Commissioner of Taxation v Smith, P.L
[1986] FCA 342
•07 AUGUST 1986
Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: PETER LINDSAY SMITH
No. G375 of 1985
Income Tax
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Sheppard J.
Neaves J.
Wilcox J.
CATCHWORDS
Income Tax - Assessability to tax of bonus given to taxpayer by employer as reward for examination success - Payment made pursuant to "encouragement to study" policy of employer - Policy defined in staff rules and providing for payment of specified amounts to employees completing portions of approved courses - Whether payment constituted "income" of taxpayer - Whether payment received "in relation directly or indirectly to" taxpayer's employment.
Income Tax Assessment Act 1936 ss.25, 26(e)
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 applied.
Reseck v Commissioner of Taxation (1975) 133 CLR 45, Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47, Scott v Commissioner of Taxation (1966) 117 CLR 514, Murdoch v Commissioner of Pay-Roll Tax (Victoria) (1980) 143 CLR 629, Moorhouse v Dooland (1955) 1 Ch. 284, Laidler v Perry (1966) AC 16, The Queen v Savage (1983) 83 DTC 5409 referred to.
HEARING
SYDNEY
#DATE 7:8:1986
Counsel for the Appellant: Mr D G Hill QC with Mr D M McCousin
Solicitors for the Appellant: Australian Government Solicitor
Counsel for the Respondent: Mr N M Forsyth QC with Mr R F Edmonds
Solicitors for the Respondent: Messrs Allen Allen & Hemsley
ORDER
The appeal be allowed.
The order of the Supreme Court of New South Wales be set aside and in lieu thereof it be ordered that the appeal to that court be dismissed with costs.
The respondent pay to the appellant his costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
In this matter I have had the advantage of reading the judgment to be delivered by the other members of the Court. I am thus saved the necessity of setting out the details of the scheme and the evidence in relation to its application to the respondent.
I regret that I am unable to reach the same conclusion as my brethren. I do not think the payments received by the respondent were income according to ordinary concepts. They were a reward to him for successfully completing a certain course and obtaining a formal qualification as a result. In consequence of the qualification which he has obtained, it is likely that his earning capacity has been enhanced because his prospects of promotion within the Bank have been increased. In the event that he were to leave the Bank, his qualifications have been improved so as to make him more attractive to other employers. Nevertheless, the amounts received were not a reward for any service rendered by the respondent; they merely constituted one of the inducements which led him to improve his qualifications. Furthermore, there was not the regularity about the payments which might itself have given them the character of income. The payments together constituted an isolated sum which was a reward for the attainment of the qualifications which resulted from the respondent's success in the course which he undertook.
The more difficult question is to determine whether the payments fall within s. 26(e) of the Income Tax Assessment Act 1936. The words of the provision, so far as they are material, are:-
"26. The assessable income of a taxpayer shall include -
........ ........ ........ ........ ........ ........
(e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise:"
........ ........ ........ ........ ........ ...
The nub of the question is whether the payments were given in respect of or for or in relation "directly or indirectly" to the respondent's employment. I do not consider that the payments were made in respect of or in relation directly to the employment. For the moneys to fall within those words, they would need, in my opinion, to be paid in respect of the discharge or performance by the respondent of an obligation arising from his employment or as a reward for the discharge of his employment obligations. Here there was no obligation on the part of the respondent to undertake any course. His employment would not be affected one way or the other by a decision to seek or not to seek further qualifications. Whether he undertook a course of study or not was, so to speak, "by the way". The scheme was something which was separate and apart from the employment, notwithstanding that a person could not take part in it unless he were an employee and that he might, in the way that I have earlier indicated, enhance his employment prospects if he obtained a further qualification.
In my opinion, the difficult question is to determine whether the use of the word "indirectly" nevertheless operates to bring the payments within the section. As the judgments of the learned primary Judge (Yeldham J.) and of the other members of the Court disclose, there are a number of authorities dealing with the meaning of the applicable words. These authorities are important and helpful in the resolution of the problem here, but one needs to exercise a degree of caution in using them by reminding oneself that each was a decision on its own particular facts and that the judgments essentially reflect the opinions of the various judges who decided the cases on the application of the provision to the facts of them. In other words the various dicta must be read in context.
Undoubtedly the Commissioner's submission finds some support in the dictum of Dixon C.J. and Williams J. in Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540 at pp 553-554 cited by the other members of the Court. In particular one needs to take into account their view that "an indirect relation" is "one where the employment is a cause less proximate or, indeed, only one contributory cause of the payment" and also the following statement, namely:-
"We are not prepared to give s. 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination".
