related to the mining company. The Sydney trip related to an American who was doing business with 0 and had also done business with some of the earlier syndicates. A said the applicant was involved in that "as the export consultant I was looking after one of the main customers of my clients and (K) was not able to look after these people". The items Bank Charges and Telephone represent amounts in a journal entry crediting A's loan account. The Charges represent the total bank charges on the account for the year and it is difficult on the evidence to see how all the transactions of A related to the activities of the applicant. Similarly it is difficult to see the same in relation to the home telephone expenses. This is not to say that some of the charges and telephone expenses were not truly applicable to the applicant. In relation to the home insurance it relates to the jointly owned house of A and B and A agreed there was no obligation on the applicant to pay it. The $10 was not the subject of evidence and the $13 was postage for 0 that A agreed was recoverable.
22. Dealing with the final item Director's Fees B $3,000 it is necessary to analyse the return claims for Director's Fees $12,000 and Wages etc $46,950 a little more closely for, as indicated in para 17, book entries were made well after 30 June 1973. As at 30 June 1973 the cash payments dissection sheet showed only $19,757.87 under the heading Wages of which only two cheques - 15 May for $650 and 28 June for $6,000 - were applicable to B. This figure of $19,757.87 was converted by journal entries into the two of $12,000 and $46,950. In addition to those entries set out in para 17 A's loan account was credited with $6,000 and Director's Fees debited - thus making up the $12,000 claimed in the return. The shareholders' minute of 31 December 1973 referred to earlier also "resolved to approve the following emoluments of office for the year ended 30 June 1973 and to instruct the Company's accountants accordingly:-
2. B) - Secretarial Fees $ 650
Director's Fee $6,000".
B had in fact received $6,650 categorised as "Wages" and it was this post 30 June 1973 change of classification plus the journal entry for provision of bonus $3,000 that makes up the total of $9,650 shown in schedule 27 to the applicant's return as Director's Fees $6,000 and Salary and Wages $3,650. Of this $9,650 total only $3,650 has been allowed - $3,000 disallowed as part of the provision for bonuses and $3,000 as Director's Fees.
23. Insofar as the merits of the various claims are concerned it is convenient to deal firstly with the year ended 30 June 1973 which relates to the share of loss syndicate $10,868, EMDE rebate based on a figure of $10,546 (applicant's share of export market promotion costs of X syndicate $21,600 as per para 9) and the items set out in para 6 above. With reference to the X syndicate the appropriate details are set out in para 9 and 10 above and the primary submission made on behalf of the Commissioner was that no amounts were allowable in that the syndicate in the year concerned was not carrying on a business.
The question of when a business commences is not an easy one in the sense that preparatory steps are often undertaken in order to decide whether a business will be undertaken. Surveys etc might be necessary to determine whether an area could support a new store or field of endeavour and such are preliminary to a commencement of a business cf Southern Estates P/L v FC of T [1967] HCA 16; (1967) 117 CLR 481. I am prepared to accept that the syndicate intended, if the wine packings demonstrated a demand for Australian wines, to commence business as exporters of Australian wine but it is difficult to positively find that at the relevant time they were carrying on a business. However I will proceed on the assumption that a business had commenced before 30 June 1973.
24. Even accepting a business had commenced it is clear that most of the claimed items are not allowable. Items incurred before the syndicate came into existence would not qualify - John Fairfax & Sons Ltd v FC of T [1959] HCA 4; (1959) 101 CLR 30 and Softwood Pulp and Paper Ltd v FC of T 76 ATC 4439 - whilst provisions for expected future outgoings are not allowable - FC of T v James Flood P/L [1953] HCA 65; (1953) 88 CLR 492. The initial item $738 (para 9) relates to tastings which were almost over before the syndicate agreement was executed. The combined items $266 and $2,234 represents the Diners' Club credit of $2,500 as at 30 June 1973 and does not represent a "prepayment" in the sense that there already existed a "liability" such as rent under a lease or interest under a mortgage - at the highest future outlays were expected to occur and provision was being made therefor. The same can be said of the air fares of $5,806 and overseas salesmen's retainer $2,400 (indeed the $2,400 had not "left" the syndicate although its balance sheet was prepared on the basis it had). Of the combined items $100 and $2,400 the evidence only quantifies allowable amounts of $325 and $380. The evidence in relation to the $681 is unclear but it would not be unreasonable to accept it is allowable. Similarly the $8072 mainly represents the cost of acquiring the wine to be used as samples and represents a capital outlay. The remaining small items $50, $6, and $7 were conceded by the Commissioner's representative to be allowable if a business was being carried on.
25. In relation to the items (para 6) also disallowed in the 1973 assessment I have already dealt with the non-allowability of provision for bonuses $6,000 (para 17), and half share German trip $1,048 (para 20). Of the small items remaining ($100, $10, $13, $92, $95, $95 and $45) I would be prepared to resolve some doubts in the applicant's favour. I am also prepared to so resolve doubts re the allowability of the whole $811 interest claim - I thing a lesser figure would be more correct but I cannot say positively $811 is not deductible. With reference to the bonuses $10,500 - see para 18 - I am not satisfied that this was a "genuine" business outgoing of the applicant as opposed to a means whereby A could dispose of some of his shares in 0. E admittedly was an employee but K was an employee of 0 and this was the only amount "received" from the applicant. The remaining item is Director's Fees B $ 3,000.
