Smith v Federal Commissioner of Taxation

[1987] HCA 48

HIGH COURT OF AUSTRALIA

Wilson, Brennan, Deane, Toohey and Gaudron JJ.

SMITH v. FEDERAL COMMISSIONER OF TAXATION

(1987) 164 CLR 513

13 October 1987

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Allowance paid to employee—Encouragement to Study scheme—Payments on completion of approved courses—Income Tax Assessment Act 1936 (Cth), s. 26(e).

Decisions

WILSON J. I have had the advantage of reading the reasons for judgment prepared by Toohey J. I agree with his conclusion and generally with the reasoning that leads to that conclusion. I wish merely to add some observations of my own.

2. The issue between the parties turns on the proper application to the facts of this case of s.26(e) of the Income Tax Assessment Act 1936 (Cth) as amended. Expressed in the language of that paragraph, the question is whether the sum of money paid to the appellant by reason of the successful completion of his course of study is a benefit given to him in respect of, or for or in relation directly or indirectly to, any employment of him.

3. If the payment be described as a gift, thereby emphasizing its voluntary character, that does not determine the answer to the question. The term "gift" is inconclusive, because, as Kitto J. observed in The Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation (1953) 86 CLR 570, at pp 627-628:

"... it is a commonplace that a gift may or may not possess an income character in the hands of the recipient. 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 how and why it came about that the gift was made."

4. Counsel for the appellant relied particularly on three decisions of this Court. In Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540 the Court refused to find the provisions of s.26(e) satisfied by circumstances where an employer made payments to a former employee to bring his army pay up to the salary he enjoyed when he was last employed. The payments in question were received during the year ended 30 June 1943. The employment relationship had terminated in July 1940. In their joint judgment Dixon C.J. and Williams J. noted, at p.554, that only "a mere historical connection" existed between the employment and the payments, this being insufficient to bring the money received within the terms of s.26(e). Their Honours made it clear that for a benefit to fall within the paragraph it must at least constitute "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". There is, of course, a contemporaneous relation between the employment and the payment in the present case. McTiernan J., at pp.558-559, distinguished between the contractual relations arising from the employment and personal or social relations between employer and employee. In his Honour's view, the scheme of supplementary payments fell outside the contractual relationship; although the taxpayer would not have received the payment but for the fact that at one time he had been in the employment, that circumstance did not necessarily make it a payment in respect of, or for or in relation directly or indirectly to, the employment. Webb J., at pp.562-563, resolved the issue on his view of the evidence, finding that the payments were made because of, and as a reward for, the taxpayer's enlistment and for no other purpose. Fullagar J., at p.564, expressed his view as follows:

"The payments were made irrespective of any services given by an employee as employee. The same bounty was available to one who had served for one month or for ten years.... 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 thought it accurate to describe the payments in the words of Fair J. in Louisson v. Commissioner of Taxes (1942) NZLR 30, at p 34, as given "out of a sense of appreciation of sacrifices made on the enlistment of employees ... and as a recognition of their public spirit in doing so". In my opinion, the facts in Dixon stand in marked contrast to those in the present case and little that was said by the Court in that case assists the appellant.

5. The decision of Fullagar J. in Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47 is also, in my opinion, of little assistance to the appellant. In that case the Commissioner sought to bring to tax a gift of shares made to Hayes in 1950 by a man who had employed him as an accountant from 1939 to 1944. His Honour did not find it necessary to consider in any detail the application of s.26(e) because he took the view that if the receipt of the shares did not fall within the general conception of income it was not caught by s.26(e). The correctness of that view remains an open question. In a passing reference to s.26(e), his Honour said, at p.54:

"The words 'directly or indirectly' are doubtless intended to cast the net very wide, but it is clear that there must be a real relation between the receipt and an 'employment' or 'services'."

The result of the case was determined by the finding of Fullagar J. on the facts that the gift was in no true sense a product or incident of any employment in which Hayes had engaged or any business which he had carried on.

6. The third decision upon which the appellant relies is that of Windeyer J. in Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514. The case is sufficiently described in the judgment of Toohey J. It is another case in which the facts bear no correspondence to the facts of this case.

7. Before leaving these cases, it is to be observed that the several judgments therein contain references to the fact that the benefit then under consideration did not bear the character of a reward or remuneration for services rendered. This is, of course, one test relating to the operation of s.26(e). But it is not the only test. The paragraph will be attracted if the benefit bears the necessary relation either to the employment of the taxpayer or to services rendered by the taxpayer. The phrase "services rendered" describes work actually performed by the taxpayer, whether in the capacity of a servant, independent contractor or otherwise. The breadth of operation of the phrase must "draw in situations not encompassed by the term 'employment'": Federal Commissioner of Taxation v. Cooke and Sherden (1980) 29 ALR 202, at pp 214-215. In such situations, in order to constitute income, the benefit must represent, directly or indirectly, a reward or remuneration for those services. On the other hand, there may be benefits which are taxable under s.26(e) because of their relationship to the ongoing "employment" relationship of the taxpayer to his employer. In this context, the benefit need not be related to any particular service rendered to the employer. It will be sufficient if it is allowed, given or granted to the taxpayer in respect of, or for or in relation directly or indirectly to his employment.