I do not understand these words to require the conclusion that a sum will form part of the assessable income of a taxpayer where the payment is in fact a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee. What they mean is that, if the payment is not of this kind and is not a reward for services rendered (which in this case it is not), it will plainly fall outside the section. If it is a recompense or consequence of the existence of the employment, it may be assessable. But one has to go back to what their Honours earlier said to determine whether it is or not. For it to relate indirectly to the employment, the employment must be a cause of it less proximate than in a case where the relationship is direct. If the employment is one contributory cause, that is apparently sufficient. The notion of what amounts to a contributory cause is often difficult to grapple with, if not in this branch of the law, then certainly in others. Some idea of what their Honours meant by it in the context in which they used it emerges from the fact that they did not regard the employment in Dixon's case itself as a contributory cause of the payments there. But, in my respectful opinion, that does not take one far in the resolution of this case. It is not an exercise which I find profitable to pursue. It would only involve a gloss on what is aleady a gloss on the statute.
I would prefer to regard the exercise as one involving a question of fact and degree. Some payments will clearly fall within the section; others will equally clearly fall outside it. Between these extremes will be cases upon which minds will differ and which may be difficult to decide. I think that this case is in that category.
The test Yeldham J. formulated was stated by him as follows:-
"The question really is whether or not the relationship of employer and employee is the explanation of how the payment comes to be made, which will not suffice to make it taxable income, or whether it is in truth a reward of the employment, an allowance or advantage given to him instead of his being paid fully in money".
I think one of the difficulties in stating the matter in this way arises out of the words "a reward of the employment". This carries with it the notion of a payment for services rendered which the Act treats separately. Nevertheless, I think there is force in Yeldham J.'s view that the payment will not fall within the provision if the employment is only the explanation for it.
Having reflected on the matter, I have reached the conclusion that the decision appealed from ought not to be disturbed. The view of the matter which I have is that a large organization with a substantial number of employees set out to encourage them to improve their formal qualifications by undertaking courses of study of various kinds. It was recognized by both the organization and the employees undertaking the courses that the attainment of additional qualifications by the employees would benefit both the organization, because it would have a more qualified staff, and the employees themselves, either because of improved opportunities for promotion within the organization or the opening up of more senior employment opportunities with other employers. It may be that, in a sense, the employment was a contributory cause of the payments which were made upon the successful completion of courses or parts of courses. But the essential question is whether there was an indirect relationship between the payment and the employment. In my opinion there was not. The employment provided the explanation for the payment but was not a cause of it in the proximate sense required by Dixon C.J. and Williams J. in the Dixon case.
It remains to mention that in Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47 Fullagar J. said (p. 54) that he doubted very much whether s. 26(e) had the effect of bringing into charge any receipt which would not be brought into charge in any case either by virtue of the general conception of what constitutes income or by virtue of the definition of "income from personal exertion" in s. 6 of the Act. The payments here do not fall within that definition. What Fullagar J. said in Hayes' case was referred to by Gibbs J. (as he was) in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45 at pp 48-9. Gibbs J. there left open the question of whether the statement made by Fullagar J. in Hayes' case was correct. He was able to do this because the provision in question in Reseck's case was s. 26(d), not s. 26(e). I must say that I have some reservation as to whether the statement made by Fullagar J. in Hayes' case could be correct. As Gibbs J. said in Reseck's case (p. 47), "... a receipt may be included in the assessable income either because it is income in the ordinary understanding of that word or because it comes within the provisions of one of the paragraphs of s. 26". If, however, the dictum of Fullagar J. is correct, it provides an additional reason, in my opinion, why the appeal should be dismissed.
For the reasons I have given I would dismiss the appeal with costs.
JUDGE2
The assessability to income tax of only $570.00 is directly involved in this appeal. But the matter is of some general importance. There are apparently some thousands of other taxpayers in the position of the respondent.
Peter Lindsay Smith is an employee of Westpac Banking Corporation. For some years that bank has had an "encouragement to study" policy, the details of which are contained in its staff rules. Rule 635 of those rules commences with the explanation:
"The Bank recognises the importance of study by its staff. The following assistance is provided to encourage staff to undertake courses relating to Banking."
Then follows a list of "approved courses of study", all of which have a connection with the world of banking. Reference is made to various concessions to enable staff to undertake those courses, including facilitating attendance at lectures and giving time to prepare for, and to attend, examinations. Under the heading "honoraria and cost reimbursement" the document contains the statement: "Payments will be made as set out in the following sections". There follows a scale of payments, in most cases instalments being payable on a "full subject passed" basis with a balance payable upon completion of the course. The rule goes on to set out the procedure for making and paying claims under the scheme; the amount payable being received by the employee along with his or her regular salary.
