Cook Islands Motor Centre Ltd v Collector of Inland Revenue [1980] CKHC 1; 008.1980 (14 May 1980)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
MISC. 8/1980

BETWEEN

COOK ISLANDS MOTOR CENTRE LIMITED
OBJECTOR

AND

THE COLLECTOR OF INLAND REVENUE
RESPONDENT

Counsel: T.C. Clarke for Objector
Advocate-General for Respondent

Dates of Hearing: 13, 14 May 1980
Date of Judgment:

JUDGMENT OF DONNE C.J.

This is a case stated pursuant to section 29 of the Cook Islands Income Tax Act 1972, (hereinafter referred to as "the Act"). It relates to assessments made by the Collector of Inland Revenue (hereinafter referred to as "the respondent") for tax for the years 1977 and 1978 in respect of income of the Cook Islands Motor Centre Limited (hereinafter referred to as "the Objector").

The Objector is a private company carrying on business at Rarotonga as motor vehicle and machinery dealers.

Its share capital is $15,000 divided into 8000 ordinary shares of $2 each. The shareholders during the relevant periods were:

"1. Donald Edward Dorrell 4411

2. Cook Islands Trading Corporation Limited 3477

3. Tangimetua Tere 76

4. Samuel Samuel 36"

The directors were:

"1. Donald Edward Dorrell

2. Neil Pearson McKegg - removed October 1976

3. John David Kenning"

In its return of income for the year ended the 30^th November 1977 the Objector declared as assessable income of $28,671.67. The Respondent after investigation assessed the assessable income for that year at $135,909.00. In its return of income for the year ended the 30^th November 1978 the Objector declared an assessable income of $11,485.92. The Respondent after investigation assessed the assessable income for that year at $58,278.00.

Burden of Proof:

Section 31 of the Act provides:

"On the hearing and determination of all objections to assessments of income tax the burden of proof shall be on the objector, and the Court may receive such evidence as it thinks fit, whether receivable in accordance with law in other proceedings or not."

In Duggan v Commissioner of Inland Revenue (1973) 1 N.Z.L.R. 682, Cooke J dealing with the question of the burden of proof under the New Zealand legislation which is analogous to Section 31 said at p 686 (lines 23-28 and 35-43):

"I think that the objector’s failure to discharge the onus applies even on the question whether the returns in the first three years were fraudulent or wilfully misleading. I cannot find it more probable than not that he did not know of the omissions. It is somewhat repugnant to have to decide such a question on the footing that the onus is on the taxpayer, but such is the statute law.............it has been said that an objector must show, not only that the Commissioner’s assessment is wrong, but if so by how much: see for instance the assets accretion cases of Babington v Commissioner of Inland Revenue (1957) N.Z.L.R. 861, 869; Lancaster v Commissioner of Inland Revenue (1969) N.Z.L.R. 589, 590; and Glausiuss v Inland Revenue Commissioner (1970) 1 A.T.R. 588, 594. Applied in a broad and commonsense way, that seems to me, with respect, to be right. In any event I would not depart from that current of authority. The objector here has gone nowhere near to showing by how much the assessments are wrong, if wrong at all."

In the event of an assessment which appears to have been made on no "intelligible basis" the court should set aside the assessment and remit it to the Collector for further consideration - Trantwien v Federal Commissioner of Taxation (No. 2) (1938) C.L.R. 63 per Latham C.J. at p.87. But the taxpayer does not shift the burden to the Collector merely by producing evidence that may possibly be a correct representation of the situation. Holler J. in Lancaster v Commissioner of Inland Revenue (1969) N.Z.L.R. 589 at p.590 (lines 51 to p.591 line 7) said:

"It is true that, in the course of a hearing the Board of Review, the onus of proof, in one sense, may, from time to time, shift between the taxpayer and the Commissioner; but the onus of proof, in the sense in which it is used in s.20 still requires that the final question must always be: ‘On all the evidence, has the taxpayer discharged the onus of demonstrating that the Commissioner’s assessment was wrong, and, if so, why it was wrong, and how far it is wrong?’ This is what Turner J. in Babington v Commissioner of Inland Revenue (1957) N.Z.L.R. 861, called the ‘considerable handicap explicitly laid upon him by the statute.’"

With these directives in mind I proceed to the issues covered in the case.

The Case:

The issues to be determined are several and counsel have prepared in the case of all but one of them a memorandum setting them out and recording agreed statements of facts relating thereto. This has been very helpful and I am indebted to Counsel for such assistance. I propose to deal with each item by reference to the memorandum.

1. 1977 Year: Fruit freight.

The agreed facts are:

"1. The $88.00 was paid by Cook Islands Motor Centre Limited on 16/12/76 as the cost of certain fruit and freighting.

2. The fruit was sent to Marac International Limited.

3. Marac International Limited provided commercial finance to Cook Islands Motor Centre Limited for the period 1974 to 1977 in connection with the trading operation of Cook Islands Motor Centre Ltd. Marac held a second debenture in respect of its advances.

4. The intention of the fruit, and freight payments, was to assist in promoting the good relationship between Cook Islands Motor Centre Ltd and Marac International Ltd."

The objector contends that this expenditure was incurred "in the borrowing of money". It relies on Section 67 of the Act which reads:

"The Collector may, in calculating the assessable income of any taxpayer, allow such deduction as he thinks fit in respect of expenditure incurred by the taxpayer during the income year for the preparation, stamping and registration of any lease of property used in the production of his assessable income, or of any renewal of such lease, or in the borrowing of money employed by the taxpayer as capital in the production of assessable income."

Mr Dorrell the Objectors Managing Director in evidence, described it as a "goodwill gesture". It is established that there had been lending on favourable terms to the Company by Marac over the years prior to this expenditure. The evidence of the objectors cannot justify a conclusion that this expenditure was necessary to ensure favourable treatment in the future. I conclude that while the fruit may have been intended as a gesture of gratitude by the objector for service received, it cannot be held to be an inducement necessary in order to obtain further lending by the Lender. I accordingly disallow the objection.

2. 1977 Year - Cigarette Purchases $119.68.

The agreed facts are:

"1. The Cigarettes were purchased by the taxpayer and provided without charge to guests at the December 1976 Christmas party of the taxpayer.

