Murdoch v Commissioner of Pay-Roll Tax (Vic)

[1980] HCA 33

HIGH COURT OF AUSTRALIA

Gibbs, Stephen, Mason, Murphy and Wilson JJ.

MURDOCH v. COMMISSIONER OF PAY-ROLL TAX (VICT.)

(1980) 143 CLR 629

2 September 1980

Pay-Roll Tax (Vict.)

Pay-roll Tax (Vict.)—Wages—Bonuses paid to an employee as such—Business conducted under will trusts—Part of net profits of business required to be distributed amongst employees for the time being engaged in it in proportions in trustees' discretion—Whether distributions taxable wages—Pay-roll Tax Act 1971 (Vict.), ss. 3 "taxable wages", 6, 7, 8.

Decisions

September 2.
The following written judgments were delivered: -
GIBBS J. The appellants, the trustees of the will of George Adams, who died in 1904, are given powers by the will to conduct a sweepstake business formerly conducted by the testator. Clause Y. of the will commences with the following words:

"AND I DIRECT my Trustees to stand possessed of the net profits which may arise from the carrying on and continuance of my said business under the power for that purpose hereinbefore given UPON TRUST to pay the same to the persons and for the purposes hereinafter named and mentioned in the following proportions . . . ."

The clause goes on to name various persons and to state the proportions in which they are respectively entitled and concludes with the following words:

"TO be distributed between and amongst such of the Employees for the time being engaged in the said business and in such proportions in all respects as my Trustees shall in their absolute discretion think fit one-tenth."

Pursuant to this provision the trustees have for many years distributed one-tenth of the profits amongst the employees of the business. At the relevant times, the months of December 1976 and June 1977, payments totalling $1,200,662 were made to employees under this provision. The evidence, which the learned trial judge accepted, showed that the trustees in fact made the distribution to the employees in accordance with the respective worth of each to the business; to use the words of the trustee who gave evidence, "it depends on the value of the employee to the business assets". Accordingly, some employees received substantial amounts; others less, and some none at all. The question for decision on this appeal is whether the appellants were liable to pay pay-roll tax under the Pay-roll Tax Act 1971 (Vict.), as amended ("the Act"), on the moneys so paid. (at p634)

2. By s. 7 of the Act, pay-roll tax is imposed on "all taxable wages" and by s. 8 the tax is to be paid "by the employer by whom the taxable wages are paid or payable". Section 3 defines "taxable wages" to mean "wages that, under section 6, are liable to pay-roll tax". Section 6, so far as it is material, is in the following terms:

"Subject to section 10, the wages liable to pay-roll tax under this Act are wages that are paid or payable by an employer after the month of August, 1971 (whether in respect of services performed or rendered before, during or after that month), and - (a) are wages that are paid or payable in Victoria, (not being wages so paid or payable in respect of services performed or rendered wholly in one other State); (b) are wages that are paid or payable elsewhere than in Victoria in respect of services performed or rendered wholly in Victoria; or (c) are wages that are paid or payable elsewhere than in Australia in respect of services performed or rendered mainly in Victoria . . ."

The words "employer" and "wages" are defined in s. 3; the material parts of those definitions are as follows:

"'employer' means any person who pays or is liable to pay any wages . . ."; "'wages' means any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employe as such . . . ."

