Federal Commissioner of Taxation v. Harris

[1980] FCA 74

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: GEOFFREY OWEN HARRIS (1980) 43 FLR 36
No. VG 33 of 1979
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.(1), Deane(2) and Fisher(3) JJ.

CATCHWORDS

Income Tax - Assessable income - What constitutes income - Gifts - Lump sum added to pension in income year and subsequent years.

Income Tax Assessment Act 1936, s.25.

Income Tax - Assessable income - Gift - Lump sum paid by former employer to former employee, now member of superannuation fund - Income Tax Assessment Act 1936 (Cth), s. 25 (1).

HEADNOTE

A bank made a payment of $450 to the taxpayer, one of its former employees. The taxpayer was in receipt of a pension under the bank's superannuation scheme. The payment was expressed to be a result of the bank's realization of the difficulties, because of high inflation, experienced by the majority of people in the superannuation scheme. The taxpayer had not received such a payment before, although he received similar payments in subsequent years. The first payment was for him an unexpected and unsolicited receipt. The Commissioner assessed the taxpayer on the payment, and the taxpayer successfully appealed to a Board of Review. The Commissioner unsuccessfully appealed to the Supreme Court of Victoria, and then appealed to the Federal Court.

Held, by majority, Deane J. dissenting - that the appeal be dismissed. The receipt of $450 was not produced by any current employment of the taxpayer. When it was received, it was not known by the taxpayer to be one of a series of periodical payments. The payment was a gift which was not income in the hands of the taxpayer.

HEARING

Sydney, 1980, March 11-12; June 2. #DATE 2:6:1980

APPEAL.

Appeal from the decision of Murphy J. of the Supreme Court of Victoria dismissing the Commissioner's appeal against the decision of a Board of Review allowing the taxpayer's appeal against the disallowance by the Commissioner of his objection to an assessment in respect of the year of income ended 30th June, 1976.

The facts appear from the judgments.

D. Graham Q.C. and G. Griffith, for the appellant.

I. C. F. Spry Q.C. and J. J. Hockley, for the respondent.

Cur. adv. vult.

Solicitor for the appellant: B. J. O'Donovan (Commonwealth Crown Solicitor).

Solicitor for the respondent: Alan Moore.

J. H. TELFER

ORDER

Appeal dismissed with costs.

JUDGE1

The question arising in this appeal is whether a payment of $450.00 made on 21 April 1976 by the Australia and New Zealand Banking Group Limited (hereafter referred to as "the Bank") to Geoffrey Owen Harris was assessable income in his hands. The Commissioner of Taxation (hereafter referred to as "the Commissioner") included the sum in Mr. Harris' income for the year ending 30 June 1976 and assessed tax accordingly. Mr.Harris objected and requested that the matter be referred to the Taxation Board of Review. His reference was heard by Board of Review No. 1, which, by majority, upheld his objection and ordered that the assessment be amended by deleting the item of $450.00 from his assessable income. The Commissioner appealed to the Supreme Court of Victoria, which held that the sum did not constitute assessable income. It was ordered that the appeal be dismissed and that the Commissioner pay Mr. Harris' costs.

The Commissioner sought leave to appeal to this Court and leave was granted upon an undertaking being given by the Commissioner that he would pay Mr. Harris' costs of the appeal in any event and that the order for costs made by the Supreme Court would not be disturbed.

The facts are not in dispute. Mr Harris was formerly employed by the Bank which conducted a pension scheme for its employees pursuant to a trust deed and a set of rules. The trustee of the scheme was a company called A.N.Z. Pensions (Overseas) Proprietary Limited. Mr Harris was a member of the scheme during his employment. He retired in November 1974 at the age of 60 and became entitled to receive a pension under the scheme. He had the right under the scheme to elect for partial commutation of the pension and he exercised this right, receiving a capital sum and thereafter a partial pension.

On 31 March 1976 the Bank sent to pensioners a memorandum, the relevant parts of which are as follows:
"MEMORANDUM TO BANK PENSIONERS EX-GRATIA CASH PAYMENT
The Bank considered the problems caused by continuing high rates of inflation and has decided to make lump sum payments to the majority of members receiving pensions from the pension schemes.
The payments take some account of eligibility for Social Security Age Pensions. Cheques will be distributed as soon as possible."

On 21 April 1976 the Bank sent a further memorandum to pensioners, a copy of which was received by Mr. Harris together with a cheque for $450.00. The relevant part of this memorandum is as follows:
"MEMORANDUM TO RETIRED OFFICERS AND OTHER FORMER EMPLOYEES OF THE BANK
EX-GRATIA CASH PAYMENT
Further to the Managing Director's memorandum of 31st March, 1976 we enclose a Bank Cheque for the lump sum payment referred to in that memorandum."
The memorandum went on to discuss the manner in which recipients might wish to treat the payment in their tax returns.