8. The problem presented by the present case is whether the facts establish the requisite relationship between the benefit received by the appellant and his employment. It is not sufficient to find that the appellant received the benefit at a time when there was an employment relationship existing between himself and the bank. The mere temporal connexion would not enable the payment to be characterized as a benefit given to him in relation directly or indirectly to his employment. It is tempting to strive to identify criteria which will assist in the process of characterization. But, however helpful such criteria may be, it is unwise to expect any paraphrase to provide a final or overriding test. Ultimately, it is the words of the statute that must prevail. Toohey J. finds it helpful to ask whether the benefit allowed, given or granted is a consequence of the employment of the taxpayer (see also Dixon C.J. and Williams J. in Dixon, at p.554). So do I. I also find it helpful to ask whether the benefit is a product or incident of the employment, as did Fullagar J. in Hayes, at p.57, and Windeyer J. in Scott, at pp.525-526. Of course, in each of those cases the asking of the question led to a different answer from that to which I have come in this case.

9. On the facts of the present case, I conclude that the benefit received by the appellant was a product or incident or a consequence of his employment. The gift, if it be so described, in no sense carried the overtones of a personal gift from the donor to the donee personally (cf. Squatting Investment, per Kitto J. at p.633). Nor is it sufficiently described merely as a gift from an employer to an employee. When all the circumstances are taken into account, the benefit is the product of a scheme embodied in the rules of the bank, and administered within that organization, designed to encourage not only the efficiency of employees within it but to provide them with the incentive to advance their prospects of promotion within the bank. In my view, the requirement of a relationship between the benefit and the employment necessary to attract the provisions of s.26(e) is satisfied.

10. I would dismiss the appeal.

BRENNAN J. The value to a taxpayer of certain "allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him" in the income year ended 30 June 1982 is brought to tax by s.26(e) of the Income Tax Assessment Act 1936 (Cth) ("the Act") as it then stood. In that income year, the appellant was paid an allowance (called an honorarium) of $570 by his employer, the Bank of New South Wales, in accordance with the Bank's "Encouragement to Study Scheme". A scale of allowances to be paid to employees for successfully completing particular courses or subjects was prescribed by general rules promulgated by the Bank. Subsequently a circular, directed to all the Bank's personnel, advised them that the scale had been revised. The question is whether the $570 "allowed, given or granted" by the Bank in accordance with the revised scale was, by reason of s.26(e), part of the appellant's assessable income for the year ended 30 June 1982.

2. The allowances the value of which is brought to tax by s.26(e) are allowances allowed, given or granted to an employee -

"in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him"

whether in money or otherwise. Liability to tax under s.26(e) does not arise merely because the taxpayer is an employee of or has rendered services to the person from whom the allowance is received: for example, a father's employment of a child does not necessarily make the value of a gift from the father to the child part of the child's assessable income. It is necessary that there be some connection between the payment of an allowance to the taxpayer and either his employment or services he has rendered. The language of s.26(e) is wide indeed. In Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540, Dixon C.J. and Williams J. said (at pp 553-554):

"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."

But their Honours held that some causal relationship is required. They said (at p.554):

"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."

It is not necessary that an allowance be paid as remuneration for the work which an employee is employed to perform; it is sufficient to attract s.26(e) that the allowance be paid to an employee in consequence of his employment. When is an allowance paid in consequence of employment?

3. In Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47, Fullagar J. applied a test which appears somewhat narrower than the text of s.26(e) would suggest. His Honour held s.26(e) did not apply to a gift of shares in a public company to an accountant from one of the directors of the company when the donor of the shares was "moved very largely by a general feeling of goodwill arising from a close relationship which had both a business aspect and a personal aspect" : p.56. His Honour did not regard the donor's motive as decisive. What was decisive, in his Honour's opinion, was "the fact that it is impossible to relate the receipt of the shares by Hayes to any income-producing activity on his part": p 56. And in Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514, where a solicitor received a gift of money from a grateful client, Windeyer J. held that the gift was not brought to charge. His Honour appeared to accept that the gift would fall within the literal terms of s.26(e) but he construed s.26(e) as bringing to charge only those receipts which are otherwise of an income nature. He said (at pp.525-526):

"... the enactment makes it clear that the income of a taxpayer who is engaged in any employment or in the rendering of any services for remuneration includes the value to him of everything that he in fact gets, whether in money or in kind and however it be described, which is a product or incident of his employment or a reward for his services. If, instead of being paid fully in money, he is remunerated, in whole or in part, by allowances or advantages having a money value for him they must be taken into account. The enactment does not bring within the tax-gatherer's net moneys or moneys' worth that are not income according to general concepts. Rather it prevents receipts of moneys or moneys' worth that are in reality part of a taxpayer's income from escaping the net." (Italics added.)

