Federal Commissioner of Taxation v. Cooke and Sherden.

Brennan J

Deane J
Toohey J

Full Federal Court

Judgment date: Judgment handed down 16 April 1980.

Brennan, Deane and Toohey JJ.

These appeals arise from the action of the Commissioner of Taxation in bringing to tax as assessable income the value of holidays provided to and enjoyed by the taxpayers, in the case of Mr. and Mrs. Cooke in 1970, 1972 and 1973, and in the case of Mr. and Mrs. Sherden in 1971, 1972 and 1973.

The background

The taxpayers, two married couples, were engaged in the selling of soft drinks on a door-to-door basis. Mr. and Mrs. Cooke, operating in a Melbourne suburb, sold drinks manufactured by Loy Bros. Pty. Ltd. and Mr. and Mrs. Sherden, operating in a Sydney suburb, sold drinks manufactured by Sharpe Bros. Pty. Ltd.

Mr. and Mrs. Cooke traded in partnership as did Mr. and Mrs. Sherden. There was however no connection between the two couples and it was only as a matter of convenience that their objections and later the Commissioner's appeals were heard together.

The cases were heard by Jenkinson J. in the Supreme Court of Victoria. The facts were found by his Honour in terms which we set out, omitting some parts of the agreements which his Honour quoted:

"... Until February 1972, Mr. and Mrs. Cooke carried on the business of selling soft drinks manufactured by Loy Bros. Pty. Ltd. under an agreement in writing, the relevant provisions of which are:

  • `the Company agrees to give to the Purchaser and the Purchaser agrees to accept retail distributing rights (but not a sole agency) for the sale of the Company's products in the No. 22 district or such other district as may from time to time be arranged between the parties hereto on

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    the following conditions which are hereby agreed to by both parties: -
    • (a) The Company agrees to sell to the Purchaser from the factory during factory supply hours as fixed by its Manager from time to time the goods ordered by him at the price arranged from time to time payable on the day of delivery or on such other day as may be approved by the Company;
    • (b) The Purchaser agrees regularly to supply the goods to the Customers at set prices throughout the year as laid down by the Company from time to time which prices must not be varied without the consent of the Company in writing.
  • 2. The Purchaser agrees to provide and maintain his own delivery vehicle provided that the Company may, if the Purchaser so desires, hire a vehicle to the Purchaser upon such terms and conditions as may be mutually agreed upon between the Company and the Purchaser.
  • ...
  • 6. The Purchaser agrees to keep properly entered and up to date the round books containing a complete list of customers with records of all purchases. These books always remain the property of the Company. They will remain in the custody of the Company except only when being used by the Purchaser for the purpose of recording transactions on the round concerned. Unless by special arrangements in writing with the Sales Department.
  • 7. This Agreement shall commence on the SEVENTH day of APRIL 1966 and shall continue until either party terminates by giving one week's notice to the other in writing.
  • 8. The benefit of the Agreement shall extend not only to the present proprietors of the firm of Loy Bros. Pty. Ltd. but to any person or persons, company or companies, to whom the said business or businesses may be made over.
  • ...'

A similar, but not identical, agreement in writing was made between the manufacturer and Mr. and Mrs. Cooke on 25th February 1972. The provision of the substituted agreement which distinguishes it from the original agreement is:

  • `1(b) The Purchaser agrees regularly to supply the goods to the Customers and the prices charged by him on the sale of the said goods shall be a recommended price only and there is no obligation to comply with the recommendation.'