2. The guests at the Christmas party were customers and prospective customers of the taxpayer and persons with whom the taxpayer dealt in the ordinary course of its business.

3. The intention of the expenditure on the cigarettes was to promote a good relationship between the taxpayer and its customers and prospective customers and persons with whom it was dealing in the ordinary course of its business."

It is contended by the objector that this expenditure was incurred exclusively in the production of assessable income as such it is properly deductible under Section 63(1) of the Act which reads:

"In calculating the assessable income of any person deriving assessable income from one source only, any expenditure or loss exclusively incurred in the production of the assessable income for any income year may, except as otherwise provided in this Act, be deducted from the total income derived for that year."

I was referred to the case of W. Nevill & Co Ltd v Federal Commissioner of Taxation [1937] HCA 9; (1937) 56 C.L.R. 290 (F.C.) which considered the application of the section of the Australian enactment identical in terms with our Section 63(1). Dixon J. at p. 307 said:

"The whole course of the transaction must be regarded......The company thus undertook an expenditure which, if it had gone on, would have been deductible. The purpose appears to me to govern the entire course of the transaction. On consideration it appeared that the purpose would be better fulfilled by a rearrangement......Why should the original purpose be excluded from view, and the immediate purpose alone considered? A wide view should be taken of (section 63(i)). For it is intended to apply to a variety of sources of income."

I accept the evidence of Mr Dorrell that the purpose of holding the Christmas Party was to entertain and hospitise existing and prospective clients and that the aim was to attract them to the selling point of the objector’s operations - the Motor Centre. It was considered that this was a more potent method of promoting sales, the objector’s advertising in the news media being on a limited scale.

It was submitted by the Respondent that while sales promotion may have been one objective, as the beneficiaries of the party and the cigarettes included staff and others in the motor trade, the expenditure even if it could be considered as having been incurred in the production of assessable income, was not "exclusively" incurred. This submission is unacceptable. In my view the whole purpose of the operation must be considered and if it is clear, as I consider it is here, that the "direct" purpose was for the purpose of producing profits then the expenditure must be considered as having been "exclusively incurred". As Callan J. dealing with identical New Zealand legislation said in Public Trustee v Commissioner of Taxes [1938] NZGazLawRp 66; (1938) N.Z.L.R 436 at p.458 (lines 19-22):

"The use of the word ‘exclusively’ in (s.63(1)) as applied to expenditure other than interest may also connote and emphasise that the expenditure must have been incurred for the direct purpose of producing profits."

There is no question as to the quantum of the item and I accordingly allow this objection.

3. 1977 Year Private Use of Motor Vehicles.

The agreed facts are:

"1. The vehicles used by the Managing Director of the taxpayer were owned by the taxpayer.

2. The vehicles were used primarily for the purposes of the business of the taxpayer. The vehicles were of makes principally dealt in by the taxpayer in its business; Datsun and Honda Civic Station Wagon.

3. The Managing Director was entitled to the use of the vehicle for private purposes as part of his terms of employment.

4. The Managing Director has been assessed by the Collector for the sum of $520 in his personal tax return in respect of his private use of the vehicle for 1977. The tax on this has been paid by the Managing Director."

The evidence adduced clearly established that Mr Dorrell used one vehicle for private purposes. The other four were used in the course of business by him and other employees of the company. I cannot uphold the Respondent’s contention that there is a significant element of private usage in relation to the objector’s vehicles, other than that used by the Managing Director. I find, on the evidence, that these vehicles are predominantly business vehicles and that the accepted practice of allowing as a deduction the full outgoings and depreciation in arriving at the assessable income of the objector should be adopted by the Respondent.

In so far as the Managing Director’s vehicle is concerned, the Respondent has disallowed two-thirds of the depreciation which, he considers, represents the correct proportion attributable to the private use of the vehicle. He contends that this, in effect, represents a benefit enjoyed by the Managing Director in the nature of a dividend to a shareholder under section 4(1)(a) of the Act which reads:

"For the purposes of this Act the expression ‘dividends’, in relation to any company, shall be deemed to include-

(a) All sums distributed in any manner and under any name among all or any of the shareholders of the company."

Now before any "sum distributed" can be deemed a dividend within the meaning of section 4(1)(a), the distribution must be to a person in his capacity as a shareholder. It has been clearly established by the objector that the provision of the car to Mr Dorrell is in his capacity of employer and I consider that on this score, the contention of the Respondent must fail. There must be a nexus between the shareholding and the benefit and as McGregor J. in Campbell v Commissioner of Inland Revenue (1968) N.Z.L.R. 1 said at p. 4 (lines 29-42):

"Mr Cooke further submits that there must be a nexus between the trustees’ shareholding and the forgiveness of the debt and in the instant case no such nexus exists. I agree with the first part of this submission. It seems to me if there is a payment to a shareholder in a capacity other than that of a shareholder the payment cannot be regarded as a dividend. For instance, in Commissioner of Inland Revenue v Lactagol Ltd. (1954) 35 T.C. 230 a company, in the relevant period director controlled made a payment to its managing director in consideration for his undertaking not to compete with the company within five years of the date when he would leave its service. It was held by Harman J. that the transaction was one involving a commercial basis to buy an asset of value to the company and should not be treated as a distribution for the benefit of the managing director. I think it is implied in this judgment of Harman J. (as he then was) that the payment was received in a capacity other then that of a shareholder."

See also Inland Revenue Commissioners v Lactogol Ltd. (1954) 35 T.C. 230.

Furthermore it seems to me that the contention that depreciation as opposed to running costs of a company vehicle even if used partly by a shareholder for his private use could be regarded as a "sum distributed in any manner under any name" to that shareholder is untenable. The vehicle is the company’s property; the company would account for any "write back" of depreciation on sale. Also it is difficult to see how depreciation assessed on a car not owned by a shareholder could be considered as a having been "distributed" to him.

In so far as the running expenses of this vehicle is concerned, it has been established that it is used by the Managing Director partly for business i.e., for the production of assessable income and partly for private purposes. On the agreed issues, I am asked to find whether the Respondent has assessed correctly the proportion of the running costs to be disallowed is being attributable to private use. The objector, on whom the burden lies, has failed to prove that the Respondent’s assessment at one-third of such expenses is wrong.

