DIRECTORS' FEES

Evening Post, Volume CX, Issue 11, 12 July 1930, Page 14

DIRECTORS' FEES

RIGHTS OF COMPANIES

TAXATION PAYMENTS

The question as to whether the Commissioner of Taxes has the- right to interfere with the allocation of directors' fees in a private company was argued in the Court o£ Appeal yesterday, before the Chief Justice (Sir Michael Myers),'.Mr.-.Justice.Herdman, and Mr. Justice Blair. Tho company involved was Aspro, Ltd., in which the whole of the capital uja.s held' equally by G. R. and- A. M. Nicholas, both of Melbourne, who had'-been since inception sole directors, and if appealed against a decision in the. Magistrate's Court by- Mr: E. Page, S.M., 'that the Commissioner was entitled to a portion of the fees for taxation purposes. Messrs. A. Gray, K.C., and Mr. White appeared for the appellants, and Mr. A. Fair, K.C., for the defendant. Mr. Gray said that this was the first tinio a case involving the right or the power of the Commissioner of Taxes io decide what was a proper or fair remuneration for a director of a private company had come before the Court of Appeal. A profit had been shown on the first year's workings and the directors' fee was fixed at £1500 each. Tho profits had increased in each succeeding year, and now the directors' remuneration had been fixed at £5000 each. '

The Chief Justice stated that there was no definite agreement as to what the directors should receive, but that these had been decided after the bal-ance-sheet had been drawn up.

It was contended that the question was whether the Commissioner of Taxes had the power to interfere with the affairs of what was practically a private partnership. Mr. Justice Herdmau: /'What the Commissioner says is that tho, money voted as remuneration amounts to a distribution of the profits.'' Mr. Gray said that in England, as well as in New Zealand, the principles of a private company composed of one or two men- was recognised. In this case thero were only two shareholders who were also the only directors. They had found tho money and tho brains to build up' the business and the Commissioner had no right to say what was a fair remuneration for their services if they as shareholders chose to pay the directors an amount which they considered they were entitled to.

The Chief Justice: "If this was a firm instead of a company composed of two gentlemen holding' an equal number of shares, they would divide the profits and pay incomo tax on that basis individually."

Mr. Gray said the Department did not lose much because the profits out of which the directors' fees were paid were added to the >income of eacli of the partners. • .

Mr. Justice Herdman: "Supposing the profits amounted to £50,000, would they be entitled'to vote themselves £20,000 each -as' directors' fees?" Mr. Gray: ''I submit, they would."

Mr. Justice Herdman-: "Without violating the principle of the Land and Income Tax Act?"

Mr. Gray: "I understand it would make no difference."

The Chief Justice: "That is only because^ of the present rates. You might have the rates reduced in which case,the question would be of considerable importance."

Mr. Gray: "If a reduction was made it would apply to companies and individuals."

The Chief Justice: "One does not know."

Mr. Justice Blair: "A company making a small profit of, say, £.1000, could escape income tax altogether by voting a large enough directors' fee." He said that in this case the Commissioner had considered that the directors were simply absorbing profits.

The Chief Justice said that, on Mr. Gray's contention, two shareholders who were also directors'could if they liked at the end of the year djvide the whole of the profits.

Counsel submitted that as competition increased it was imperative that the directors should be as active as ever in their operations.

, The Chief Justice: "Supposing this was a business belonging to' one of these gentlemen and his wife. The maji has 19,999 shares and the wife one. The husband is the governing director and his wife an advisory director. According to your judgment he could divide the profits in the same way as was done in this case. They could vote £5000 to themselves as directors' fees and the Commissioner would be powerless, and you must go that length.""

Counsel:,"So long as the shareholders make due provision for a return of the capital."

Mr. White argued that the man who sat in the chair and looked after costs was the most important man in the business.

Mr. Justice Blair: "Supposing they passed a resolution voting their moth-er-in-law £J000."

-. Mr. Gray/"That would bo most unusual."

Mr. Fair contended that as the com: patiy became established the directors' duties would become lighter. Their hardest years would be the first two or three when they were carrying out the preliminary work. In these years the directors' fees were lower than in the preceding years, in fact the fees had become progressively higher. The fees paid by the great banks and insurance companies were much lower than those paid by Appro, Ltd., and he argued that the action-of the directors had been ■ nothing more than a distribution of profits as fees in order to lower the rate of income tax; I Decision wag reserved.