From the evidence, it appeared that the Bank first made lump sum payments to pensioners in February 1975. However, that distribution did not include officers who had retired in that current financial year so Mr. Harris did not participate. The first receipt by him of a lump sum was the one he received in April 1976 with the memorandum of 21 April 1976.

The evidence also showed that Mr. Harris had shared in further distributions by the Bank in later years. On 21 January 1977 he received $625.00; on 20 January 1978, $558.00; and on 19 January 1979 an amount which was not given in evidence but which it appeared was of the same order as the previous receipts.

The primary Judge found, and there is no reason to question his finding, that at the time Mr. Harris received the April 1976 payment of $450.00, it was for him an unexpected and unsolicited receipt. Mr. Harris, after his retirement, worked for reward with a firm of accountants. He was not in need of the ex-gratia payment of $450.00 in order to support himself. In fact, he paid the bank cheque which he received into his account which, at all relevant times, showed a credit balance in excess of the amount received.

Under the rules relating to the pension scheme the pension might be varied by the trustee in accordance with a form of indexation stated in rule 20(2), but any increase was not to exceed 3% per annum compounded. There was further provision in rule 20(3) that notwithstanding rule 20(2) the trustee might with the approval and should at the request of the Bank increase the pension beyond the variation provided under rule 20(2) to such amount and for such period as might be agreed between the trustee and the Bank. On the evidence, no such approval or request was given or made by the Bank under rule 20(3).

Dealing with the ex gratia payments made to pensioners, it is not possible from the evidence to discern any method which was used for calculating the amount of these payments. It seems that the amount of the payment would fall upon a person's reaching 70 years of age and becoming entitled to a non-means-tested pension. Such a person would not be excluded but the payment to him would be reduced. Former employees not in receipt of a pension were not recipients of ex-gratia payments, nor were persons whose pensions exceeded $9,000.00 per annum. It seems that, apart from the year of 1975, when the same amount per capita was paid to the various recipients, differing amounts were paid to different officers. However, it did not appear that the amounts paid were in any way related to length or quality of service with the Bank or seniority of position occupied at the time of retirement.

The motive of the Bank in making the payment to Mr. Harris is, at least in part, to be gathered from the terms of its memorandum to pensioners dated 31 March 1976. From this it appears the Bank was concerned with the problems caused by continuing high rates of inflation. It decided to make lump sum payments to the majority of members receiving pensions, presumably in order to assist them with living expenses. Evidence to the same effect was given by Mr. D.D. Williamson, Senior Manager, Personnel Administration and Pensions, of the Bank, who was called as a witness before the Board of Review, the transcript of this evidence being tendered in the Supreme Court.

The board of directors of a company is not ordinarily justified in giving away shareholders' money, unless it appears to them to be for the benefit of the company to do so. The justification commonly found where ex gratia payments are made to a former employee or to the widow or dependants of a deceased employee is that fair and liberal dealing with past employees and their families is an encouragement to existing employees (see Henderson v. Bank of Australasia (1888) 40 Ch.D. 170). The memorandum of association of the Bank was not in evidence. The Bank's power to make the payments might appear from the memorandum. However, it seems to be a reasonable inference that, whatever the source of power was, the somewhat paternalistic attitude adopted by the Bank in making the payments was considered to be in the business interests of the Bank.

Whether any particular receipt is an income receipt falls to be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the Income Tax Assessment Act 1936 provides otherwise (see Scott v. Commissioner of Taxation (1935) 35 S.R. (N.S.W.) 215 per Jordan C.J. at p.219). It was not argued that the Act contained any provision covering the present receipt. The question whether it is to be regarded as being of an income nature has to be determined by these general considerations.

It may be said that a gift by one person to another will not ordinarily be regarded as income in the hands of the recipient. Thus, a present given by a father to his son out of natural love and affection is not income in the hands of the son. On the other hand, a tip given to a waiter or a taxi driver is income in the hands of the donee. It is considered to be the product of the services which have been rendered. It is not easy to formulate a simple test. Some guidance is afforded by decisions of the High Court. It is clear that the whole of the circumstances must be considered (Squatting Investment Company Ltd. v. Federal Commissioner of Taxation (1953) 86 C.L.R. 570 at p.627; on appeal (1954) 88 C.L.R. 413). Whether or not a particular receipt is income depends upon its quality in the hands of the recipient (Scott v. Federal Commissioner of Taxation (1966) 117 C.L.R. 514 at p.526). The motives of the donor may be relevant but are seldom, if ever, decisive (Scott v. Federal Commissioner of Taxation, supra, at p.526; Hayes v. Federal Commissioner of Taxation (1956) 96 C.L.R. 47 at p.55). The regularity and periodicity of the payment will be a relevant though generally not decisive consideration (Federal Commissioner of Taxation v. Dixon (1952) 86 C.L.R. 540 at p.568). A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by him (Squatting Investment Company Ltd. v. Federal Commissioner of Taxation, supra, at p.633; Hayes v. Federal Commissioner of Taxation, supra, at pp.56-57; Scott v. Federal Commissioner of Taxation, supra, at pp.527-528; cf. Commissioner of Taxes (Vic) v. Phillips (1936) 55 C.L.R. 144; A.L. Hamblin Equipment Pty. Limited v. Federal Commissioner of Taxation (1974) A.T.C. 4001 at p.4010).