An agreement in writing under which Mr. and Mrs. Sherden bought and sold by retail soft drinks manufactured by Sharpe Bros. Pty. Ltd. subsisted at relevant times until 20th April 1972. The relevant provisions of that agreement read as follows:

  • `... WHEREAS
  • A. The Company manufactures and sells by wholesale cordials non-excisable beverages and other products.
  • B. The Company has agreed to sell to the Retailer for resale in the North Ryde district (the boundary of which shall be indicated to him) or in such other district or districts as may from time to time be mutually agreed upon by the parties such of the Company's products as may be ordered by the Retailer subject to the conditions hereinafter set out WHEREBY IT IS AGREED AS FOLLOWS:
    • 1. The Company shall sell to the Retailer and the Retailer shall purchase from the Company such of the Company's goods available for sale by the Company as the Retailer may from time to time order.
    • 2. The prices payable by the Retailer to the Company for such goods shall be such prices as may be fixed from time to time by the Company and such prices shall be payable by the Retailer to the Company on the day of delivery of the goods to the Retailer or on such other days as may be approved by the Company.
    • 3. The Retailer agrees with the Company that he or any person who may be employed by him to assist in his business will sell the said goods only to persons who are resident in the said district or are carrying on business therein and that the prices charged by

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      him on sale of the said goods shall be such prices as shall be from time to time determined by the Company by notice in writing to the Retailer provided that the Retailer shall be given not less than seven days' notice in writing by the Company of any variation in such prices.
    • 4. The Retailer also agrees with the Company to charge deposits of such amounts as the Company may from time to time fix on cordial and aerated water bottles which deposits he agrees to refund to his customers on return by them of the bottles in good order.
    • 5. The Retailer further agrees to keep and to deliver regularly to the Company at its registered office at such intervals of time as may be specified by the Company a written record containing the following particulars:
      • (a) the names and addresses of each of his customers,
      • and
      • (b) particulars of all purchases made by each customer.
    • 6. This agreement shall commence on the FIRST day of JULY 1969, and shall continue until either party terminates it by giving not less than one week's notice in writing to the other of such termination.
    • ...
    • 8. The Retailer shall not at any time during the currency of this Agreement or during a period of two years after the date of its termination either alone or jointly with or as the employee or agent of any other person or persons directly or indirectly be engaged or concerned or interested in the business of manufacturing or selling within any district or part of a district which has during the currency hereof been the subject of this agreement, cordials or non-excisable beverages of any type manufactured and sold by the Company.
    • ...
    • 10. The Retailer agrees to provide and maintain his own delivery vehicle provided that if the Retailer has not a suitable vehicle of his own the Company may if it thinks fit hire a vehicle to the Retailer upon such terms and conditions as may be mutually agreed upon between the Company and the Retailer.
    • 11. The Company shall not have the right to direct the Retailer in any way as to the manner of conducting his business nor in any way to restrict the Retailer from engaging in any other business, calling or occupation except as provided in Clause 8 hereof.
    • ...'

[Clauses 7 and 12] of that agreement... were omitted from an agreement in writing dated 20th April 1972 and made in substitution for the prior agreement. Clause 3 of the substituted agreement provides:

  • `3. The Retailer agrees with the Company that he or any person who may be employed by him to assist in his business will sell the said goods only to persons who are resident in the said district or are carrying on business therein and that the prices charged by him on sale of the said goods shall be a recommended price only and there is no obligation to comply with the recommendation, but the selling price must not at any time exceed the price recommended in writing from time to time by the Company.'

The two agreements are not otherwise different in any material respect.

Each couple carried on the business of selling the manufacturer's drinks in the area assigned to that couple. Each chose to hire from the manufacturer the truck on which the bottles were carried and each of the male respondents habitually drove the truck and delivered bottles to the customers' residences. The truck was marked with the manufacturer's name and colours. No sale was made to a person other than a consumer and delivery was always at the purchaser's premises or in the street. Custom was gained in the first place by taking over from a predecessor the customers recorded in the `round book' kept by the predecessor and the respondents sought to increase their trade by personal contact and, sometimes, by calling in aid canvassers employed by the

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manufacturer, for whose canvassing the respondents were not charged any fee. Orders for drinks placed by consumers with the manufacturer by telephone or letter were passed on to the respondents who called at the manufacturer's premises several times each week to take delivery of stock and to pay for stock previously delivered to them. Payment by each couple was required whenever the couple took delivery of bottles, for so many of the bottles sold and delivered to the couple on previous occasions as were not still on their truck nor held at their home, with the manufacturer's approval, as a small reserve of stock. Payment was required for bottles lost or destroyed after delivery to the respondents.

