Case L54
Judges:AM Donovan Ch
LC Voumard M
G Thompson M
Court:
No. 2 Board of Review
A.M. Donovan (Chairman); L.C. Voumard and G. Thompson (Members): This reference raises the question whether the taxpayer, the managing director of and an employee of a company CM Pty. Ltd., was properly assessed pursuant to sec. 26(e) of the Income Tax Assessment Act 1936, as amended, in respect of a payment of the sum of $783 education fees paid by an associated company, S.H. Pty. Ltd. on behalf of the taxpayer's employer under a scholarship scheme in respect of his son's education at a private college.
2. The Commissioner in an amended assessment assessed the said sum of $783 claiming that this payment represented the value of benefits to the taxpayer provided by the said CM Pty. Ltd. for the education of the taxpayer's child. As a corollary the Commissioner then asserted in his Reg. 35(1) statement that the said sum constituted assessable income ``in the hands of the taxpayer pursuant to the provisions of sec. 26(e) of the Income Tax Assessment Act''.
3. Several grounds of objection were taken on behalf of the taxpayer in his Notice of Objection the principal of which pleaded that: ``No portion of the amount was a value to the taxpayer by way of an allowance, gratuity, compensation, benefit, bonus or a premium granted to him in respect of, or for or in relation directly or indirectly to any employment of or services rendered by him to CM Pty. Ltd. either in money, goods,
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land, meals, sustenance, the use of premises or quarters or otherwise as covered by sec. 26(e) of the Income Tax Assessment Act.''4. Various further argumentative grounds were added on behalf of the taxpayer which we do not deem necessary to quote in detail, except that we make brief reference to the contention that payment of school fees can in fact be made by a child, for instance where the child receives income from a trust or from dividends. Further, school fees are sometimes paid by a mother or grandparents or by other relatives of the child. It was then contended on behalf of the taxpayer that ``It cannot therefore be presumed that any `benefits' were provided by (the taxpayer's employer) to the father in this case''.
5. Thus the essential question to be answered in this reference appears to be whether the said payment of $783 represented ``value to the taxpayer of... benefits 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... or otherwise''.
6. As a matter of mere machinery the said fees were paid directly to the college concerned by the said S.H. Pty. Ltd. by cheque, which payment was then debited to the loan account of the said CM Pty. Ltd. This was done because CM Pty. Ltd. did not operate a bank account, in accordance with the normal group company policy. Nothing turns upon this, as it is common ground that the said payment emanated from the said CM Pty. Ltd. which was the taxpayer's employer. It bore the actual expense incurred.
7. The scholarship scheme in question was inaugurated by a meeting of directors of CM Pty. Ltd. held on 2 February 1976 when the taxpayer was managing director of the company and chairman of the meeting. The proposal to set up an Employees' Educational Scholarship Scheme was outlined by the chairman. This scheme, according to the minutes of that meeting, would:
``(1) Provide for scholarships to children of employees in the S Group of Companies to encourage the best educational standards for them with the prospect of obtaining a satisfactory standard of employee from this source in the future, particularly on the managerial side.
(2) Cover all educational expenses involved except the cost of school uniforms.
(3) Provide for payments to be made to the college or school where the scholar was attending.
(4) Empower the Directors of the Company to decide which employees' children would participate from time to time.''
8. In a letter to the Deputy Commissioner of Taxation written by the public officer of CM Pty. Ltd. details of how the recipients of the scholarships would be selected and the matters which the directors would consider were set out as follows:
``(1) The recipient must be a child of an employee of the S Group of Companies.
(2) The employee must accept that the scholarship is not part of a salary 'package' so that on termination of the scholarship, no adjustment to salary could be contemplated or made on account of such termination.
(3) No agreement is to be entered into between the Company and the employee.
(4) Scholarships are awarded for a defined period (1 year in respect of those under review) and any extension would be dependent on satisfactory progress being made as evidenced by school reports.
