Robert G Nall Ltd , v Federal Commissioner of Taxation [1937] HCA 88; (1937) 57 CLR 695 (17 August 1937)

HIGH COURT OF AUSTRALIA

H C of A

12 December 1936

Rich J.

Bowie Wilson, for the appellant.

Roper, for the respondent.

1936, Dec. 12

Rich J

. delivered the following written judgment:—

These are five appeals from amended assessments, in respect of the financial years 1930-1931, 1931-1932, 1932-1933, 1933-1934 and 1934-1935. The subject of each appeal is a sum of £2,000, portion of director's fees totalling £2,500, claimed by the taxpayer, but disallowed by the commissioner, who considered the balance over £500 an expense not necessarily incurred in the production of the company's assessable income. The appeals depend upon the well-known provisions of the Income Tax Assessment Act which govern deductions for business expense, viz., secs. 23 (1) (a) and 25 (e). Sec. 23 (1) (a) is as follows: "(1) In calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer shall be taken as a basis, and from it there shall be deducted—(a) all losses and outgoings (including commission, discount, travelling expenses, interest and expenses, and not being in the nature of losses and outgoings of capital) actually incurred in gaining or producing the assessable income." Sec. 25 provides: "A deduction shall not, in any case, be made in respect of any of the following matters ... (e) money not wholly and exclusively laid out or expended for the production of assessable income."

It has been determined by the decisions of the English courts and this court that the question whether a certain sum should be deducted from the taxpayer's profits as being wholly and exclusively expended for the purpose of that taxpayer's business is primarily a matter of fact in each case. The decisions are collected in Maryborough Newspaper Co. Ltd. v. Federal Commissioner of Taxation[1] and Federal Commissioner of Taxation v. Gordon[2] . The taxpayer is a company which was incorporated at the end of 1920. It acquired its business from an earlier limited company the capital of which was held by Mr. R. G. Nall. The consideration for the sale appears to have been shares, the allotment of which Mr. R. G. Nall controlled. They appear to have been allotted to or for the benefit of members of his family. They were issued as fully paid up. One share only was issued to Mr. R. G. Nall. But by the articles of association of the appellant company it was provided that Mr. R. G. Nall should be the governing director of the company until resignation or death. The fullest powers of management and control were vested in him. His remuneration was provided for by a clause in the articles in the following terms: "The salary of the said Robert Greaves Nall as such governing director shall be at the rate of £2,500 per annum or such greater sum as the company in general meeting may from time to time determine. The salary of the governing director shall be payable weekly."

The business of the company was extensive and probably the company would have little difficulty in justifying the salary as a remuneration if the business had been continued. I do not understand the commissioner as attacking the bona fides of the article of association viewed as at the time of its adoption. At the same time the fact cannot be overlooked that it was open to Mr. Nall to take the income he derived from the business either in the form of profit distributable on shares or as remuneration for services. Possibly his intention to distribute the shares amongst the members of his family influenced his choice between the alternatives, but it is likely that the effect upon income tax of the distribution between income from property and income from personal exertion was not overlooked. However, the company did not continue its business. On the contrary it disposed of its business in 1928 and thereafter the activities of the company were limited to the receipt of rent, interest on Commonwealth bonds, interest on mortgages, the getting in of sundry debts and attention to such matters as arose out of its position as landlord and the holder of investments. Its investments were limited, and the company's affairs called for little more than general supervision on the part of its governing director. During the relevant periods the company possessed an experienced and efficient accountant and auditor who was its public officer. The company's accounts were made up for the twelve-monthly periods ending 31st July and the commissioner assessed the company for each financial year on the figures made up to the 31st July in that financial year instead of up to the previous 30th June. No change was made in the company's articles of association until 15th November 1933, when a resolution was confirmed substituting £1,000 for the sum of £2,500 payable to Mr. R. G. Nall. He died in 1935. In the five accounting periods beginning 1st August 1929 and ending 31st July 1934 the commissioner refused to allow a deduction from the appellant company's assessable income in respect of Mr. Nall's remuneration under the articles of more than £500. The company appeals from the five assessments based on these accounting periods. The last appeal admittedly cannot succeed because by sec. 31H of Act No. 18 of 1934 the quantum becomes a matter within the discretion of the commissioner. The appeal for that year was not pressed. It was in the course of the accounting period for that year that the remuneration was reduced to £1,000. The substantial question which I am called upon to decide is whether in the circumstances prevailing during the four prior financial years the commissioner was wrong in holding that no more than £500 of the governing director's remuneration was money wholly and exclusively laid out for the production of assessable income. This case differs from Aspro Ltd. v. Commissioner of Taxes[3] because the challenge to the remuneration arises out of the changed condition of the affairs of the company. A contention of the taxpayer's counsel is that as the remuneration when originally fixed was bona fide it was not possible to hold that in whole or in part it had ceased to be expenditure laid out for the production of assessable income. I cannot agree in this contention. The articles of association conferred no contractual right on Mr. R. G. Nall to retain the office until he died at the remuneration which it specified. The articles did not constitute a contract between the company and Mr. Nall and, so far as appears, no contract entitling him to hold the office fixed by the articles was made between him and the company. It was, therefore, open to the company in each year to alter its articles and fix an appropriate remuneration. When the company disposed of its business the services justifying the remuneration were no longer needed, and, in reality, the governing director's remuneration ceased to be a reward for services performed on behalf of the company in gaining its income and became an annual payment out of the company's income enjoyed by an office holder as opposed to a shareholder. I do not think that it is correct to treat the matter as one altogether depending on bona fides. In each year of income in respect of which the deduction is claimed the question must be, What was the reason or occasion for the payment? Was it laid out for the production of income or was it made for some other reason? If the company were guided solely by business considerations and in deciding whether the articles should stand or be altered had nothing in view but the profitable conduct of the company's affairs, it is to my mind quite clear that the article would have been altered at the time when the business was sold. A salary of £2,500 a year is out of all proportion to the demands made by the company's transactions upon the time and capacity of the person directing its affairs. I have no hesitation in attributing the continuance of the remuneration to other motives than those of business. It may be that the commissioner took too favourable a course in apportioning the £2,500 and allowing £500 as remuneration. I am not called upon to express an opinion whether the total remuneration can be dissected and if so whether the amount allowed is not too liberal.