Mr. and Mrs. Sherden normally sold the manufacturer's products at the recommended prices, but had given discounts for large orders. Mr. and Mrs. Cooke had not only given discounts, but had also sold at a price above the recommended price, in a country town.

The respondents carried on their businesses on days and during periods of their own choosing and when one of the male respondents was unable to drive his truck the couple could hire the services of a driver from the manufacturer, if they did not choose to engage other labour. When trade was heavy an assistant unconnected with the manufacturer was engaged by the partners to help in delivering from the truck.

In the winter of each of the three years of income under consideration each couple took a holiday of about a week's duration at a place in Queensland, or outside Australia in the Pacific Ocean. The manufacturer offered to pay the charges for transportation and accommodation and in fact did bear those charges. Each holiday was taken by the respondents, and provided by the manufacturer, by way of participation in a `holiday scheme' controlled by the manufactuer. The manufacturer claimed to exercise a discretionary and gratuitous benevolence to those who satisfactorily performed agreements of the kind to which the respondents were parties. Each of the manufacturers published at different times within the relevant period statements about the schemes. One example will indicate the terms on which holidays might be offered:

`Rules for Holiday Scheme

The Committee in charge of the administration of the Holiday Scheme consists of the following: -

      Manager Director            Mr. J.H. Sharpe
      General Sales Manager       Mr. W. Sprott
      Consultant                  Mr. J. Stewart

As you are aware, every Retailer is a self employed franchise operator. The franchise rules require him to fulfil many obligations, but the amount of satisfaction and earnings is almost limitless. The help of friends and wives increases his earnings just as though he were operating his own shop or small business.

The Island Holiday Scheme is designed to encourage every Retailer to do his best to promote his sales during the year commencing 1st July, 1970, and although this is purely a gratuitous gesture by the Management and no legal rights are conferred upon any retailer by reason of the Scheme, the Management is anxious to see that the efforts of Retailers who reach their allotted quotas of sales are recognised.

The following general rules have been prepared to cover the arrangements:

  • 1. The holiday period is to be approximately one week taken during the months of June and July unless the Committee otherwise determines.
  • 2. No cash payment in lieu of the holiday trip will be made.
  • 3. Each Retailer, in order to be considered, must be a fully effective Retailer at the time of the holiday trip.
  • 4. Each Retailer accepted by the Committee will receive one ticket for himself and one ticket for his wife for the holiday trip. He is not at liberty to transfer either ticket to any other person but must go himself and take his wife.
  • This is only a discretionary holiday scheme for Retailer and Wife, not a negotiable reward. Our objective is to give the Retailer's wife a holiday as much as the Retailer. If the wife cannot go or if a Retailer is single (unattached) a second ticket may be issued to a lady companion in lieu of a wife, provided the Committee considers that this person is genuinely in

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    lieu of a wife and not just a fill-in for someone because the Retailer thinks there is a free ticket to be used.
  • 5. Any Retailers who negotiate any transferring of stock or trading in sales between one another in order to indicate an apparent increase in individual sales or otherwise take part in any practice considered unfair by the Committee will be automatically disqualified for two years.
  • 6. The Committee will exclude from further participation in the Scheme any individual or individuals reported by the Manager of a Scheme Holiday Resort to have misconducted or misbehaved in any way.
  • 7. The Committee may, without notice, exclude any individual or individuals from the Scheme.
  • 8. The decision of the Committee on any matter arising in connection with the scheme shall be final.

You may be assured that the Committee will do its best to see that no injustice is done to any Retailer.'

Another example reads:

`August 28, 1972.