26. A felt very strongly in respect of this item (para. 22) on the basis that B's advice, etc. was valuable and as co-directors, they should be treated equally. The Commissioner's attitude was that A was the driving force behind the applicant and that whilst he may have discussed matters with B she was not involved to the same extent particularly as at the relevant time she had the care of five children. She was paid for her other activities - writing up books of account etc - and the figure of $6,000 was, in terms of section 109 unreasonable to the extent of $3,000. I accept this submission but I have a difficulty overall in that, although the Commissioner would "allow" $3,000 Director's Fees and $3,650 Wages for B ie a total of $6,650, the effect (as set out in para 22) is that only a total of $3,650 has in fact been allowed although B received during the year $6,650. If only $3,000 had been transferred from Wages to Director's Fees and the $3,000 had been made up by journal entry to that account instead of to Wages there would be no difficulty re B. However, since no adjustment was made in relation to the Director's Fees of A, the applicant has not been adversely affected - A's $6,000 coming into "existence" long after 30 June 1973 should have been disallowed along with his provision for bonus $3,000 thus yielding a total amount disallowed of $9,000 equal to the present disallowance of $9,000 overall ($6,000 provision for bonus A and B and $3,000 Director's Fees B). In the circumstances I am prepared to treat B's amounts in the same way as dealt with in the books of the applicant ie $6,000 Director' Fees paid during the year ended 30 June 1973 of which, by the operation of S.109 only $3,000 is "allowable" and $3,000 provision for bonus which is also not allowable.
27. For 1974 there are the two syndicate losses to consider and dealing firstly with X I am prepared to accept that a business was being carried on during this year so that the share of loss claimed $1,530 is allowable. Turning now to the Z syndicate loss of $26,346 claimed (see details para 12) the major item making up the loss is the A$29,382 forwarded to New Zealand on 30 June, 1974 and shown as a receipt by the NZ entity on 3 July 1974 - paras 13 and 14. It was sought to show this was a "prepayment" to meet a committed liability in respect of which there was no possibility of recovery. On the evidence (including para 14) I am unable to accept this contention. In fact the whole position concerning this item is far from clear insofar as the syndicate was concerned - there seemingly being some changes in direction and the NZ firm regarding C Games Ltd as its client not the syndicate. However, it is sufficient to find that the item does not satisfy the requirements of section 51(1). With respect to the other larger items $1,249 and $3,870 the evidence was far from clear as to when commitments in relation to these were made. The Commissioner's view was that in any event, the amounts were of a capital nature and not deductible. Accepting that the requirements are otherwise satisfied I am of a similar view they were for the production of components of the product that was ultimately to be sold.
(a) is allowable as a deduction under Section 51;
(b) was incurred for the purpose of gaining or producing income that would be exempt from tax by virtue of paragraph (9) of Section 23 and is of a kind that, if it had been incurred for the purpose of gaining or producing assessable income, would have been allowable as a deduction under Section 51;
(d) is of the kind referred to in paragraph (d) or (e) of the definition of "prescribed outgoings" in sub-section (1); or
(d) was incurred in relation to disposals of the kind referred to in paragraph (c) of the definition of "export market development expenditure" in sub-section (1),
the taxpayer is entitled, in his assessment in respect of income of the year of income in which any such expenditure was so incurred, to a rebate...". Sub-paragraphs (a) and (c) are the only ones applicable in the present instance. Since the term "or" is used the fact an amount is not allowable in terms of Section 51(1) does not automatically disqualify an item. However it must meet the requirements of (c) which in turn takes one back to the tests of "prescribed outgoings" in 160 AC (1).
31. The term "export market development expenditure" is defined as meaning "prescribed outgoings incurred primarily and principally for the purpose of creating or seeking opportunities, or creating or increasing demands, for
(a) The export from Australia of goods that have been manufactured, produced, assembled, processed or packed, or graded and sorted, in Australia;
................
but does not include-
(d) outgoings incurred in promoting the sale of goods... manufactured or produced outside Australia if the parts or materials from which the goods are manufactured or produced include, to a substantial extend, parts or materials not of Australian origin;
...................
"Prescribed outgoings" is itself defined as meaning "outgoings to the extent to which they are incurred by a taxpayer... by way of
(a) expenses of, contributions towards expenses of, or payments made to an agent for the purpose of
(i) the carrying out of market research or the obtaining of market information: or
(ii) advertising or other means of securing publicity or soliciting business..., not being amounts paid or payable to -
(iii) a person ordinarily employed in Australia by the taxpayer or an associated company... as the case may be, in respect of services performed by him in Australia or in the course of a visit from Australia to a place or places outside Australia;
.................
