Between: Federal Commissioner of Taxation
And: French

Judges: Dixon CJ
McTiernan J
Williams J
Kitto J

Taylor J

Subject References:
Taxation and revenue
Income tax
Exempt income
Whether derived 'from a source out of Australia'

Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 (No 27) - the Act
Judiciary Act 1903 - s 18

SYDNEY

Judgment by:
Taylor J

The broad question, as I see it, in this case is whether we are to accept the view that the territorial "source" of an employee's wages or salary is to be ascertained by reference to the place where he performs his duties and not-except in special circumstances-by reference to the place where he receives payment of his remuneration or where the contract of service was made. The problem is by no means simple for the expression "source", in the context in which it is used in s. 23 (q) of the Income Tax and Social Services Contribution Assessment Act 1936-1950, may be thought equally appropriate to denote, in the case of wages and salary, either the contract pursuant to which remuneration of that character has become payable or the services by which it has been earned. And when one is concerned with ascertaining the territorial source of such remuneration the expression may, in addition, be appropriate to denote the place where, pursuant to the contract of service, wages or salary have become payable and have been paid.  

Decisions of the English courts have, in general, tended to reject the place where an employee's services are rendered as the place in which his salary or wages are derived and they have observed a distinction between the problem which arises in such cases and that which arises in cases where it is sought to ascertain the territorial source of the income of a business or trade. In Bennett v Marshall ^[F53] the Master of the Rolls said:

"I think it is just to observe that there is an inherent difference between a trade and a profession on the one hand and an employment on the other when one is considering the essential question which is to be looked at-namely, what is the source of the income? Trades and professions are, so to speak, based on activity, either by the persons carrying on the trades or the persons carrying on the professions. A trade or profession is not attached to some specific contract, and, accordingly, in such a case it is impossible to put a finger on a particular contract as the source of the income ....

But in the case of employment different considerations arise. Employment arises from a contract of employment and, therefore, there is what there is not in the other cases, some definite contract to which to look when inquiring into the source of the income which it is sought to charge. I should have thought, therefore, that in the case of employment the contract is the first thing which must be looked at to find out the answer to the question raised in any particular case of employment: Is it or is it not income derived from a source out of the United Kingdom?" ^[F54]

(See also Colquhoun v Brooks; ^[F55] Foulsham v Pickles ^[F56] and Bray v Colenbrander; Harvey v Breyfogle ^[F57] .)

As has been said already, however, these cases were decided pursuant to legislative provisions vastly different from that with which we are concerned and, though some of the reasoning appearing in them may appear to be apposite, I agree that it is doubtful whether it provides a solution for the problem with which we are confronted.  

What we are concerned to identify is the source from which the respondent derived his salary for the period from 28th November 1950 to 21st December 1950, that being the period during which he was required to perform duties for his employer in New Zealand.  

Both the word "source" and the word "derived", have been the subject of observation and discussion in our own courts over a long period. A variety of cases has made it clear that the word "derived", in the context in which it is used in s. 23 (q), is not a term of art and that it may be treated as synonymous with "arising" or "accruing". (See for instance, Commissioner of Taxation v Kirk ^[F58] and per Barton J., in Harding v Federal Commissioner of Taxation, ^[F59] at p. 131.) And the "source" from which income of any particular description may be said to arise or accrue is a question of fact to be resolved by considerations of a practical nature. As was said in Nathan v Federal Commissioner of Taxation ^[F60] "the legislature in using the word `source' meant, not a legal concept, but something which a practical man would regard as a real source of income". ^[F61] Perhaps it is fair comment to say that these observations throw little light on the immediate problem of selecting one factor rather than another as indicative of the source of an employee's wages or salary. But I venture to think that practical considerations would lead one to conclude, for instance, that the source of a tradesman's wages is to be found in the place where he works whether as an employee or in the course of his own business. That is the place where he earns his living and in a very real and practical sense the source of his income is to be found in that place whether he is entitled to be paid there or elsewhere. Nor can I see any distinction in principle between such a case and the ordinary case of any employee, whether remunerated by wages or salary, when, pursuant to his contract of employment and in accordance with his master's requirements, he is required to earn his remuneration in some place other than that in which he was engaged or where his remuneration is payable. I do not, of course, mean to suggest that cases do not exist or may not arise where special circumstances will invest these latter factors with added weight and, perhaps, transform them into deciding factors. As Jordan C.J. observed in Commissioner of Taxation v Cam & Sons Ltd: ^[F62]