Standing slightly apart from these High Court cases is Federal Commissioner of Taxation v. Dixon (1952) 86 C.L.R. 540. The Court there had to consider whether moneys paid to Mr. Dixon by Macdonald Hamilton & Co. were income in his hands. On 22 September 1939 that firm circulated among its staff a memorandum which stated:
"In regard to those members of our Staff who may enlist for home defence or service outside Australia, for the duration of the War, we shall also endeavour to make up the difference between their present rate of wages and the amounts they will receive from the Naval or Military Authorities, but of course circumstances may compel us to review this decision at some later stage."

Mr. Dixon, who was a clerk in the employ of the firm, read this memorandum and shortly after reading it, enlisted (on 12 July 1940) in the Australian Imperial Forces. From shortly after that date until he was discharged on 13 December 1945 he served in those forces in Australia and overseas. From the date of commencement of his military service the firm paid to Mr. Dixon, or as he directed, a sum of money equal to the difference between the rate of his military pay and the rate of pay he was receiving as their clerk. In the period of twelve months ended 30 June 1943 the difference so paid to him amounted to One hundred and four pounds. Faced with a somewhat similar case, the New Zealand Court of Appeal had held such moneys were not assessable income (Louisson v. Commissioner of Taxes (1943) N.Z.L.R. 1, cf. (1942) N.Z.L.R. 30). The High Court by majority (Dixon C.J., Williams and Fullagar JJ.; McTiernan and Webb JJ. dissenting) held the moneys were assessable income. It is difficult to derive a simple ratio decidendi from the reasons for judgment.

Dixon C.J. and Williams J. pointed out that if payments are really incidental to an employment it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognised incident of the employment or work. They went on to say (at p.557):
"In the present case the employment or service, as we would emphasize, is as a soldier. The circumstances in which the taxpayer entered into that service were such as to enable him to rely with more or less confidence on the periodical payments from Macdonald, Hamilton & Co., as well as from his military pay, making up an 'income' of the level appropriate to civilian service."
Later they said:
"Because the one hundred and four pounds was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income, and therefore to form part of the gross income within the meaning of s.25 of the Income Tax Assessment Act 1936-1943."

Two important elements in this appear to be the periodical nature of the payments and the circumstances attending the war service undertaken. The payments were periodical in a real and a relevant sense, being additions to his military pay. The circumstances were that the firm had, in effect, stipulated that if he enlisted and served in the military forces they would make the specified addition to his military pay. By enlisting and serving he became entitled to receive, indeed without straining language one might say he "earned", the addition to his wages. The other element concerns his reliance on the payments for regular expenditure upon himself and his dependants. This element seems to have less weight. The use which a taxpayer makes of particular moneys in his possession, will often throw little light on the character which those moneys bore when he received them. Furthermore, it is an element which, if significant, seems to place the poor man at an unnecessary disadvantage.

Fullagar J. took a somewhat different view. He said (at p.564):
"The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment. The payment does not partake in any degree of the character of a reward for services rendered or to be rendered."

His Honour, in referring to the respondent's employment, appears to be referring to his employment with the firm. Certainly the payment was not the product of that employment. In contrast with the judgment of Dixon C.J. and Williams J., his Honour's judgment seems to place no weight on the fact that the payment was incidental to or flowed from his enlistment and service in the military forces.

In arriving at the conclusion that the receipts were assessable income Fullagar J. appears to have had regard to three considerations: first, they were "regular periodical payments"; secondly, the expressed object and the actual effect of the payments was "to make an addition to the earnings, the undoubted income" of Mr. Dixon; and, thirdly, the payments were intended to be, and in fact were, "a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place". The reference to the payment taking the character of that for which it is substituted contains an echo of the successful argument of Fullagar Q.C. (as he then was) in Commissioner of Taxes (Vic) v. Phillips (1936) 55 C.L.R. 144.

Certainly, the payments to Mr. Dixon had a significant periodical character as an addition to his wages. But it seems to have been the coincidence of the fact that payment was an addition to wages and the fact that the payment was in substitution for wages he would have earned if he had remained with the firm, which his Honour regarded as important. His Honour (at p.568) said:
"It acquires the character of that for which it is substituted and that to which it is added."

