Case D7

JL Burke Ch

RC Smith M
RE O'Neill M

No. 1 Board of Review

Judgment date: 28 March 1972.

J.L. Burke (Chairman) and R.C. Smith, Q.C., and R.E. O'Neill (Members): The question at issue is whether an amount of $1,633 received by cheque by the taxpayer on 1 July 1965 from the Department of the Treasury in the Territory of Papua and New Guinea is properly assessable to the taxpayer under sec.25(1)(a) of the Commonwealth Assessment Act which provides that the assessable income of a taxpayer shall include - where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia.

2. The following facts were agreed to at the hearing -

``By virtue of his employment with the Department of... in the abovementioned Territory taxpayer was entitled as at 20 November 1964 to fourteen months' leave on full pay, made up of three months' recreation leave, three months' long leave and eight months' furlough.

Although not covered by any Public Service Regulation there was an understood arrangement by which a retiring officer could elect to receive payment for his leave entitlement in one, two or more cheques covering periods nominated by him, or he could elect to have fortnightly payments made and at any time request payment for the unexpired term in a lump sum.

Before commencing his leave on 20 November 1964 taxpayer elected to take his leave pay in two separate cheques, one covering the period from that date to 30 June 1965 and the other from 1 July 1965 to the termination of his leave on 20 February 1966, the first cheque to be paid to him on 20 November 1964 and the second to be sent to him on 1 July 1965 during his leave in Australia.

The cheque for the first of these periods was drawn on 12 November 1964 and received by taxpayer while he was still in the Territory; the second cheque for $1,633 covering the final period was drawn on 29 June 1965 and received by taxpayer in Australia on 1 July 1965.

Taxpayer arrived in Sydney from the Territory on 7 December 1964 when he started to live in a home at (Sydney outer suburb) and he has resided continuously in Australia since that date. (Taxpayer does not dispute that he was a `resident' of Australia for the purposes of the Assessment Act from 7 December 1964.)

The effective date of taxpayer's retirement was 12 January 1966 when he reached 55 years of age.

A return of income for the year ended 30 June 1966 forwarded by taxpayer to the Territory of Papua and New Guinea Taxation Office, Port Moresby, showed the following sources of income against Item 1 -

      Commonwealth of Australia
      (Superannuation Pension) for
      the period 13.1.66 to 30.6.66       $1,187
      Department of Treasury
      (Leave Pay) for the period
      30.6.65 to 14.2.66                  $1,633

A Territory tax assessment for the year ended 30 June 1966 based on that return included the amount of $1,633 as having been derived by the taxpayer from a source in the Territory and tax of $89.80 was met by taxpayer on that assessment.''

3. In a letter from the Acting Crown Solicitor to the Assistant General Secretary of the New Guinea Public Service Association dated 22 July 1970 which was tendered in evidence by counsel for the taxpayer it was stated, inter alia, that ``There is no doubt that (taxpayer) was entitled to the money (received on 1/7/65) at the time of his departure, but a sum equivalent to his entitlement was not carried to any special fund.'' Counsel also tendered a ``Leave Advice'' document dated 9 November 1964 showing that the amount which the taxpayer requested be paid to him by cheque on 1 July 1965 was calculated prior to him commencing his leave on 20 November 1964.

4. The primary submission put forward on behalf of the taxpayer was that there was an acknowledgment that the money paid to the taxpayer by the second cheque was due to him in November 1964 before he proceeded on leave and that he should be

ATC 40

held to have then derived the income when he was a resident not of Australia but of the Territory of Papua and New Guinea.

5. ```Derived' is not necessarily actually received, but ordinarily that is the mode of derivation'' (
F.C. of T. v. Thorogood (1927) 40 C.L.R. 454 per Isaacs A.C.J. at p.458). In
F.C. of T.(S.A.) v. Executor Trustee & Agency Co. of S.A. Ltd. (1938) 63 C.L.R. 108 (Carden's case) Dixon J. at p.155 quoted with approval the following extract from Shaw & Baker, Law of Income Tax -

``There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something `coming in'; that is, for income tax purposes, receivability without receipt is nothing.''

This Board applied the above principle in Case A78,
69 ATC 422 in a case involving a payment of arrears of salary and thinks that it is likewise appropriate here. We would hold that the amount of $1,633 was derived not in November 1964, not on 29 June 1965 when the cheque was drawn and posted but on 1 July 1965 when the cheque was received by the taxpayer.

6. It was however further submitted that sec.19 of the Assessment Act could be called in aid of the taxpayer. The section reads as follows -

``19. Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.''

The money having been retained by the Treasury at the request of the taxpayer it should be held, so it was argued, to have been otherwise dealt with as the taxpayer directed. This submission is, in our opinion, completely answered by the following observation of Gibbs J. in
Brent v. F.C. of T. 71 ATC 4195 at p.4201 -

``However, even if the company had deferred payment at the request of the appellant, sec.19 would not have applied. Income is not `dealt with', under sec.19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower. In
Permanent Trustee Company of New South Wales Ltd. v. F.C. of T. (1940) 6 A.T.D. 5 at p.12, Rich J. said -

`The object' (of sec.19) `is to prevent a taxpayer escaping though his resources have actually been increased by the accrual of the income and its transformation into some form of capital wealth or its utilisation for some purpose.... But here the facts show that the deceased got nothing except a new obligation to pay in exchange for an existing obligation to pay. He was no nearer getting his money or of transferring it into anything of any value.'

He held in those circumstances that sec.19 did not apply. In the present case, even if the money had been retained at the request of the appellant, her position would have remained exactly as it was; the income would not have been used on her behalf and the company would have remained under an obligation to pay it to her. There is not the slightest ground in the present case for applying the provisions of sec.19.''

7. Finally it was submitted that only 5% of the amount of $1,633 should be subjected to tax on the footing that the said sum represented, for the purposes of sec.26(d) of the Act, ``the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment....''

8. The taxpayer when proceeding on leave took positive steps to ensure that his leave pay was paid in two separate instalments so that even if they could be said to have been paid in consequence of ``retirement from, or the termination of, any

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office or employment'', and this is certainly arguable, it cannot be said of either of the amounts paid to the taxpayer that it represented a ``capital amount...paid in a lump sum'' for the purposes of the section. The amount due to the taxpayer was, at his behest, paid in instalments. In these circumstances there is no scope for the application of sec.26(d) of the Act.

9. For the foregoing reasons we would uphold the Commissioner's decision on the objection and confirm the assessment the subject of review.

Claim disallowed

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