His Honour went on to say (at p.527):

"The relation between the gift and the taxpayer's activities must be such that the receipt is in a relevant sense a product of them."

His Honour adopted (at pp.527-528) a test derived from a judgment of Kitto J. in The Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation (1953) 86 CLR 570, at p 633:

"The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character ... and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally". (Italics added.)

4. The judgments in Hayes and Scott raise two related issues for consideration: first, does s.26(e) bring to charge only those pecuniary benefits which are "income according to general concepts"? And second, must a gift to an employee be paid in consequence of an income-producing activity on the part of the employee if it is to fall within s.26(e)? The first issue was left open by Gibbs J. in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45, at p 48, and in the Federal Court by Deane and Toohey JJ. and myself in Federal Commissioner of Taxation v. Cooke (1980) 29 ALR 202, at p 214. No doubt s.26(e) brings within the tax net benefits which might have been thought otherwise to escape by reason of the judgment of the House of Lords in Tennant v. Smith (1892) AC 150 but, as Toohey J. has shown in his judgment in this case, the operation of s.26(e) and its statutory predecessor was not limited to covering the problem arising from Tennant v. Smith. With great respect for the view expressed by Windeyer J., I do not find in the context of s.26(e) any ground for holding that the scope and effect of that provision is limited to bringing into the tax net the value of those benefits which are, according to general concepts, of an income nature, being benefits received in kind rather than in money. If an allowance is paid to an employee in consequence of his employment, s.26(e) is attracted whether or not the allowance is of an income nature.

5. The second issue focusses on the activity in consequence of which a gift is made, seeking a causal relationship between the gift and the activity. Section 26(e) speaks of a relationship between the making of the gift and the donee's employment or the services rendered by him; the provision does not speak of an income-producing activity. It may be that Fullagar J. and Windeyer J. were using the term "income-producing activity" or "activity ... of an income-producing character" as an embracing synonym for "employment or ... services rendered"; but if their Honours intended to distinguish between an income-producing aspect of employment and other aspects of employment or between an income-producing aspect of rendering services and other aspects of rendering services, the distinction finds no support in the text of s.26(e). Employment is more than the activity for which an employee is remunerated: employment comprehends all aspects of the relationship of employer and employee in the particular case save those aspects which are merely personal. If a distinction is to be drawn between the income-producing activity which is an aspect of employment and the entirety which constitutes employment, s.26(e) looks to the relationship between the entirety and the payment of the allowance.

6. The difficult problem which arises under s.26(e) is to identify the nature and degree of the relationship, if any, between the allowing, giving or granting to a taxpayer of an allowance, etc. on the one hand and the taxpayer's employment or the services rendered by him on the other. The difficulty is the greater when the allowance is paid not in discharge of a legal obligation but voluntarily. There is no doubt that voluntary payments may fall within s.26(e): see per McTiernan J. in Dixon, at p.558. If an allowance is paid under a contract between the payer and the taxpayer, the consideration for the payment is usually decisive of the matter "in respect of, or for or in relation ... to" which the allowance is paid, but if the allowance is paid voluntarily, it is necessary to inquire "how and why it came about that the gift was made" (to adopt the words of Kitto J. in The Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation, at p 628). See Federal Coke Co Pty Ltd v. Federal Commissioner of Taxation (1977) 15 ALR 449, at pp 472-473.

7. When an allowance is paid voluntarily by an employer to an employee, the ascertainment of any relationship between the payment and the employment raises some evidentiary problems. The motives of the employer might be thought to be the most direct evidence of how and why the employer made the gift, but an unexpressed motive, uncommunicated to the employee, can hardly be determinative of the character of the receipt in the hands of the employee. The importance of evidence of mere motive was discounted by Fullagar J. in Hayes (at pp.55):

" While I would not say that the motive of the donor in making the payment or transfer is, in cases of this type, irrelevant, motive as such will seldom, if ever, in my opinion, be a decisive consideration."

However, the admissibility and cogency of evidence of motive are not questions of substantive law: they relate to the means of proving the relationship between the payment and the employment. If the motive of the employer is communicated to the employee or is known by him, the common understanding of the motive for the payment may be cogent evidence of "how and why it came about that the gift was made". Again, there may be evidence of external indicia tending to show the reason for (or cause of) the payment. It is difficult to estimate the cogency of a class of evidence in the abstract. That is not a problem in this case, for the character of the allowance paid by the Bank to the appellant is not in doubt. Its character is established by the scheme promulgated by the Bank and acted on by the appellant. The allowance was paid because the Bank had a scheme for paying allowances to its employees and the appellant fulfilled the two requirements on which the payment of allowances under the scheme depended: the appellant was employed by the Bank and he completed a prescribed course. The question of law that arises on those facts is whether such a payment was made in consequence of the appellant's employment.

