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JM Ah Chong & Co Ltd v Commissioner of Inland Revenue [1966] WSLawRp 1; [1960-1969] WSLR 154 (23 February 1966)

[1960-1969] WSLR 154

J.M. AH CHONG & CO. LTD. v. COMMISSIONER OF INLAND REVENUE

DISCRETIONARY REVIEW BOARD. 1965. 1966. 25, 26, November; 6, December; 23, February. Chairman, Mr C.G. Fowles S.M. and Appointed Member, Mr N.S. Wilson.

Limited liability company - remuneration of shareholders - considered excessive for purposes of income tax - whether Commissioner's assessment unreasonable - burden of proof - Income Tax Ordinance 1955, s. 79.

This was the first appeal of its kind brought by the appellant company under section 36 of the Income Tax Ordinance 1955 on the ground that the Commissioner of Inland Revenue's assessment of income was unreasonable in the circumstances.

The appellant company was incorporated in 1957 as a limited liability company with a fully paid-up capital of 20,000 shares held as to 3,250 shares each by shareholders Adams, S. Ah Chong, Macfarland and Ala Ching; and as to 7,000 shares by J.M. Ah Chong.

For the 2 years in question, being those ending 31 March 1963 and 31 March 1964, all 5 shareholders were employees of the company and were accordingly remunerated by way of salaries. No dividends were declared for these years. In the case of shareholder J.M. Ah Chong, the company had also paid him a sum of £1,500 per annum for rent of a building he owned and used by the company.

In 1965 the Commissioner advised the company that remuneration and rent for 1963 and 1964 were considered excessive and he fixed them as follows for both years:-

In accordance with s. 79 of the Income Tax Ordinance 1955 the Commissioner advised that remuneration considered excessive would be treated as dividends. The company's objection to the above assessment was disallowed by the Commissioner and this appeal was instituted.

Decision: The opinion of the Board was unanimous, as follows:-

APPEAL against assessment of income tax.
Phillips, for Appellant.
Wood, Acting Attorney-General, for Respondent.

Cur. adv. vult.

CHAIRMAN, Mr Fowles S.M.:

1. The appellant company was incorporated in 1957 as a limited liability company with a fully paid up capital of 20,000 £1 shares. On 25th March 1964, the authorised capital was doubled by the issue of 20,000 £1 shares which are partially paid up. As this appeal relates to the two years ending 31st March 1963 and 31st March 1964, we are concerned only with those who were the five shareholders before the increase of capital, namely:-

The company business during the relevant years largely comprised two wholesale and retail stores situated close to each other in Vaea Street. The principal store is known as Saleufi, and the other, Tauftsi. The company handled all lines of goods with an emphasis on drapery.

Figures declared by the company for the four years 1961-196-(ending 31st March) are:-

No dividend was declared. All shareholders were employees, and the company remunerated them as follows:-

As owner of the Saleufi building, J.M. Ah Chong was paid rent by the company at £250 p.a. until 1962 when it was increased to £500. Then, as from 16th January 1963, the company decided to pay £1,500 p.a.

On 14th January 1965 the Commissioner requested details of the remuneration and rent received by shareholders and of the nature of their services and the time spent by each on the company's business. The company complied with the request by letter dated 7th May 1965, although the reply contained little information and omitted any details of time worked. In July 1965, the Commissioner advised that he considered the remuneration and rent excessive for the two years 1963 and 1964 (ending 31st March) and he fixed them as follows for both years:-

The effect of the Commissioner's action upon the company's assessable income is that it and income tax assessed (in round figures) rose as follows:-

In accordance with section 79 of the Income Tax Ordinance 1955 (hereinafter referred to as "the Ordinance") the Commissioner advised that the remuneration considered excessive would be treated as dividends. The company objected to the assessment; the Commissioner disallowed the objection; and the present appeal was instituted pursuant to section 36 of the Ordinance as amended by the Income Tax Amendment Act 1965.

4. Before examining the principal questions for determination, the Board should mention certain preliminary matters. The Board's jurisdiction in respect of appeals under section 36 is limited to the consideration of one ground of appeal only, namely that set out in section 36(2)(a) of the Ordinance:

".... that an assessment of income.... whereby the Commissioner is required or empowered to exercise his discretion or his own judgment in such assessment, is unreasonable in the circumstances, and that the Commissioner on receiving an objection to such assessment has declined to allow the objection."