The appeals will be dismissed with costs.

From that decision the taxpayer appealed to the Full Court.

By an order made on 12th February 1937 the appeals were consolidated.

Appeal dismissed with costs.

Solicitors for the appellant, Harold T. Morgan & Sons.

Solicitor for the respondent, H. F. E. Whitlam, Commonwealth Crown Solicitor.

H C of A

17 August 1937

Latham C.J., Starke, Dixon, Evatt and McTiernan JJ.

Bowie Wilson, for the appellant.

Roper, for the respondent.

1936, Dec. 12

Rich J

. delivered the following written judgment:—

These are five appeals from amended assessments, in respect of the financial years 1930-1931, 1931-1932, 1932-1933, 1933-1934 and 1934-1935. The subject of each appeal is a sum of £2,000, portion of director's fees totalling £2,500, claimed by the taxpayer, but disallowed by the commissioner, who considered the balance over £500 an expense not necessarily incurred in the production of the company's assessable income. The appeals depend upon the well-known provisions of the Income Tax Assessment Act which govern deductions for business expense, viz., secs. 23 (1) (a) and 25 (e). Sec. 23 (1) (a) is as follows: "(1) In calculating the taxable income of a taxpayer the total assessable income derived by the taxpayer shall be taken as a basis, and from it there shall be deducted—(a) all losses and outgoings (including commission, discount, travelling expenses, interest and expenses, and not being in the nature of losses and outgoings of capital) actually incurred in gaining or producing the assessable income." Sec. 25 provides: "A deduction shall not, in any case, be made in respect of any of the following matters ... (e) money not wholly and exclusively laid out or expended for the production of assessable income."

It has been determined by the decisions of the English courts and this court that the question whether a certain sum should be deducted from the taxpayer's profits as being wholly and exclusively expended for the purpose of that taxpayer's business is primarily a matter of fact in each case. The decisions are collected in Maryborough Newspaper Co. Ltd. v. Federal Commissioner of Taxation[4] and Federal Commissioner of Taxation v. Gordon[5] . The taxpayer is a company which was incorporated at the end of 1920. It acquired its business from an earlier limited company the capital of which was held by Mr. R. G. Nall. The consideration for the sale appears to have been shares, the allotment of which Mr. R. G. Nall controlled. They appear to have been allotted to or for the benefit of members of his family. They were issued as fully paid up. One share only was issued to Mr. R. G. Nall. But by the articles of association of the appellant company it was provided that Mr. R. G. Nall should be the governing director of the company until resignation or death. The fullest powers of management and control were vested in him. His remuneration was provided for by a clause in the articles in the following terms: "The salary of the said Robert Greaves Nall as such governing director shall be at the rate of £2,500 per annum or such greater sum as the company in general meeting may from time to time determine. The salary of the governing director shall be payable weekly."