In view of my findings on this issue, I hold:

(a) That the total running expenses in relation to all the objector’s vehicles, other than that used by the Managing Director, should be allowed as a deduction from the objector’s income as provided in section 63 and 65 of the Act;

(b) That in the case of the Managing Director’s vehicle the full rate of depreciation should be allowed as a deduction from the objector’s income as provided in Sections 63 and 65 of the Act;

(c) That the assessment of running expenses as being a non allowable deduction in relation to the vehicles used by the Managing Director’s be made on the basis of one-third of the total running expenses thereof (not including depreciation).

4. 1977 Year- Bonus payments to Managing Director - $16,766.12.

The agreed facts are:

"1. The payment was made to the Managing Director (D.E. Dorrell) in 1977.

2. The Collector was satisfied that D.E. Dorrell was an adult employed substantially full time in the business of the taxpayer and participating in the administration or management of the company.

3. The Collector was satisfied that D.E. Dorrell was not a relative of a shareholder nor a relative of a director."

The Respondent contends that this payment is excessive and had disallowed it as a deduction for the income of the objector. He relies on section 76 of the Act which reads:

"Where any sum paid or credited by a company, being or purporting to be remuneration for services rendered by any person who is a shareholder or director of the company or a relative of any such shareholder or director, exceeds such amount as in the opinion of the Collector is reasonable, the amount of the excess shall not be an allowable deduction in calculating the assessable income of the company, and shall, for the purposes of this Act, be deemed to be a dividend paid by the company to that person and received by him as a shareholder of the company.

Provided that this section shall not apply in any case where the Collector is satisfied-

(a) That the person to whom the sum is paid or credited as aforesaid is an adult employed substantially/fulltime in the business of the company and participating in the administration or management of the company; and

(b) That the determination by the company of the amount so paid or credited to that person was not influenced by the fact that he is a relative of a shareholder or director of the company."

The Respondent considers he can invoke the section to hold the bonus payment to be excessive since while the managing Director can satisfy the requirement of proviso (a) (Agreed Fact 2) he cannot satisfy that of proviso (b) since he is a director of the Objector and the Respondent is of the opinion that the payment to him was influenced by that fact. This conclusion is wrong. Once the Respondent is satisfied (as he is) that the Managing Director qualifies under proviso (a) then I am satisfied the section does not apply. Proviso (b) only comes in to question if the payment is made to "a relative of a shareholder or director of the "Objector". The Respondent interprets that proviso as applying to two classes: to a relative of a shareholder and to a director of a company. "A relative of a shareholder or director" is a generic term designating one of the three classes covered in the first limb of Section 75, the other two being shareholders and directors. Clearly the proviso must be read in that light and can only apply in the case of a relative either of a shareholder or of a director. It certainly does not apply in the case of a director.

Section 75 having no application in this case, the bonus payment to the Managing Director cannot be disallowed as a deduction from the objector’s income on that authority.

The Respondent, however, contends that even if the payment cannot be deemed a dividend under Section 75, it can be held as such under section 4(1)(a) (supra). In my view, it cannot. Section 75 specifically gives the Collector the power to consider remuneration to directors and if he is of the opinion, they are excessive to rule that such sum to the extent that it is excessive be a dividend. But by proviso (a) the Legislature clearly provided that remuneration to directors who are "substantially employed full time" in a company’s business cannot be deemed to be a dividend on the grounds of excessiveness and was not within the purview of the Collector on that ground. For the Collector to bring such remuneration into the category of dividends under section 4(1)(i) is to ignore the clear intention of the Legislature expressed in the aforesaid proviso that they should not be so classed. It is questionable also whether Section 4(1)(a) which covers "all" sums could be invoked to permit the Collector to dissect part of a total payment for services and rule that part only be dividend.

I accordingly allow the objection.

5. 1977 Year - Bonus Provision $57,472.50.

The facts are established on the evidence. The Objector’s Balance date was the 30^th November. On the 30^th November 1977 by entry in its Ledger relating to "Provision for Bonus" provision was made for $58,511.25 for bonus payment. In December 1977 one payment of $1,557.00 was made. This the Respondent has allowed. No bonuses were paid in 1978. Then in April 1979, December 1979, February 1980, March 1980, actual bonus payments were being made $200, $2,344.06, $38,185.45, $2,300.40 respectively having approximately $12,000 to be disbursed. While there was provision made in 1977 for bonus payments, the Objector was unable to make any payments apart from that in December 1977 because of his precarious financial position or what Mr Dorrell called "severe liquidity problems". It was intended to pay the bonus when the finance of the company permitted. The question is whether the bonus provision for 1977 can be held as having been incurred in that year notwithstanding that actual payments thereof were not made for over 15 months later and have not yet been fully disbursed. The Respondent contends that the expenditure was not "incurred" in 1977 since there was no liability to pay. The Objector contends that although there was no expenditure it was committed to the payment of bonuses "in that year".

In Felt and Textiles of New Zealand Ltd. v Commissioner of Inland Revenue (1969) N.Z.L.R. 493, the taxpayer issued debentures of $283,000 to the public at a discount of one per cent. Each subscriber thus paid £99 to the taxpayer objector, and, on maturity, became entitled to £100.

McGregor J. at p.499 (lines 26-38) said:

"The money borrowed by the taxpayer and employed by it as capital in the production of assessable income is £99. Is the agreement or obligation incurred to pay an additional amount of £1 at the expiration of fifteen years an expenditure incurred in the borrowing of money?

I cannot appreciate how the agreement to pay the additional sum on the maturity of the debenture can be regarded as an expenditure incurred by the taxpayer. The words of Kekewich J. In Re Bristol [1893] UKLawRpCh 109; (1893) 3 Ch. 161 are somewhat apt: "’Expenditure’: what do you expend? You expend that which you have. In Common Parlance you say that a man has spent more than his income. That is common parlance, but that is not language which you would suppose the legislature to use. A man cannot spend what he has not got; he can mortgage or pledge, but he cannot actually spend.""