Retailer Island Scheme

Each Retailer, as a self employed man, is expected to promote sales to the utmost in the Territory franchised to him and the longer he stays on that Territory the more he is accepted by customers, the better is his sales performance and the greater is his financial reward.

Frankly we are mainly interested in the man who wants to settle into a Territory and develop it as his own permanent business over a major part of his working life.

Our present Island Scheme will therefore be enlarged to include a great many satisfactory Retailers of long standing with our Company who, at times, have missed Island Holidays due to vagrancies (?) of weather. It will also be widened to provide encouragement to those Retailers who have accepted the challenge to build up newer territories in our developing Brands and who have not been able to participate because the qualifying targets are those usually achieved on established territories.

This expanded System will mean an Island Holiday for well over double the number of Retailers presently participating and to help offset the large additional expenditure involved we are favouring Hayman Island because no other Island offers a more complete and relaxing holiday.

The rules will be altered to include:

  • 1. The qualifications necessary for a Retailer to participate are: -
    • (a) He must have completed a financial year with the Company (from week 1 to week 52) as a Retailer, completely free from subsidy.*
    • (b) He must own his own Credit and be financially independent of the Company by the time his holiday falls due.
  • 2. Hayman Island is the only venue until after three years when an alternative may be offered.
  • 3. For his first year a Retailer qualifies for one week at Hayman Island with his wife or a lady companion. For subsequent years he qualifies for two weeks at Hayman with his wife. His children under 12 years of age will be subsidised by the Company.
  • 4. Current Retailers who have already qualified for three Island visits up to 1st July, 1972, may next year elect to: -
    • (a) go to Hayman Island for two weeks with wife and concessions for children under 12 years,
    • or
    • (b) go to Fiji for 10 days with wife.

Although some may be disappointed, the vast majority of Retailers will wholeheartedly welcome this gesture by the Company giving all Retailers an equal chance to participate in these ``Holidays of a Lifetime''.

* For this current year of 1972/73 he has until Week 14 to be free from Subsidy.

Bill Sprott,

National Sales Manager.'

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The references to freedom `from subsidy' and to ownership `of his own credit' require explanation. A person who entered into an agreement with one of the manufacturers of the kind to which the respondents were parties would be paid by the manufacturer a weekly amount sufficient to bring his weekly income to a modest competence during the initial period of performance of the agreement. He was not required to repay that supplement or `subsidy'. He would habitually allow credit to many customers, some of whom delayed or defaulted in payment. The manufacturer would sometimes, at its discretion, itself allow some credit to him in respect of bottles he had sold when he was experiencing difficulty in recovering money owing to him by consumers. But the manufacturers limited that assistance to exceptional occasions and the retailer was expected to `own his own credit'.

Once each year the manufacturer paid each retailer the aggregate amount of a discount per bottle on bottles of soft drink purchased by the retailer during the preceding year.


The male respondents,... believed the assertion to be true which is contained in the manufacturer's `Rules for Holiday Scheme', that `No cash payment in lieu of the holiday trip will be made', and the parties to the appeals made their submissions on the assumption that those persons for whose transportation and accommodation in connection with a holiday the manufacturer offered to pay had no means of obtaining any other benefit in lieu of what was offered."

The taxpayers could not hope to receive money from the manufacturer if they did not take the benefit, and they acquired no rights against the carriers or resort proprietors which they might convert into money. Nevertheless, the holiday was paid for by the manufacturer, and satisfied a desire of each taxpayer, and the Commissioner contends that the value of that benefit is part of the income of each partnership, and thus increases the assessable income of each taxpayer.