In correspondence, the company raised a further ground of appeal, namely, that the Commissioner was estopped from making his assessment because of earlier action he had taken, but this ground was not proceeded with, with the result that the Beard is not called upon to decide whether an appeal on such a ground can be brought within the limits of the jurisdiction conferred by the Ordinance.

5. With regard to burden of proof, there is no express statutory provision as there is in New Zealand (section 20, Inland Revenue Department Amendment Act 1960 (N.Z,)). He ever, the position in Western Samoa is clear. The weeding of section 36 (quoted above), the provisions of regulation 23 of the Income Tax Regulations 1956 which oblige the appellant to conduct his case procedurally as if he were a plaintiff in Court, and the general rule that he who asserts must prove" - because he is usually in possession most of the facts (Halsbury 3rd Ed. Vol. 15, p. 267) - require that the burden of proof in these proceedings be on the appellant company. As to the standard of proof required, the proceedings are akin to civil proceedings (regelation 2& above), and must be determined on the balance of probabilities (refer 1 NZBTR Case 35). In short, the appellant company must establish that it was more likely than not the Commissioner's decision was unreasonable in the circumstances.

6. There are two questions for determination: the remuneration of shareholder employees and rent paid to a shareholder lessor. The first question is whether the company has established that deductions for the remuneration of all of any of the five shareholder employees for one or both of the tine year in question should be allowed in excess of the Commissioner's figures, and, if so, what the deductions should be Section 79 of the Ordinance applies:-

"Where any sun 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, exceeds such amount as in the opinion of the Commissioner is reasonable, the amount of the excess shall not be an allowable deduction in computing the assessable income of the company, and shall, for the purposes of this Ordinance, be deemed to be a dividend paid by the company to that person and received by him as a shareholder of the company."

In considering what is reasonable remuneration, one must go back to first principles and note that a company must pay income tax on its net profit, that employees' wages are a proper deduction, but that in the case of shareholder employees a company may not (under section 79) pay excessive wages, thereby distributing profits of the business to shareholders under the name of wages and evading tax. I am sure that in the present case the company's accountant wished to save tax, and, of course, every man is entitled to endeavour to do that, but I believe he did not pay proper attention to what was reasonable remuneration in the circumstances. There is only one way by which shareholders may receive their share of the profits of a business, and that is by the payment of dividends.

7. The Board has been invited to have regard to a number of considerations. I shall deal with what seem to be the more important ones, bearing in mind that, as this is the first appeal of its kind, the Board's comments may prove helpful.

(a) The appellant company has devoted a significant part of its printed Answer to informing the Board of the similar New Zealand legislation (section 139 of the land and Income Tax Act 1950, the recent amendment to it in 1964, and New Zealand commentary on the legislation and departmental practice. Counsel for the appellant went so far as to say that the Commissioner should act upon the administrative rules reflected in the New Zealand Amendment. Much time could be devoted here to a discussion of such matters as - whether the New Zealand Amendment applies to shareholders as well as relatives of shareholders; whether it is in fact proper for the New Zealand Commissioner to make administrative rules for determining questions each of which is required by statute to be determined on its own merits and circumstances; and whether. New Zealand policy changes which, it seems, proceeded statutory changes, should be of some guidance to the Commissioner hers and therefore to the Board. I prefer to say simply that the law here has not been altered, and, as circumstances in. Western Samoa may be different from those in New Zealand, it is impossible for the Board to presume any intention in the legislation other than that appearing in the plain language of our section 79. Of course, because of the similarity between our section and the New Zealand section before it was amended, the manner in which the New Zealand Taxation Board of Review approached similar appeals prior to 1964 will be of assistance to this Board.

On the subject of administrative rules, however, I should like to take the opportunity of endorsing the comments of both counsel to the effect that, if the information contained in the Commissioner's letter of 15th July 1965 is correct, he should not have purported to fix the remuneration for the year ended 31st March 1965, as he had not asked for information about it and, presumably, he was not in a position to consider all the circumstances of that year as a separate matter for determination on its merits under the Ordinance.