On 5 May 1981 Mr J C Keck, General Manager, Personnel Services, of the bank issued a memorandum addressed to "all personnel". It read in part:
"Increasingly the Bank has a need for more qualified personnel to assist us to maintain our place in the rapidly changing climate in which we operate.
Staff members who seek further education are better equipping themselves for their future progression within the service.
In recognition of further education the Bank has in the past offered rewards to staff gaining qualifications, as set out in Rule
635. These rewards have recently been reviewed and the increases/alterations are attractive. The principal alterations for approved courses are:
...
All officers should consider taking up further study to enhance their own development and career progression."
In oral evidence Mr R J Gorrell, the Westpac officer in charge of the encouragement to study policy, identified the advantage of the scheme to the bank as being that it provides the bank with better qualified staff. He assumed that better qualified staff would provide better service to customers. He added that the staff "would be pleased" to have the policy. Mr Gorrell agreed that the scheme provided an incentive to some staff to stay with the bank but he thought that "it also encourages others to leave after they become qualified".
In 1978 the respondent commenced a four year Management Certificate course at the Penrith Technical College. He did so in order to improve his career prospects, increase his chances of promotion whilst with the bank and broaden what he called his "market appeal" if he looked for employment elsewhere. Each year Mr Smith claimed, and received, payments for subjects completed. Mr Smith completed the course in the financial year ended 30 June 1982 and he then received from the bank a payment of $570.00 -- two payments of $50.00 each for completing particular subjects and an end of course payment of $470.00. The respondent disclosed the receipt of this money to the Commissioner of Taxation but he contended that it was not assessable income. The Commissioner determined that the money formed part of the respondent's assessable income in the relevant year and made an assessment accordingly. An objection having been disallowed, the respondent appealed to the Supreme Court of New South Wales. That Court allowed the appeal and remitted the matter to the Commissioner for re-assessment. From that decision the Commissioner now appeals to this Court.
Section 25(1)(a) of the Income Tax Assessment Act 1936 provides that the assessable income of a taxpayer who is resident in Australia shall include "the gross income derived directly or indirectly from all sources whether in or out of Australia" other than certain items specifically excluded. Section 26 of the Act states that the assessable income of a taxpayer shall include:
"(e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise,"
not being certain benefits which are presently immaterial.
In Reseck v Commissioner of Taxation (1975) 133 CLR 45 at pp.47-49 Gibbs CJ discussed the relationship between ss.25 and 26 of the Act, noting that it has been said that s.26(e) -- unlike some of the other paragraphs in that section -- does not bring into charge any receipt which is not income according to general concepts. If that is so, it is because the items specified in para.(e) are all items which, by their very nature, fall within the concept of income, as that word is generally understood. The scheme of the Act does not subordinate either section to the other. If an item is caught by any provision of s.26, it is assessable income whether or not it also falls within s.25.
In the present case counsel for the appellant Commissioner rely upon both s.25 and s.26(e) but the emphasis of their argument has been upon s.26(e), it being apparently accepted that, if the receipt is not within that paragraph, it would not be correct to regard it as being "income" according to general concepts, and so within s.25. Accordingly, it is convenient to concentrate attention upon the major question argued upon the appeal, namely whether s.26(e) applies to the case.
The leading authority upon s.26(e) is Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540, a case in which the Full High Court of Australia considered the assessability of "make up" pay provided by a soldier's peace time employer during the period of his war service. By majority, the Court held that the payments were assessable, as being "income" within the meaning of s.25; but all members of the Court held that s.26(e) was inapplicable. In their joint judgment two members of the majority, Dixon CJ and Williams J, at pp.553-554 said this of s.26(e):
"There can, of course, be no doubt that the sum of 104 pounds represented an allowance, gratuity or benefit allowed or given to the taxpayer by Macdonald, Hamilton & Co. Our difficulty is in agreeing with the view that it was allowed or given to him in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him. It is hardly necessary to say that the words 'directly or indirectly' extend the operation of the words 'in relation ... to'. In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause. It may be conceded also that the proviso has an effect upon the construction of par. (e) of s. 26, but the effect is only to show that the allowance may be in consequence of a retirement from or termination of the office, not to show that a mere historical connection, as it may be called, is sufficient. We are not prepared to give s. 26 (e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination".