The business of the company was extensive and probably the company would have little difficulty in justifying the salary as a remuneration if the business had been continued. I do not understand the commissioner as attacking the bona fides of the article of association viewed as at the time of its adoption. At the same time the fact cannot be overlooked that it was open to Mr. Nall to take the income he derived from the business either in the form of profit distributable on shares or as remuneration for services. Possibly his intention to distribute the shares amongst the members of his family influenced his choice between the alternatives, but it is likely that the effect upon income tax of the distribution between income from property and income from personal exertion was not overlooked. However, the company did not continue its business. On the contrary it disposed of its business in 1928 and thereafter the activities of the company were limited to the receipt of rent, interest on Commonwealth bonds, interest on mortgages, the getting in of sundry debts and attention to such matters as arose out of its position as landlord and the holder of investments. Its investments were limited, and the company's affairs called for little more than general supervision on the part of its governing director. During the relevant periods the company possessed an experienced and efficient accountant and auditor who was its public officer. The company's accounts were made up for the twelve-monthly periods ending 31st July and the commissioner assessed the company for each financial year on the figures made up to the 31st July in that financial year instead of up to the previous 30th June. No change was made in the company's articles of association until 15th November 1933, when a resolution was confirmed substituting £1,000 for the sum of £2,500 payable to Mr. R. G. Nall. He died in 1935. In the five accounting periods beginning 1st August 1929 and ending 31st July 1934 the commissioner refused to allow a deduction from the appellant company's assessable income in respect of Mr. Nall's remuneration under the articles of more than £500. The company appeals from the five assessments based on these accounting periods. The last appeal admittedly cannot succeed because by sec. 31H of Act No. 18 of 1934 the quantum becomes a matter within the discretion of the commissioner. The appeal for that year was not pressed. It was in the course of the accounting period for that year that the remuneration was reduced to £1,000. The substantial question which I am called upon to decide is whether in the circumstances prevailing during the four prior financial years the commissioner was wrong in holding that no more than £500 of the governing director's remuneration was money wholly and exclusively laid out for the production of assessable income. This case differs from Aspro Ltd. v. Commissioner of Taxes[6] because the challenge to the remuneration arises out of the changed condition of the affairs of the company. A contention of the taxpayer's counsel is that as the remuneration when originally fixed was bona fide it was not possible to hold that in whole or in part it had ceased to be expenditure laid out for the production of assessable income. I cannot agree in this contention. The articles of association conferred no contractual right on Mr. R. G. Nall to retain the office until he died at the remuneration which it specified. The articles did not constitute a contract between the company and Mr. Nall and, so far as appears, no contract entitling him to hold the office fixed by the articles was made between him and the company. It was, therefore, open to the company in each year to alter its articles and fix an appropriate remuneration. When the company disposed of its business the services justifying the remuneration were no longer needed, and, in reality, the governing director's remuneration ceased to be a reward for services performed on behalf of the company in gaining its income and became an annual payment out of the company's income enjoyed by an office holder as opposed to a shareholder. I do not think that it is correct to treat the matter as one altogether depending on bona fides. In each year of income in respect of which the deduction is claimed the question must be, What was the reason or occasion for the payment? Was it laid out for the production of income or was it made for some other reason? If the company were guided solely by business considerations and in deciding whether the articles should stand or be altered had nothing in view but the profitable conduct of the company's affairs, it is to my mind quite clear that the article would have been altered at the time when the business was sold. A salary of £2,500 a year is out of all proportion to the demands made by the company's transactions upon the time and capacity of the person directing its affairs. I have no hesitation in attributing the continuance of the remuneration to other motives than those of business. It may be that the commissioner took too favourable a course in apportioning the £2,500 and allowing £500 as remuneration. I am not called upon to express an opinion whether the total remuneration can be dissected and if so whether the amount allowed is not too liberal.

The appeals will be dismissed with costs.

From that decision the taxpayer appealed to the Full Court.

By an order made on 12th February 1937 the appeals were consolidated.

Appeal dismissed with costs.

Solicitors for the appellant, Harold T. Morgan & Sons.

Solicitor for the respondent, H. F. E. Whitlam, Commonwealth Crown Solicitor.

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1. [1929] HCA 16; (1929) 43 C.L.R. 450.

2. [1929] HCA 48; (1930) 43 C.L.R. 456.

3. (1932) A.C. 683.

4. [1929] HCA 16; (1929) 43 C.L.R. 450.

5. [1929] HCA 48; (1930) 43 C.L.R. 456.

6. (1932) A.C. 683.