In the present case the appellants, who made the payments, were the employers of the recipients. It is therefore unnecessary to consider the effect of the definition of "employer" as any person who pays "wages", which seems to make it unnecessary that the relationship of employer and employee in accordance with common law principles should exist between the payer and the payee. Where that relationship does exist, however, the critical question is "whether the payment is one which the employer makes to the employee because of something done in the service of the employer": W.A. Flick &Co. Pty. Ltd. v. Federal Commissioner of Taxation (1959) 103 CLR 334, at p 339 . In other words, as Starke J. said in Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 389, at p 401 , the tax is payable "upon payments made in cash or in kind for services rendered". In the same case, both Dixon J. (1944) 69 CLR, at p 403 and Williams J. (1944) 69 CLR, at p 406 indicated that the subject of the tax is remuneration for work. The necessity for a close connexion between the payment and services rendered by an employee is indicated not only by the provisions of s. 6, but also by the fact that a payment only comes within the definition of "wages" if it is paid to an employee "as such". Those words, in their ordinary sense, simply mean "as an employee" or "in the character of an employee", and have the effect that the definition of "wages" comprehends "only payments made to an employee in connection with and by reason of his service as an employee or in respect of some incident of his service": Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR, at p 396 . However, if the critical test is satisfied, it is not necessary that the payment should be one to which the employee is contractually entitled; the definition of "wages" includes a bonus, which, as Kitto J. said in Attorney-General (Cth) v. Schmidt (No. 3) (1963) 109 CLR 169, at pp 172-173 , generally means "a gratuitous addition to contractual remuneration". (at p635)

3. The question whether the payments made to the employees can properly be regarded as payments made because of something done by them in the service of the appellants, or as payments for services rendered, is one of considerable difficulty, as the difference of opinion in the Supreme Court indicates. On behalf of the appellants it was submitted that the entitlement of the employees to the payments was to be found in the will, that their remedy if they were not paid was an action for breach of trust, and that the payments were therefore made to the recipients in the character of beneficiaries, and not in the character of employees. Serious questions arise as to the validity of the provisions of the will in question, and as to their effect if valid. In 1907 an originating summons taken out of the Supreme Court of New South Wales by the executors and trustees of the will was heard by Street J., and one of the questions raised was "Whether the trust in favour of the employees for the time being engaged in the 'Tattersall Sweep Consultation care of George Adams' in the said Will mentioned is void for uncertainty or otherwise?" Street J. rejected an argument that the provision in question infringed the rule against perpetuities or was void for uncertainty, and answered the question in the negative. In Blair v. Curran (1939) 62 CLR 464, at p 527 Dixon J. pointed out the difficulty of accepting the correctness of this view, but the order of Street J. of course bound the trustees in the administration of the estate. The order does not bind the respondent Commissioner, but he concedes for the purposes of the present proceedings that the relevant provision of the will is valid. If necessary, however, he relies on the suggestion made by Dixon J. in Blair v. Curran (1939) 62 CLR 464, at p 527 , that in order to make the provision good it may be necessary to construe it "as giving the employees no title as a class beneficially interested in the discretionary trust and as being no more than a direction operating for the benefit of the named persons sharing in profits, a direction, in effect, to distribute a bonus among employees, not for their benefit, but to obtain better service in the interest of the business." (at p636)

4. If the question for decision were simply whether the payments were made to the employees because they were employees, the answer would be in the affirmative, since the only persons eligible to share in the distribution under the relevant provision of the will are employees for the time being engaged in the business. However, to attract tax the payments must be made to the employees in respect of the services which they rendered. The will itself does not provide that payment is to be made to employees because of something done in the service of the employer. If clause Y. is understood according to its own terms it gives the trustees an absolute discretion to select any employees as the recipients of the bounty - not because they are hard working or worthy, but, if the trustees so decide, because they are impecunious, artistic, good at sport, or in need of further education. Even if the clause is construed in accordance with the suggestion of Dixon J. in Blair v. Curran, it is not quite clear that an employee is entitled because of the services that he has already rendered; the suggestion is that the payment is to encourage better service in the future. (at p636)

5. I do not deny that, in deciding whether the Act applies, it is right to consider the manner in which the appellants actually exercised their discretion. The whole of the circumstances must be considered in determining the nature of the payment. But when all the circumstances are considered what appears is that the appellants were bound by the decision of a court to administer the estate of the testator on the footing that there was a valid trust in favour of employees for the time being engaged in the business and that, in the exercise of the absolute discretion conferred on them by the will, they made payments to the employees in accordance with their value to the business. (at p637)