The English cases, while containing observations which are useful on the nature of income generally, have to be used with caution because they depend in the main upon applying particular provisions of the English legislation which do not find a place in the Australian legislation. Thus, in Stedeford v. Beloe (1932) A.C. 388, the House of Lords had to consider an annual pension of 500 pounds granted by the Warden and Council of a college to a former headmaster. It was held that the pension was not income assessable to tax in the hands of the recipient. However, it is clear that what was there in question was whether the receipt fell within Schedule E as a payment to the recipient in respect of his office as headmaster, it being held that it did not because he no longer held that office; or whether it fell within Schedule D as a profit or gain arising or accruing to him from his office or employment, it being held that it was not because it was simply a succession of voluntary payments which depended on someone else's goodwill.

Turning to the $450.00 received by Mr. Harris from the Bank, the first question which arises (applying the test generally applied to determine whether a gift is income) is whether that receipt was the product of his employment with the Bank. It is clear that in one sense his former employment was a cause of the payment being made, that is, in the sense that if he had not been an employee he would not have been a pensioner and would not have received the payment. However, on the evidence the receipt clearly was not the product of that employment in the sense of being produced by his service in that employment; the amount was in no way related to the length or quality of his service with the Bank. It depended upon other considerations concerning his pension.

If one seeks to apply the reasoning of Dixon C.J. and Williams J. in Dixon's Case, it is clear the payment received by Mr. Harris was not periodical within the income year and was not incidental to any current employment. Nor did it form part of the receipts upon which he depended for regular expenditure upon himself and his dependents. If one seeks to apply the reasoning of Fullagar J. in Dixon's Case, the question is whether the payment should be regarded as being in substitution for or an addition to earnings of a revenue character. In this case, in contrast with the facts of Dixon's Case, the payments were not in any sense in substitution for salary or wages foregone or lost. On the other hand, they were intended by the Bank to be an addition to a pension which, although it does not constitute earnings, is a class of receipt which is of an income character. This raises one of the critical questions in the case: is the fact that the payment was intended to be supplementary to the pension which was regarded as depreciated by the forces of inflation a situation sufficient to require it to be regarded as having the same character as the pension and to be treated as an income receipt? Certainly, as I have pointed out, it was not received or relied upon by Mr. Harris for regular expenditure upon himself and his dependents, nor was there any assurance as there was in a qualified form in Dixon's Case, that the payment would be regularly forthcoming as a periodic addition to his income. In the present case, the pension was under rule 17 of the pensions scheme payable fortnightly or monthly. But the ex gratia payment by the Bank was made once a year. It was not periodic within any single income tax year.

Furthermore, in the circumstances of Dixon's Case, the payment was made by the taxpayer's former employers because of his enlistment in the military forces as an addition to his military pay in order to bring that pay up to the level which he had enjoyed in his civilian employment. In this case, the payment made to Mr. Harris by the Bank was not designed to bring the pension up to any particular figure; it was simply an ex gratia payment made in accordance with the bounty of the Bank as one lump sum during the income year to assist him because of the effects of inflation.

It appears to me that the circumstances of this case are insufficient to lead to the conclusion that a gift, not normally to be regarded as being of an income nature, should be so regarded because the Bank as payer intended it to be, and it in fact was, a supplement to the taxpayer's pension.

This is not a case where the motives of the donor throw much light on the character of the receipt in the hands of the donee. As has been stated the Bank was concerned with the problems caused to its pensioners by high rates of inflation. It desired to mitigate the impact of inflation upon its pensioners, who were formerly its employees. It was not its motive to reward its pensioners for previous faithful service. The only underlying business consideration was one which concerned the Bank not the pensioner, that was that it was in the business interests of the Bank in relation to existing employees to be seen to be treating pensioners, who were former employees, with fairness and liberality.

It was submitted on behalf of the Commissioner that the Court should pay regard to the payment made to other pensioners in 1975 and to the payments made to Mr. Harris after the income year ended 30 June 1976, namely, in 1977, 1978 and 1979. These, it was argued, could be used as a "cross-check" and as a way of testing the decision whether in the circumstances the receipt of $450.00 should be regarded as income.