8. A provision couched in terms similar to s.26(e) was considered by the Supreme Court of Canada in Reg. v. Savage (1983) 83 DTC 5409. The taxpayer in that case, like the appellant in this case, had received a payment from her employer for successfully completing some courses designed to improve her work abilities. The Canadian Act included in a taxpayer's "income from an office or employment" the value of "benefits of any kind whatever ... received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment". The payment was held to fall within the provision. Speaking for the majority, Dickson J. (as he then was) rejected the applicability of English authorities construing a provision which did not contain the wide phrase "in respect of". He distinguished an earlier Canadian case (Estate of Phaneuf v. The Queen (1978) 2 FC 564 (T.D.); (1978) 78 DTC 6001) in which an employee received a beneficial option to acquire shares in his employer company under the will of the principal shareholder. The point of distinction was that, in Savage "there was no element of gift, personal bounty or of considerations extraneous to Mrs. Savage's employment". In my opinion, this approach is applicable to cases arising under s.26(e) where an allowance is made voluntarily by an employer to an employee. An allowance paid voluntarily to an employee for reasons extraneous to the employment is outside s.26(e). But if the payment of the allowance is made because of some aspect of the employment it is within the tax net, whether or not the material aspect of the employment is an income-producing activity. The same approach is exemplified by the decision of this Court in Dixon.

9. In Dixon, where an employer gave to employees who enlisted for service during the second World War a sum to make up the difference between service pay and the pay which the serviceman had received as an employee prior to enlistment, it was held by Dixon C.J. and Williams J., who were in the majority, that the payments were made in respect of or in relation to the payee's employment or service as a soldier, but the Court was unanimously of the opinion that the payments were not made in respect of or in relation to the payee's employment by his erstwhile employer. To adopt the words of McTiernan J. (at p.559), although the scheme "grew out of" the employment relationship, the scheme was "ultra that relationship". His Honour said (at p.560):

"The fact that the payment was voluntary is not per se a reason why the sum should not be taxable. It is an element in the scheme. The sum was a special contribution made to the respondent by reason of the circumstance that he sacrificed some of his income by enlisting. This was the dominant and determining factor. The sum was in a sense paid to him honoris causa."

Fullagar J. explained the reason for the payment in this way (at p.564):

"The whole substance of the matter is accurately stated by Fair J. in Louisson v. Commissioner of Taxes ((1942) NZLR 30, at p 34), where his Honour speaks of such moneys as 'given out of a sense of appreciation of sacrifices made on the enlistment of employees ... and as a recognition of their public spirit in doing so'. The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment."

10. Of course, it will frequently be a difficult question of fact to decide whether a particular allowance which is paid voluntarily is paid for a reason which brings the allowance into or for a reason which carries it out of the tax net. But if the employment (or some aspect of the employment) is the reason or one of the reasons why the allowance is paid, the allowance falls within s.26(e). A reason which is an insubstantial cause of the payment is immaterial, as the judgments in Dixon illustrate. But if an employee's employment or some aspect of that employment is a substantial reason why the allowance is paid, it cannot be said that the allowance is merely personal or that the payment is made for reasons extraneous to - or ultra - the employment. As the requisite relationship may be indirect as well as direct, it is immaterial that there is another reason why the allowance is paid or even that the other reason is the dominant one.

11. In this case, an allowance was payable only to those in the Bank's employment, and the scheme provided for payment of the allowance to any employee who qualified by completing a prescribed course. Although no course of study was mandatory for any employee, the approved courses were calculated to improve the skills of the Bank's employees. The scheme was an aspect of their employment. The allowance was not paid as a mere mark of an employer's personal esteem for particular employees. I am quite unable to say that the allowance was paid for considerations extraneous to the employment. On the contrary, the allowance was paid because it was an incentive to an employee to improve his skills to his own advantage and to the anticipated advantage of the Bank. The relationship between the employment of the appellant and the payment of the allowance was substantial. In my opinion, the employment was a direct cause of the payment. It follows that the allowance was paid "in consequence of" the employment, and thus was paid "in respect of ... or in relation ... to" the employment. The relationship prescribed by s.26(e) was established. The appeal should be dismissed.

DEANE J. I agree with the judgment of Gaudron J.