6. In a sense it is equally true to say that the employees to whom payments were made received them as employees, as that they received them as beneficiaries. It is therefore possible to bring the payments within the words of the Act, if those words are strictly and literally construed. But with the greatest respect I cannot agree that the Act was intended to tax payments made under trusts genuinely created, or that a payment made to a beneficiary who is an employee is rightly characterized as remuneration for services rendered. It should be observed that there is no element of sham or attempted tax-evasion in the present case; the will was made long before pay-roll tax was introduced. It is a fundamental rule of construction that the statute should be construed as a whole and that the literal meaning of the words of a particular provision may be restricted (or of course expanded) by reference to the general scope and intention of the statute. The decision of Windeyer J. in Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 provides a pertinent example. There the question was whether a gift made by a client to her solicitor was income within general concepts or within s. 26 (e) of the Income Tax and Social Services Contribution Assessment Act 1936 (Cth), as amended. The latter provision referred to "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. . .". Windeyer J. said (1966) 117 CLR, at p 524 , that the meaning and effect of this provision was "not to be answered by reading the words in the abstract with the aid of a dictionary. Their meaning and the limits of their denotation must be sought in the nature of the topic concerning which they are used." He went on to hold that although the words of s. 26 (e), if literally understood, covered the case, the transaction was not within their scope, having regard to the subject of the enactment as a whole (1966) 117 CLR, at pp 524-526 . (at p637)

7. In my opinion the Act is concerned with payments that can rightly be regarded as remuneration to employees for their services, although the form which the remuneration takes, and whether there is a contractual right to it, do not matter. The payments in the present case were made as the result of the exercise by the appellants, in the character of trustees, of powers under a provision in the will which they were bound to treat as creating a valid discretionary trust. Payments of that kind, at least when not made as a device to conceal their real nature, should not properly be regarded as remuneration in respect of services rendered, and were not, in my opinion, of the kind which the Act intended to tax as part of the "pay-roll". (at p638)

8. I would allow the appeal. (at p638)

STEPHEN J. The facts of this matter, as well as the relevant provisions of the Pay-roll Tax Act 1971 (Vict.) as amended, appear from the reasons for judgment of my brothers Mason, Murphy and Wilson JJ. (at p638)

2. The question is whether or not the appellants are liable to payroll tax on sums paid by them to a large number of their employees during the year ending 30th June 1977. The Act selects as the criterion of liability the payment of taxable wages by any person who pays any wages - s. 8, read with the definition of "employer" in s. 3 (1). However, the effect of s. 6 of the Act is to make the present payments "taxable wages" so long as they fall within the definition of "wages". The presently relevant part of that definition consists of the words "bonuses. . . paid. . . to an employe as such". (at p638)

3. Were it not for the circumstance that the appellants, who are the trustees of the trusts of the will of the late George Adams, made the payments pursuant to the terms of the testator's will, there could be no doubt but that the payments are "wages" as defined, attracting liability to pay-roll tax accordingly. They are otherwise appropriately described as bonuses and, as the evidence establishes, were paid to the recipients because they were employees and because of the worth of their services as such employees. (at p638)

4. The appellants contend that, because the payments have the character of sums paid by the trustees of a will pursuant to the terms of that will, they cannot also fall within any part of the statutory definition of "wages". Yet it is within undoubted legislative competence to attach fiscal liability to payments of any description, for that purpose selecting any characteristics of payments as criteria of liability. The legislature has here enacted that payments which answer the description of "wages", as defined, will carry fiscal consequences and has failed to exempt from those consequences payments which also bear other descriptions relevant in other circumstances. The question is simply whether or not the payments in question do meet the statutory description of "wages". If so, fiscal consequences follow. (at p639)