(5) The need to retain key employees. Such retention is vital to the continuing profitability of the Company in a highly competitive industry which is subject to extreme market fluctuations, in many instances caused by decisions and events outside the control of the Company. Such employees are vulnerable to offers from competitors and other industries.
(IV) The Company is not an educator other than `on the job' practical experience which is supplemented by giving employees the opportunities to attend conferences and seminars provided within the industry and commerce generally. A `rounded' education up to matriculation level would give potential
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employees a sound base on which to build a trade or tertiary course.
- (b) the employees whose children have been offered a scholarship are all employed by CM Pty. Ltd. and are:
- (1) Taxpayer
- (2) Mr. S
- (3) Mr. P
- (c) All payments amounting to $3238 were made direct to the particular school by cheque. Such payments were made as accounts were rendered and the cheques were drawn by S.H. Pty. Ltd. on behalf of CM Pty. Ltd. and debited to its loan account.
- CM Pty. Ltd. does not operate a bank account and in order to maintain confidentiality, payments were made by the internal 'banker' S.H. Pty. Ltd. This course of action is in accordance with normal Group policy.
- (d) There have been no pamphlets prepared for distribution to employees. The Company considers the scheme is of a confidential nature and is offered at the discretion of the directors. Discussions are held with the employee at the time of awarding the scholarship to ensure the arrangements are closely understood.''
9. In his submission to the Board the representative of the taxpayer cited the case of
Constable v. F.C. of T (1952) 86 C.L.R. 402 and referred especially to a passage dealing with sec. 26(e) in the joint judgment of Dixon C.J., McTiernan, Williams and Fullagar JJ. in the High Court at p. 415 which reads as follows:
``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?' The employment or services must be employment by, or services rendered to, the Shell Co. of Australia Ltd. It is evident that it is enough for the taxpayer if any of the foregoing questions is answered in the negative.''
10. The argument continued to emphasise that there is a doubt as to whether there is a benefit to the taxpayer, and if there be any benefit resulting from the payment, the benefit is not to the taxpayer but rather to the child, particularly since the company of which the taxpayer was an employee made the payment by its agent S.H. Pty. Ltd. directly to the school. This proposition appears impliedly to assert that since the child received a benefit arising from the payment of fees by the company to the college, thus permitting him to continue his studies there, no benefit could be said to arise in favour of his father, the taxpayer. In our opinion this conclusion does not necessarily follow.
11. Reliance was also placed upon the decision in Case 16
12 C.T.B.R. 109 which concerned the purchase of a house property in the name of taxpayer's wife, where the purchase money was provided by the taxpayer's employer. The Commissioner sought to rely upon sec. 26(e) against the taxpayer. The reasoning of the Board of Review is for present purposes sufficiently summarised in part of para. 16 of p. 116 of the report which reads:
``If there was a gift to the taxpayer's wife, sec. 26(e) is plainly inapplicable. On that assumption, it could no doubt be conceded that the gift was made in respect of, or for or in relation, directly or indirectly to the taxpayer's services to 'AB' and also that the gift was beneficial to him in the sense that, as the husband of the owner, he was able to use the property as a place of residence; but as the subject of the gift was land and the land was not `given or granted to him' the value of the gift obviously cannot be included in his assessable income by virtue of sec. 26(e).''
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12. Case 16 appears to us to be a somewhat special case since it dealt with a gift of land made to the wife of the taxpayer, in circumstances where the taxpayer had been an employee of the donor. Since the gift was made to the wife of the taxpayer it could not be said that it was ``given or granted to him'', meaning the taxpayer. Again, if as the donor in that reference asserted, there was no gift, the Board pointed out that the taxpayer's claim must be upheld. As the Board said in para. 14 (p. 116 of the report):
``His assertion, moreover, has the prima facie support of the rebuttable presumption that where a property is purchased in the name of a stranger there is a resulting trust to the purchaser.''
