WJ & F Barnes Pty Ltd v Commissioner of Taxation

WJ & F Barnes Pty Ltd v Commissioner of Taxation - [1957] HCA 23 - HCA 1957 case summary — Zoe

[4]

During that year the company paid retiring allowances to three of its directors who had filled that office for an average period of forty-five years and whose average age was nearly eighty years. In its ordinary return the company treated the retiring allowances as deductions from the assessable income. The commissioner, however, purporting to act under s. 109, disallowed the deductions. Since s. 109 says that whatever amount ceases to be an allowable deduction as a result of his invoking that section "shall, for all purposes of this Act, be deemed to be a dividend", this meant that in the personal assessment of each retiring director the amount he received on retirement would be included in his assessable income as income from property and he would not have the benefit which s. 26 (d) would otherwise confer of being taxed only on five per cent of the lump sum. It also meant that in ascertaining the undistributed amount of income within the meaning of s. 103 for the purpose of tax under Div. 7 (s. 104) it was necessary for the commissioner to deduct the amount disallowed in respect of retiring allowances on the footing that dividends aggregating that amount had been distributed. The commissioner made his assessment of tax under Div. 7 on that basis. He took the company's ordinary assessment of taxable income as supplying the point of commencement, namely the taxable income, and deducted the aggregate amount of the three retiring allowances as if they were distributions of dividend. In the company's ordinary assessment, of course, he disallowed the retiring allowances as deductible outgoings. Whether, if the commissioner had not acted under s. 109, a case existed for deducting the retiring allowances under s. 51 is a question on which we can form no opinion. Under that section the inquiry would be whether they constituted outgoings incurred in gaining or producing the assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing such income, and perhaps whether they were of a capital nature: cf. Maryborough Newspaper Co. Ltd. v. Federal Commissioner of Taxation [1] ; Mitchell v. B. W. Noble Ltd. [2] . The necessary facts are not before us. But when the company challenged its ordinary assessment before a board of review on the ground that the retiring allowances ought to be deducted in ascertaining its taxable income, the company does not seem to have contended that s. 51 applied. At all events the board of review decided that the retiring allowances were not so deductible. The board in giving its reasons excluded the application of s. 51 because that had been abandoned by the company and excluded the application of s. 78 (1) (c) because on the facts the directors were not employees and s. 78 (1) (c) applied only to the case of employees. The board rightly treated that part of s. 109 which concerns deductibility as possessing only a negative, restrictive or privative effect, but, although they upheld the disallowance of the deduction on grounds which are independent of the operation of that section, they thought it better to add in effect that, had they been called on to say under that section whether the amounts of the allowance were unreasonable they would, differing from the commissioner, have said that they were not unreasonable. Apparently because of this expression of the board's view, the commissioner decided to abandon the application he had given to s. 109. We are told in the reasons of the board given in the present proceedings that the commissioner decided to treat the respective amounts not as dividends but as retiring allowances in the hands of the recipients and that they benefited accordingly. He also made the amendment now under consideration in his assessment of the company to additional tax under Div. 7. The amendment struck out the deduction of the notional dividends into which the commissioner had sought to convert the retiring allowances by using s. 109. The result was, of course, greatly to increase the amount of the company's undistributed profit in respect of the year of income ending on 31st December 1945 and the additional tax thereon for the year of tax 1946-1947.