(b) expenses (including costs of delivery) directly attributable to providing, without charge, samples ... to a person outside Australia;
............................
(d) expenses directly attributable to the selection or designing of, or of materials for, packaging and labelling for use exclusively in connexion with the export of goods from Australia; or
.....................
but not including —
(f) expenses, other than fares, in respect of travel, accommodation, sustenance or entertainment in respect of or in relation to a visit from Australia to a place or places outside Australia by the taxpayer or by a prescribed agent of the taxpayer... ordinarily employed or carrying out duties in Australia;
.......................
32. In relation to the Z syndicate I am of the view the terms of S160 AC do not apply. As indicated earlier I do not accept that the object was simply the "sale" of opal tokens. Nor do I accept in relation to the game that it would not have included "to a substantial extent, parts or materials not of Australian origin". Consequently there is no need to further consider the EMDE rebate claim in respect of this syndicate. The X syndicate was to export wines produced and bottled in Australia and therefore further consideration is needed of the relevant claims as set out in paras 9 and 11 above.
33. For 1973 for the reasons previously indicated I do not consider the amounts of $2,234, $5,806 and $2,400 were outgoings incurred (provision of "credit" for anticipated outgoings to be later incurred) and these claims automatically do not qualify. I am uncertain (para 10) as to how much of the advertising $2,400 was actually incurred but I am prepared to accept the $380.07 (label) as qualifying and satisfying sub-para (c) of the definition of "prescribed outgoings". The $681 I also accept as incurred and satisfying sub-para (a) (ii) of the definition and the $7 (accepted by Commissioner as incurred) as satisfying sub-para (b) of the definition. This leaves the item $8,072 and the initial problem is as previously indicated ie to what extent it was in fact "incurred" in being a "prepayment" for an existing as distinct to a future commitment. On the evidence I am unfortunately unable to arrive at an acceptable figure or indeed any figure at all. If I could I would accept it as satisfying sub-para (b) and in this regard I would put to one side the Commissioner's contention that the wine could in fact have been sold rather than used for sampling. Accordingly I would accept a total of $1,068 as qualifying for rebate with the applicant's share thereof being $521.
34. Of the 1974 rebate claims the Commissioner accepts the overseas retainer $2,081 and the $8 packaging but rejects the $500 salary that was applicable to an Australian who although not paid a wage or paid in Australia had been engaged initially in acquiring wines for tastings at A's home and assisting thereof (largely prior to the commencement of the syndicate). I am prepared to resolve the doubts as to whether he escapes the exclusion of (a) (iii) in favour of the applicant. Accordingly I would accept the net amount of $2,263 claimed in the return of which the applicant's share thereof is $1,103.
ADMINISTRATIVE APPEALS TRIBUNAL )
) NO. 377 -378 of 1984
TAXATION APPEALS DIVISION
)
Re: J R EXPORT PTY LTD
Applicant
And: COMMISSIONER OF TAXATION
Respondent
REASONS FOR DECISION Mr P M Roach (Senior Member)
1. THE TAXPAYER
The applicant is a limited liability, proprietary company (ACO). It was incorporated in 1960 and thereafter operated in the manner of a "family company", being one of several companies and entities in which the family in question was concerned. A, who gave evidence and who represented ACO at the hearing, and his then wife (B) were the directors of ACO at all material times. The issued share capital was recorded as being on issue to A and B and their five children, the youngest of whom was aged only 3 years in 1973. I am satisfied upon the evidence that at all material times the "controlling mind and will" of ACO was to be found in the person of A.
2. THE ASSESSMENTS
A was an entrepreneur who, through ACO and other entities, vigorously pursued moneymaking objectives as promotional opportunities presented themselves to him. One multi-faceted field of activity involved opals. It extended from mining opal in Australia to the marketing of opal overseas. In particular A generated a substantial income for ACO by promoting "opal syndicates", which were concerned to market opal overseas. The syndicates did so by retaining the services of ACO to provide salesmen in international markets who would canvass potential buyers. This enterprise generated gross commissions for ACO amounting to $138,500 and $114,800 in the years of income ended 30 June 1973 and 1974 respectively. In those years ACO also derived small amounts of assessable income by way of interest. At the same time in those years in its returns of income, it claimed deductions in sums of $108,943 and $92,599 respectively. The deductions claimed by ACO included
(a) a partnership loss for the X syndicate (yet to be mentioned), $10,868 and $1,530 in the years of income ended 30 June 1973 and 1974 respectively;
(b) a partnership loss in the Z syndicate (yet to be mentioned) in the sum of $26,346 in the year of income ended 30 June 1974; and
(c) other deductions relating to the derivation of the assessable income already referred to and generally: in sums of $98,075 and $64,723 respectively.
Taxable income was returned by ACO at $29,767 and $26,051 respectively. In addition ACO claimed Export Market Development rebates ("EMD rebates") based on figures of $10,546 and $27,404, arising out of the activities of the X syndicate and the Z syndicate.