TOOHEY J. In his income tax return for the year ended 30 June 1982, the appellant disclosed that he had received "an Honoraria Payment of $570.00 under the Bank of New South Wales 'Encouragement to Study' scheme". Although the appellant claimed that the amount of $570 did not form part of his assessable income, the respondent included that amount and assessed the appellant to tax accordingly. The appellant's objection was disallowed, his appeal to the Supreme Court of New South Wales was allowed, but that decision was reversed by the Full Court of the Federal Court (Neaves and Wilcox JJ., Sheppard J. dissenting).

2. The amount is small and the issues are narrow. Yet as things stand, two judges (Yeldham J. in the Supreme Court of New South Wales and Sheppard J. in the Federal Court) decided in favour of the appellant and two judges (Neaves and Wilcox JJ.) held for the respondent. The appeal to this Court was argued largely by reference to s.26(e) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). That paragraph includes in the assessable income of a taxpayer:

" 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 ...".

There follows a number of exceptions, none of which is relevant in the present case. Some reference must also be made to s.25(1) of the Act, but first it is necessary to say something of the circumstances surrounding the payment of the $570.

3. The appellant was at all material times an employee of Westpac Banking Corporation. The "Encouragement to Study" scheme referred to in his income tax return is a scheme that the bank has had on foot for some years. It is set out in the bank's staff rules. Rule 635 begins:

" The Bank recognises the importance of study by its staff.

The following assistance is provided to encourage staff to undertake courses related to Banking."

4. The list of "approved courses of study" for which financial assistance is given may be taken at a range of tertiary institutions. They are particular courses described in the rules as "related to Banking", together with a catch-all reference to other courses related to banking "as may be approved from time to time".

5. Staff generally are eligible for the benefits of the policy. The bank endeavours to facilitate the placing of officers reasonably close to a place of study, assists where attendance at lectures during normal working hours is required, grants special study leave, refunds excess fares incurred in travelling to lectures, and makes interest free loans for the cost of essential textbooks and compulsory tuition fees. It makes payment, in accordance with a scale, for subjects passed as well as then reimbursing the cost of essential textbooks and compulsory tuition fees. There is one amount payable when each subject is passed and a further amount, in respect of that subject, when the course itself has been completed. An amount payable to an employee is paid together with his or her regular salary.

6. There is no doubt that the bank saw the advantage of the scheme to it as leading to the provision of better qualified staff and in turn better service to its customers. In a circular dated 5 May 1981, addressed to "All Personnel", the General Manager, Personnel Services, said:

" 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.

...

All officers should consider taking up further study to enhance their own development and career progression."

7. In 1978 the appellant began a four year Management Certificate course at Penrith Technical College. He completed that course in the financial year ended 30 June 1982. The sum of $570 referred to in his return was made up of two payments of $50 each for completing particular subjects together with an end of course payment of $470. In evidence the appellant said that he took the course to accelerate the progress of his career with the bank, to increase his chances of promotion while with the bank and to broaden his "market appeal" if he looked for employment elsewhere.

8. Although not formally stated, there was an assumption underlying the argument of counsel for the respondent that if the sum of $570 was not assessable by reason of s.26(e), it was not assessable under s.25(1). The precise relationship between s.25(1) and s.26(e) was therefore not fully argued. As Gibbs J. pointed out in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45, at p 47:

" Speaking generally, s.26 does not limit s.25 but includes as assessable income some receipts that might not ordinarily have been regarded as income."

Whether receipts falling within s.26(e) are within that description is a question that has not yet been determined. Gibbs J. left the matter open in Reseck for that case was concerned with the operation of s.26(d). In Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47, at p 54 Fullagar J. said:

" I doubt very much whether s.26(e) has 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."

Because of the way in which this appeal has been argued, it is unnecessary to try to resolve the doubt raised by Fullagar J. The matter must remain open though, having regard to the breadth of language used in s.26(e), there are strong arguments for the conclusion that receipts that might not ordinarily be regarded as income are included. There is however one aspect that, I think, must be dealt with.

9. Counsel for the appellant relied on what he said was a view expressed more than once in this Court (the cases were not identified) to the effect that s.26(e) found its way into the tax legislation to overcome a problem arising from the decision of the House of Lords in Tennant v. Smith (1892) AC 150. The question in that case was whether, in estimating the appellant's total income from all sources, there should be included the yearly value of a privilege of free residence in a house owned by the bank by which the appellant was employed. The answer given was that the yearly value of the privilege of free residence could not be brought into account. Several judgments were delivered by their Lordships; but in general the view was taken that the relevant schedules of the taxing statute were concerned with actual receipts of money or at any rate with things capable of being turned into money, and not with the value to the taxpayer of the benefit of living in premises rent free.

10. A quarter of a century separated Tennant v. Smith from the Income Tax Assessment Act 1915 (Cth), the first statute in which the content of s.26(e) appeared. The counterpart of s.26(e) in the 1915 legislation was s.14(g) which included in the income of a taxpayer:

" all allowances, gratuities (except retiring allowances and gratuities paid in lump sums) bonuses, and premiums, whether in money or goods or sustenance or land allowed given or granted to a taxpayer in respect of or for or in relation to any employment or service of such taxpayer to the amount of the value of such allowances, gratuities, bonuses and premiums respectively ...".

