Case N28

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 1 May 1981.

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K.P. Brady (Chairman), L.C. Voumard and J.E. Stewart (Members)

This reference poses for our consideration whether an allowance received by the taxpayer in the year of income ended 30 June 1978 for full-time study is exempt under the provisions of sec. 23(z).

2. That subsection, so far as it is relevant, reads as follows:

``23. The following income shall be exempt from income tax: -

...

• (z) income derived by way of a scholarship (other than a scholarship referred to in paragraph (zaa)), bursary or other educational allowance by a student receiving full-time education at a school, college or university, but not including -
  • (i) an amount received by the student from a person or authority upon condition that the student will (or will, if required) render, or continue to render, services to that person or authority;
  • ...''

(Paragraph (zaa) referred to above relates to Commonwealth scholarships and its provisions are not relevant to the issue before us.)

3. The taxpayer was a senior executive with a large mining company. He joined the company in 1967 and rose to the position of executive vice-president in an overseas country. Following upon a major reorganisation of the company in 1975, he was brought back to Australia to take over the position of commercial manager of one of the company's main metal divisions. Shortly after, a downturn took place in the demand for that metal due to world economic conditions and, with the company facing a consequential curtailment in its operations, the taxpayer considered it an appropriate time to complete on a full-time basis a Bachelor of Commerce degree which up to that time he had studied part-time. Accordingly, he approached the company to be granted study leave. In a discussion which he had with a director of the company, the matter of terminating his employment was mentioned (because of the adverse situation then prevailing in the industry) but no specific date was determined. Certainly the taxpayer intended to rejoin the company on completion of his studies if a satisfactory position was made available to him. The results of the discussions were formulated in a letter dated 8 November 1977 signed by the taxpayer's divisional manager and sent to the taxpayer by the company. This document was tendered in evidence and is as follows:

``Dear...

Further to our discussions I am now able to confirm the details relating to the period of special study leave approved by the Company for you for the period 1 January 1978 to 31 December 1979.

I understand you will be proceeding on annual leave from the close of business on 8 November 1977 to 30 December 1977.

The following details are advised to ensure that we have an identical understanding of your entitlements, and would ask that you endorse your agreement by signing the attached copy of this letter which we will retain in our files for future reference:

1. Salary

• For the period of your approved study leave, i.e. 1.1.1978 to 31.12.1979, the Company will make salary payments to you at the rate of $14,750 per annum, being half of your current annual salary rate of $29,500.

2. Annual Leave

• Your annual leave entitlement as at 31 December 1977 will be 94.4 days. This figure will be reduced by 36 days to 58.4 days after allowing for the period of annual leave from 9.11.1977 to 31.12.1977 (includes two public holidays). Leave loading will apply to the above 36 days. The balance of leave attracting leave loading at 31.12.1977 will then be 21.4 days.
• If you resume with the Company following the period of study leave the above balances of annual leave and leave loading applicable at 31.12.1977 will be available to you on commencement.
• If you do not resume full employment with the Company on 1.1.1980 then the annual leave standing to your

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  ATC 156

  credit will be paid to you, along with other resignation benefits, at your current salary rate of $29,500 per annum. Annual leave will not accrue during your period of study leave.

3. Long Service Leave

• As at 31.12.1977 your accrued long service leave amounts to 8.6667 weeks. This entitlement will remain constant and be credited to you on the resumption of full time employment with the Company.

4. Death and Permanent and Total Disablement Cover

• From 1.1.1978 to 31.12.1979 the above cover is equivalent to $130,384. The cost has been assessed as follows:

                                           $
        1.1.1978 - 30.6.1978             282.29
        1.7.1978 - 30.6.1979             631.06
        1.7.1979 - 31.12.1979            350.74
                                      ---------
              Total:                  $1,264.09
                                      =========
                  

  As agreed, the above charges will be to your account. Mr....., Superannuation Manager, will be in touch with you to arrange the payment of the premiums as they become due.

• Staff Personal Accident Insurance will not apply during this approved period of study leave.

5.... Staff Superannuation Fund

• Contributions to the Superannuation Fund will be suspended during the period of your special study leave. At 31 December 1977, the benefit payable to you in the Fund is $39,373. This sum will attract interest during the period of study leave and as at 31.12.1979 it is estimated with interest to be $45,121.