Two subsequent cases, each decided by single Justices of the High Court, emphasize that it is not sufficient to activate s.26(e) that there be, at the date of the receipt by the taxpayer of money or other benefits, a relationship of employee and employer or of provider and recipient of services between the taxpayer and the payer of the money: see Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47, Scott v Commissioner of Taxation (1966) 117 CLR 514. It is also necessary that the money be received by the taxpayer in such a capacity and not otherwise.
The question in the present case is whether, as the appellant contends, the employment of the taxpayer by the bank is, at least, "one contributory cause" of the payment by the bank to him of the relevant money or whether, as is said on his behalf, the relationship has no causal connection with the payment.
The argument on behalf of the appellant makes reference to six factors: the degree of organization of the encouragement to study policy, the large number of employees who have participated in the scheme, the entrenchment of the policy within the bank's staff rules, the limitation of benefits to courses related to banking, the requirement that the recipient be a serving employee at the time of qualifying for, and receiving, any particular benefit and the evidence of Mr Gorrell as to the advantage of the scheme to the bank. Counsel submit that the combination of these factors points clearly to the conclusion that the benefit was paid to the taxpayer in his capacity as an employee. The benefit was paid because Mr Smith was an employee who had earned a reward promised by his employer to such employees as might fulfil specified criteria. Except to the extent that he had, whereas others had not, fulfilled those criteria there was nothing personal about the bank's selection of him as a recipient of its bonus. Counsel liken the position to that referred to in Murdoch v Commissioner of Pay-Roll Tax (Victoria) (1980) 143 CLR 629. In that case, in considering whether certain payments constituted wages paid to employees as such, Mason, Murphy and Wilson JJ asked whether it was possible "to describe the payments in question as 'a merely personal gift by an employer to a person who happened to be an employee'". Their Honours went on to comment at p.644:
"The key word in this question is the word 'personal'. It calls for a relationship which goes beyond that of employer and employee. A legacy may often reflect the existence of such a personal relationship between the testator and his legatee, but that can hardly be said of this legacy which is to be distributed, in the discretion of trustees, among a class of people having no 'personal' relationship with either the testator or his trustees. It is the business, and only the business, that establishes the class from whom the recipients are to be chosen."
For their part, counsel for the respondent point to several matters: that the payment was not recurrent or periodic -- although it was in fact the last of a series of payments to the respondent in respect of his course -- that it related to the activities of the employee undertaken voluntarily and outside the terms of his employment, and not to any work done for the employer, and that the payment was not conditional upon the continuation of his employment for any particular period.
Notwithstanding the matters referred to by counsel for the respondent, it must in our view be concluded that the payment was causally connected to the taxpayer's employment by Westpac. It is not necessary to determine whether the bank was contractually bound to make payments to those of its employees who might from time to time fulfil the requirements of the scheme as set out in the rules; although we note that the language adopted in respect of payments is promissory and arguably intended to have contractual force. Whether or not there was a contract, there clearly was an elaborate scheme for the reward of those employees of the bank who achieved specified goals in respect of certain courses selected by the bank as being related to banking. Once it be accepted, as it was accepted by the learned trial judge, that the payment would not have been made if the relationship of employer and employee had not existed, it is almost impossible to deny that the employment was "one contributory cause". This is not a case where the payment was prompted by some special personal characteristic of the recipient. The selection of the recipients of payments under the policy was an entirely impersonal matter. Recipients selected themselves, by achieving a particular academic goal during a time of employment by the bank. In that regard the facts of this case contrast with those of hypothetical cases cited in argument: a gift by an employer to an employee who won an event at the Olympic Games or a birthday gift by an employer to his personal secretary.
Reference was made in argument to several overseas decisions: in the United Kingdom Moorhouse v Dooland (1955) 1 Ch. 284 and Laidler v Perry (1966) AC 16, in Canada The Queen v Savage (1983) 83 DTC 5409. We derive no assistance from those decisions, which are each based upon legislation in somewhat different terms, but nothing said in any of those cases conflicts in principle with the views we have expressed.
In a community in which unearned prizes and winnings -- often of substantial amounts -- are commonplace and do not normally bear tax, it may be regarded by some as unfortunate that the value of Mr Smith's hard-earned and relatively small bonus should be diminished by taxation. However, in our view this is the clear effect of the application to the case of s.26(e) of the Income Tax Assessment Act. The appeal to this Court should be allowed, the order of the Supreme Court of New South Wales should be set aside and, in lieu thereof, it should be ordered that the appeal to that Court be dismissed with costs. The respondent must pay the costs in this Court.
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