On 21 March 1975, following an investigation which commenced shortly after 30 June 1973, the Commissioner assessed ACO as having a taxable income of $62,526 for the year of income ended 30 June 1973 - an increase of $32,677 over the income returned - and wholly disallowed the claim to the Export Market Development rebate. ACO promptly objected to the assessment, doing so only a few days after lodging its 1974 return of income. On 25 September 1975 the Commissioner assessed the income of ACO for the year ended 30 June 1974 at $54,096 - an increase of $27,876 - and wholly disallowed the claim in relation to the Export Market Development rebate. ACO objected to the assessment.
3. DELAY
On 26 March 1976 the Commissioner wholly disallowed both objections and ACO responded by requesting reference of the Commissioner's determinations on the objections to a Board of Review for review. That was on 15 April 1976. The Commissioner did not comply with those requests until August 1984 - over eight years later. The evidence of A was that the delay was not requested by ACO. I accept that evidence. It was of course open to the Applicant to act pursuant to s189 of the Income Tax Assessment Act ("the Act"), to require the Commissioner to perform the duty cast on him by s188, but the Applicant did not do so. It seems probable that, like most citizens, ACO was unaware that the Commissioner could be obliged in that way to carry out his duty.
4. SECTION 170(4)
I mention that delay because it is in many respects material to the ultimate result for this taxpayer of the assessment and review process. First, had these references been heard and determined within three years of the date for payment of the tax assessed and the findings which are made hereafter had then been made, ACO could at least have applied to the Commissioner to exercise his discretion pursuant to s170(4) of the Act to reduce the assessments for 1974 and later years as appropriate. Unfortunately long before the Commissioner had referred the references to a Board of Review for review, that period of three years stipulated by the Parliament as the maximum period within which that discretion to reduce an assessed liability to tax can be exercised in favour of the taxpayer had long since passed. Experience as a member of the Number 1 Taxation Board of Review suggests that this taxpayer is far from being alone in being confronted with that circumstance at the conclusion of the review process.
I recommend that the time restrictions imposed by the Section be reconsidered by the Parliament because in this, as in other cases, delays on the part of the Commissioner and, delays on the part of Boards of Review, the Administrative Appeals Tribunal and the Courts may work to sustain against the taxpayer a greater liability in tax than the substantive law provided for.
The proceedings upon these references were conducted before Taxation Board of Review Number 1 and the hearing concluded in June 1986, since which date the Taxation Boards of Review (Transfer of Jurisdiction) Act has taken effect. The Act came into force on 1 July 1986 with the result that, if a similar chain of events in the assessment and litigious process were to commence now, relief might be had. The Transfer of Jurisdiction legislation amended the two most seriously restrictive provisions of earlier legislation relating to tax litigation. First there is now a discretion in the Commissioner - reviewable by this Tribunal - to extend time for the lodgment of objections beyond the 60 days originally allowed for that purpose. Secondly, the Courts and this Tribunal may permit a taxpayer to amend the grounds of his objection. Unfortunately for the applicant in these references, the power to extend time for objecting does not permit an objection to be now instituted in relation to the assessment for the year ended 30 June 1974. The power to extend time is not available to assist taxpayers for whom the last day for objecting expired prior to 1 July 1986. Further, in my view, although there is no similar time restriction on the power to authorize the amendment of grounds of objection, that power of amendment does not extend to authorize the extension of the issues as to which an objection has been taken. In consequence I am satisfied that the Transfer of Jurisdiction legislation does not authorize any course of action which would result in the taxpayer being correctly assessed in accordance with substantive law in relation to issues not covered by the objections lodged in 1974 and 1975.
6. OBJECTIONS IN THE ALTERNATIVE
Those restrictions upon the relief available from this Tribunal arise because in presenting its income tax returns, and later its objections to the assessments by the Commissioner in relation to the syndicates X and Z, ACO only claimed losses and outgoings as related to one or other of two years without taking into account the possibility that a claim might not have been allowable in relation to the year in respect of which it was claimed but would be allowable in a later year. Those difficulties would not have arisen if, when raising the assessments he did, the Commissioner in disallowing a claim as not allowable in one year because it was incurred in another had proceeded to allow the claim in that other year. It seems that the Commissioner dealt with the claims strictly on the basis on which they were presented by the taxpayer. Although the Commissioner had made his assessments on that basis, it was open to ACO in its objections to claim that the expenditure was allowable in both years, even though it could only succeed in any one hearing in establishing an entitlement to the allowance in one year. One consequence of that failure on the part of Aco is that ACO is to be held liable to pay tax substantially in excess of the tax which would have been due if both years had been correctly assessed when the assessments were originally raised.
7. DELAY AND EVIDENCE
Nor do the difficulties caused by the delay end there. The evidentiary task of establishing the quantum of losses to be attributed to each of the months of June and July 1973 is made difficult by the delay, even in circumstances where the total expenditure over those two months can be readily established. That circumstance led to arguments being presented for the Commissioner that if, a known and quantified loss or outgoing claimed to have been wholly incurred in June 1973 is found to be attributable in part to June and in part to July 1973, no deduction could be allowed in either year for the latter part because:
(a) in relation to the year ended 30 June 1973 it was not incurred; and
(b) in relation to 1974 there was no claim in the objection that it was incurred so as to be allowable.