[10]

It will be seen that the function of the commissioner under this provision is limited; it is to form an opinion on nothing but a matter of quantum. The payment or crediting of sums of money is assumed. The fact is assumed that they are or purport to be of the given description. These are not matters which the commissioner's opinion can touch, much less govern. The supposition is implied that being of that description the payments will constitute allowable deductions. It is unnecessary for us to consider whether this implication involves a necessary condition of the application of the section or even of so much of it as relates to allowability. It is enough to say that it is an obvious presupposition. All that is of consequence is that the question whether, independently of s. 109, a payment forms an allowable deduction also falls outside the ambit of the function assigned to the commissioner of forming an opinion. Again the remainder of the section operates of its own force on the "excess" and deprives that amount of its allowability as a deduction and clothes it with its artificial character of dividend. Clearly the section does not confer upon the commissioner a discretion to decide whether or not an outgoing in respect of retiring allowance ought or ought not to be allowed as a deduction. The concern of the section is with the excessiveness of remuneration and of retiring allowances etc. It does not deal with the title to deduct expenditure of that character but seeks to place a restraint on the amount deductible under that heading and to do so by reference to the commissioner's opinion of what is a reasonable amount. Having placed that restraint upon the quantum it directs how the excess is to be dealt with. But what the commissioner did seems to me to go beyond and outside such a limited power of judgment. He appears to me, when he assessed the company to ordinary tax and additional tax under Div. 7, simply to have decided that the payments to three directors on their retirement ought not to be allowed as deductions at all. He must have deserted the assumption that the payments were in character allowable deductions; he could not have accepted that assumption and then turned his attention to the simple question of quantum. Nothing else will explain the total disallowance of the deduction. According to the first decision of the board of review he was right in saying that the payments were not allowable as deductions but, of course, for reasons quite outside s. 109. It may be difficult to draw the line between quantifying the reasonable amount of a specified payment and saying no such payment should reasonably be made at all. (Cf. Eastern Extension Australasia and China Telegraph Co. Ltd. v. The Commonwealth [1] with respect to the distinction between "reducing" and "abolishing" a charge.) But in the case of s. 109 it is clear enough that it was never intended that his opinion should go beyond the fairness or reasonableness of the amount and extend to concluding the question whether the outgoing was deductible at all. What the case stated says about it is that he treated the sum in question as being "by reason of the provisions of s. 109 of the said Act, not an allowable deduction, his opinion being that it was not to any extent reasonable as an allowance, gratuity or compensation in consequence of the retirement of the above-mentioned persons or any of them from the offices held by them respectively in the company." This language supports the conclusion that the commissioner did not apply his mind to that question which under s. 109 is made a matter of his opinion. But independently of his statement in the case stated the conclusion is the necessary result of the facts. It appears to me that the commissioner did not really apply his mind to the formation of the opinion as defined by s. 109, but to a different thing, namely the allowability of the deduction. When he came, in the amendment under consideration, to correct his conclusion he was correcting a subtraction from the taxable income of a sum as a dividend which was no dividend. The subtraction was the result of a legal misconception. He was not correcting an opinion, which appeared erroneous, as to the reasonableness of a sum paid or credited, the opinion the formation of which was his province and his only province under s. 109. For that reason I think that we have not here a case in which an opinion formed in compliance with s. 109 is revised by the commissioner as erroneous under the authority of sub-s. (8) of s. 170.

[15]

For the purpose of ascertaining its taxable income, whether for the purpose of "ordinary" company tax or for the purpose of Div. 7, the company was, of course, entitled to make all deductions which are allowable deductions under the Act. In its return of income derived in the relevant period the company claimed as a deduction the amount of £9,450 which had been paid to the three retiring directors. Prima facie the deduction might have been supported either under s. 51 or under s. 78 (1) (c). Section 51, so far as material, provides: - "All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income." Section 78 provides: - "The following shall, subject to this section, be allowable deductions (c) Sums which are not otherwise allowable deductions, and which are paid by the taxpayer during the year of income as retiring allowances or pensions to persons who are or have been employees or dependants of employees, where such persons are residents, to the extent to which in the opinion of the commissioner those sums are paid bona fide in consideration of the past services of the employees in any business of the taxpayer." The commissioner made inquiries as to the circumstances attending the making of the payment in question, and on 30th January 1948 made an assessment of the ordinary income tax payable by the company in which he disallowed the deduction of those payments. The notice of assessment was accompanied by an adjustment sheet in which the commissioner, after stating that the deduction of the sum of £9,450 was disallowed, said: "The question of allowance of this amount will receive further consideration. If, however, the company wishes to protect its legal rights an objection should be lodged within the prescribed time."