Mr. Harris was not a recipient of the 1975 distribution and was not aware of it. Its only relevance is in furnishing some evidence of a continuing intention on the part of the Bank to mitigate the effects of inflation to some extent for its pensioners. So far as the distributions after the income year are concerned, they also appear to me to be relevant but only in a limited sense. The character of the receipt of $450.00 by Mr. Harris in April 1976 has to be determined for income tax purposes as at the close of the income year ended 30 June 1976 in respect of which the assessment was made. In the light of the reason given by the Bank in its memorandum dated 31 March 1976 for making the payment, namely, consideration of the problems caused by continuing high rates of inflation, it was evident that there existed the possibility, if inflation continued, that the Bank would feel impelled by similar considerations to make further payments in subsequent years. If evidence of subsequent events is available, which shows the possibility has become a reality, it is proper for the Court to have regard to the actual events, when assessing the position as it was in the income year ended 30 June 1976 (McCathie v. Federal Commissioner of Taxation (1944) 69 C.L.R. 1). This may be summed up by saying the Court can conclude that when the payment of $450.00 was made, it was not only possible but likely that similar payments would be made in the future, or, in other words it was likely that the $450.00 was the first of a series of such payments while high rates of inflation persisted. This, of course, falls far short of concluding that there was any assurance or any certainty that such payments would be made. Furthermore, because of the somewhat arbitrary manner in which the distributions were made by the Bank, the later payments do not as at 1976 assist in forecasting what the amount or basis of any future payments might be. The most that one can derive from consideration of the later payments is that the $450.00 was likely to be for Mr. Harris the first of a succession of payments of uncertain amount arrived at by separate decisions of the Bank taken from year to year. It is true to say, that a lump sum payment of uncertain and varying amount paid in each of five successive income years, may in sense be described as a "periodic" payment. So might one paid every five years or every ten years. But it is not "periodic" in any sense which is of much help in determining whether the payment is, or is not, of an income nature. In particular, I consider that the fact that the $450.00 was the first of such a series, is insufficient to lead to the conclusion that it should be regarded as being income.

In the result I am of opinion that the decision of the learned trial Judge that the $450.00 was not assessable income of Mr. Harris was correct. I consider the appeal should be dismissed with costs.

JUDGE2

The background of this appeal and the relevant facts appear from the judgments of Bowen C.J. and Fisher J. which I have had the benefit of reading in draft form. The issue between the appellant Commissioner of Taxation and the respondent taxpayer is whether a payment of $450 received by the taxpayer from his former employer, the Australia and New Zealand Banking Group Limited ("the Bank"), constituted assessable income in his hands. That issue will be resolved conformably with whether the receipt constituted income according to ordinary concepts and was, therefore, assessable income pursuant to the provisions of s.25(1) of the Income Tax Assessment Act, 1936.

The taxpayer was, at relevant times, entitled to receive a pension under the Bank's staff pension scheme ("the pension scheme"). His qualification to become a member of that pension scheme had been his employment with the Bank and the quantum of his pension entitlement had been determined by reference to his salary at the time of his retirement from that employment. Under the pension scheme, the Bank was empowered to direct the Trustee to increase the pensions paid to ex-employees and was liable to make up any deficiency in the pension scheme funds available for payment of pensions. Such an increase would apparently be payable to all pensioners regardless of need. The amount representing any such increase would, ignoring any amounts received on commutation, constitute assessable income, being income according to ordinary concepts.

During the year ended 30 June, 1976 ("the tax year"), the Bank gave consideration to the problems caused by continuing high rates of inflation and decided to make direct lump sum payments to the majority of members receiving pensions under the pension scheme. Similar payments were also made in the preceding tax year and in the following tax years. Payments were not made to ex-employees whose pensions exceeded a particular amount and the payment made took "some account of eligibility for Social Security Age Pensions". The taxpayer's employment with the Bank terminated during the year ended 30 June, 1975 and he did not share in the payments made by the Bank during that year. The first payment received by the taxpayer was the $450 which he received during the tax year. He received payments of $625, $558 and an unspecified amount of the same order respectively in the three following tax years.

The payments which the taxpayer received were paid to him by the Bank pursuant to a consistent course of conduct whereby it paid amounts on an annual basis to former employees to supplement pensions which had been rendered inadequate by the inroads of continuing inflation. True it is that the payment in question was the first received by the taxpayer and was part of what appears to have been but the second group of such payments made by the Bank. The making of the second group of payments demonstrated, however, that the first group of payments had not been a "one off" affair. The Bank's policy in making the first two groups of payments could be seen to be a considered one which, if and while it remained operative, was likely to lead to such annual payments to a significant number of its ex-employee pensioners, including the taxpayer, being continued. It is permissible to pay regard to the fact that such payments were made in the following tax years to confirm that the payments in question should properly be seen as having been made by the Bank to the taxpayer as part of the second group of a series of such payments (see, McCathie v. Federal Commissioner of Taxation (1944) 69 C.L.R. 1 at p.16).

The payment in question cannot properly be seen as a direct product of the taxpayer's employment with the Bank. It was, however, closely related to that employment in that it was one of a group of payments made by the Bank to former employees and was intended to supplement the pension which the taxpayer received under the pension scheme to which the Bank contributed for the benefit of its employees and to which the taxpayer was only eligible to belong by virtue of his former employment. While the payment was no doubt the result of a desire on the part of the Bank to benefit former employees, it cannot properly be seen in the character of a simple gift from, for example, one member of a family to another. It was presumably motivated, in so far as the Bank was concerned, by genuine commercial considerations (see In re Lee, Behrens and Company Ltd., (1932) 2 Ch. 46 at p. 51).