5. In the present case the testator, by the terms of his will, and the appellants, by the way in which they have chosen to exercise the discretion conferred upon them by that will, have combined to confer upon these payments qualities which result in their falling squarely within one part of the statute's definition of "wages". Their combined efforts have resulted in payments being made by persons, the appellants, who are undoubtedly employers, to persons who are no less clearly their employees. And because these payments were made to particular recipients solely because they were employees whose services proved of particular value to the employers, they could not better answer the description of amounts paid to "employes as such". They answer no less happily the description of "bonuses", being "occasional or periodical additions whether contracted for or voluntary": per Dixon J. in Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 389, at p 403 , and see In re the Income Tax Acts (No.3) (1904) 29 VLR 735, at pp 741-742 and the Oxford English Dictionary: "bonus". In the absence of any statutory exemption in favour of payments made pursuant to the terms of a will, the fact that these payments possess that character will not avail the appellants: that fact is simply irrelevant to the appellants' liability to tax, as is the existence of any equitable remedies available to enforce such duties as the appellants may have as trustees of the will of the deceased. (at p639)

6. It is no accident that the actions of the testator and of the appellants should have combined to confer upon amounts payable under the terms of this will the character of "bonuses paid to an employe as such". In doing so they have acted no differently from the general run of employers who make payments to their employees over and above ordinary wages or salaries, payments which are commonly described as bonuses. The testator intended that his successful business as "a conductor of sweep consultations" should continue to be carried on by his trustees after his death, and he directed that a share of its net profits should periodically be distributed by them in such proportions amongst such of the employees for the time being engaged in the business as they should think fit. He thereby ensured that there would exist a relationship of employer and employee between his trustees and the employees of his business and that some at least of those employees would, as members of the class of "employees for the time being", receive payments from the trustees. (at p640)

7. The appellants, as trustees, in their turn decided that their selection of particular employees and their determination of how much each selected employee should receive would be determined by reference exclusively to an employee's "worth to the business". They thus ensured that it would be each recipient's qualities as an employee that determined what, if any, half-yearly payment he would receive. There is, therefore, no unreality in treating these payments as bonuses. They serve, and are intended by the appellants to serve, precisely those purposes for which employers customarily pay bonuses to their employees. (at p640)

8. Having so arranged matters, no doubt much to the benefit of the efficient conduct of the business, it follows that the fiscal burden of this legislation, which imposes a tax upon those who pay "bonuses . . . to an employee as such", falls upon the appellants. (at p640)

9. I would dismiss this appeal. (at p640)

MASON, MURPHY AND WILSON JJ. The appellants are the trustees of the will of George Adams, deceased. Pursuant to the authority of the will they carry on the business of the testator known as Tattersalls, a "sweep consultation" business. The trustees are authorised and empowered to carry on the business "with the fullest most complete and most absolute powers in all respects as if they were the sole owners thereof" (cl.X). Clause Y of the will opens with the following words:
"AND I DIRECT my Trustees to stand possessed of the net profits which may arise from the carrying on and continuance of my said business under the power for that purpose hereinbefore given UPON TRUST to pay the same to the persons and for the purposes hereinafter named and mentioned in the following proportions namely: - . . ."
Then follows the names of twelve persons among whom eight-tenths of the net profits referred to are to be distributed in the specified proportions, and the clause concludes:

"TO be distributed between and amongst such of the Employees for the time being engaged in the said business and in such proportions in all respects as my Trustees shall in their absolute discretion think fit one-tenth."