[20]

The only question raised by the case stated is whether this amended assessment of 2nd October 1951 is authorised by the Assessment Act. The question turns on s. 170 of the Act, by which the power of the commissioner to amend an original assessment is delimited. The section draws a primary distinction between cases where the taxpayer has, and cases where the taxpayer has not, "made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment". Here the company had, before the original assessment, made such a full and true disclosure. The sub-section of s. 170 which deals generally with such cases is sub-s. (3), which provides: "Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact; and no such amendment shall be made after the expiration of three years from the date upon which the tax became due and payable under that assessment." It is common ground that the amendment in the present case was not made to correct an error in calculation or a mistake of fact, and sub-s. (3) therefore does not authorise the amended assessment. Sub-section (8), however, provides: "Where - (a) any provision of this Act is expressly made to depend in any particular upon a determination, opinion or judgment of the Commissioner; and (b) any assessment is affected in any particular by that determination, opinion or judgment, then, if, after the making of the assessment it appears to the Commissioner that the determination opinion or judgment was erroneous, he may correct it and amend the assessment accordingly in the same circumstances as he could under this section amend an assessment by reason of a mistake of fact." It is on sub-s. (8) that the commissioner relies as justifying the amendment of the original assessment. If that sub-section is applicable, then, a full and true disclosure having been made by the taxpayer, and the amendment having been made within the three years mentioned in sub-s. (3), that amendment was authorised. Sub-section (8) is somewhat obscurely expressed, but it has been assumed - rightly, I think - that that is its effect. The question is whether sub-s. (8) is applicable to the case.

[22]

Section 109 contains one of the provisions of the Act under which the assessment of a taxpayer may be affected by an opinion formed by the commissioner. It is clearly one of the provisions referred to in s. 170 (8). It is, however, apparent on its face that it is concerned only with the quantum of a particular class of allowable deduction. It is aimed at a well-known type of case, which is exemplified in Aspro Ltd. v. Commissioner of Taxes [1] . It first made its appearance in the Act (in a somewhat simpler form) in 1934 as s. 31H. A private company, having two or three directors who hold all the shares, and making large profits, would naturally desire to pay to its directors and shareholders as much as possible under the name of remuneration, and as little as possible under the name of dividends. The advantage was, of course, twofold. There was advantage to the company, because remuneration paid for services was deductible in arriving at its taxable income: and there was advantage to the shareholders, because remuneration received for services was taxed at personal exertion rates, whereas dividends were taxed at property rates. Section 109 requires the commissioner in such cases to form an opinion as to how much of any sum ostensibly paid by a private company to a director or shareholder or relative as remuneration is reasonable in relation to services rendered. When he has formed his opinion on that matter, he must disallow as a deduction in the company's assessment any excess over what he thinks is reasonable, and must treat that excess for all purposes as a dividend paid by the company to a shareholder. The important point is that s. 109 presupposes a payment which, apart from s. 109 itself, would be an allowable deduction to the company. Unless there is a payment of that character, the commissioner is neither commanded nor authorised to form any opinion under that section. It is the reasonableness of the payment as a reward for services that he must consider, and it would be absurd to require him to consider that question if the amount paid were, as a matter of law and apart altogether from its reasonableness, not deductible. On the one hand, s. 170 (8) can operate only with respect to a change in an original opinion, the formation of which is authorised by the Act and made by the Act a criterion of liability to tax. On the other hand, when s. 170 (8) does operate, it authorises only such an amendment as will make the assessment what it necessarily must have been if the commissioner's changed opinion had been the opinion originally held by him.

At a glance

Court

Decision date

Before

Source

Judgment (38 paragraphs)

Parties