A divergent approach was taken by the High Court of Australia in The Federal Commissioner of Taxation v James Flood Pty. Ltd. [1953] HCA 65; (1953) 5 AITR 579 where it had to consider a taxpayer’s claim in respect of holiday pay for employees, to deduct a provision made in one income year which would be offset against the actual holiday paid at a later date. The relevant part of section 51(1) of the Income Tax Assessment Act 1936-1947 provided:

"All loses and outgoings to the extent to which they are incurred in gaining or producing the assessable income... shall be allowable deductions except...."

The judgment of the Court was in favour of the Commissioner. At pp. 584-585 citing New Zealand Flax Investments Ltd v Federal Commissioner of Taxation [1938] HCA 60; (1938) 61 C.L.R. 179 p. 207 the Court said:

"The word ‘outgoing’ might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word ‘incurred’, the provision has been interpreted to cover outgoings to which the taxpayer is definitely committed in the year of income although there has been no actual disbursement...... To come within that provision there must be a loss or outgoing actually incurred. ‘Incurred’ does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon."

and again at pp. 585-586:

"It is one thing ...to say that it is not necessary, for the purposes of that an actual disbursement should have taken place. It is another thing to say that, in the present case, the taxpayer had incurred a loss or outgoing in the year of income in respect of the pay of its men during the annual leave to be taken in the ensuing accounting period of employees whose service had not as yet qualified them for annual leave. In respect of those employers there was no debitum in praesenti solvendum in futuro. There was not an accrued obligation, whether absolute or defeasible. There was at best an inchoate liability in the process of accrual, but subject to a variety of contingencies ........ In short, the deduction claimed of £578.10.2 does not represent an expenditure associated with the production of income before (the last day of the year covered by the return) for which a liability has been completely incurred by that date."

These two judgments were considered by Wild CJ in King v Commissioner of Inland Revenue (1974) 2 NZLR 190 where at p.195 (lines 32-41) he said:

"In the New Zealand section the word ‘expenditure’ is linked with the word ‘incurred’ as is the phrase ‘loses or outgoings’ in the Australian section. For that reason, notwithstanding the citation made by McGregor J. from Kekewich J, I think the reasoning of the High Court should be applied to the construction of s. 121. Accordingly I think that a deduction may be allowed under that section in respect of ‘expenditure incurred’ although there has been no actual disbursement if, in the relevant income year, the taxpayer is definitively committed to that expenditure. In this case the objectors were so committed."

With respect I would adopt that approach.

I was also referred to 7 C.T.B.R.(N.S) Case 1 p1. In that case, the Articles of Association of a private company provided for the fixation of salaries by a general meeting of the company. At such a meeting of director’s resolution to pay bonuses to directors "as soon as the financial position... allows, in the mean time to credit a ‘Managers Bonus due’ account with the full amount" was approved. Such an account was so credited in the £2,500. At no time was any payment made in respect of the bonuses. The commissioner disallowed a claim for deduction of the bonus for £2,500 in 1953. The Board upheld the Commissioner’s ruling. After adopting the approach of the High Court in James Flood’s case (supra) the learned Chairman of the Board at p.4 said:

"Here the company, rather than ‘subjecting itself to a definite loss or outgoing, was projecting into the future a self-imposed liability in connexion with the payment of a bonus.’"

In this case the objector on the 30^th November 1977 by an entry in an account known as "provision for Bonus" credited this sum for bonuses which sum in fact has not yet been fully expended, the first payment on account being made 15 months later. I cannot see how by making such provision the objector was definitely committed to pay any employee a bonus.

There were approximately 30 employees of the objector in 1977. If it were intended to incur a liability for a bonus payment to them in 1977 the appropriate course for the objector to take short of payment would be to fix the amount of the bonus to be awarded to each and credit it to the account of each individual. That would be a definitive commitment. With the normal turnover of staff it is safe to assume that those employed in 1979 and 1980 would not be identical with the 1977 personal. In respect of those there was no "debitum in praesenti solvendum in futuro". There was, and in respect of the unpaid balance of the bonus provision is, no obligation to pay any of the staff. At the best, it was an impending payment. By no measure can it be concluded that the expenditure of $57,472.50 was incurred in 1977. I therefore disallow the objection.

6. 1977 and 1978 years - Agency Fees.

"Cook Islands Trading Corporation Ltd included in its accounts as income the amounts received as agency fees from the objector for each of the two years in question. Cook Islands Trading Corporation Ltd has been assessed for taxation on these amounts and paid tax accordingly. The amounts were not shown as dividends and thereby exempted from tax, Cook Islands Trading Corporation Ltd returned a net profit for each of the 2 years without the said payments".

Considerable evidence was adduced by the objector to support his submission that the agency fees payable are deductible under Section 63 of the Act. The alleged arrangement between the Objector and the Cook Islands Trading Corporation Limited (hereinafter referred to as "the Corporation") has never been committed to writing and the Respondent regards it with some suspicion since the Objector has never declared any dividends over its period of trading and the Corporation is a substantial shareholder receiving, on the face of it, no returns on its investment. He considers that the payments are in fact dividends under the useful section 4(1)(a), or, alternatively, they were capital payments not deductible.

