Case: Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation [1965] HCA 58 ; (1965) 114 CLR 314
Outcome: considered
The Taxpayer submitted that if the incentive fees were, in fact, partial advances of Manager's Fees to become payable in the future, then, in determining whether they comprised income received in the 2001 year, the decision of the High Court in Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation [1965] HCA 58 ; (1965) 114 CLR 314 should be applied. The effect of that decision was said to be that amounts received in one year, to be earned in a subsequent year, should not be treated for tax purposes as income received in the year of receipt. They should rather be treated as being received in the year in which they are eventually earned. 43 Arthur Murray was a company which conducted ballroom dancing lessons. It sold courses of tuition, usually consisting of 5, 15 or 30 hours to be taken by appointment within a year, payment often being made in advance, either in a lump sum or by instalments, with a variable discount for immediate payment. There was no contractual right to a refund in the event that a course was not completed. In practice, refunds were sometimes given. In the company's books fees were credited, upon receipt, to an account-styled "Unearned Deposits Untaught Lessons Account". As lessons were taught, amounts were transferred from that account to an account-styled "Earned Tuition Account". The company prepared its income tax on the footing that fees received in advance of tuition formed no part of its assessable income at the moment of receipt, but became income as and when earned by the giving of the tuition. 44 At 318, the Court (Barwick CJ, Kitto and Taylor JJ) said: 'As Dixon J observed in Carden's Case ... : "Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form" ... The word "gains" is not here used in the sense of the net profits of the business, for the topic under discussion is assessable income, that is to say gross income. But neither is it synonymous with "receipts". It refers to amounts which have not only been received but have "come home" to the taxpayer; and that must surely involve, if the word "income" is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust or charge in favour of the payer not only that they have been received beneficially but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived. The ultimate enquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income. A conclusion as to what that understanding is may be assisted by considering standard accountancy methods, for they have been evolved in the business community for the very purpose of reflecting received opinions as to the sound view to take of particular kinds of items.' 46 To my mind the facts in Arthur Murray differ from the present facts in substantial respects. Firstly, in that case, as far as can be seen from the report, all services to be provided in consideration of receipt of the relevant fees were to be provided subsequent to payment. In other words, there was no suggestion that any part of the remuneration had been earned in advance of such payment. In the present case it is clear that a significant part of the Taxpayer's function (for which it was to be remunerated) was performed in locating a potential lender and facilitating the loan transaction although, of course, some duties remained to be performed by way of management of the loan after it was made. Thus some part of the consideration for the Manager's Fee had been earned prior to payment of each incentive fee. There is no evidence which demonstrates any basis for apportioning the Manager's Fee as between such preliminary work and the subsequent management of each loan. Whilst in Arthur Murray , the upfront payment must have been for the tuition, it cannot be said that in the present case, the Manager's Fees were only payable in consideration of the Taxpayer's managing the loan after it was made. It is quite possible that the reduced amount of the Manager's Fee fairly represented the proportion of the total fee attributable to such management. 47 Secondly, in Arthur Murray , there was evidence of an accounting nature, suggesting that it was consistent with good business practice that amounts paid in advance of services to be provided not be credited to any revenue account until the services had been rendered. There is no such evidence in the present case, although there is evidence which suggests that both the Taxpayer and the Bank treated the relevant amounts as having been paid by way of commission, with no suggestion that they were by way of loan. In the business which the Taxpayer acquired in the 2005-2006 tax years, the incentive fees were treated in a different way, but no attempt has been made to demonstrate that such treatment was more appropriate, from a business point of view, than was that adopted by the Taxpayer in its return and accepted by the Commissioner. 48 The Taxpayer bears the ultimate onus of proof. It asserts that the incentive fees should be treated as unearned in the year in which they were received simply because some management duties remained to be performed over the first five years of each loan. However there is no evidence as to how the Manager's Fees should be apportioned amongst the duties which were to be performed by the Taxpayer. It might be argued that as subcl 7.1 of the Deed contemplated monthly payments of the Manager's Fee, this suggests that each monthly fee related to the work to be performed in that month. However that would be an unrealistic approach. Firstly, it would fail to recognize the fact that a substantial part of the overall work performed by the Taxpayer was in identifying the borrower and facilitating the loan. Part only was attributable to subsequent management. Secondly, such an approach would overlook the fact that however the Manager's Fee was characterized in the Deed, the parties conducted themselves upon the basis that there should be an advance payment of part of it. 49 The Taxpayer has not demonstrated that it had not, prior to payment of each incentive fee, earned that part of the Manager's Fee which it represented. The evidence is simply silent on that point. In those circumstances, accepting that the incentive fee was an advance of part of the Manager's Fees, the Taxpayer's appeal must fail.