(b) The appellant argues that the increase in turnover which undoubtedly occurred after 31st March 1962 justifies higher salaries, and that the percentage increase in turnover is a dependable guideline for the amount of increase in remuneration of shareholder-employees in subsequent years. This argument was urged upon the Board and supported by details of turnover and gross and net profit for each year since 1958. However, I am satisfied that this approach is inconsistent with a further contention of the appellant that each of the shareholder - employees should be paid according to his real worth. How can the worth from year to year of any employee to an employer be assessed by having regard to the fluctuating fortunes of the employer? The services of a particular employee may prove to be more valuable in a lean year. I say "any" employee because the only difference between the worth of a shareholder employee and that of a non-shareholder-employee can surely be that a shareholder is assumed to contribute somewhat more than an average employee to a business in which he has invested his capital. The success or failure of the business may, however, be due to totally unrelated factors. For instance, in the present case, it seems on the evidence that the increase in turnover was due primarily to changes in the company's system of operations, including a change in emphasis from retail to wholesale. In short, although evidence of the improved results of a trading concern in a given year may possibly indicate the improved worth of its employees (which I shall consider later in reference to this case), this is by no means necessarily so, and, as the New Zealand Board has already done, I think that this Board should reject the "turnover guideline" argument. (Refer 1 NZTBR Case 1 para. 24, Case 3 para. 21, and Case 4 para. 12.)
(c) A closely related argument is that the shareholder-employees "are entitled to share in the growth of the company". This is an attractive sounding phrase which overlooks the fact that shareholders can share through the dividends they receive representing the return on their investment. Section 79 of the Ordinance clearly refers to "remuneration for services rendered", and there is no place for a consideration of a share in the profits when one is determining reasonable remuneration, which, after all, merely comprises what is normally understood by salary and/or director's fee.
(d) From a study of the figures produced by the appellant, it is apparent that the shareholder-employees were underpaid in the earlier years of the company's growth. However, the Ordinance does not permit them to be compensated in more recent years. Of course, their remuneration may be brought up to figure reflecting their fair worth in any given year, but sections 56 and 79 together prevent the company from compensating them for earlier inadequate reward. It is only fair to point out, however, that if a shareholder employee is prepared to accept inadequate reward at a certain period of the company's growth, that fact should not operate against him when payment of a higher figure is warranted during better times.
(e) It was at one stage submitted by Counsel for the appellant that details of the company's affairs after 31st March 1964 were not admissible, as they were, irrelevant. The Board ruled that the figures were admissible, but that it would remain to be seen how much weight should be attached to the evidence. It is axiomatic that although the Board is only dealing with two years, evidence of what the parties did in earlier or subsequent years will be admitted if their conduct then may throw light on the correct interpretation to be placed on their conduct during the years under review. Incidentally, in its prepared Answer, the appellant company referred to events and figures arising in the year ended 31st March 1965, and at the hearing the company wished to make use of the fact that since Mr J.M. Ah Chong had left, business had fallen off. Then Mr Wood asked company witnesses why the salaries paid in the year ended 31st March 1965 (as set out in the Answer) were appreciably lower than in the years under review. The reply given by Mr Reynolds was that there had been a drop in turnover due to the absence on holiday of some of the shareholder employees and to a changed economic climate. However, Mr Phillips said later in his submissions that the reasons for the drop had not been fully discussed, although he could have applied to call further evidence if he thought it was important. It is difficult, in the circumstances not to draw any conclusions unfavourable to the appellant, but, for the purposes of this appeal, and duo to the inadequacy of the evidence, I would be prepared not to attach great weight to the fact that salaries fell after 31st March 1964.
(f) It was argued in letters written by the company to the Commissioner, although not pressed by Counsel at the hearing, that "the company and shareholders should not be penalised through forming a company" and that "it is not reasonable if a decision of the Commissioner's results in their total taxation bill being much in excess of that which would be assessed if the same persons had remained in partnership." My first comment is that there is evidence that the five shareholders involved in this appeal never were members of a partnership and that the business belonged to Mr J.M. Ah Chong prior to 1957. Be that as it may, the decision to form a limited liability company is commonly being made by business people on good advice. There are many advantages and some disadvantages which have to be weighed up. As far as the Commissioner is concerned, however, he is simply charged with the duty of taxing persons - both individual persons and corporate persons - and he cannot be called upon to consider whether a group of individuals made the right decision in forming a company which would be taxed as a corporate person as a separate entity from the individuals. For, of course, a company is a legal entity which can employ individuals, including its own shareholders, to work for it. If the working shareholders own the shares, they and the company will nevertheless be taxed separately under the Ordinance. A recent decision of the Judicial Committee of the Privy Council on appeal from New Zealand, Lee v Lee's Air Farming Ltd [1961] NZLR 325, has emphasised how a company and its shareholder employees are separate legal entities. In this case, I have studied the correspondence, and I am satisfied that whatever delay there may have been on the part of the Commissioner in waiting until 14th January 1965 to query salaries for the year ended 31st March 1963 as contained in the return filed on 30th December 1963 the shareholders were not prejudiced in being unable to wind up the company in 1963 and form a partnership. There is no evidence that they would in fact have done so, and it is likely that they now understand the substantial advantages of incorporation, together with which they must accept the disadvantages.
(g) When Mr Wood called the Tax Inspector, Mr Kear, to give the only evidence for the respondent, the question was raised as to how much evidence should properly be given as to what was in the Commissioner's mind when he made his decision to disallow the company's objection. In fact, Mr Phillips was free to ask what questions he wished, but it soon became apparent that Mr Kear inevitably did not know everything the Commissioner knew. In this respect, the position here is somewhat different from that in New Zealand, and here the Commissioner himself may be in possession of facts of which his subordinates are unaware. If this is so, then the Commissioner may wish to give evidence before the Board and it may be both necessary and desirable for him to do so. On the other hand, the tax inspector concerned may be in possession of all relevant material. It is not for the Board to speculate what was in the Commissioner's mind, and, as the appeal is a re-hearing of the matter, the Board is only concerned to know what the Commissioner and members of his department can say in evidence. The Board will then consider the evidence afresh.
(h) In the appellant company's written Answer and at the hearing, a great deal of now evidence was submitted. It is fair to say that much time and trouble might have been saved if this evidence had been submitted to the Commissioner in the first place. Although such evidence must be admitted as relevant, and without directing any comment at the present appellant, it would be unfortunate if appeals to this Board came to be regarded simply as an opportunity for taxpayers to gain further time to prepare their cases.