6. Motor Vehicle

• We wish to confirm the Company's agreement to sell to you the Holden Statesman vehicle... for the sum of $3,085. If you elect to purchase the vehicle at this price you should contact [AB] and arrange payment and the transfer of the vehicle to your name from 1 January 1978.
• During our discussions it was agreed that it was impossible to predict the Company's circumstances two years from now, and for this reason we are unable to formally commit a position to you within... Limited at the conclusion of your special study leave. The matter will be reviewed in the last quarter of 1979, and if we are able to offer a position in the Company it will be discussed with you at that time. If, however, we are unable to offer you a position it must be mutually understood that your service with the Company would be concluded from 31.12.1979.
• It is also mutually understood that you are not obliged to recommence with... Limited at the conclusion of your study leave. We also accept that you may elect to determine this period of study leave at any time and leave the Company's service. If this is the case your entitlements will be paid as a resignation on the date you leave the Company's employ, at today's salary rate of $29,500 per annum.
• It would be appreciated if you would let [AB] know of any change to your home address to enable us to contact you at any time. We will keep... informed of your movements as your salary will continue to be paid from Melbourne Office.
• On behalf of the Company I would like to thank you for your contribution to the... Division and wish you well in your study course and future activities.''

4. The taxpayer duly endorsed his agreement to the above terms by signing the copy of the letter as requested in its third paragraph.

5. In preparing his taxation return for the year of income ended 30 June 1978, the taxpayer included as assessable income his salary covering the period 1 July 1977 to 31 December 1977, $16,226. A note interpolated in item 1 of his return stated that he was a full-time student from 1 January 1978 to 30 June 1978. Amplification was set out on a schedule accompanying his return (which was tendered as part of Exhibit A), which provided the following further detail:

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ATC 157

      ``SCHEDULE `A'
      ASSESSABLE INCOME
                                          $
      Gross Salary Payments
      Group Cert. No. ....
      1.7.77 to 31.12.77              16,226.66
      EXEMPT INCOME (sec. 23(z))
      Study leave salary payments
         1.1.78 to 30.6.78             7,204.85
                                     ----------
                                     $23,431.51
                                     ==========
            

Requirements of sec. 23(z) are met in that:

• 1. The taxpayer was in receipt of payments in respect of an educational allowance (see Document `C').
• 2. The taxpayer was at all material times a full-time student at the University of.... (see Document `E').
• 3. The said amount received was not received by the taxpayer upon any condition that the taxpayer render, or continue to render, services to any person or authority (see Document `D').
• 4. The said amount was not received under the scheme known as National Employment and Training System.''

6. In relation to the documents referred to above, Document ``C'' represented a letter from the company advising details of salary and study leave payments for the year of income ended 30 June 1978, as set out above, Document ``E'' was a photocopy of the taxpayer's Confirmation of Enrolment at his home State's university, and Document ``D'' was the company's letter of 8 November 1977, detailed supra.

7. In making his assessment of the taxpayer's income, the Commissioner adjusted the income as returned by including the amount of $7,206 as assessable income. (The Commissioner's representative admitted here to the commission of an arithmetical error of $2 and conceded that the assessment should be amended by that amount.) The taxpayer objected to the assessment, and following upon the Commissioner's decision to disallow the objection, the taxpayer has requested the Commissioner to refer the matter to this Board.

8. To complete the fact situation, it must be said that the taxpayer completed his Bachelor of Commerce degree in 1979 at the close of the period of his two years' study leave. At about the same time he enquired of the company as to whether there was a position available for him, and was told there was not.

9. The matter poses for our consideration two main issues: did the taxpayer receive an amount of money in the capacity of a student, which amount could be properly categorised in accordance with sec. 23(z) as a ``scholarship, bursary or other educational allowance'' and, if so, was it obtained by the taxpayer free of any condition that he (the taxpayer) would render or continue to render services to his employer company?

10. The evidence showed that the taxpayer remained an employee with the company whilst on study leave and that his services were not terminated until 31 December 1979, when his application for reappointment proved unsuccessful (see para. 8 supra). This is indicated in the company's letter dated 8 November 1977, detailed supra. Also, the company's manager of administrative services, who was called by the Commissioner to give evidence, stated that throughout the period that the taxpayer took study leave he was regarded by the company as an employee, and stated further that the taxpayer's services terminated on 31 December 1979. Also he advised that it was usual for the company to grant study leave to employees, some 15 to 20 employees having been granted such leave in the five years that he had been employed in the company, and that the taxpayer's situation was no different from the norm. He mentioned further that the scale of remuneration paid to employees whilst on study leave varied as from no remuneration to that of half salary. He added that the company did not grant scholarships to its own staff, although it made them available to persons outside the company to help them complete their courses.