The relevant expenditure was as follows:

                    Cost to Sharpe Bros. Pty. Ltd. of holidays
                         provided for F. and L.M. Sherden

         30 June              F. Sherden              L.M. Sherden
                                    $                       $
           1971                    194                     194
           1972                    345                     345
           1973                    450                     450
                       Cost to Loy Bros. Pty. Ltd. of holidays
                           provided to A.W. and J.A. Cooke

         30 June              A.W. Cooke              J.A. Cooke
                                  $                        $
           1970                235.40                   235.40
           1972                345.00                   345.00
           1973                830.50                   830.50

The Commissioner adjusted the net income of the respective partnerships to include the amounts paid to provide the respondents' holidays. The respondents each objected to the inclusion in his or her assessable income of his or her individual interest in the increased amount of the net partnership income. Each objection was disallowed and each objection, at the instance of the taxpayer, was referred to a Board of Review. The Board unanimously upheld the objections, directing that the assessments be amended by excising from the income of each partnership for the years in question the sums included by the Commissioner as the cost of the holidays and that each partner's assessment be consequentially amended.

From these decisions the Commissioner appealed to the Supreme Court of Victoria. The appeals were heard together and dismissed. From that judgment the Commissioner sought and obtained leave to appeal to this Court.

The issues

The Commissioner seeks to uphold the assessments by reference both to sec. 25(1) and sec. 26(e) of the Income Tax Assessment Act 1936. He contends that the value of the holidays constitutes income according to ordinary concepts and furthermore that it is a benefit given to the taxpayers in respect of,

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or for or in relation directly or indirectly to, services rendered by them.

The concept of income

It is convenient first to look at the concept of income, to which the Act frequently refers but which it does not define. Whether a receipt is to be treated as income or not is determined according to ``the ordinary concepts and usages of mankind'' (per Jordan C.J. in
Scott v. F.C. of T. (1935) 35 S.R. (N.S.W.) 215 at p. 219), except where statute sweeps in particular receipts or amounts which would not ordinarily be taken to fall within the concept.

Although income is not defined by the Act, its provisions give some indication of its meaning. Thus, an indication may be found in the definition in sec. 6(1) of ``income from personal exertion'':

``income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in relation to any services rendered, the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person, any amount received as a bounty or subsidy in carrying on a business...''

``Income from property'' is defined simply to mean ``all income not being income from personal exertion''.

F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 555, Dixon C.J. and Williams J. commented:

``The definition in s. 6 of `income from personal exertion' or `income derived from personal exertion' has always been used as a possible guide or test in cases where the question is whether a particular receipt is income or not. It is true that the definition is concerned only or chiefly with the difference, for the purposes of the rates of tax, between income from property and income from personal exertion, but, where any of the expressions contained in the definition are relevant, it is logical enough to use them as an indication that a given receipt is income.''

But the definition does not bring into the statutory concept of income what would not be found within the concept according to ordinary notions. As Windeyer J. pointed out in Scott v. F.C. of T. (1966) 117 C.L.R. 514 at p. 524:

``The definition does not I think bring anything into charge as income. It refers to what is already by its nature income.... By describing what `income from personal exertion' is, the definition is indirectly indicative of what income is. That is all: but otherwise it is irrelevant.''

There are other provisions which indicate the nature of an income receipt. By sec. 25, the gross income of a taxpayer is divided into assessable income and exempt income; by the definition of taxable income in sec. 6(1), taxable income is assessable income reduced by allowable deductions; and by sec. 17 income tax at the rates declared by the Parliament is levied upon taxable income. The operation of this complex of provisions requires that taxable income must be, or be expressed as, a pecuniary amount. An item of income which could not be reckoned as money could not find its way into taxable income so as to be subjected to tax at a rate declared by the Parliament. And sec. 20 requires that income wherever derived and expenses wherever incurred be expressed in terms of Australian currency. So the Act sufficiently shows that the items of income are to be money or to be reckoned as money. consistently with this notion, the Act makes particular provision for some non-pecuniary receipts by including within assessable income the value to the taxpayer of those receipts (see sec. 26(e) and (ea)), and thus brings a pecuniary amount to tax. The notion that the items of income are money or are to be reckoned as money accords with the ordinary concepts of income as ``what comes into (the) pocket'' to adapt Lord Macnaghten's phrase in
Tennant v. Smith (1892) A.C. 150 at p. 164. That is not to say that income must be received as money; it is sufficient if what is received is in the form of money's worth (
Cross v. London and Provincial Trust Ltd. (1938) 1 All E.R. 428 per Greene M.R. at p. 430). Nor is it necessary that an item of income be paid over to the taxpayer: it is sufficient, according to ordinary concepts and usages, that it be dealt

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with on his behalf or as he directs, as sec. 19 of the Act recognizes.