In our opinion that decision is distinguishable from the present case before us.
13. It was further submitted on behalf of the taxpayer that ``the scheme was not set up for the purposes of providing a benefit by way of income or otherwise in accordance with sec. 26(e) or any other section of the Act...''. The taxpayer's representative was then asked, in effect, why he argued that there was no benefit to the taxpayer when the taxpayer was absolved from meeting the college expenses himself. It was then contended on behalf of the taxpayer that, in substance the parent's obligation is only to educate his child and has a choice year by year whether he wishes to incur fees to a private college, and that it is not the necessary obligation of a parent to educate his child at a school where it is necessary to pay fees.
14. However, the taxpayer's representative quite candidly and properly referred us to the decision in Case C49
(1952) 3 T.B.R.D. 269 where:
``A taxpayer and his wife were employed as manager and housekeeper of an hotel. Pursuant to a written agreement they were paid a salary and provided with free board and lodging, upon which the agreement placed a certain value. It was at the same time verbally agreed that the taxpayer's two daughters and his step-son (his wife's child by a former marriage) should also have free board and lodging.''
15. The Board there held ``that the provision of free board and lodging for the taxpayer's daughters and step-son, for whose maintenance and support he accepted full responsibility, was an allowance or benefit granted to him in respect of his employment and therefore part of his assessable income, and that it was not for the taxpayer and his employer but for the Commissioner to fix the value of that allowance''. This appears to us to dispose of the submissions on the absence of benefit to the taxpayer made on his behalf by his representative at the hearing. In our opinion, we must pay regard to the events which have actually occurred and decide the result upon the actual facts proved in evidence, rather than upon any hypothetical basis of reasoning.
16. We revert now to the central question whether the payment of the said college fees in the circumstances described above constitutes a benefit allowed given or granted to the taxpayer in respect of or for or in relation directly or indirectly to his employment whether so allowed given or granted in money or otherwise. We have already noticed the decision in Case C49 (supra) which, in our view, tends to support an affirmative answer to this question.
17. The term ``benefit'' in the Shorter Oxford English Dictionary is described as, inter alia, an ``advantage, profit, good'' in the ordinary sense of that word. The verb ``benefit'' is also there described as ``to do good to, be of advantage or profit to; to improve, help forward''. From these meanings attributed to that word in common parlance we are led to the conclusion that the taxpayer, who was relieved of the payment of the said college fees (which he had previously himself paid), was allowed or given or granted a benefit in money or otherwise which bore a relation directly or indirectly to his employment with his employer company which, through its agent, paid the said fees. Indeed his employment was the direct cause of the benefit allowed him as is demonstrated by para. (1) of the Minutes of the Meeting of Directors of his employer which he chaired, which minutes we have quoted supra. In essence the proposal was to provide scholarships to children of employees of the S Group of Companies.
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18. Our conclusion that the taxpayer did in reality receive a benefit is by parity of reasoning reinforced by the opinion of the House of Lords in
Rendell v. Went (Inspector of Taxes) (1964) 2 All E.R. 464, where the appellant taxpayer, a full-time director of a company, whilst driving a car, left the road and caused the death of a pedestrian in respect of which he was charged. Upon conviction on that charge he was liable to a term of imprisonment for up to five years. At the time of the incident the company of which he was a director had special need of his services. Concerned at possible serious loss of business in the event of taxpayer's conviction and imprisonment the company itself engaged an expert, and engaged senior and junior counsel for his defence, and the taxpayer had nothing further to do with the provision of his defence. He was acquitted and the company paid the costs of his defence. The taxpayer was assessed in respect of the total sum paid by the company for his defence under sec. 160(1) of the (U.K.) Income Tax Act 1952.
