Issue
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?
Decision
The amounts requested for the relevant three consecutive years are not reasonable arm's length salaries for the taxpayer and the taxpayer cannot have arm's length salaries greater than the arm's length salaries previously allowed by the Commissioner.
Facts
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 rate higher than previously allowed.
The taxpayer's remuneration package consisted of actual salaries and employer superannuation contributions for the requested three consecutive years. No fringe benefits were received by the taxpayer, in the requested three consecutive years. The taxpayer sacrificed significant amounts of salary for superannuation. The taxpayer also incurred partnership losses.
The taxpayer is an associated employee and director/shareholder of the company, and was responsible for the company's overall financial performance. The taxpayer worked an average of over 50 hours per week. The taxpayer was born before 1 July 1944.
The company had a low gross income.
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.
The upper quartile salary for CEOs who work over 50 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.
Reasons for Decision
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 of the company. 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. 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.
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.
The arm's length salaries determined were the same as the arm's length salaries previously allowed by the Commissioner. A Highest Average Salary ("HAS") reflecting these arm's length salaries is the same as the HAS previously calculated to reflect the arm's length salaries previously allowed by the Commissioner. The Commissioner therefore upheld the previously allowed arm's length salary decision.