During the financial year ending 30th June 1977 the trustees in obedience to the direction contained in this clause paid sums amounting in total to approximately $1.2 million to many of the four hundred persons in their employ at that time. Mr. Kilgour, the senior trustee, gave evidence before Jenkinson J. and described the payments as "bonuses". He said they were paid according to the value of the employee to the business. Some employees received very substantial amounts, some smaller amounts, and some none at all. (at p641)

2. The question in the appeal is whether these payments are "wages" within the meaning of that term in the Pay-roll Tax Act 1971 (Vict.), as amended ("the Act"). The respondent Commissioner assessed the trustees to tax in respect of them, whereupon the trustee appealed successfully to the Supreme Court of Victoria (Jenkinson J.) (1979) 10 ATR 238; 79 ATC 4362 . The Commissioner then appealed to the Full Court, which, by a majority (Crockett and Marks JJ., McInerney J. dissenting) allowed the appeal and restored the original assessment of the Commissioner (1980) 10 ATR 629; 80 ATC 4085 . The trustees, as of right, now bring the matter to this Court. (at p641)

3. The Act imposes a tax upon employers in respect of certain wages. The tax is imposed by s. 7 on all taxable wages, which are described in s. 6. It is payable by the employer by whom the taxable wages are paid or payable (s. 8). Section 3 (1) defines the relevant terms as follows:

"'employer' means any person who pays or is liable to pay any wages. . . 'wages' means any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employe as such and, without limiting the generality of the foregoing, includes - (a) any amount paid or payable by way of remuneration to a person holding an office under the Crown in right of the State of Victoria or in the service of the Crown in right of the State of Victoria; (b) any amount paid or payable under any prescribed classes of contracts to the extent to which that payment is attributable to labour; (c) any amount paid or payable by a company by way of remuneration to a director or member of the governing body of that company; (d) any amount paid or payable by way of commission to an insurance or time-payment canvasser or collector; and

(e) the provision by the employer of meals or sustenance or the use of premises or quarters as consideration or part consideration for the employe's services". (at p641)

4. The definition of "wages" contains the words which are of critical importance to the resolution of the appeal. If the payments in question are to be held liable to pay-roll tax it will be because they are "bonuses . . . paid . . . to an employe s such . . .". With respect, we find acceptable the description of a bonus which was given by McInerney J. in the Supreme Court (1980) 10 ATR, at p 630; 80 ATC, at p 4086 :

"A bonus imports, in the case of an employee or agent, something given or paid over and above what is due and payable for his services. Often it is paid out of profit realised, in reward to those whose services have contributed to the making of the profit. . . . in the case of an employee the payment of a bonus is ordinarily made as a voluntary gift, ex gratia, in recognition of the extent to which the services of that employee have contributed to the making of the profit".

(Cf. also Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 389, at pp 396, 399, 401, 403 .) The significance attaching to the fact that to come within the definition of "wages" the payments must be made "to any employee as such" is emphasized by Latham C.J. in the Mutual Acceptance Case (1944) 69 CLR, at p 396 in the following words: "They therefore comprehend only payments made to an employee in connection with and by reason of his service as an employee or in respect of some incident of his service. Thus a merely personal gift by an employer to a person who happened to be an employee would not be included within 'wages', though a bonus paid to employees because they were employees would be so included." (at p642)

5. It is common ground that in fact the payments in question were paid to employees of Tattersalls by their "employer", and that they were paid out of the net profits of the business. It is also accepted that in choosing the recipients and in determining the amount of the payment in each case the "employer" had regard to the value of the services rendered to the business by the particular person. If that were all, then it would seem to follow without doubt that the payments were subject to pay-roll tax. (at p642)

6. But Mr. Hulme, for the appellant, argues that this is not so. The payments were not "wages" within the meaning of the Act. They were moneys paid to the recipients, who happened to be employees, by the trustees of the will of the late George Adams, who happened to be the employer, in the performance of a trust. The employees received the payments, not because they were employees, but because they were the beneficiaries of the generosity of the testator. If the employer neglected to make the distribution contemplated by the will, the remedy would be provided by the law relating to breach of trust rather than master and servant. The payments were therefore not made to any employee "as such". The fact that the trustees, in the exercise of their discretion, have regard to the value of the contribution of each employee to the profitability of the business may provide a connexion between the payments and the business, but even if that be so it is not a relevant connexion. It is within the range of discretion accorded to the trustees to vary the criteria governing the distribution, so as to have regard to poverty, family needs, education requirements, or sickness none of which have any immediate connexion with the business. Mr. Hulme argues that the particular considerations attending the payments in a particular year were not material, and that the court should rely on the provisions of the will and nothing more to discover their true character. He observes that it is within the discretion of the trustees to convert the business into a company in which the employees for the time being might hold shares and receive the share of the profits which it was within the contemplation of the will that they should receive in the form of dividends and that moneys bearing such a character clearly would not attract payroll tax. (at p643)

