The Trustees of the Estate of George Adams (Deceased) v. The Commissioner of Pay-roll Tax (Victoria).

Judges:
Gibbs J
Stephen J
Mason J
Murphy J
Wilson J

Court:
High Court of Australia

Judgment date: Judgment handed down 2 September 1980.

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Gibbs J.

The appellants, the trustees of the will of George Adams, who died in 1904, are given powers by the will to conduct a sweepstake business formerly conducted by the testator. Clause Y of the will commences with the following words:

``AND I DIRECT my Trustees to stand possessed of the net profits which may arise from the carrying on and continuance of my said business under the power for that purpose hereinbefore given UPON TRUST to pay the same to the persons and for the purposes hereinafter named and mentioned in the following proportions....''

The clause goes on to name various persons and to state the proportions in which they are respectively entitled and concludes with the following words:

``TO be distributed between and amongst such of the Employees for the time being engaged in the said business and in such proportions in all respects as my Trustees shall in their absolute discretion think fit one-tenth.''

Pursuant to this provision the trustees have for many years distributed one-tenth of the profits amongst the employees of the business. At the relevant times, the months of December 1976 and June 1977, payments totalling $1,783,665 were made to employees under this provision. The evidence, which the learned trial judge accepted, showed that the trustees in fact made the distribution to the employees in accordance with the respective worth of each to the business; to use the words of the trustee who gave evidence, ``it depends on the value of the employee to the business assets''. Accordingly, some employees received substantial amounts; others less, and some none at all. The question for decision on this appeal is whether the appellants were liable to pay pay-roll tax under the Pay-roll Tax Act 1971 (Vic.) as amended (``the Act'') on the moneys so paid.

By sec. 7 of the Act, pay-roll tax is imposed on ``all taxable wages'' and by sec. 8 the tax is to be paid ``by the employer by whom the taxable wages are paid or payable''. Section 3 defines ``taxable wages'' to mean ``wages that, under section 6, are liable to pay-roll tax''. Section 6, so far as it is material, is in the following terms:

``Subject to section 10, the wages liable to pay-roll tax under this Act are wages that are paid or payable by an employer after

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the month of August, 1971 (whether in respect of services performed or rendered before, during or after that month), and -

• (a) are wages that are paid or payable in Victoria (not being wages so paid or payable in respect of services performed or rendered wholly in one other State);
• (b) are wages that are paid or payable elsewhere than in Victoria in respect of services performed or rendered wholly in Victoria; or
• (c) are wages that are paid or payable elsewhere than in Australia in respect of services performed or rendered mainly in Victoria...''

The words ``employer'' and ``wages'' are defined in sec. 3; the material parts of those definitions are as follows:

``employer' means any person who pays or is liable to pay any wages...;''

```wages' means any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employe as such...''

In the present case the appellants, who made the payments, were the employers of the recipients. It is therefore unnecessary to consider the effect of the definition of ``employer'' as any person who pays ``wages'', which seems to make it unnecessary that the relationship of employer and employee in accordance with common law principles should exist between the payer and the payee. Where that relationship does exist, however, the critical question is ``whether the payment is one which the employer makes to the employee because of something done in the service of the employer'':
W.A. Flick & Co. Pty. Ltd. v. F.C. of T. (1959) 103 C.L.R. 334 at p. 339 . In other words, as Starke J. said in
Mutual Acceptance Co. Ltd. v. F.C. of T. (1944) 69 C.L.R. 389 at p. 401 , the tax is payable ``upon payments made in cash or in kind for services rendered''. In the same case, both Dixon J. (at p. 403) and Williams J. (at p. 406) indicated that the subject of the tax is remuneration for work. The necessity for a close connexion between the payment and services rendered by an employee is indicated not only by the provisions of sec. 6, but also by the fact that a payment only comes within the definition of ``wages'' if it is paid to an employee ``as such''. Those words, in their ordinary sense, simply mean ``as an employee'' or ``in the character of an employee'', and have the effect that the definition of ``wages'' comprehends ``only payments made to an employee in connection with and by reason of his service as an employee or in respect of some incident of his service''; Mutual Acceptance Co. Ltd. v. F.C. of T. at p. 396. However, if the critical test is satisfied, it is not necessary that the payment should be one to which the employee is contractually entitled; the definition of ``wages'' includes a bonus, which, as Kitto J. said in
Attorney-General (Cth.) v. Schmidt [No. 3] (1963) 109 C.L.R. 169 , at pp. 172-3 , generally means ``a gratuitous addition to contractual remuneration''.

The question whether the payments made to the employees can properly be regarded as payments made because of something done by them in the service of the appellants, or as payments for services rendered, is one of considerable difficulty, as the difference of opinion in the Supreme Court indicates. On behalf of the appellants it was submitted that the entitlement of the employees to the payments was to be found in the will, that their remedy if they were not paid was an action for breach of trust, and that the payments were therefore made to the recipients in the character of beneficiaries, and not in the character of employees. Serious questions arise as to the validity of the provisions of the will in question, and as to their effect if valid. In 1907 an originating summons taken out of the Supreme Court of New South Wales by the executors and trustees of the will was heard by Street J., and one of the questions raised was ``Whether the trust in favour of the employees for the time being engaged in the `Tattersall Sweep Consultation care of George Adams' in the said Will mentioned is void for uncertainty or otherwise?'' Street J. rejected an argument that the provision in question infringed the rule against perpetuities or was void for uncertainty, and answered the question in the negative. In
Blair v. Curran (1939) 62 C.L.R. 464 , at p. 527 , Dixon J. pointed out the difficulty of

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accepting the correctness of this view, but the order of Street J. of course bound the trustees in the administration of the estate. The order does not bind the respondent Commissioner, but he concedes for the purposes of the present proceedings that the relevant provision of the will is valid. If necessary, however, he relies on the suggestion made by Dixon J. in Blair v. Curran, at p. 527, that in order to make the provision good it may be necessary to construe it ``as giving the employees no title as a class beneficially interested in the discretionary trust and as being no more than a direction operating for the benefit of the named persons sharing in profits, a direction, in effect, to distribute a bonus among employees, not for their benefit, but to obtain better service in the interest of the business''.

If the question for decision were simply whether the payments were made to the employees because they were employees, the answer would be in the affirmative, since the only persons eligible to share in the distribution under the relevant provision of the will are employees for the time being engaged in the business. However, to attract tax the payments must be made to the employees in respect of the services which they rendered. The will itself does not provide that payment is to be made to employees because of something done in the service of the employer. If cl. Y is understood according to its own terms it gives the trustees an absolute discretion to select any employees as the recipients of the bounty - not because they are hard working or worthy, but, if the trustees so decide, because they are impecunious, artistic, good at sport, or in need of further education. Even if the clause is construed in accordance with the suggestion of Dixon J. in Blair v. Curran, it is not quite clear that an employee is entitled because of the services that he has already rendered; the suggestion is that the payment is to encourage better service in the future.

I do not deny that, in deciding whether the Act applies, it is right to consider the manner in which the appellants actually exercised their discretion. The whole of the circumstances must be considered in determining the nature of the payment. But when all the circumstances are considered what appears is that the appellants were bound by the decision of a court to administer the estate of the testator on the footing that there was a valid trust in favour of employees for the time being engaged in the business and that, in the exercise of the absolute discretion conferred on them by the will, they made payments to the employees in accordance with their value to the business.

In a sense it is equally true to say that the employees to whom payments were made received them as employees, as that they received them as beneficiaries. It is therefore possible to bring the payments within the words of the Act, if those words are strictly and literally construed. But with the greatest respect I cannot agree that the Act was intended to tax payments made under trusts genuinely created, or that a payment made to a beneficiary who is an employee is rightly characterized as remuneration for services rendered. It should be observed that there is no element of sham or attempted tax-evasion in the present case; the will was made long before pay-roll tax was introduced. It is a fundamental rule of construction that the statute should be construed as a whole and that the literal meaning of the words of a particular provision may be restricted (or of course expanded) by reference to the general scope and intention of the statute. The decision of Windeyer J. in
Scott v. F.C. of T. (1966) 117 C.L.R. 514 provides a pertinent example. There the question was whether a gift made by a client to her solicitor was income within general concepts or within sec. 26(e) of the Income Tax and Social Services Contribution Assessment Act 1936 (Cth.) as amended. The latter provision referred to ``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....'' Windeyer J. said at p. 524 that the meaning and effect of this provision was ``not to be answered by reading the words in the abstract with the aid of a dictionary. Their meaning and the limits of their denotation must be sought in the nature of the topic concerning which they are used''. He went on to hold that although the words of sec. 26(e), if literally understood, covered the case, the transaction was not within their scope, having regard to the

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subject of the enactment as a whole: see at pp. 424-6.

In my opinion the Act is concerned with payments that can rightly be regarded as remuneration to employees for their services, although the form which the remuneration takes, and whether there is a contractual right to it, do not matter. The payments in the present case were made as the result of the exercise by the appellants, in the character of trustees, of powers under a provision in the will which they were bound to treat as creating a valid discretionary trust. Payments of that kind, at least when not made as a device to conceal their real nature, should not properly be regarded as remuneration in respect of services rendered, and were not, in my opinion, of the kind which the Act intended to tax as part of the ``pay-roll''.

I would allow the appeal.