It was even suggested that the whole claim for a quantified loss might fail because the evidence was insufficient to enable the loss appropriate to each year to be sufficiently quantified.
8. ALLEGATIONS OF MISCONDUCT
A, as the alter ego of ACO, was a severe and bitter critic of nearly everyone associated with the assessments of ACO and of the members of the X and Z syndicates and of the determination of their objections - bitter to the point of alleging "criminal" misconduct. However he advanced no evidence to lend any support to his allegations. As the evidence stood before us there was no foundation for and no reason to think any foundation likely for any of the more extreme contentions of A. Even so having regard to the years of delay in referring ACO's references to the Board, it is a matter of some concern that A alleged that the claims of several other taxpayers who had invested in syndicates and whose claims had been disallowed had been referred for hearing and determined well before the claims of ACO which, on the evidence before us, was the leading figure in the syndicates.
A, was concerned that those decisions, said to be adverse to the taxpayers, might influence the tribunal in its deliberations. During the hearing he was repeatedly assured that the tribunal would determine these references upon the evidence before it. Although references to reported decisions of other, associated taxpayers were provided by a during the course of the hearing, I have taken care ex abundanti cautela, to neither refer to them nor to learn anything of them.
9. EXPORT MARKET DEVELOPMENT REBATES
In the relevant period Parliament enacted legislation providing a fiscal incentive to those taxpayers who would invest in the development of export markets and accept the risks that such investment would entail. Aco sought to respond to and take advantage of those incentives by promoting syndicates (of which ACO would be a member) to engage in the development of export markets. In at least the case of syndicate X, substantial exports did follow, although overall the venture was unsuccessful. But what generated most of the difficulties relating to the assessment of the Applicant was the way in which A sought to organize losses and outgoings to fall into a particular fiscal year, in preference to the year immediately following it. Some consequences of that have been considered already. Substantially the same results follow in relation to the claims for rebates for the same reasons.
10. SOME COMMON ISSUES
Before proceeding to a consideration of particular elements of the claim it is convenient to express a few general observations as to some characteristics which were common to several claims.
(A) ADVANCE PAYMENTS
Upon the evidence it seems that A had a concept that if monies were paid out by a taxpayer to a third party at a time when no obligation existed between them, but with the intention that the third party would later be called on to supply goods or services as required by the taxpayer, that a "loss or outgoing" within the meaning of s51 of the Act was immediately "incurred". He was wrong. I illustrate the point by reference to dealings with Diners Club. On June 1973, $2,500 was paid to Diners Club. It was the first transaction of Syndicate X with that organization and established a credit balance intended to fund future transactions. No such transaction was undertaken prior to 1 July 1973. There were later transactions and as they occurred a loss or outgoing was incurred which was instantly satisfied by reducing the credit balance with Diners Club, but no loss or outging was incurred until then. So it was that nothing having been charged to Diners Club on or before 30 June 1973 there could be no entitlement to a deduction in that year of income. Conversely, to the extent to which charges were incurred in the course of business in the next financial year, there were losses or outgoings which would have been deductable in the year ended 30 June 1974.
(B) "PROVISIONS" - IN ADVANCE AND IN ARREARS
A also seems to have thought that a loss or outgoing was "incurred" upon the writing out of a cheque with the intention that in due course it, or the monies drawn or to be drawn, would be paid to others, such as employees, as a reward for their services. In this he was again in error. As the evidence stands before us, although amounts in question were paid to employees during the year of income ended 30 June 1974, there was no entitlement to a deduction in relation to the year of income ended 30 June 1973 simply because a cheque had been drawn before 30 June of that year. Even if the cheque had been presented and paid, but so that the proceeds of the cheque continued to be held by the drawer, the position would be the same. As the evidence stands before us, at 30 June 1973 there was not even an entitlement in the employees to be paid the monies in question. Nor does the evidence suggest that the employees even knew that there was any intention on the part of ACO (or A) that the monies would be or might be paid to them. Nor does the evidence suggest that any amount would have been paid to those employees during the next fiscal year had they not during that year rendered the services which they did. In such cases the expense belongs to the year in which payment was effected, which in this case means not the year in which it was claimed and disallowed (1973) but the year in which it was neither claimed nor allowed (1974). Another error on the part of A lay in thinking that the making of book-entries attributing amounts to persons in respect of a year which had passed by credit to a loan account and the like, could constitute the amounts so credited in the course of one year as a loss or outgoing "incurred" in the immediately preceding year. He was wrong. In such a case the expense belongs to the later year, being the year in which the entry or payment giving rise to the loss or outgoing was made, which means in this case not the year in which it was claimed and disallowed but the year in which it was neither claimed nor allowed.