7. On the other hand, Mr. Merralls, for the Commissioner, argues that there is no necessary dichotomy between the competing propositions, and that the payments are caught by the Act notwithstanding, if it be the case, that they are made, pursuant to a trust, to beneficiaries under a will. He does not concede that the latter description is apt, having regard to the observations of Dixon J. in Blair v. Curran (1939) 62 CLR, at p 527 directed to the particular clause in this same will:

"Upon the bare construction of the provision for distributing one-tenth of the profits among the employees, I should have thought that employees for the time being were beneficially interested in the discretionary trust. But this means that a class took a beneficial interest who were not necessarily ascertained within the period limited by the rule against perpetuities. If this were so, the provision would be void. Indeed there is no escape from the conclusion that the provision contravenes the rule against perpetuities, unless it is construed as giving the employees no title as a class beneficially interested in the discretionary trust and as being no more than a direction operating for the benefit of the named persons sharing in profits, a direction, in effect, to distribute a bonus among employees, not for their benefit, but to obtain better service in the interests of the business. The order of Street J. has declared the provision good, and it may, therefore, be right to adopt some such construction."

Of course, there being no challenge in this case to the validity of the bequest, we are concerned only with its proper construction. If the alternative construction suggested by Dixon J. were to be accepted, then the submission of the appellants would be seriously disadvantaged. However, in the light of the conclusion which we have reached, it is unnecessary to pursue the distinction. (at p644)

8. In our opinion, the solution to the problem is to be found in the application of the provisions of the Act to the particular circumstances of the case. In our opinion, such legal character of the payments as may be deduced from the terms of the will are not determinative. In other words, the Act, like all taxing statutes, takes a pragmatic line. So understood, in order to attract the tax the payments must satisfy three requirements: they must be paid by the employer; they must answer the description of "wages" as defined; and they must be paid to employees as such. Mr. Merralls drew attention to the definition in the Act of "employer" as tending to denude the term of any significance beyond the fact that it refers to any person by whom wages are paid. On the other hand, the concept of "wages" would seem necessarily to ground the relationship of payer and payee in that of master and servant. In any event, we find the first requirement to be satisfied. The appellants were in fact the employers of those who received the payments, and it is not to the point that in doing so they may have acted in obedience to a trust. (at p644)

9. The second and third requirements are closely related, in the sense that one cannot be satisfied without at the same time satisfying the other. It is helpful to consider the circumstances of this case in the light of the test suggested by Latham C. J. in the Mutual Acceptance Case to which we have referred (1944) 69 CLR, at p 396 . Is it possible to describe the payments in question as "a merely personal gift by an employer to a person who happened to be an employee"? 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. (at p644)

10. The key features of the payments are their source and their destination. They came from the net profits of the business, and they were made only to persons who were employees for the time being of that business. In our opinion, therefore, they were "wages" paid to "employees as such", and the Commissioner was correct in assessing them to pay-roll tax. Our conclusion does not rest on the criteria applied by the trustees in making the distribution. On the other hand, although we do not regard those criteria as irrelevant, they certainly support the conclusion. But even if other criteria, as suggested in argument, were adopted, in our opinion it does not follow necessarily that the payments would not attract liability to pay-roll tax. Ordinarily they would still seem to be rightly described as remuneration paid to employees because they were employees. (at p645)

11. We would dismiss the appeal. (at p645)

Orders

Appeal dismissed with costs.