11. Section 14(g) was repealed and re-enacted as s.16(g) in the Income Tax Assessment Act 1922 (Cth), at which time the words "directly or indirectly" were added. The third report of the Royal Commission on Taxation in 1934 drew attention to the anomaly that would exist if subsidiary benefits arising out of employment were not taken into account in assessing income. Paragraph 896 of the report reads:

" We recommend that the rental value of a residence or quarters provided by an employer for use of an employee be included as part of the taxable income of the employee."

12. Section 26(e) found its way into the legislation of 1936. It was then that the notion of equating the income of the taxpayer with the value to him of certain benefits mentioned was established. But, leaving aside the question of value, subsidiary benefits had been the subject of legislation since 1915 and in a form that, at the outset at any rate, was not designed to meet any problems arising from Tennant v. Smith.

13. There can be no doubt that, in formulating s.26(e), the legislature chose words of wide import - "in respect of", "for or in relation to", "directly or indirectly". It remains true however that, notwithstanding the breadth of the language used, there must be a connection between the benefit received and the employment of the taxpayer or services rendered by him. In the present appeal we are concerned only with the nature of the relationship between the benefit received viz. the sum of $570 and the employment of the appellant by the bank.

14. Consideration of the scope and operation of s.26(e) often begins with a passage from the joint judgment of Dixon C.J. and Williams J. in Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540, at pp 553-554:

" 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. ... 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."

15. This passage should not be divorced from the context in which it was written. Mr. Dixon had been employed by Macdonald, Hamilton &Co., shipping agents, as a clerk in its Sydney office. In 1940 he voluntarily enlisted for service in the Australian Imperial Forces, and from shortly after that date until his discharge in 1945 he served in those forces in Australia and overseas. In 1946 Mr. Dixon began to work again for Macdonald, Hamilton &Co. At no time had he given any undertaking that he would return to the company upon completion of his war service nor had the company given him any undertaking that it would re-employ him. However, during the period of Mr. Dixon's war service, his employer paid to him a sum of money equal to the difference between the rate of his military pay and the rate of pay being received by him at the time of his enlistment.

16. The amount received by Mr. Dixon from Macdonald, Hamilton &Co. in the year in question was held to be part of his assessable income. But it was held to be so, not because of the operation of s.26(e) but in the words of Dixon C.J. and Williams J. at p.557:

" Because the 104 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."

Fullagar J., who was among the majority, took the view that the sum paid was within s.25 but that it was not so related to any employment of the taxpayer as to fall within s.26(e). McTiernan J., by implication, held that the sum did not fall within s.25 or s.26(e). Webb J. held that the sum was not within s.26(e); he did not advert to s.25.

17. What can be derived from the passage quoted from the judgment of Dixon C.J. and Williams J., and perhaps all that can be derived, is the notion that for s.26(e) to operate the allowance or benefit must in some sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee.

18. Judgment in Dixon was delivered on 11 December 1952. On the same day judgment was delivered in Constable v. Federal Commissioner of Taxation (1952) 86 CLR 402. No reference is made in the judgments in the one case to the judgments in the other. Constable concerned the assessability of moneys withdrawn by an employee from a provident fund into which he and his employer had paid. The Commissioner of Taxation included in the employee's assessable income so much of the sum withdrawn as corresponded with the contributions made by the employer and interest thereon, and with the interest on the contributions made by the employee. The Commissioner did not include any amount representing the employee's own contribution. Dixon C.J., McTiernan, Williams, Webb and Fullagar JJ. held that the moneys were not assessable within s.26(e). In a passage which has not attracted the same attention as the passage already quoted from Dixon, Dixon C.J., McTiernan, Williams and Fullagar JJ. said of s.26(e), at p.415:

" Upon the text of the paragraph it would seem that the liability of the sum, or any part of the sum, received by the present taxpayer during the year of income to inclusion in his assessable income must depend upon the answers to one or other or all of the following questions. Can that sum or any part of it be described as an allowance, gratuity, compensation, benefit, bonus or premium? If so, can it be said of it that it was 'allowed, given, or granted to him' during that year? If an affirmative answer is given to these two questions, then is it correct to say of the amount or any part of it that it was so allowed, given or granted to him 'in respect of, or for or in relation directly or indirectly, to any employment of him or services rendered by him?' ... It is evident that it is enough for the taxpayer if any of the foregoing questions is answered in the negative."

19. The Court held that the amounts in question were not assessable; it did so because it delivered a negative answer to the first question.