8. In determining what is reasonable remuneration under section 79, I am satisfied that, having regard to the meaning of the section, the clear intention of the legislative as expressed in the Ordinance, and the principles of taxation embodied therein, there is only one question to be answered - What is a reasonable figure to be placed on the value of the services rendered by a particular person to a particular company in the year under review? The factors which may be taken into account in deciding the value of services cannot be defined once and for all, as every case will be different, but it is possible to mention certain factors which are generally of assistance, and which have been considered by the Board in the present case. These factors have been generally accepted by the New Zealand Board (1 NZTBR Case 1). They are:-

(a) The scope and nature of the services rendered. Under this head the degree of responsibility carried by the employee would be relevant.
(b) Special qualifications of the employee.
(c) The quality of the work performed. It may be mentioned that, if the evidence warranted it, the circumstance that a shareholder-employee had a stake in the business and therefore more incentive would be relevant to the question of the quality of his work.
(d) The time spent in performing the services for which payment is made.
(e) Statistics and other evidence as to salaries currently paid for similar services.
(f) The economic climate generally prevailing in the community.

As I have said, this does not in any way purport to be a complete list.

9. It is now necessary to consider the evidence submitted by the appellant company. It is impossible to mention here all the aspects of the appellant's case which I have taken into account. However as the burden of proof is on the appellant, I wish to make the preliminary observation that it will always be difficult for a company to discharge that burden of proof in this type of case unless records are kept of hours worked by the shareholder-employees. After all, while it is relatively easy to assess a person's worth in a rate per hour, or per normal working week, it is an impossible task to assess an annual salary if the time worked cannot be determined with some degree of certainty. Another serious deficiency in the appellant's case is that three of the shareholders over whom there was considerable controversy were not called to substantiate the claims made in the Answer and to be available for cress examination. This was particularly unfortunate in view of the lack of records, and in view of the fact that such of the detailed information contained in the Answer had not been available to the Commissioner when he made his assessment.

10. With regard to the remuneration of all the shareholder-employees, and subject to what I have said in paragraph 7(b) above, I am prepared to agree that the improved turnover and profit figures were due to, in part, to the skill, hard work and enthusiasm of these persons. On the other hand, can the non-shareholder-employees be so lacking in these qualities as to justify the wide margin between the salary level of shareholder and non-shareholder employees? The Board must consider what is a reasonable remuneration in Apia during the years under review for employees possessing these qualities. With regard to directors' fees, no formal directors' meetings were held and it is not possible for the Board to assess separate figures for these duties, although of course, a director's responsibilities are taken into account.