Two payments are involved, $30,099.55 in 1977 and $43,748.18 in 1978. Mr Dorrell, in evidence, said that prior to 1974 the Objector obtained its supply of Honda Motor vehicles from the Corporation which had the sole agency therefore and was paid a 25% commission on the value of cars supplied. The Corporation which also had the Toyota and Daihatsu franchises at this time did not actively develop the motor trading branch of its business, apparently considering the Objector, in which it had a 40% shareholding as the major motor trader in the Cook Islands. In 1974, without reference to the Corporation, the Objector negotiated with the Honda Company in Japan and secured for itself the sole agency for Hondas in the Cook Islands the franchise being taken away from the Corporation. It then became clear to the Objector that the Corporation in all probability by way of retaliation for this hurt would actively engage in the development and expansion of its motor trading providing much greater competition than hitherto to the grave detriment of the Objector which had involved itself in heavy financial commitments in building new premises. At Mr Dorrell’s instigation, a meeting to discuss the future was held with Mr N McKegg, Chairman of Directors and Mr A Law, Manager, of the Corporation to consider the future operations of both companies in the motor trade. It was agreed that in consideration of the Corporation refraining from expanding its motor trading for a period of five years, the objector, depending on its financial ability as to do, would pay a commission not exceeding 5% commission or agency fee on all sales of Honda motor vehicles by the latter, the amount to be fixed each year by agreement. In pursuance of that agreement agency fees were fixed after discussions between the two companies for the years 1974, 1976, 1977 and 1978 at $4,022, $13,223, $30,099 and $13,625 representing rates of 4.93%, 3.03%, 4.77% and 2.02% respectively. Mr Dorrell said there was no fee fixed for 1975 because the Objector had financial difficulties in meeting a 30% surtax levied for that year and it was agreed between Mr McKegg and himself that no fee be claimed. There appeared to be no set formula for fixing these agency fees; they were arbitrary amounts agreed to by Mr McKegg and Mr Dorrell. Mr Law, Manager of the Corporation, confirmed substantially the evidence of Mr Dorrell. He said that the Corporation had declared and returned for income tax purposes all these agency fees, it had been assessed for tax on these amounts and had paid the tax accordingly. It is common ground that if these fees had been treated as dividends they would not have been taxable in the hands of the Corporation - section 48(1)(o). The agreement terminated in 1978 and upon such termination the Corporation became a substantial shareholder in a company then formed and known as Harbour Motors Limited which now trades as motor dealer in competition with the Objector dealing in (inter alia) Toyota and Daihatsu motor vehicles.

In attacking the bona fides of this agreement, the Respondent argues that:

"(a) the Corporation was a shareholder of the Objector.

(b) there was no written agreement.

(c) there is no set basis for the fixing of the agency fees.

(d) In its objection to the respondent, the objector made no mention of the purpose of the agreement as being to restrain competition.

After careful consideration of the evidence in its totality, I have come to the conclusion that the Objector has proven the existence and genuiness of the agreement. I am influenced by the evidence of Mr Law the Manager of the Corporation, which, as I see it, has nothing to gain by confirming that the agreement was in the terms as contended by the Objector. The manner in which the Corporation has dealt with the agency payments in its accounts and the fact that the Corporation on the termination of the five year agreement with the Objector joined in the formation of Harbour Motors Limited to trade in the vehicles of which the former had the franchise, are compelling evidence supporting the Objector’s case.

That being so, I now turn to consider whether these agency fees can be deducted from the income of the objector as having been exclusively incurred by it in the production of assessable income as allowed by section 63. Understandably, the case law dealing with the application of this section (or its counterpart in the tax laws of other Territories) is prolific, but, apart from establishing certain guidelines, the cases are of little assistance because each case must be determined on the particular facts thereof and "the final result ... depends not on fact so much as on the weight and emphasis that one gives to indisputable facts and the overall inference which one draws from the situation as a whole "BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (1965) 3 All ER 209 at p211. This was also emphasised by Moller J in Commissioner of Inland Revenue v Murray Equipment Ltd (1966) NZLR 360 at p 364 (lines 31-45). However a good starting point can be found in the dictum of McCarthy J in Nicholls v Commissioner of Inland Revenue (1965) NZLR (CA) 836 at pp 849 (line 46) to 845 (line 15) which reads:

"It is, I think, essential to see what was the true nature of the liability assumed ... but the true nature of the payments is not to be determined solely by analogy. I must, doubtless, have regard to the substance of the transaction; but that substance is arrived at on a consideration of the agreement. ‘The decision in any particular case can only be arrived at by considering what is the substance of the transaction in question, and what is the substance of that transaction can only be ascertained by a careful consideration of the contract which embodies the transaction. That being so, in my judgment what has to be done here is to examine the particular clauses of ... the agreement in question, and to see what is the appropriate conclusion ... to be arrived at on the consideration of that agreement.’ Lord Wright MR in Commissioners of Inland Revenue v Ramsay (1935) 20 TC 79, 94. This approach has received general approval: see, for example, Commissioners of Inland Revenue v Ledgard (1937) 21 TC 129, and, in Scotland, Commissioners of Inland Revenue v Ramsay (1935) 20 TC 79; (1935) All ER Rep 847."

Here there was a real threat to the Objector by the Corporation expanding its own motor business in retaliation for the objector’s taking from it the Honda franchise. It had the resources to do so. Clearly at this stage, such increased competition in business would affect the sales and profitability of the Objector at a time when it was heavily committed in building premises and expanding its own business. I have no doubt the true nature of the payments under the so called "Agency Fee Agreement" was to maintain the "status quo" for a five year period to enable the Objector to maintain its profitability and consolidate its business.

The established facts do not support the submission of the Respondent that the payments to the Corporation amounted to dividends by virtue of section 4(1)(a) and I rule against it. While the Corporation was a shareholder of the Objector, the Agreement is clearly one involving a commercial transaction between two motor traders. It was in the capacity of a motor trader and not as a shareholder that the Corporation received the payments and in consideration thereof restricted its motor trading and competition with the Objector. Campbell v Commissioner of Inland Revenue (supra).

However the issue as to whether or not such payments are capital payments is not easily resolved. What was described as a "valuable guide" is the dictum of Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337 cited with approval in the Privy Council case of B P Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (1965) 3 All ER 209 by Lord Pearce at p 216 (lines B2 - E3):

"A valuable guide to the traveller in these regions is to be found in the well-known judgment of Dixon J (as he then was) in the case of Sun Newspapers Ltd v Federal Comm. of Taxation [1938] HCA 73; (1938) 61 CLR 337 where he discussed the nature of certain sums spent in buying up the competition of a rival and concluded that they were capital. He said at p.363:

‘There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.’

Also he said at p.362:

‘the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.’"

Lord Pearce further stated at p.218 (lines D2-G2):

"The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border-line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:

‘depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured employed or exhausted in the process.’

(per Dixon, J., in Hallstroms Proprietary, Ltd v Federal Commissioner of Taxation [1946] HCA 34; (1946) 72 CLR 634; 638. As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other; but those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken."