"The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances; and even in respect of a true gift it is necessary to inquire who and why it came about the gift was made" (per Kitto J. The Squatting Investment Co. Limited v. Federal Commissioner of Taxation (1953) 86 C.L.R. 570 at pp. 628-9). In the present case, there are circumstances pointing in different directions and the decision whether the receipt was income according to ordinary concepts turns on questions of emphasis and degree. Bowen C.J. and Fisher J. have pointed to a number of factors which militate against regarding the receipt as such income and I am conscious of the force of the matters to which they have referred. Ultimately, however, I am persuaded by the combination of a number of considerations that the preferable conclusion is that the receipt constituted income according to ordinary concepts and was properly included by the Commissioner in the taxpayer's assessable income of the tax year. I have already made reference to those considerations. I recount them in summary, if more argumentative, form.

The first is the relationship of the receipt and the taxpayer's former employment. If the receipt had been the product of the taxpayer's income-producing activities in the course of his former employment, that would, in my view, have in itself been decisive of the present case (see, for example, Hayes v. Federal Commissioner of Taxation (1956) 96 C.L.R. 47 at p. 57). Notwithstanding the fact that the receipt could not properly be regarded as the product of that employment, the relationship between the receipt and the taxpayer's former employment with the Bank points, in my view, towards the receipt being income. The receipt could not properly be seen as being a mere gift or present made to the donee on personal grounds (see The Squatting Investment Co. Limited v. Federal Commissioner of Taxation (supra) at pp. 633-634). It was received by the taxpayer because he was one of a class of ex-employees of the Bank whose well being the Bank was, for proper commercial reasons, concerned to protect.

Second, the payment was related to an annual period and was part of one group of a series of annual groups of payments. Regularity and periodicity are factors of some importance in determining whether particular receipts possess the character of income in the hands of the recipient (see, per Fullagar J. Federal Commissioner of Taxation v. Dixon (1952) 86 C.L.R. 540 at pp. 567-8),. The fact that the payment, when viewed with the permissible confirmation of hindsight, was one of a group of a series of annual groups of payments made in respect of successive annual periods points, in my view, strongly towards the receipt being a receipt of income.

Thirdly, the payment was made to supplement income because of the erosion of the value of such income as a result of inflation and was made by the entity which was entitled to direct an increase in that income and which would, in the event of resulting deficiency of pension funds, be liable to make up the deficiency. A payment of capital can, of course, be made to supplement an inadequate income. The fact that a payment, which is a periodic payment, is made to supplement income is however, in my view, a factor pointing to the receipt of the amount paid being a receipt of income (see per Fullagar J. Federal Commissioner of Taxation v. Dixon, (supra) at p. 568).

In the result, I would allow the appeal and set aside the order of the Taxation Board of Review that the assessment be amended by deleting the sum of $450 from the taxpayer's assessable income. In accordance with the undertaking given by the Commissioner at the time when leave to appeal was granted, I would leave undisturbed the order of the Supreme Court of Victoria as to costs and order that the Commissioner pay the respondent taxpayer's costs of the appeal to this Court.

JUDGE3

This is an appeal brought by the Commissioner of Taxation ("the Commissioner") against a decision of the Supreme Court of Victoria dismissing the appeal of the Commissioner from the Board of Review. That Board by a majority had upheld the objection of the respondent Geoffrey Owen Harris ("the taxpayer") and ordered that the assessment of income tax issued by the Commissioner against him in respect of the year of income ended 30 June 1976 ("the tax year") be amended by deleting the sum of $450 from the taxpayer's assessable income for that year.

This amount of $450 comprised a payment made to the taxpayer by the Australia and New Zealand Banking Group Limited ("the Bank") on 21 April 1976. It was made in circumstances concerning which there is no dispute and the relevant facts are set out in detail in the reasons for judgment of the learned trial judge. I set them out again shortly, primarily for the purpose of emphasising those to which I attach particular significance.

The taxpayer had for many years been employed as a bank officer by the Bank when, in November 1974, he exercised the option available to him to take early retirement. Upon such retirement he became entitled to a pension pursuant to the terms of the Bank's staff pension scheme, of which scheme another company A.N.Z. Pensions (Overseas) Proprietary Limited was trustee. The pension was calculated on the basis of a specified proportion of the employee's salary at the date of retirement, multiplied by his years of service. It was by the rules of the scheme indexed to a limited extent but the trustee was permitted or alternatively obliged if the Bank approved in the one instance or directed the trustee in the other to increase the pension to a greater extent. Such indexed or other increase was doubtless required to be paid to all pensioners without exception. A pensioner had under the rules a limited right to commute his pension and the taxpayer availed himself of this right to commute. Subsequent to his retirement the taxpayer engaged in employment with a firm of accountants from whom he received remuneration which was additional to his pension under the scheme.

On 21 April 1976, some eighteen months after his retirement the taxpayer received a payment from the Bank of $450, which amount the Commissioner conceded was for the taxpayer an unexpected and unsolicited receipt. A few weeks earlier the taxpayer had received a memorandum from the managing director of the Bank dated 31 March 1976 in the following terms:

"Memorandum to Bank Pensioners
Ex-gratia cash payment

The Bank considered the problems caused by continuing high rates of inflation and has decided to make lump sum payments to the majority of members receiving pensions from the pension schemes.