11. THE CLAIMS OF ACQ
The claims of the taxpayer can be conveniently divided into three distinct parts, namely:
(a) to deduct losses of $10,868 and $1,530 in relation to the X Syndicate for the years of income ended 30 June, 1973 and 1974 respectively and for Export Market Development rebates (EMD rebates);
(b) to a deduction for a loss of $26,346 incurred through Z Syndicate in the year of income ended 30 June 1974 and for EMD rebates; and
(c) other deductions arising directly out of the activities of ACO.
Unless otherwise indicated in these reasons, I adopt the findings of fact of my colleague, Mr Stevens.
12. CLAIMS RE: X SYNDICATE
I find that this syndicate was formed on 6 June 1973 when ACO and another person executed a Syndicate agreement and each subscribed $200 by way of capital. The agreement provided for the admission of other persons to membership and I find that by 30 June 1973 several other members had joined, subscribing a further $21,800. The deposits to the bank account of the Syndicate by the 30 June 1973 amounted to $23,900 comprising subscribed capital $22,200; a $200 loan from AC0 (recorded as deposited on Saturday 30 June 1973); and $1,500 deposited 29 June 1973 (being a repayment of monies borrowed by AC0 on 21 June 1973). In the period of thirteen months to 30 June 1974 the Syndicate traded in a substantial way in the United States of America but in doing so incurred substantial losses amounting to $25,390. The trading venture embarked upon by the Syndicate involved the purchase of Australian wines; their export to the United States; the establishment of markets for the wines in the United States; and sales in those markets. Prior to the formation of the Syndicate, on the initiative of A, wine tastings had been carried out in Australia with a view to the selection of wines to be exported and sold.
The Syndicate claimed that the total loss was a loss for income tax purposes and that it was incurred as to $22,260 in the year of income ended 30 June 1973 and as to $3,130 in the year of income ended the 30 June 1974. That claim was presented in the returns of income of the X Syndicate as follows:
Year Year
30.6.73 30.6.74
(a) Loss of Trading Stock 238 66
(b) Wine Samples 8,072
(c) Air Fares 5,806* 2,081
(d) Salesmen's Retainers 2,400
(e) Sales Promotion 2,234
(f) Advertising 2,400
(g) Postage: Direct Mail Advertising 681
(h) Packaging of
Samples 7 8
(i) Salary $500 & Entertainment $178
678
(j) Accountancy fees 50 52
(K) Bank fees 6
23
(l) Accommodation & Meals 266
(m) Stationary 100
82
(n) Interest 644
$ 22,260 4,016
* Less refund (cf 1973) 881
3,130
giving a loss of $25,390 over the two years.
I am of the view that the Syndicate was in business from at least the earliest date after its formation upon which it incurred any expense. The objective of the Syndicate was to profit by acquiring a saleable product from local suppliers and selling overseas to purchasers. To do so it needed to have both suppliers and customers. I am of the view that the Syndicate was in business from the time it set about using its resources to obtain supplies from vendors and orders from customers. Having so found I proceed to a consideration of the several components of the claim in relation to the 1973 year.
(a) As to $8,072 "wine samples":- I adopt the findings of fact which appear in Paragraph 10 in the Reasons for Decision of my colleague, Mr Stevens. Insofar as $1,500 was paid to a firm with a view to the future transport of wines I am not satisfied that the payment was made pursuant to any obligation or that the payee had any obligation to ACO. To that extent the claim related to a prepayment or advance payment as described in paragraph 10 (A) of these reasons. Accordingly there was no loss or outgoing "incurred" in the year of income ended 30 June 1973. It was incurred in the next year. As to the balance $6,572, the disbursment was again by way of advance payment and no loss or outgoing was "incurred" in relation to the purchase of the wines in question until the next year of income.
(b) As to $5,806 "Air Fares":- I adopt the findings of fact expressed by my colleague, Mr Stevens. This too was by way of advance payment and gives rise to no loss or outgoing "incurred" in the year of income. That loss was also incurred in the year to follow but when the return was originally lodged it was not so claimed; when the assessments were issued, it was not so allowed; and it is not now allowable - a problem exacerbated by the fact that the $881 refunded by the travel agents was brought to account in the year of income ended 30 June 1974.
(c) As to $2,400 "salesmen's retainers":- Once again this was an advance payment as previously described and nothing can be allowed as a deduction in the year of income because the liability was only incurred in the year following.
(d) As to $2,234 Sales Promotion Costs and $266 accommodation and meals. These two claims arise from the payment of $2,500 to Diners Club as at 30 June 1973 with a view to providing a fund wherewith to meet the cost of future services yet to be organized and in particular with a view to meeting the costs to be associated with future wine-tastings in the USA. I am not persuaded that any loss or outgoing in that regard was "incurred" on or before 30 June 1973 and no portion of either claim can be allowed in relation to that year of income.