11. As to J.M. Ah Chong, it is accepted that his contribution to the company's success far exceeded that of the rest of the staff. There is no reason to doubt his competence in the management of this quite substantial business, and his devotion to it, Having regard to these considerations and to all the circumstances before the Board, I am of the opinion that a deduction in excess of the Commissioner's figure of £2,300 is justified in the case of J.M. Ah Chong. I think that reasonable remuneration for the year ended 31 March 1963 would be £2,850, and, for the year ended 31 March 1964, £2,950. It seems logical that the figure for the second year should be a little higher than the first, not only because of gradual increases in the cost-of-living index, but also because the increased turnover figures for the second year, with the same number on the staff, does indicate some increase in the work load. I believe that this would be so, in spite of the fact that the change in emphasis from retail to wholesale was also occurring.

12. With regard to Mrs Adams, I have read the decision of Mr Wilson and entirely agree with his reasoning and comments. I agree that there should be an increased deduction of £1,300 for the first of the two years, and a lower figure of £750 for the second year. There is nothing in the Ordinance requiring the Board, once it is satisfied that the Commissioner's assessment of the deduction is unreasonable, to allow an increase. If the evidence justifies a reduced figure for deduction, then the Board is obliged to determine the matter accordingly.

13. Ah Chong and Mrs Macfarland can conveniently be considered together. Mr Wilson has commented upon the evidence in relation to them, and I agree with his comments. I would add that while the Board does not accept that the turnover of a business is a proper yardstick for measuring remuneration, when one considers the proportion of turnover of the Taufusi branch as compared with the figure for the total enterprise, one can see that the amount of work done in the branch was necessarily very much less than in the Saleufi store. Furthermore, there was no evidence upon which the Board could accept the contention that these two shareholders possessed special qualities. For the year ended 31 March 1963, I would allow no increase on the Commissioner's figures, but for the second year, for the reasons stated by Mr Wilson with which I agree, the remuneration for S. Ah Chong should be £1,250, and, for Mrs Macfarland, £1,300.

14. In my view, the appellant company has not satisfied the Board that the Commissioner's assessment of £500 for each year in the case of Mrs Ah Ching is unreasonable.

15. The second question for determination is that of the rent paid by the company to J.M. Ah Chong in the year ended 31 March 1964 for the use of the downstairs portion of the Saleufi building. Section 56 of the Ordinance prevents a taxpayer from deducting from his profit any expenditure or loss unless it is "exclusively incurred in the production of the assessable income for any income year". It is necessary to consider whether the Commissioner's disallowance of a figure above £750 as a deduction was unreasonable. Clearly a fair and proper rent for business premises is a deduction incurred in the production of income, but anything in excess of that figure should be disallowed. The appellant company endeavoured to show:

(a) that a figure between £1,000 and £1,500 was a fair and proper rent (£1,500 was the rent actually paid), and
(b) that because the rent had been unjustifiably low for earlier years, the landlord was now entitled to be recompensed for former deficiencies.

With regard to the second ground, such an attempt to make up for earlier losses is clearly prohibited by section 56.

As to what is a fair and proper figure, I have read the decision of Mr Wilson on this point, and I agree with his reasoning and his conclusion that the burden of proof has not been discharged by the appellant and that the Commissioner's figure must therefore stand.

APPOINTED MEMBER, Mr N.S.Wilson

1. The Commissioner of Inland Revenue, by letter dated 14th January 1965, asked the appellant company, through its financial adviser to submit certain information in respect of the shareholder-employees of the company. Details requested were:

(a) Business qualifications and experience.
(b) Nature or services rendered.
(c) Approximate amount of time spent by him (or her) in the company's business.

2. These were reasonable questions and the appellant company, it its own interests, should have given the fullest possible reply. Such statements as "works fulltime for the company and is on hand for any overtime work", "is competent and works much longer than normal hours", "does not work regular hours but over the year puts in a considerable amount of time" were very vague answers to the Commissioner's letter and could be regarded as falling short of the term "reasonable assistance" required of the taxpayer in accordance with section 144(2) of the Ordinance.