"Where income is derived from wages or salary, again the source has several factors. Personal exertion may be involved in negotiating and obtaining the contract of employment, in performing the stipulated services, and in obtaining payment for them. In the present instance, for example, in the case of all the men concerned, in a very real sense it may be said that the source of their wages consisted of the three elements of getting the job, doing it, and getting paid for it. Which of these factors is the most important element of the source in any given case depends upon the facts of that case". ^[F63]

In that case the learned Chief Justice of the Supreme Court saw nothing special in the circumstances of the employment under consideration and treated the place where the employees' services were rendered as determining the territorial source of the wages paid in respect of those services. He said:

"In the ordinary course of the employment of a seaman, such as is now under consideration, where there is nothing special, either in the circumstances of the contract of employment or in the payment, and where the work is both done and paid for in the ordinary course, the all-important factor is the doing of the work; and the contract of employment and the payment are relatively insignificant and formal elements. But this is not necessarily so with respect to all wages or salary. In the case of an appointment to a sinecure, the engagement and the payment may be the only significant factors. In the case now before us, the engagement and the payment took place, and part of the work was done, in New South Wales, but the bulk of it was done outside New South Wales. The source of the wages was thus partly within and partly without the State". ^[F64]  

I agree with his Honour's observations and if, as the statute requires, I am compelled to select as the source of an employee's remuneration either the locus of the contract of service, or, the place where remuneration is payable thereunder, or, the place where the services are performed which give rise to the right to remuneration I am content to conclude that, in the absence of special circumstances, this third element should be chosen.  

Accordingly, were it not for two other matters which present themselves the case might be disposed of at once by saying that the amounts in question were derived from sources out of Australia. The facts of the case, however, may be thought to raise for consideration the question whether it is necessary to make the qualification that if an employee is required to perform in some country other than that in which he is usually employed some insignificant or formal duty it would be wrong to conclude that his income was derived from more than one source (see per Jordan C.J. in Cam's Case ^[F65] ). But I do not think that upon the facts as they appear in the case stated the respondent's service in New Zealand should be treated as falling within this category. He worked there for some sixteen days and a not inconsiderable sum is attributed to his service there.  

The second matter arises out of the fact that, apparently, the respondent's salary was payable to him by monthly payments at the end of each month. Paragraph 6 of the case stated, however, relates that

"The salary payable by the company to the respondent in respect of the period during which he performed services in New Zealand as aforesaid amounted to PD110 and was included in the following two monthly payments made by the company to the credit of the respondent's bank account in Sydney on the dates mentioned below: 28th November 1950, PD108 12s. 11d.; 21st December 1950, PD111 16s. 5d."

I take this statement to mean that, of the total of payments made in respect of the months of November and December 1950, the sum of PD110 was attributable to the period during which the respondent performed his duties in New Zealand. In strictness it cannot be said that his services in New Zealand created any right to wages; his right to the monthly payments arose only when he completed each monthly period of service. Accordingly it may be said that these two monthly payments not only accrued to the respondent under a contract made in Sydney and that the payments were made there, but, also, that each monthly sum became payable in respect of a period of service partly within and, partly, out of Australia. That is to say that each payment was made as one sum for the whole of the respondent's services during each of those two months. It has, however, been necessary to deal with much the same kind of problem in relation to the apportionment of business income earned by activities partly in one country and partly in another. In such cases it has been the practice to make an apportionment and I see no reason why the same principle should not be applicable in the case of income which consists of salary or wages. It was adopted without question by Jordan C.J. in Cam's Case ^[F66] his Honour remarking that:

"It is well established that, where the criterion of liability to tax is derivation from a source in the State, and income is derived from a multiple source, it must be apportioned, and only so much of it as is attributable to the source within the State is liable to be taxed". ^[F67]

The learned Chief Justice, no doubt, thought that the necessity of attributing income of the character under consideration to particular territorial sources made apportionment not only appropriate but inescapable. I agree and accordingly think that the question raised by the case should be answered in the affirmative.