The Commissioner of Taxation has forwarded the following memorandum for advice:

The question has been raised as to the liability to taxation of bonuses paid by an employer of labour: (a) in the hands of the recipient, and (b) in the hands of the donor.

Section 14 (g) of the Income Tax Assessment Act appears to make it plain that such bonuses are taxable to those receiving them inasmuch as the term bonus itself is used in that section in this present application.

There is however some doubt in my mind as to their taxability to the company or person who has distributed them.

I have taken the view that unless it can be proved that the recipient has a legal right thereto, that is to say, that the receipt of a bonus on the year's operations forms portion of his conditions of employment, and that he has the legal right of recovery, the employer is not entitled to deduct it.

In this view I have been guided by the fact that the payment of a bonus cannot be regarded as in any way forming an expense incurred in gaining or producing the gross income.

The following cases on record would appear to support this view:

An insurance company acquired the business of another company and agreed to take into its service the manager of such company at a certain salary, with liberty to commute the same by payment to the manager of a gross sum, to be calculated upon life tables. The transferee retained the manager's services for a short time and then paid him a gross sum in commutation of his salary. They claimed to deduct that sum in estimating their profits for income tax.

Held by the Court that the payment was a sum employed as capital within the Act and could not be deducted.

A marine insurance company issued a class of policies carrying bonuses. The company paid away certain sums as bonuses on the bonus policies. They stated that by their Articles of Association they were compelled to pay the bonuses, which they claimed as deductions.

Held by the Court that the company was not entitled to deduct bonus payments.

A further case was that where discounts and refunds allowed by an insurance company to policy-holders on payment of premiums were not deductible. It was stated by the Court that such discounts were not expenses incurred in the production of the income.

A wife and stepdaughter lived on the premises, worked about the house and helped the taxpayer to manage his business. The taxpayer paid these persons no specific wages and was under no contract to do so, but gave them money from time to time as they required it but no fixed amount.

Held by the Court that such moneys paid by the taxpayer were not deductible. Will you be so good as to advise me whether the position I have taken up is in accordance with the law.

Section 18 (1) (a) provides that a deduction is to be allowed in respect of losses and outgoings incurred in the production of the gross income.

It must, I think, be conceded that at the present time payment of a bonus to employees is a reasonable and ordinary outgoing in the case of companies, particularly so in the case of banks doing business in Australia.

The question is whether the bonus is an outgoing incurred in the production of the gross income of the bank.

The objects of a bonus are, I think, twofold, viz.: (a) a recognition of services faithfully rendered; and (b) an inducement to render service to the best of the employee's ability.

From the second of these objects I think that the sum expended on the bonus has been incurred in the production of the gross income. It has been laid out by the company and paid to the employee in augmentation of his salary in order that the business of the company may be efficiently carried on, and as such is an outgoing incurred in the production of the income of the company.

But expenditure by the company can only be claimed as a deduction in the year in which it is actually expended.

In my opinion, a bonus paid to employees by a company is deductible by the company from its income in the taxation year in which it is paid by the company.

[Vol. 14, p. 402]