I approach the problem by considering the first of the matters mentioned by Dixon J in the Sun Newspaper case (supra) that is, the character of the advantage sought and in this; both its lasting qualities and the fact of recurrence may play their parts. Under this head one might also take into account the nature of the need or occasion which calls for the expenditure. Hallstroms Proprietary Ltd v Federal Commissioner of Taxation (supra) per Dixon J at p.650. As I have found the need or the occasion for the payments in this case arose when the relationship between the Objector and the Corporation changed on the former acquiring the Honda Franchise to the detriment of the latter who by holding the franchise itself was entitled to a commission on all Honda vehicles supplied to the Cook Islands. The probability of the Corporation in retaliation expanding its motor trading was a real one. The Agreement forestalled that and provided an assurance that profitability would be maintained over a period of five years during which time the Objector would have completed its new premises and established its business there.

Counsel for the Respondent however submits that the real effect of the agreement was to eliminate potential competition and refers to Sun Newspapers Ltd v Federal Commissioner of Taxation (supra) where it was held the suppression of competition, resulting in an improvement of goodwill, when one newspaper makes payments to prevent the publication of its rural, will render these payments capital. He also argues that while the Objector obtained nothing of an enduring nature as a result of the agreement, the payments thereunder must be regarded as being made on account of capital since the initiation of the agreement was not to prevent something that was already happening but was a kind of insurance against the Corporation embarking on an expansion of sales of vehicles in respect of certain agencies already held. He refers to John Fairfax & Sons v Federal Commission of Taxation [1959] HCA 4; 7 AITR 346 Dixon CJ p 354. Alternatively he contends that as the Objector had just begun the Honda Agency, there was not an existing business to protect but the payments were for the purpose of building up an asset and did in fact obtain for the Objector something of an enduring benefit. He cites Associated Portland Cement Manufacturers Ltd v Inland Revenue Commissioners (1948) 1 All ER 68 where a payment made to eliminate competition forever was treated as a capital payment. He also relies on Ward & Co Ltd v Commissioner of Taxes (1922) N.Z. P.C.C. 625. Counsel for the Objector, on the other hand, submits that there are definite pointers in the nature of the transaction towards a revenue expenditure. These are (a) the payments are of a recurrent nature rather than once and for all; (b) the expenditure is out of circulating capital as it is related to sales; (c) it does not bring into existence an asset or advantage for enduring benefit of the trade, but expenditure in making a profit; and finally (d) it was expenditure in the money earning process as opposed to the structure within which the profits were to be earned. He cites Commissioner of Inland Revenue v Murray Equipment Ltd (supra); BP Australia Ltd v Commissioner of Taxation etc (supra); Mann Crossman & Paulin Ltd., v Compton; Mann etc v Inland Revenue Commissioners (1947) 1 All ER 724; Timaru Herald Co Ltd v Commissioner of Taxes (1935) NZLR (CA) 978.

One useful consideration is that of recurrence of expenditure but is not decisive. The locus classicus occurs in the judgment of the Lord President Dunedin in Vallambrosa Rubber Co Ltd. v Farmer (1910) 5 TC 529 which states at p.536:

"These expenses were all expenses which were necessary every year. Now, I do not say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure - against what is income expenditure - to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year. Therefore, prima facie, weeding, which does occur every year, seems to me to be an income expenditure."

As Rowlatt J pointed out, however, in Quanworth v Vickers (1915) 1 KB 267 at p 273:

"the real text is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once and for all".

In the instant case, the payments to the Corporation extended over the five year period. They were made to meet the demand of the Corporation and were the solution to the problem of the Corporation’s threatened competition. Although a temporary solution they nevertheless were aimed at securing to the Objector its business and the maintenance of its profits for five years. The fact that the agreement was for a five year period only lends support to the view that the expenditure was recurrent.

This was the view expressed in the BP case (supra) at p.220 (lines C1-D1) as follows:

"What additional indication is given by the actual length of the agreements? That must be a question of degree. Had the agreements been only for two or three year periods, that fact would have pointed to recurrent revenue expenditure. Had they been for twenty years, that fact would have pointed to a non-recurring payment of a capital nature. Length of time, though theoretically not a deciding factor, does in practice shed a light on the nature of the advantage sought. The longer the duration of the agreements, the greater the indication that a structural solution was being sought."

A further indication but again by no means a conclusive one, is whether the sums were payable out of fixed or circulating capital. The distinction was discussed by Lord Hanworth MR in Anglo Persian Oil Co Ltd v Dale; Anglo-Persian Oil Co Ltd v I.R. Commissioners (1932) 16 TC 253 at p.258:

"It seems rather that the cases of Hancock, (1919) TC 358; and of Noble v Mitchell (1927) 11 TC 732; and of Mallett v Stavely Coal Co. (1938) 17 TC 772; give illustrations that the test of fixed or circulating capital is the true one; and where, as in this case, the expenditure is to bring back into the hands of the company a necessary ingredient of their existing business - important, but still ancillary and necessary to the business which they carry on - the expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is employed in and sunk in the permanent - even if wasting - assets of the business."

Simply put, "circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital is not involved directly in that process, and remains unaffected by it" - Lord MacMillan in Van Den Berghs Ltd v Clark [1935] UKHL TC_19_390; (1935) All ER Rep 874 at p 888 (lines F2-4). Having regard to the "whole picture" of the transaction here, it is plain that the expenditure secured freedom from competition which must of course secure trade. The capital was turned over for the purpose of securing profits. It was not for the purpose of extending the Objector’s selling organization. It was to protect and increase an existing business. Dixon CJ in his dissenting judgment in BP Australia Ltd v Commissioner of Taxation etc. in the High Court of Australia which was preferred by the Judicial Committee said of the expenditure which the BP Company paid to petrol retailers for improvements to premises in return for the securing of "tied" filing stations:

"I do not think it was acquiring a capital asset or doing any more than so conducting its business on revenue account as to increase it and make as certain as it could that its business was continuing and also would continue, if possible, to expand. For my part I cannot think that all the course adopted changed the character of the transactions of the company from those of a continual attempt to establish its product in a consumers’ market and to meet all the obstacles which arose in a long and rather troubled period to obtaining a reputation for its product."

In his argument in support of his contention that the expenditure under the agreement resulted in the Objector obtaining an enduring benefit, counsel for the Respondent stressed that the Objector in effect obtained an enduring benefit in that the deal enabled it to set up a selling outlet for the Honda Agency it had just obtained. But the facts do not support this. The Objector had been trading in Honda vehicles for some years prior to the arrangement obtaining its supply through the Corporation to which it paid a sales commission and which itself had not acted as a retailer of the vehicles. It had already established itself as a Honda seller. It is probable that the Objector’s sales may have been improved under the arrangement but that increase is built on an existing business and not as a result of the acquisition of a new asset.