The payments take some account of eligibility for Social Security Age Pensions. Cheques will be distributed as soon as possible."

The Bank's cheque for the sum of $450 was accompanied by a memorandum dated 21 April 1976, the initial sentences of which were as follows:

"Memorandum to Retired Officers and other former employees of the Bank
Ex-gratia cash payment

Further to the Managing Director's memorandum of 31st March 1976, we enclose a Bank Cheque for the lump sum payment referred to in that memorandum."

The balance of this document referred to the fact that the character of the payment for income tax purposes was uncertain and gave the taxpayer instructions as to how he should disclose it in his return of income.

The memorandum of 31 March 1976 was the first information which the taxpayer had of the Bank's intentions. He had no knowledge, apart from any information gained from that and the subsequent memorandum of 21 April 1976, why the Bank made a payment to him or whether it had made any payments on earlier occasions to other pensioners. The taxpayer stated that he did not need the payment to support himself and that he had paid it to the credit of his bank account which at all relevant times showed a balance in excess of the amount received from the Bank.

There was however evidence from the Bank as to why it made the payments and the number and nature of payments made prior and subsequent to the payment on 21 April 1976. If the proper enquiry before us is to determine "the character of the receipt in the hands of the taxpayer" (Scott v Federal Commissioner of Taxation (1966) 117 C.L.R. 514 at p.526, A.L. Hamblin Equipment Pty. Ltd v Federal Commissioner of Taxation (1974) A.T.C. 4001 at p.4010) the relevance of this evidence is open to doubt, but no such point was taken before us or the trial judge.

The Bank's evidence was that the payment was voluntarily made,

". . . in recognition of the continuing inflation in the community and the effect that this has had on the incomes of our pensioners basically, a recognition of the difficulties of living on the pensions as payable from the scheme in some cases."

However, not all Bank pensioners received a payment and in particular pensioners in receipt of pensions in excess of $9,000 per annum did not receive a payment. There was no evidence whether this figure of $9,000 took into account the fact that certain pensioners had exercised their right to commute in part their pension entitlement or how the amount of the payments to pensioners, which were not uniform, were calculated. However, there was evidence that some account was taken by the Bank of the age of recipients and the fact that a number were entitled to Social Security benefits.

The Bank gave evidence that it had in fact in other years made similar ex-gratia payments to some pensioners, though it had never promised any additional payments nor made any suggestion that the pensioners could expect subsequent payments. In February 1975, subsequent to the retirement of the taxpayer but unbeknown to him, the Bank paid "a flat amount" to some pensioners. The taxpayer did not receive a payment in that year, but did receive payments in each of the calendar years 1977 ($625), 1978 ($550) and 1979 (a somewhat like amount). On each occasion the payment was made, not by the trustee but by the Bank, which did not during those years direct the trustee of the scheme to increase pensions above the stipulated indexed percentage.

The learned trial judge concluded, in my view correctly, that in the hands of the taxpayer the payment in question did not have the character of income. In so deciding he attached little, if any, significance to the fact that the taxpayer received a further payment on the third Friday in January of each of the three succeeding years. However in my opinion the use, if any, which can properly be made of these facts is in this case crucial to the correct characterisation of the payment in April 1976. I am inclined to the view that it properly falls into the category of income if it is to be seen as the first of a series of regular recurring amounts received by the taxpayer from his former employer as supplementation of his pension. Alternatively, and this is in my opinion the case before us, it has the character of a capital receipt if it was an unexpected and unsolicited lump sum payment which the Bank was, for specified reasons, motivated to make to the taxpayer without any promise or raising any expectation that it would be regularly or periodically repeated. The fact that the subsequent payments were made in succeeding years makes it difficult to accept the payment in question as the first of a series because it would seem that as a matter of principle the character of a receipt in the hands of the taxpayer falls to be determined at the end of the tax year. However, the other arguments in favour of the competing categories are finely balanced and ultimately the proper conclusion in this particular matter depends, in my opinion, upon whether the payment is properly seen as a lump sum payment or the first of a series of annual payments.

Counsel for the Commissioner presented a number of arguments in support of his contention that in the hands of the taxpayer the receipt had the character of income. At the outset he did not rely upon the fact that payments were received by the taxpayer in subsequent years. The receipt had the relevant character, he submitted, because the object of the payment and its actual effect was to make an addition to the undoubted pension income of the taxpayer. In these circumstances it acquired the character of that to which it was added. Moreover because of the nexus between payment and employment the payment could be said to be the product of the taxpayer's former employment.