3. The Commissioner was obliged to act on the information before him.

4. No hours of work were placed before the Commissioner by the appellant company, except by way of example referring to one shareholder-employee in a letter dated 2nd August, 1965, in reply to the Commissioner's written decision dated 15th July, 1965.

5. At the hearing the appellant company made lengthy written and verbal submissions in respect of the hours worked by the various shareholder-employees and this was of course an attempted recapitulation of the events over two years and commencing from a period over three years prior to the presenting of the first information to the Commissioner. Because of the time involved and the nature of the business this was undoubtedly difficult to compile with accuracy but in fact it was deficient and inconsistent in several important respects and cross-examination brought out further relevant and vital facts not previously disclosed.

6. The witnesses called by Counsel for the appellant company, which included the company's financial adviser, were unable to substantiate with certainty the hours of work claimed for the various shareholder-employees, although there was evidence that certain of these had worked hours considerably in excess of the usual salaried employee. No attempt was made to show the productiveness of the hours worked by the individual shareholder-employees.

7. Much of the weight of the appellant company's submissions relied on the evidence produced showing the turnover, gross profit and net profit figures during the years under review and including the years prior to and after such period. Submissions showed that for the financial year ended 31st March 1963 the turnover increased by 117% on the previous year and further increased by 40% in the year ended 31st March 1964. It was submitted that between the years 1962 and 1963, nett profit rose by 239/1.

8. It is noted, however, that the years 1963 and 1964 showed only an improvement in nett profit of approximately 2 and 34g on the year 1960 and that-total remuneration to all shareholder-employees during the same period increased by 142% and 164% respectively. The appellant company submitted that the salaries paid in the formative years had been lower and that this should not be taken as the "present worth" of such employees. Attention must therefore be drawn to section 56 of the Income Tax Ordinance 1955 in respect of such a submission.

9. The appellant company also submitted that the increased turnover was a dependable guide for assessment of reasonable remuneration. If proper regard is to be had to section 79 of the Ordinance the reasonable remuneration to be paid to shareholder-employees cannot be determined in such an arbitrary manner.

10. The salaries received by all the employees of the appellant company during the financial years 1959 to 1962 showed a reasonably consistent pattern. Total remuneration of the shareholder-employees was influenced by the bonuses paid although the gross total for the four years varied by no more than £700. No dividends were paid from the date of incorporation up to the year ended 31st March, 1965. However, in the year ended 31st March, 1963 salaries were increased by over 93% and bonuses and directors' fees by 1000% making the total remuneration for shareholder-employees more than 143% higher than the previous year. Total remuneration to the same shareholder-employees was further increased in the following year.

11. The Commissioner also indicated in his letter of 15th July, 1965, that he intended to fix the "salaries" for 1965, but at the hearing this determination was withdrawn. It can be noted, however, that the total remuneration paid to the same shareholder-employees in 1965 was approximately 30% less than 1964, nearly 24% less than 1963 but still more than 85% higher than 1962.

12. Before proceeding to state my conclusions I wish to say that I have read the Chairman's decision and I agree with his conclusions as to those matters which are relevant for the consideration of the Board and those matters which should not be taken into consideration.

13. Upon the evidence now available I am satisfied that a reasonable remuneration for the services of some of the shareholder-employees of the appellant company would be a sum higher than that allowed by the respondent.

(a) I accept the submission made by the appellant company that Mr J.M. Ah Chong was the "person most responsible for the success of the company." Matters affecting the welfare of the company no doubt occupied much more of his time and skill than that required or given by other shareholder-employees and the progress of the company is undoubtedly a reflection of his business ability. I agree with the Chairman's decision with regard to this shareholder.
(b) Mrs H. Adams is apparently a competent employee and a director who has accepted responsibility for certain sections of the business plus the formal duties required of her as a director. Considering her duties and responsibilities she was not required to work excessive hours. It was noted with serious concern that important relevant information relating to the service of Mrs Adams was not mentioned in any of the written submissions before the respondent or the Board. Verbal evidence by Mrs Adams under cross-examination disclosed that she did not perform any of her duties for six months of the year ended 31st March 1 964 but conducted a business of her own for most of that period and for a considerable period thereafter. Under the circumstances and having regard to her duties and responsibilities I would fix a reasonable remuneration for the year ended 31st March, 1 963 at a higher sum than that assessed by the respondent and for the year ended 31st March 1964 at much lower sum. I am therefore of the opinion that £1,300 is that reasonable sum for the year ended 31st March 1963 and fix the sum of £750 for the year ended 31st March 1 964 during which year she was absent for a period of six months.
(c) Because of the close association of the work and working conditions of Mr S. Ah Chong and Mrs S. Macfarland it is necessary to consider them together.