Although Tennant v. Smith (supra) was concerned with the operation of legislation different in structure from the Income Tax Assessment Act, some parts of their Lordships' speeches applied ordinary conceptions to the construction of the terms of the Act there under consideration. Thus Lord Halsbury L.C. said (at p. 157):

``I come to the conclusion that the Act refers to money payments made to the person who receives them, though, of course, I do not deny that if substantial things of money value were capable of being turned into money they might for that purpose represent money's worth and be therefore taxable.

The illustration given in the argument of the mode of arriving at a trader's profits, and the mode of treating his stock-in-trade, suggests that money's worth may be treated as money for the purposes of the Act in cases where the thing is capable of being turned into money from its own nature.''

And Lord Watson held that:

``profits... in its ordinary acceptation, appears to me to denote something acquired which the acquirer becomes possessed of and can dispose of to his advantage - in other words, money - or that which can be turned to pecuniary account.''

(at p. 159).

Lord Hannen said (at p. 165):

``That which could be converted into money might reasonably be regarded as money - but that is not the case before us.''

If a taxpayer receives a benefit which cannot be turned to pecuniary account, he has not received income as that term is understood according to ordinary concepts and usages.

The conversion of an item into money may occur, of course, in a variety of ways. It is not desirable (even if it be possible) to define in advance the ways in which conversion may possibly occur in order that a non-pecuniary item of receipt might be treated as an item of income. However, it will not often occur that a benefit to be enjoyed by a taxpayer cannot be turned to pecuniary account if the benefit be given up, or if it be employed in the acquisition of some other right or commodity.

If one were so to vary the facts of the present case that the tickets with which the taxpayers were provided could be surrendered by them for cash, the benefit which, on that hypothesis, the taxpayers would have received would have been converted into money, and would have constituted income if the origins of the receipt gave that character to it. Indeed, as the authorities show, it is not necessary that the pecuniary alternative be available by way of direct conversion of the benefit received (
Heaton v. Bell (1970) A.C. 728;
Abbott v. Philbin (1961) A.C. 352).

In Heaton v. Bell (supra) the taxpayer was an employee of a company which had introduced a voluntary car loan scheme for certain employees. Under the scheme the company bought cars, insured them, paid road fund tax and lent them to employees from whose weekly wages money was deducted according to the type of car on loan. If an employee cancelled the arrangement, as he was free to do on notice, the deduction from his pay ceased. By a majority it was held that on the true interpretation of the arrangement between company and employee, the monetary wage remained unaltered and that accordingly the respondent's emoluments, taxable under Sch. E of the Income Tax Act 1952 were his gross wage before deduction. On that footing, of course, the relevant receipt was the monetary wage, part of which was applied to the hire of the car. But an alternative basis of assessment was upheld by a majority of their Lordships who held that the free hire of the car was a ``perquisite'' of the taxpayer's employment because he could have surrendered the free hire of the car and become entitled to a higher monetary wage than he was receiving.