20. It is true that the passage from Constable does little more than restate the language of s.26(e) itself. But, for the purposes of the present appeal, it does isolate the one question upon which the outcome of the appeal depends. Was the amount received by the present appellant allowed, given or granted to him in respect of, or for or in relation directly or indirectly to his employment by the bank? The answer to that question must, I think, be yes.

21. Whether the expressions "in respect of" and "in relation to" are synonymous may be arguable. But I would adopt the following passage from the judgment of the Supreme Court of Canada in Nowegijick v. The Queen (1983) 144 DLR (3d) 193, at p 200, delivered by Dickson J.:

" The words 'in respect of' are, in my opinion, words of the widest possible scope. They import such meanings as 'in relation to', 'with reference to' or 'in connection with'. The phrase 'in respect of' is probably the widest of any expression intended to convey some connection between two related subject-matters."

The passage was endorsed by the Supreme Court of Canada in The Queen v. Savage (1983) 83 DTC 5409, at p 5414. In Savage the taxpayer, who was employed by a life insurance company as a research assistant, received a sum of money from her employer as an award for passing three life insurance courses which she had taken voluntarily. A majority of the court (Ritchie, Dickson, Lamer and Wilson JJ.) held that the amount at issue was a benefit in respect of the taxpayer's employment and was therefore subject to income tax unless exempted by another section of the Income Tax Act 1970 (Canada). The Court then held unanimously that the payment was exempt as falling within the phrase "prize for achievement in a field of endeavour ordinarily carried on by the taxpayer".

22. The amount received by the present appellant was an amount allowed, given or granted to him in respect of his employment. It was paid by the bank in accordance with a policy designed to encourage its employees to increase their knowledge in subjects relevant to the banking industry and therefore to increase their proficiency as employees. It is not to the point that the courses might stand employees in good stead if they later changed their employment. The sum paid to the appellant was one of many such sums paid by the bank to its employees under its "Encouragement to Study" scheme. There was an evident connection between the appellant's employment and the sum he received. And in a very real sense the payment was a consequence of the existing relation of employer and employee. It was only as an employee that the appellant qualified for the benefits payable under the scheme. Borrowing the language of the majority in Savage at p.5414, there was no element of gift or personal bounty or of considerations extraneous to the appellant's employment.

23. It is necessary to make reference to three decisions of this Court relied upon by the appellant. In my view, except to the extent that the judgments contain express reference to s.26(e), they do not assist in the disposition of this appeal.

24. Dixon has already been mentioned and the point has been made that the sum received by Mr. Dixon was regarded as income according to ordinary concepts. The decision does not provide an authoritative answer in the circumstances of the present appeal.

25. In Hayes v. Federal Commissioner of Taxation the taxpayer was an accountant who had been employed on a full time basis from 1939 to 1942. Two years later, his employer's business was taken over by a proprietary company and the taxpayer became a shareholder and a director and secretary of the company. In 1947, the business having deteriorated, Mr. Hayes' former employer agreed to resume control of the business but only on condition that he held all the shares in the company. Mr. Hayes, who had become a shareholder after he ceased to be a full-time employee, reluctantly parted with his shares at a price he considered to be less than their potential value, his former employer telling him that he would make it up to him some day. On the incorporation of the company as a public company some years later, the former employer received a large number of shares some of which he gave to Mr. Hayes. Fullagar J. held that the receipt of shares by Mr. Hayes was not a receipt of income and was no more than a simple gift of property. In the view of Fullagar J., if the receipt of the shares did not fall within the general conception of income it was not caught by s.26(e). It was therefore unnecessary for his Honour to consider the full implications of s.26(e).

26. Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 concerned a solicitor who had acted for a client for many years and who, in addition to proper remuneration for his services as a solicitor, was given a large sum of money by his client. Windeyer J. held that the gift did not fall within the general understanding of income. He also took the view that s.26(e) did not bring to tax moneys or money's-worth that were not income according to ordinary concepts. Scott was of course not concerned with the relation of employer and employee. Nevertheless it is true that at pp.525-526 Windeyer J. said:

" As I read s.26(e) its meaning and purpose is to ensure that certain receipts and advantages which are in truth rewards of a taxpayer's employment or calling are recognized as part of his income. In other words the enactment makes it clear that the income of a taxpayer who is engaged in any employment or in the rendering of any services for remuneration includes the value to him of everything that he in fact gets, whether in money or in kind and however it be described, which is a product or incident of his employment or a reward for his services."

What his Honour said concerning s.26(e) was obiter. But if this passage be thought to impose a test different to that which asks whether the benefit allowed, given or granted was a consequence of the employment of the taxpayer, I respectfully adhere to the latter test.