As to the buying off of competition, the decided cases appear to support the proposition that payments not being of a capital nature for the purpose of enabling the taxpayer to maintain or increase his assessable income are incurred in the production of income and are deductible. Whether or not the payments are capital depends on the facts in each case and inferences that can be drawn from them. However, cases already decided can be of some assistance by way of analogy and I would refer to some of those to which I have been referred. The first of these is Ward and Co Ltd., v Commissioner of Taxes (1922) 93 LJPC 33, NZPC 625. In that case a brewery company expended considerable sums in carrying on propaganda for the purposes of influencing electors to vote for continuance of the existing licensing system at a poll taken for the purpose of determining whether national prohibition should come into force in New Zealand. The judgment of the Judicial Committee was delivered by Viscount Cave LC who at p.627-628 said:

"The real question is whether the expenditure in question was, within the true meaning of s.86(1) of the Act of 1916, (identical with sec. 63(1)) exclusively incurred in the production of assessable income; and, after fully considering the arguments adduced, their Lordships are of the opinion that this is not made out. The conclusion of the Court of Appeal upon this point is contained in the following passage in the judgment of that Court: ‘The question, therefore, is, was the expenditure under consideration exclusively incurred in the production of the assessable income? For unless it was so, the Act expressly prohibits its deduction from such income. This question must, we think, be answered in the negative. We find it quite impossible to hold that the expenditure was incurred exclusively, or at all, in the production of the assessable income. It was incurred not for the production of income, but for the purpose of preventing the extinction of the business from which the income was derived, which is quite a different thing. It was contended by the company that it was illogical that while legitimate expenses incurred in the production of the income was deductible, similar expenses incurred for the much more important purpose of keeping the profit-making business alive are not deductible, and, further, that it was inequitable that the Legislature should, on the one hand, force a certain class of traders into a struggle for their very existence, and, on the other hand, treat the reasonable expenses incurred in connection with such struggle as part of the profits assessable to income tax. These aspects of the matter are clearly and forcibly set out in the contentions of the company as embodied in the correspondence with the Commissioner contained in the case, but they raise questions which can only be dealt with appropriately by the Legislature. This Court cannot however, be influenced by such considerations, being concerned only with the interpretation and application of the law as it stands.’

Their Lordships agree with this reasoning. The expenditure in question was not necessary for the production of profit, nor was it in fact incurred for that purpose."

Ward’s case was discussed and distinguished in Commissioner of Inland Revenue v Murray Equipment (supra) where the taxpayer, which held patents for a machine to deodorize milk, opposed the grant of patents to two other companies in respect of substantially identical apparatus. It feared that grants to these companies would have inhibited sales of its own product through customer’s fees of involvement in patent infringement actions. Moller J adapting the reasoning of Coates SM in the Court below said at p370 (lines 1-18):

"The learned Magistrate distinguished Ward’s case from the present one by saying that, here, the company’s business, although it would have been diminished, would not have been extinguished as would have been the result for Ward & Co Ltd; and he went on to point out that this is a distinction which Latham CJ drew in the Hallstrom case [1946] HCA 34; (1946) 72 CLR 634. The judgment in the Court below draws attention also to the words of Viscount Cave LC in Ward’s case, where he said: ‘The expenditure in question was not necessary for the production of profit, nor was it in fact incurred for that purpose. It was a voluntary expense incurred with a view to influencing public opinion against taking a step which would have depreciated and partly destroyed the profit bearing thing’ (ibid; 149; 628).

The Magistrate took the view that

In the present case... the expenditure was incurred as a business necessity to enable (the company) to carry on its business as it had done in the past without interference or possible involvement in legal proceedings for infringement of patent rights in respect of a process or system which it was already using."

Again, in holding that the expenditure incurred by the taxpayer in contesting the grants of the patents was deductible Moller J said at p 368 (lines 38-50:

"In the present case, if one seeks the need or occasion which called for the expenditure, one finds it in a sudden threat, through the action of trade competitors, to the company’s opportunities of earning a substantial part of the income which, up till then, it had enjoyed, and, in the future, expected to be able to enjoy, perhaps increasingly. This also defines the advantage sought by the company, and it was, moreover, clearly the advantage obtained. Here it is of some importance to note that their Lordships in the BP Australia case approved, at least impliedly, what Dixon CJ said in his dissenting judgment in the High Court: ‘I do not think it was acquiring a capital asset or doing any more than so conducting its business on revenue account as to increase it and make as certain as it could that its business was continuing and also would continue, if possible, to expand.’"

Cited in the Murray Equipment case are Kellog Company of Canada Ltd v Minister of National Revenue (1942) CTC 51; Commissioner of Inland Revenue v Stellenbosch Farmers Winery (1945) 13 SATC 381; Hallstroms Proprietary Ltd v Federal Commissioner of Taxation [1932] HCA 56; (1932) 48 CLR 113 in which cases the costs incurred in preventing what amounted to competition were held to be expenditure incurred in protecting a right to income and deductible on that account.

On the other side of the coin in Van den Berghs Ltd v Clerk (supra) where the taxpayer brought out a rival in order to secure his goodwill or to suppress it and so provide or maintain a clear field for his enterprise over a substantial period, it was held there was a definite prima facie pointer towards a capital payment. Lord MacMillan at p.887 (line 15 to p.888 line D1) said:

"The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits, when earned, should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants’ profit-making apparatus. They regulated the appellants’ activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organization of a trader’s activities can be regarded as an income disbursement or an income receipt."