Abbott v. Philbin (supra) was another example. There, the taxpayer, the secretary of a company, was granted an option to purchase shares in the company at a certain price, then the market price. The taxpayer exercised the option when the market price of the shares had increased, and he was assessed to tax on the difference between that market

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price and the sum of the option price and the cost of the option. This basis of assessment was rejected, and it was held that the monetary value (if any) of the option when granted was taxable. Although the option was not assignable, it was a benefit capable of being turned to pecuniary account as Lord Radcliffe explained ((1961) A.C. at pp. 378, 379):

``That right is, in my opinion, analogous for this purpose to any other benefit in the form of land, objects of value or legal rights. It was not incapable of being turned into money or of being turned to pecuniary account within the meaning of these phrases in Tennant v. Smith ((1892) A.C. 150) merely because the option itself was not assignable. What the option did was to enable the holder at any time, at his choice, to obtain shares from the company which would themselves be pieces of property or property rights of value, freely convertible into money. Being in that position he could also at any time, at his choice, sell or raise money on his right to call for the shares, even though he could not put anyone he dealt with actually into his own position as option holder against the company. I think that the conferring of a right of this kind as an incident of service is a profit or perquisite which is taxable as such in the year of receipt, so long as the right itself can fairly be given a monetary value, and it is no more relevant for this purpose whether the option is exercised or not in that year, than it would be if the advantage received were in the form of some tangible form of commercial property.''

In the present case it is unnecessary to answer the questions which his Lordship asked at p. 378:

``Must the inconvertibility arise from the nature of the thing itself, or can it be imposed merely by contractual stipulation? Does it matter that the circumstances are such that conversion into money is a practical, though not a theoretical, impossibility; or, on the other hand, that conversion, though forbidden, is the most probable assumption?''

Whatever be the answer to these questions, and whether their answers depend upon principles universally applicable or upon the circumstances of particular cases, the respondents in the present cases could not have turned the benefits in fact received by them to pecuniary account. It is immaterial that the respondents would have had to expend money themselves had they wished to provide the holidays for themselves. If the receipt of an item saves a taxpayer from incurring expenditure, the saving is not income: income is what comes in, it is not what is saved from going out. A non-pecuniary receipt can be income if it can be converted into money; but if it be inconvertible, it does not become income merely because it saves expenditure.

The holidays which were enjoyed by the taxpayers in the present case provided them, at a cost to the manufacturers, with a non-convertible benefit. It seems curious that a benefit which has cost money is not convertible into money, either by sale or by some less direct mode of realization, and it may be that cases of this kind are to be found only where the benefit is gratuitously provided. If this be so, the inconvertible benefit falls outside the revenue net not because it is a gratuity, for a taxpayer may receive as income a benefit gratuitously provided (F.C. of T. v. Dixon (supra)); it falls outside the revenue net because it is not money or money's worth, and there is no statutory provision which widens the net to catch it. In particular, it falls outside sec. 21 which brings to tax the money value of consideration which is paid or given upon any transaction otherwise than in cash. In the present case, the Commissioner disavowed any reliance on that section.

If the definition of income from personal exertion in sec. 6(1) of the Act is referred to as a description of income, a question may arise whether the benefit of a holiday may be seen as the ``proceeds of a business''. The gratuitous provision of the benefit does not necessarily preclude its characterization as the proceeds of a business (
The Squatting Investment Co. Ltd. v. F.C. of T. (1953) 86 C.L.R. 570 at pp. 620, 627-628; (1954) A.C. 182). But the inconvertibility of the benefit, which prevents it from falling within the general notion of income, takes it outside the proper ambit of the proceeds of the business. Just as inconvertibility limited the connotation of ``profits'' in Tennant v.

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Smith (supra) and was apt to limit the connotation of ``perquisite'' in Heaton v. Bell (supra) so it limits the connotation of ``proceeds of a business'' in sec. 6(1), for that term does not go beyond proceeds which would be held to be income according to ordinary concepts (
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 8 A.T.D. 137 at p. 142).

The benefit not being convertible into money or money's worth, there was no receipt of income according to ordinary concepts, and the assessments are not supported by sec. 25(1). The alternative foundation is sec. 26(e).

Section 26(e) of the Act

It is conceded that the relationship between retailer and manufacturer was not that of employee and employer, and that aspect of sec. 26(e) may be omitted from consideration. Omitting that aspect, sec. 26(e) includes in assessable income:

``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... services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise.''

