Here JG sets out scheme for the substitution of a “loan” for a salary increase.

A Salary for a partner is not of the same character as a payment in an employment relationship.

A Partner cannot be an employee of the Partnership.

The salary is actually a fixed distribution of the Partnership profits.

The actual payment of cash is in the nature of a drawing.

The drawings would in the normal course be offset by the recognition of an entitlement to a share of the profits equal to the salary agreed.

The Partnership agreement should make provision for the sharing of profits including of course the question of Partners salaries.

In the normal course these issues would be determined on June 30 each year.

The nature of the arrangement is made clear in this note.

Her “salary” was to be increased from 1/11/90.

She didn’t receive the extra money until 20/2/91 and 7/6/91.

So she puts in a claim for what she should have received under the agreed increase.

The effect is that she will work off the payments in advance over 4 years??

(nb the note refers to 3 years, which seems to indicate a formalisation of the arrangement).

This reduction may have been at the following rates

(13750/40000)* 10000*(107/365) = $1008  for the period 20/2 to 7/6/91

 10000 per 12 mths for the period 7/6/91 to 20/2/95 = 30000+ (235/365)*10000+(23/365)*10000=$37068

(26250/40000)* 10000*(107/365) = $1924 for the period  20/2/95 to 7/6/95.

This gives the total of $40,000.

The arrangement may have been given the appearance of a loan which was forgiven after a certain period as a partner but this was an obvious cover for its true nature.

It is inconceivable that the “loan” would not have been regarded as “forgiven” on a pro rata basis.

The obvious effect of the arrangement was to defer any income tax which would have been payable on the “salary” to which she became progressively entitled.

The recognition of this payment as a loan would have had the effect of increasing the shares of Income returned from the Partnership by the Equity partners (or decreasing their share of losses).

Whilst a Partners salary is not deductible the method allowed by the Tax Office for calculating the respective shares of partners has the same effect where the arrangement is on an arm’s length basis and no tax avoidance is involved.

It is not possible to make any further comments on this aspect without reference to the Taxation returns of the S&G entities over this period. 

Consideration would also need to be given to the anti–avoidance provisions of the 1936 Act at the time.           

The minutes below show the Partnership was still recording the $40,000 as a loan in September 95.

It is therefore safe to assume that no Income in relation to this matter had been included in JG’s tax returns for at least the 91, 92, 93, and 94 years of Income.

As an aside why did she need independent legal advice re Wilson if she had done nothing wrong? 

Here is some previously redacted information.

I thought it interesting that JG knew enough about Wilson’s finances to make this comment in the exit interview but seemed to know very little about the subject at the RC.

Page 9 Interview

Below is some further information about the reason JG was surprised they found the AWU WRA file.

The thought that Wilson would be concerned to have a copy of the rules is almost hilarious.

Just wanted to share the joke.

Also thought it significant that she went on Holidays at the time Wilson started the renovations.

Most people would be short of cash after a Holiday let alone be in a position to handle a major renovation which apparently was unexpectedly thrust on them.