19. This section reads:
``Subject to the following provisions of this Chapter, where a body corporate incurs expense in or in connexion with the provision, for any of its directors or for any person employed by it in an employment to which this Chapter applies, of living or other accommodation, of entertainment, of domestic or other services or of other benefits or facilities of whatsoever nature, and, apart from this section, the expense would not be chargeable to income tax as income of the director or employee, para. 1 and 7 of Sch. 9 to this Act, and sec. 27 of this Act, shall have effect in relation to so much of the said expense as is not made good to the body corporate by the director or employee as if the expense had been incurred by the director or employee and the amount thereof had been refunded to him by the body corporate by means of a payment in respect of expenses.''
20. The House of Lords held that the whole of the expenditure was a benefit to the taxpayer. The basic reasons for the unanimous opinion of their Lordships may be found in the speech of Lord Reid at p. 466 where he said:
``The facts make it quite clear that the company did incur expense in the provision of a legal defence for their director, the taxpayer; and it appears to me to be equally clear that the provision of that defence was a benefit within the meaning of this subsection. It was argued that the expense had been incurred solely for the purpose of protecting the interests of the company. That may be so. But it cannot be doubted that in fact the provision of his defence was a benefit to him: if it had not been provided by the company he would have had to pay for his own defence or take the risk that lack of a proper defence might lead to his being convicted and sent to prison.''
21. Although this opinion of the House of Lords cannot be a binding authority in Australia in relation to sec. 26(e) of the Income Tax Assessment Act, we regard it as some persuasive authority in that it was held that the costs of the taxpayer's defence which were paid by the company constituted a benefit to the taxpayer, despite the fact that were he to bear the costs himself, he would have spent only a much lesser sum. We consider that the instant case is much stronger in favour of the Commissioner since the taxpayer was relieved of his previous burden, and of his obligation which he had undertaken, to pay the college fees, and thus in essence received a financial benefit.
22. On the evidence, and for the foregoing reasons, the Board holds that the said sum of $783 was correctly included in the assessable income of the taxpayer pursuant to sec. 26(e) of the Act.
23. Accordingly, the decision of the Board is that the taxpayer's objection be disallowed, and that the Commissioner's amended assessment be confirmed.
Ref. No. M.172/1978:
1. This reference raises the question whether the amount of $2,002 education fees paid by an associated company on behalf of the taxpayer's employer under a bursary scheme in respect of the education of his children was correctly included in the assessable income of the taxpayer pursuant to the provisions of sec. 26(e) of the Income Tax Assessment Act 1936, as amended.
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2. The taxpayer was an employee of the company CM Pty. Ltd. which was one of the S Group of Companies referred to in Reference No. M.170/1978, and the payment of college fees was made under the same Employees' Educational Scholarship Scheme as was done in the abovementioned reference.
3. Since the essential facts are the same in both references, on the evidence adduced and for the reasons given in the said Reference M.170/1978, the Board decides to disallow the taxpayer's objection and to confirm the Commissioner's amended assessment.
4. A copy of the reasons given by the Board in the said Reference M.170/1978 is annexed to this decision. [See p. 399 for text of this decision.]
Ref. No. M.173/1978:
1. This reference raises the question whether the amount of $452 education fees paid by an associated company on behalf of the taxpayer's employer under a scholarship scheme in respect of his daughter's education was correctly included in the assessable income of the taxpayer pursuant to the provisions of sec. 26(e) of the Income Tax Assessment Act 1936, as amended.
2. The taxpayer was an employee of the company CM Pty. Ltd. which was one of the S Group of Companies referred to in Reference No. M.170/1978, and the payment of college fees was made under the same Employees' Educational Scholarship Scheme as was done in the abovementioned reference.
3. Since the essential facts are the same in both references, on the evidence adduced and for the reasons given in the said Reference M.170/1978, the Board decides to disallow the taxpayer's objection and to confirm the Commissioner's amended assessment.
4. A copy of the reasons given by the Board in the said Reference M.170/1978 is annexed to this decision. [Sec p. 399 for text of this decision.]
Claims disallowed
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