It has been suggested that sec. 26(e) applies only to receipts within the general conception of income. See for instance
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 per Fullagar J. at p. 54, Scott v. F.C. of T. (supra) per Windeyer J. at p. 525. Or as was said by Bowen C.J. in Eq. in
Donaldson v. F.C. of T. 74 ATC 4192 at pp. 4205-4206; (1974) 1 N.S.W.L.R. 627 at p. 642:

``Perhaps the proposition is not so much that sec. 26(e) applies only to income and not to capital items, but rather that it is so worded that there is nothing it covers which would not be of an income nature in any event.''

Section 26(e) was explained by Windeyer J. in Scott v. F.C. of T. (supra) at pp. 525-526 in this way:

``As I read sec. 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. 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 money's 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.''

Whether or not sec. 26(e) widens or strengthens the net cast by sec. 25(1) - a question which it is unnecessary now to resolve - the former provision applies, in the circumstances of the present cases, only if the benefit received by the taxpayers was in respect of or for or in relation directly or indirectly to services rendered by them.

The dual reference in sec. 26(e) to employment and services rendered conjures up the distinction between a contract of service and a contract for services to be found in decisions on workers' compensation legislation. Whether or not that is the distinction intended here, the expression ``services rendered'' must draw in situations not encompassed by the term ``employment''.

There is a general sense in which the giving or rendering of services may be used in which case it is a term of wide import:
Employers' Mutual Indemnity Association Ltd. v. F.C. of T. (1943) 68 C.L.R. 165 per Starke J. at p. 181. But it must be read in the context of sec. 26(e). It may be, as Jenkinson J. suggested in the judgment under appeal, that the expression should be understood in the way in which ``work and labour done'' is understood by lawyers.

In Employers' Mutual Indemnity Association Ltd. v. F.C. of T. (supra) the

ATC 4151

Court held that when a company limited by guarantee, empowered to carry on all kinds of insurance business, investigated and adjusted and either resisted or paid claims made under policies issued by it, it did so on its own account in the course of its business and did not thereby render services to its members even though policies issued by the company were only to members.

Various views were expressed by the members of the Court as to the notion of giving or rendering services.

They were analyzed subsequently by McTiernan J. (himself a member of the Court) in
Revesby Credit Union Co-operative Ltd. v. F.C. of T. (1965) 112 C.L.R. 564 at p. 578:

``I consider that `the rendering of services' should consist of the doing of an act for the benefit of another, which is more than the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract.''

Here the parties were in the position of manufacturer and retailer. One sold and the other bought bottles of soft drinks. The retailer paid to the manufacturer a price for those drinks.

There were no services which the respondent retailers rendered to the manufacturers. Although the successful conduct of the retailers' respective businesses enhanced the sales by the manufacturers to the retailers, and added to the notoriety of the manufacturer's products, the conduct of the retailers' businesses was not a service rendered to the manufacturers. The businesses were conducted for the benefit of the retailer, and the advantages which thereby accrued to the manufacturers were not the product of services rendered to the manufacturers. Advantages accrued to the manufacturers because the retailers, independently of any obligation owed to the manufacturers, conducted their businesses in a way which yielded advantages to both. It is true that the retailer was required to keep a round book containing a record of customers, but we agree with Jenkinson J. that this was no more than the ``performance of an obligation ancillary to the agreement for sale and resale of the products''.

The relationship was essentially one of seller and buyer. The taxpayers did not render services to the companies with which they had contracted. The provision of holidays was not part of any contractual relationship and in our view the provision of holidays could not be said to have been directly or indirectly for services rendered by the taxpayers.

Neither of the foundations relied on by the appellant supports the assessments. The appeals should be dismissed with costs.


  • 1. The appeals be dismissed.
  • 2. The appellant pay to the respondents their costs of the appeals.

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