A case from which the Objector seeks support is Timaru Herald Co Ltd v Commissioner of Taxes (1938) NZLR 978. In this case one newspaper company by agreement paid another newspaper company over which it had complete control £100 per month in consideration of the latter’s not reducing the price of newspapers. Myers CJ at p998 (lines 10-29) said:

"Assuming the circulation of the appellant’s newspaper to be eight thousand daily, which is probably a moderate estimate, the appellant would have ensured to itself the retention of about £5,000 per annum which would have been lost if the Post Company had reduced the selling price of its newspaper from 1½d to 1d and the appellant company had been compelled as a matter of business to do the same. There is ample authority for the proposition that in such circumstances the moneys paid under the agreement would have been a deductible item under s.80(2) of the Act: (identical with sec. 63). Moore v Stewarts and Lloyds Ltd (1906) 6 Tax.Cas. 501; Guest, Keen and Nettlefolds, Ltd. v. Fowler [1910] UKLawRpKQB 36; (1910) 1 KB 713; Grahamston Iron Co. v Crawford (1915) 7 Tax.Cas. 25; Federal Commissioner of Taxation v Gordon [1929] ArgusLawRp 39; (1930) 43 CLR 450 and W Nevill and Co., Ltd. v Federal Commissioner of Taxation [1937] HCA 9; (1937) 56 CLR 290. Indeed, this proposition was not disputed by counsel for the respondent. The payments made by the appellant were made with a view to earning (or ensuring) larger profits for itself. If that is so, the payments were part of its business outlay or expenditure - part of its current commercial expenditure: per Lord McLaren in Moore v Stewarts and Lloyds, Ltd (1906) 6 Tax Cas. 501, 506."

A consideration of these cases and the tests suggested therein when applied to the facts of this case would seem to point to the expenditure here being revenue rather than capital. It did not eliminate forever competition but rather curbed it for a comparatively short period. What was done was for the Objector a matter of business necessity.

One of the matters to be considered is how these payments should be treated on the ordinary principles of Commercial accounting. In the Murray Equipment case (supra) Moller at page 369 (lines 20-34) said:

"Again it seems to me that, on ordinary principles of commercial accounting, this expenditure would be treated as being of a revenue nature, and that indeed is how it was treated in the company’s financial statements for the year concerned. In this connection I bear in mind that portion of the BP Australia case where, it was said: ‘It is of commercial importance that profits should not be inflated for tax purposes by the artificial withdrawal from the profit and loss account of expenditure directly incurred in earning them unless it is of a truly capital nature. There is force in the observation of the Lord President in the Wallambrosa case ... ‘The Crown will not really be prejudiced by this because when the tree comes to bear, the whole produce will go to the credit side ... the only deduction will be the amount which has been spent on the tree in that year; they will not be allowed to deduct what has been deducted before."

The sums paid to the Corporation have been put by the Objector’s accountant in the profit and loss account. It is obviously the only way to deal with them bearing in mind the true nature of the transaction. They could scarcely be shown in the balance sheet as being identified with an asset.

Finally, the Objector contends the payments constituted expenditure in its money earning process and thus must be regarded as a revenue expenditure.

The correct approach in considering these questions is to consider "what the expenditure is to effect from a practical and business point of view rather than upon the juristic classification of the legal rights (if any) secured, employed or exhausted in the process" per Dixon J in Hallstrom's case (supra). Here the payments were imply to prevent competition to enable the objector to maintain its sales and profitability and thus concern the money earning process of the Objector which again is a pointer to revenue expenditure.

Turning to the second consideration suggested by Dixon J in the Sun Newspaper case (supra), namely, the manner in which the advantage sought is to be used, relied upon or enjoyed, again the pointer is to revenue expenditure. The curbing of competition from the Corporation meant that the Objector could for five years continue to enjoy its selling profitably and indeed expand its sales on the same basis as hitherto, namely, with the Corporation remaining an indifferent motor trader. These facts are also a pointer to the expenditure being a revenue item.

The third consideration suggested by Dixon J is the means adopted to obtain the advantage to the method of payment. This factor here support the contention that the expenditure is a revenue one. Firstly the payments are annual ones (with one exception in 1975), they were not of a "once and for all" quality. Secondly they are for a period of five years only; they were not for a substantial period in the life of the Objector.

Thus on reviewing all the above matters and having weighed what I regard as all the relevant considerations, I have no doubt that the payments under this agreement were of a revenue nature.

I must now turn to the question as to whether this expenditure was "exclusively incurred in the production of assessable income". I think that the dictum of Callan J in Public Trustee v Commissioner of Taxes (supra) as to the use of the word "exclusively" in section 63 provides the guide to the resolution of this matter. There can be no question but that the "direct purpose" of these payments was to ensure sales and profits i.e. to produce revenue and I am satisfied they were incurred exclusively for that purpose.

I am consequently of the view that the payments made by the Objector to the Corporation pursuant to the agreement made between are properly designated as "expenditure exclusively incurred in the production of assessable income" within the meaning of section 63 of the Act and are properly deducted from the total income of the Objector. I accordingly allow the objections under this head.

7. 1978 Year - Travelling expenses of children.

The agreed facts are:

"1. The travelling expenses of $497.00 were for air fares of D E Dorrell’s children to New Zealand.

2. The terms of employment of D E Dorrell by the taxpayer entitled D E Dorrell to this payment."

The Objector contends that the terms of employment of Mr Dorrell entitled him to this payment. Mr Dorrell commenced employment about 1969. It seems surprising therefore that it was necessary for a Company resolution in 1975 to authorize it. However it is an agreed fact which I must accept. The burden is on the objector to satisfy the Court that such travelling expenses were exclusively incurred in the production of assessable income. It has been submitted by Counsel for the Objector that such a provision is a common term of employment for the Cook Islands, but, it was conceded by Mr Dorrell that this applied mostly to contracts with expatriates of which he is not one. I think the correct approach is to consider the true nature of the payment. If it is travel necessary for and in the course of work it could be classed as revenue expenditure, if it is not then it must be capital expenditure. In this case, the provision of such expenses in the Managing Director’s contract of employment amounts to a perquisite of the employment. The objector has not proven that it was necessary to induce Mr Dorrell to offer or enable him to improve his services to the Company. Clearly it was not an inducement offered to him when he commenced employment with the Motor Centre. I am therefore satisfied the payment of these expenses are not deductible under section 63(1). I disallow the objection.

The questions in the case having been answered the assessments should be amended accordingly.

SIR GAVEN DONNE, K.B.E.
CHIEF JUSTICE

Solicitors for the Objector - Clarke Ingram & Co., Rarotonga.
Solicitor for the Respondent - The Advocate-General.