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Are the amounts requested for the relevant three consecutive years reasonable arm's length salaries for the taxpayer and can the taxpayer have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner?

The amounts requested for the relevant three consecutive years are not reasonable arm's length salaries for the taxpayer. However, the taxpayer can have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner.

The taxpayer applied for the determination of an arm's length salary.

Included in the application was a remuneration report which claimed that the taxpayer's arm's length salaries should be valued at a particular rate for three consecutive years.

The taxpayer's remuneration package consisted of actual salaries, employer superannuation contributions and fringe benefits for the requested three consecutive years. The taxpayer sacrificed significant amounts of salary for superannuation and fringe benefits in those years.

The taxpayer is an associated employee and Director of the entity which had a high gross income. The taxpayer worked an average of 70 hours per week.

The Commissioner consulted the remuneration survey published by a widely recognised remuneration consultant.

The Commissioner considered that the nature of the taxpayer's employment was comparable to that of a Chief Executive Officer (CEO) under the remuneration tables of the survey.

An upper quartile salary for CEOs who work 60 hours per week is established under the tables. This amount represents the total salary package paid to employees performing comparable duties.

There were a high level of risks and responsibilities associated with the position.

Arm's length salaries were determined by the Commissioner and informed to the taxpayer. A Highest Average Salary (HAS) was calculated to reflect these arm's length salaries.

The taxpayer applied for a re-determination of the arm's length salary that was originally allowed. Included in the application was a Transitional Reasonable Benefit Limits ("TRBL") application form, and a remuneration report which claimed that the taxpayer's arm's length salaries should be valued at a rate higher than previously allowed and for three different consecutive years.

Amended arm's length salaries were allowed by the Commissioner for the requested three different consecutive years, and a HAS was calculated to reflect these arm's length salaries.

The taxpayer has now objected against the Commissioner's decision on the grounds that the arm's length salaries should be valued at a rate higher than previously allowed.

The arm's length salaries requested by the taxpayer varied from the upper quartile salary for CEO positions published by the remuneration survey.

The Commissioner accepted the upper quartile figure from the remuneration survey because of the hours worked by the taxpayer.

The taxpayer was the Director who was responsible for the overall financial performance of the entity. The taxpayer's employment was compared with the position of CEO to allow the maximum salary available to the taxpayer under the remuneration survey tables.

The nominal salary figures for the relevant three years were reduced by the same proportion as the taxpayer had sacrificed actual salary to superannuation and other fringe benefits. These amounts were deducted from the total salary package in order to arrive at a 'salary' as defined under subregulation 47(1) of the Income Tax Regulations 1936 (ITR 1936).

A 15% bonus was given to the taxpayer to cover the additional risks and responsibilities associated with the taxpayer's position with the company was allowed and was added to the reduced salary figures.

There was nothing unusual in the application to indicate why the published salary statistics should not be used. Because of this, the Commissioner chose not to accept the salary figures claimed by the taxpayer.

Having regard to subregulations 47(3) and 47(4) of the ITR 1936, it is the opinion of the Commissioner that the taxpayer can have arm's length salaries greater than the arm's length salaries that were previously allowed.