(e) As to $2,400 advertising, $100 stationery, $600 postage stamps and $81 for typing services:- These items of expenditure relate to expenses incurred in the promotion of the selling project by direct mail advertising. I am satisfied that as to $40 and $41, these amounts were paid to typists on Saturday 23 and Saturday, 30 June 1973 respectively; and that the services on the latter occasion related to the preparation for dispatch of stamped envelopes enclosing promotional literature. I am also satisfied that the Syndicate at a cost of $600 purchased stamps from Australia Post on Friday, 29 June 1973; and that an undetermined number of stamps were affixed to envelopes on or before 30 June 1973, leaving the balance of the stamps in hand unused. As to the other two items amounting to $2,500, I am satisfied that that sum was paid to an advertising organization on Friday, 29 June 1973 with a view to that organization providing services and that on or before 30 June 1973 services had been rendered by that organization at a cost to the syndicate of $325 for stationary and $380 for labels, leaving a credit balance in hand with the organization at 30 June 1973 of $1,795. I am not persuaded that there was any obligation at 30 June 1973 which required ACO to maintain that credit balance with the organization. ACO claimed a deduction for the entire $2,500, the claim being apportioned between advertising $2,400 (claimed for EMD rebate purposes) and $100 for stationary (not so claimed). Having found that the Syndicate was engaged in carrying on business from at least the date on which it first incurred a loss or outgoing, I am satisfied that as to $81 in respect of typing services, the claims are allowable. As to $600 expended on stamps, I am satisfied that that is allowable in full in the year in which the expenditure was incurred. In my view the stamps were "consumables", in the same sense as is appropriate to standard stationery items. I reject the contention that the cost of stamps is only allowable to the extent to which they were "used" -whether that means affixation or cancellation, or affixation and delivery up to Australia Post affixed to postal articles. I also reject any argument that because the evidence is inadequate to enable a finding of fact to be made as to the quantum of stamps used by 30 June 1973, that therefore no allowance at all should be made even though the evidence establishes that all stamps were used by 30 June 1974. As to $325 stationery (being part of the $2,500), I would allow the claim on the same basis as for stamps. As to $380 (labels - also being part of the $2,500), I would allow the same on the basis that labels are not part of the stock-in-trade of the Syndicate. The stock-in-trade of the Syndicate was wine. Wine stocks did need to be brought to account in order to fairly determine the trading results of the Syndicate for the year and the Assessment Act requires that that be done. But labels are not the subject of trade, although property in them passes upon a sale.
As to the balance of $1,795, I find that it was an advance payment in the sense already described and is not allowable in the year ended 30 June 1973 being allowable only in relation to the year of income ended 30 June 1974, being the year during which the evidence establishes that the money was expended;
(f) As to $50 accountancy, $6 bank fees and $7 packaging of samples:- it was conceded on behalf of the Commissioner that if business was being carried on on or before 30 June 1973 these amounts should be allowed. Accordingly, I would allow them; and
- (g) Loss on Trading Stock ;
The claimed loss was $238 made up as follows:
Sales Nil
Less Purchases 438
Stock 30.6.73 200 238
I adopt the findings of fact set forth in the Reasons for Decision of my colleague, Mr Stevens, and, accordingly, I am satisfied that the sum of $438 was the cost of procuring wines for samplings but that that purchase was not made by the Syndicate. I so find for the simple reason that the tastings preceded the formation of the Syndicate. I accept that upon the formation of the Syndicate it received some "left-overs" and that it paid out $438 to obtain those "left overs" and the benefits of the experiences gained by A and others at the wine tastings, achieving both ends by reimbursing the expenses incurred by others in acquiring the wines for use at the tastings. That being so I am not persuaded that at 30 June 1973 the cost price of the wine acquired by the Syndicate was less than its value at 30 June 1973 - $200. That being so, I am not satisfied that there was any loss in the trading account to be taken into account when determining the taxable income of the Syndicate.
In relation to the year of income ended 30 June 1974 it is sufficient to say that I am well satisfied that the Syndicate continued throughout that year in the business commenced in the month of June 1973. That being so I am satisfied that each head of claim detailed in the return of the Syndicate for that year has been made out and, accordingly, I would on that account reduce the taxable income of ACO by $1,530.
As to Export Market Development rebates, I agree with my colleague Mr Stevens that the "advance payments" which have been detailed do not constitute "prescribed outgoings" as defined by s160AC(1): a prerequisite to the grant of any rebate. That being so I agree with him that the rebate is only allowable in relation to Syndicate expenditure of $681 (postage); $7 (packaging); and $380 (labels) in relation to the year of income ended 30 June 1973. I would allow the rebate to ACO to the extent of $1,521. In relation to the year of income ended 30 June 1974 I also adopt the reasons and conclusions of my colleague.
13. CLAIMS RE Z SYNDICATE
I have had the advantage of reading in draft the Reasons for Decision of my colleague, Mr Stevens, and I agree with his findings of fact and conclusions. As to the major item of $29,382 I am well satisfied that it constitutes an advance payment as previously explained and for that reason was not allowable in the year of income in question. As to the other matters of $1,249 and $3,870 I am not persuaded upon the evidence that even if they were "losses or outgoings incurred" in the year of income ended 30 June 1974, that they did not represent expenditure of capital or of a capital nature.