Mr S. Ah Chong is described as the "assistant manager" in charge of the "grocery section' of a branch store, supervising two employees.

Mrs S. Macfarland is described as the "Manageress" at the branch store and "controlled a small staff."

There was no evidence before the Board to show or suggest that either of these shareholder-employees took any pat in the conduct or management of the main store which functioned as the major part of the company's business. It is necessary therefore to consider, according to the information available, the activities of the branch store as a separate unit. This requires a close examination of the major grounds for the appeal submitted by the appellant company and in particular -

(1) the long hours spent on the affairs of the company, and
(2) the quality of the work.

By the very nature of the trading operations at the branch store long hours were essential to attain a reasonable turnover but this does not necessarily mean longer hours than those put in by any similar trader or that the hours were more strenuous. There was no evidence before the Board to show that either of the shareholders now under consideration required or displayed any unusual business ability. The hours were shared by the two shareholders and several other staff and, considering the turnover, wore not arduous. The quality of the work can often be judged by its productiveness. If the percentage of gross profit for the whole business was applied to the estimated turnover of the brand store taken from the quarterly figures supplied (and there was no reason given to suggest that it would be much greater) the respondent has fixed remuneration for both these shareholders (in total) at a sum not less than the approximate gross profit of the branch store. The remuneration fixed was still nearly 506 more than the actual amount received in the year ended 31st March, 1962. Evidence as to time spent on the private business interests of these shareholders was vague and neither of them was called as a witness.

I am accordingly of the opinion that the appellant company has failed to show where or to what extent the respondent was in error in making the assessments objected to in respect of these two shareholder-employees for the year ended 31st March 1963 and has therefore failed to discharge the burden of proof imposed upon it. Evidence showed that the year ended 31st March 1 964 was a record for the company. During the same year Mrs S. Macfarland was transferred to the main story to "relieve the strain and pressure" on Mr J.M. Ah Chong, and Mr S. Ah Chong took charge of the branch store. Having regard to their activities during the year ended 31st March 1964, and the extra responsibilities assumed during part of the year, I am of the opinion that sums higher than that allowed by the respondent would be reasonable remuneration for that particular year. I would fix such remuneration at £1,250 for Mr S. Ah Chong and the sum of £1,300 for Mrs S. Macfarland, for the year ended 31st March 1964.

(d) The information placed before the Board, although more comprehensive than that placed before the respondent, in respect of Mrs M. Ah Ching did not discharge the burden of proof imposed upon the appellant company and I have no hesitation in agreeing that the respondent acted correctly in disallowing a deduction in excess of £500 in respect of the remuneration for this shareholder-employee.

14. The appeal was also concerned with the objection made against the amount allowed by the Commissioner in respect of rent paid by the company during the year ended 31st March 1964 to its landlord, the Managing Director of the company. The company paid the sum of £1,500 and the respondent disallowed £750. The appellant company in its written submissions provided a calculation of £1,116 as being the capitalised value for rental purposes based on the valuation and depreciation. In final submissions Counsel for the appellant company submitted that the sum allowed should be a figure between £1,000 and £1,500.

However, in making its assessment of rent the appellant company did not make provision for the occupation by the owner (as a flat) of one half of the main store building. Furthermore no allowance was made for the payment of the cost of repairs and maintenance by the lessee. Without creating a precedent and because of the difficulty in securing the services of a competent valuer the appellant company was alloyed a further seven days to bring forward substantiated evidence in respect of rents payable in the area but no additional evidence was produced. The respondent produced figures to show that £530 was considered as a reasonable return and also produced figures which were an adjustment of the valuation submitted by an independent witness. This adjusted valuation came to just over £503.

In my opinion the onus of proof has not been discharged by the objector and the appeal is consequently disallowed in respect of the rent.

SUMMARY OF DECISION: The Board is unanimously of the opinion that the appeals against the assessments of the Commissioner be disposed of in the following manner:-