In support of this submission counsel cited in particular the reasons for judgment of Fullagar J. in Federal Commissioner of Taxation v Dixon (1952) 86 C.L.R. 540 at pp.567-8. In that case the employer paid during the year of income to the taxpayer whilst he was a member of the defence forces an amount of 104 punds by weekly instalments of 2 pounds pursuant to an undertaking to make up to the taxpayer the difference between his pay as an employee at the time of enlistment and his pay as a member of the defence forces. In these circumstances Fullagar J. held that the expressed object and actual effect of the payments was to make an addition to the earnings of the taxpayer. It was a substitute for wages he would have earned if the taxpayer had not enlisted. Fullagar J. concluded that the payment acquired the character of that for which it was substituted and that to which it was added.

On a number of grounds that reasoning and its conclusion ought not, in my opinion, to be applied directly to the facts of this matter. It was expressly based upon a finding that the weekly payments in question were regular and periodic, a factor which Fullagar J. stated to be an important but not decisive consideration. In those circumstances, considered in the light of the expressed object of the employer to make up the earnings of the taxpayer, Fullagar J. considered it appropriate to see the regular and periodic payments as an addition to the earnings of the taxpayer and taking on the character of such earnings. It is not easy to treat a lump sum payment in the same manner.

The majority of the Full High Court in Dixon's case, supra (Dixon C.J. Williams & Fullagar JJ.) were of opinion that the amount paid by the employer formed part of the assessable income of that taxpayer. The reasoning of Fullagar J. was not adopted by the other members comprising the majority, who proceeded on the basis that the payments were incidental to an employment, namely employment as a soldier, and that it was immaterial that they were made by somebody other than the employer.

It follows that there are substantial grounds for distinguishing Dixon's case and not applying it to the facts of the present, where the payment was of a single lump sum to a person who was not in an employment to which the payment could be said to be incidental. Moreover the most that could be said of the object of the payment was that it was by way of recompense for the impact of inflation on the taxpayer's pension.

The Commissioner also contended that such was the nexus between the payment and the prior employment that it could be said to be the product of such employment. I can not accept this contention. The prior employment of the taxpayer was of course relevant, but in my opinion its only relevance is that it explains why the Bank was motivated to make a payment to him. However it is of no great assistance in categorising the payment. I agree with the reasoning of the learned trial judge and his conclusion that the payment could not in the relevant sense be said to be a product of the previous employment.

If the payment can properly be regarded as a single lump sum gift, in my opinion the trial judge was right and the other circumstances do not justify characterising it as a payment of income.

However, we were pressed with a further submission, namely that we should not consider the payment as a single lump sum but rather, in the light of the payments in subsequent years, as the first of a series of payments. If this contention is acceptable, then I would agree that there are cogent arguments to the effect that as the first of a series of periodical and regular payments it falls, in the light of other circumstances, into the category of income rather than capital.

In support of this submission counsel cited a number of English and Australian authorities. He relied on and sought to apply the principle that "where facts are available they are to be preferred to prophecies" (Willis v The Commonwealth (1946) 73 CLR 105 per Dixon J. at 116). However, in my opinion, this principle is not of general application, and I am not aware that it has been used to resolve problems arising under the Income Tax Assessment Act.

The area of law most akin to income taxation in which it has been applied is that of valuation for death duty or compulsory acquisition purposes. In this field Williams J. stated the principle with its appropriate qualifications in McCathie v Federal Commissioner of Taxation (1944) 69 C.L.R. 1 at 16 in the following words:
"But I will venture to repeat the remarks that I made in the Daandine case on the question whether this evidence '(of profits of subsequent years)' was admissible:- 'Values must be calculated in the light of circumstances which existed on the material date, in this case 30 June 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances'."

The limitation on the principle is thus that subsequent events can only be used to determine the weight to attach to circumstances which existed at the relevant date. This point, to which I attach significance in the present matter, was made clear by Bright J. in John Martin (Elizabeth) Limited v Commissioner of Land Tax (1965) S.A.S.R. 217 at pp.224-225 when he stated as follows in respect of the use which could be made of subsequent happenings:
"The only relevance of the negotiations and contract is therefore the type of relevance referred to by Williams J. in the Daandine case, cited in McCathie v Federal Commissioner of Taxation. The subsequent events cannot create an expectation which was not in existence at the relevant date, but the subsequent events 'can be taken into account in order to determine the proper weight to attach' to circumstances in existence at the relevant date."

In the present case the payments in subsequent years can, in my opinion, only be taken into account to confirm any suggestion made or indication given in relation to the first payment that the taxpayer could expect to receive in the future annual supplementations of his pension to compensate for the impact of inflation. In my opinion, after reading carefully the memoranda of March and April 1976 there was no such suggestion or indication from which the taxpayer could anticipate receipt of a like payment each year thereafter. In particular there was nothing which could reasonably suggest to him that the payment in question was the first of a series of annual payments.

In these circumstances I agree with the trial judge that the payment in question did not form part of the assessable income of the taxpayer. I would dismiss the appeal with costs.