14. THE CLAIMS OF ACQ
Aco was the principal vehicle for income-earning activities promoted by A for the benefit of his family and himself. It claimed deductions for the year of income ended 30 June 1973 in its own right amounting to $98,075. The Commissioner disallowed or reduced many claims. The amounts so disallowed ($21,809) are all in dispute and may be conveniently grouped as follows:
(a) provision for bonuses to A and Mrs A of $3,000 each $6,000;
(b) bonuses to K $10,000 and another employee $500: $10,500;
(c) expenditure to the advantage of A (bank fees $95; private telephone $95; house insurance $45): $235;
(d) director's fees to Mrs A reduced from $6,000 to $3,000;
- (e) interest on monies borrowed, $811;
(f) expenses said to be related to the income-producing activities of others (travel costs $1,048; caravan $100, Sydney visit $92; Registrar of Companies $10; and postage for others $13).
(a) As to the provision for bonus ($6,000) my colleague has detailed the evidence and I adopt his findings of fact. I find that no loss or outgoing was incurred during the year of income ended 30 June 1973 but that a loss or outgoing in that amount was incurred during the year of income ended 30 June 1974 but was not claimed, was not allowed and may not now be allowed;
(b) As to the bonuses paid to K and another employee. I find that the monies in question were paid as a reward for services provided to ACO although K was not an employee of ACO and even though part of the bargain was that the payees would invest $7,500 and $400 respectively as capital in Syndicates the operations of which would generate income for ACO. I am satisfied that the payments were not made for the sake of generosity but to satisfy the demands of K and the entitlements of the other payee, an employee. The prospect of reinvestment by the payees may have made the parting with the money a little easier, but that in my view is its only significance. In my view the claims are allowable. There is nothing in the evidence which in my view suggests that the expenditure was capital or of a capital, private or domestic nature on the part of ACO. In particular there was nothing to suggest that the moneys so paid, or the interests in Syndicates acquired with them, were held otherwise than beneficially by the payees.
(c) ACO paid some of the domestic expenses of its employee, A. That it did so was to the advantage of A so long as the value to him of the benefits was not included in his assessable income. Be that as it may, the money expended in my view was paid by ACO as a reward for his services. If it was excessive in nature or amount (which, was not suggested), s. 109 of the Assessment Act might have been invoked, but it was not. In my view the expenditure is allowable.
- (d) As to the question of the reasonableness of remuneration paid to Mrs A by way of Director's fees, I am not persuaded, particularly having regard to the remuneration paid to Mrs A as an employee, that it was reasonable to pay her any greater sum than $3,000 per annum as a Director. In argument A proposed that to so hold would be to manifest sexual discrimination, but that contention is unsound and irrelevant unless it be established that it was reasonable to pay a male $6,000 for services which have the same or a lesser value than those rendered by Mrs A. Such a contention has not been argued or supported by evidence, and accordingly, has not been established.
(e) As to interest, the Commissioner's contention is that, having regard to the balance sheet of ACO, the interest expenditure must relate to monies borrowed to be on-lent; and that as the monies on-lent did not generate income by way of interest, that therefore the expenditure was not allowable as a deduction. In my view the approach is to narrow. ACO carried on business. Its objective - exceptional circumstances apart - was to earn money. It made money by encouraging others to trade with it. That included lending at low rates of interest and, on occasion, interest free, all in pursuit of its income-earning endeavours. There was no suggestion in the course of evidence or argument that the borrowing was related to any capital, private or domestic purpose of ACO. Accordingly, I would allow the claim.
(f) As to travelling expenses $1,048, the evidence is not easily followed but it does appear (cf. transcript page 148) that A and K were joint venturers on their own account in opal mining; that ACO was the source from which A drew the monies he needed to contribute to the joint venture; that K incurred travelling expenses in an endeavour (inter alia) to market opal overseas; that A arranged the provision of one-half of K's expenses, namely $1,048; that A provided that sum by drawing against the funds of ACO, later recording the drawing as an expense in the profit and loss account of the company. ACO did not derive income from the joint venture, and I am not persuaded that it was intended that it should, otherwise than from its own activities as a dealer in opals if it purchased from the joint venture. That being so, I am not persuaded that the payment of "travelling expenses" was anything more than an advance of monies on loan to A which should have been so treated in the company's accounts when they were later prepared. I would not allow the claim.
(g) The remaining items relate to the actions of the company in paying $100 in relation to the hire of a caravan used on the opal fields by A - an employee of the company - and his family; $92 as costs incurred by the company in relation to a Sydney trip by A, related to an American who had done business with some of the opal syndicates whose activities generated income for ACO; fees paid to the Registrar of Companies $10; and for postage provided for others with whom it did business $13. I am satisfied upon the evidence that in the case of each item of expenditure ACO was motivated to profit. I would allow the deductions.
15. CONCLUSION
For the reasons set forth in the preceding passages I would allow the claims to the extent indicated. I would only add that I regret that it seems that for many years to come the procedures for the conduct and resolution of tax disputes will still work injustice notwithstanding the major reforms effected by the Taxation Boards of Review (Transfer of Jurisdiction) Act, 1986.
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