11. The treatment accorded by the company whilst the taxpayer was on study leave to the various items making up the taxpayer's total remuneration package is consistent with the view that he remained an employee whilst undertaking his study leave.

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ATC 158

He received study leave payments (called salary payments by the company in its letter of 8 November 1977) at the rate of 50% of his normal salary, and these were paid no differently than before he undertook study leave, viz. every four weeks, and with tax deducted from them. His superannuation benefits continued, although the contributions were suspended during the period of study leave in keeping with the rules of the superannuation trust deed. Also his recreation leave and long service leave entitlement remained to his credit. Furthermore, whilst the taxpayer did not have a service agreement with the company, it was usual for an employee of the taxpayer's status to be required to give a minimum of four weeks' notice if intending to terminate his service. No such notice was given.

12. The fact that the taxpayer remained an employee whilst on study leave and that his services were not terminated until 31 December 1979 points at the very least to a strong inference that the study leave payments were made to him in his capacity as an employee and not as a student, as provided by sec. 23(z).

13. Section 6(1) of the Income Tax Assessment Act provides a definition of income from personal exertion and, to the extent that it is relevant in the instant case, it states as follows:

``In this Act, unless the contrary intention appears -

• `income from personal exertion' or `income derived from personal exertion' means 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...''

14. It will be noted that the above extract relates wholly to receipts in the form of emoluments of person's employment.

15. In our view, the study leave payment of $7,204 may be properly regarded as an allowance received in the capacity of an employee and therefore can be regarded as income in accordance with normal conceptions, and therefore assessable under sec. 25(1). At this juncture, the dictum of the Lord Justice Clerk in
Lord Inverclyde's Trustees v. Millar (1924) 9 T.C. 14 at p. 18 appears apposite:

``... no subject can be taxed, unless the Crown can find a clearly charging section, and that, once that is found, the subject cannot escape taxation unless he can find a clearly exempting section.''

16. Despite the able arguments of the taxpayer's representative to the contrary, we are unable to find that the exemption provided by sec. 23(z) operates, because the very character of the study leave payments precludes them from being of the genus of ``scholarship, bursary or other educational allowance'' derived by a student (ref.
F.C. of T. v. Hall 75 ATC 4156 at pp. 4163 and 4164; see also Case D72,
72 ATC 422 at p. 424).

17. Also we do not find the relevant facts greatly different from those that appertained in Case E3,
73 ATC 9. There, a bank officer was granted by his employer a ``full time bursary'' to undertake an honours degree in Commerce. The ``bursary'' carried full-time leave on full pay and ancillary benefits. During the period of his leave, the taxpayer continued to receive the salary he would have received had he been performing full-time duty with the bank. The taxpayer was not bonded to continue service with the bank after completion of the course. The No. 1 Board, as then constituted, ruled that the payments in question could not be correctly described as a ``scholarship'' or ``bursary'' for the purposes of sec. 23(z), stating that they were received by the taxpayer in his capacity of employee rather than as student.

18. Similarly, in the instant case, we rule that sec. 23(z) can have no application.

19. In denying that sec. 23(z) operated, the Commissioner based his argument on two alternative grounds:

• 1. The words ``scholarship, bursary or other educational allowance'' used in that subsection do not extend to payments by an employer to an employee on study leave; and
• 2. The payments were made to the taxpayer on the condition that he render, or continue to render services to his employer company.

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  ATC 159

20. As we find for the Commissioner on the first ground, it becomes unnecessary for us to consider the alternative ground, but for completeness we would add that it was always open to the company to request the taxpayer to render services to it whilst he was on study leave, because of the employer/employee relationship which continued to exist during that period. Accordingly, we find that the situation was not one where the words of qualification as contained in sec. 23(z)(i) had any application.

21. For the reasons stated above, we would uphold the Commissioner's decision on the objection and confirm the assessment, subject to correction in the taxpayer's favour of the arithmetical error of $2.

Claim allowed in part