27. In my view the appeal should be dismissed.

GAUDRON J. The appellant was at all relevant times an employee of the Bank of New South Wales, now known as Westpac Banking Corporation. That Bank maintains an "Encouragement to Study" policy under which employees who undertake courses of study approved by the Bank receive certain payments described in the policy as "honoraria". Payments are made for the successful completion of subjects passed in the approved courses, and for the successful completion of the courses.

2. The evidence establishes that to receive payment, the person undertaking the course of study must be in the Bank's employ at the time of the successful completion of the subjects or the course of study, and also at the time when the payment is made.

3. The appellant, Mr Smith, successfully undertook an approved course of study, and on completion of the course received payment of the sum of $570.00. That sum was included by the Commissioner of Taxation in the appellant's assessable income for the year ending 30 June 1982, and income tax was assessed thereon. An objection was disallowed by the Commissioner. An appeal by the taxpayer was allowed by the Supreme Court of New South Wales, but subsequently disallowed by the Full Court of the Federal Court. An appeal is now brought from the judgment and orders of the Full Court of the Federal Court.

4. The question for determination in this appeal is whether the payment made to the taxpayer falls within the provisions of s.26(e) of the Income Tax Assessment Act 1936 (Cth). That paragraph provided, at the relevant time, that the assessable income of a taxpayer shall include:

"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".

There follows a proviso by which is excepted certain benefits which are not relevant to the present matter.

5. The relationship to which s.26(e) is directed is the relationship between benefit allowed, given or granted and "employment of or services rendered". Although the operation of the paragraph in relation to "services rendered" is to include benefits received in relation thereto by a person rendering services otherwise than as an employee, the juxtaposition of "employment" and "services rendered" also indicates that the benefits referred to in the paragraph must relate to the employment of the taxpayer, and not merely to the existence, present or past, of an employer and employee relationship (see Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47, at pp 56-57). Thus the fact that eligibility to receive payments under the Bank's "Encouragement to Study" policy depended on a continuing employer and employee relationship at the time of successful completion of the subjects or course and at the time of payment does not of itself constitute a relationship sufficient to satisfy the paragraph.

6. The necessary relationship between the benefit given and the employment of the taxpayer was expressed in negative terms in a passage, which was much relied upon in argument, in the joint judgment of Dixon C.J. and Williams J. in Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540, at p 554. That passage reads:

"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."

7. Expressed positively, in relation to a taxpayer whose employment is continuing (as is here the case), the passage identifies the necessary relationship as:

1) recompense for the relationship of employer and employee, or

2) consequence of the relationship of employer and employee, or

3) reward for services rendered.

8. The subject payment of $570 to the taxpayer was neither recompense for the relationship of employer and employee nor reward for services rendered. It was recompense or reward for completing an approved course of study which, although approved by the Bank, was required neither as a condition of the relation of employer and employee, nor as a qualification necessary for the rendering of services in that relationship.

9. The consequential relationship between payment of the benefit and the relation of employer and employee is not constituted simply by a definitional requirement of a continuing employer and employee relation as a condition of eligibility to receive payment, for the paragraph is concerned with the allowing, giving or granting of the relevant benefit, and not with eligibility to receive the benefit.

10. In the present case the Commissioner of Taxation relies on a number of matters, additional to the eligibility requirement, to establish that the amount paid was paid in consequence of the employment relationship. Those matters are the highly organized nature of the Bank's "Encouragement to Study" policy, the large number of employees who have participated therein, the publication of the policy within the Bank's staff rules, the Bank's requirement that the courses undertaken have some relevance to banking, the advantages to the Bank of having suitably qualified staff, and the Bank's practice of making payments pursuant to the policy in the same manner and at the same time as ordinary salary. It seems to me that, apart from the two matters relating to the nature of approved courses and the advantages to the Bank of having suitably qualified staff, these are matters of administration, rather than matters indicative of a relationship between employment and the payment in question. On the other hand, the advantages to the Bank of the policy and the Bank's requirement that courses have relevance to banking indicate that the Bank's motives in the establishment, maintenance and administration of the policy are employment related. But the motivation of the Bank in establishing and maintaining the policy does not provide any relevant causal link between the employment of the taxpayer and the making of any particular payment. The proximate cause of that payment is the successful completion of a subject or a course of study. Less proximate causes of the payment include the employee's undertaking the requisite course work, and enrolling in the course of study. Still less proximate is the existence of the Bank's policy under which payments are made. The fact that the policy exists because of the advantages to the Bank in having suitably qualified employees, does not serve, in my view, to make the payment a payment made in consequence of the relation of employer and employee, or in the words of the paragraph "in respect of, or for or in relation directly or indirectly to, (the) employment of" the taxpayer, for the paragraph looks, not to a relationship between payment and employment related benefits to an employer, but to a relationship between a particular benefit allowed, given or granted to a taxpayer and his employment.

11. I would allow the appeal, and set aside the judgment and orders of the Full Court of the Federal Court.

Orders

Appeal dismissed with costs.