Case R23

KP Brady Ch

JE Stewart M
DJ Trowse M

No. 2 Board of Review

Judgment date: 22 March 1984.

K.P. Brady (Chairman); J.E. Stewart and D.J. Trowse (Members)

In this reference, which is concerned with the year of income ended 30 June 1979, the taxpayer is a school teacher employed by the State Education Department. The matter in issue is the assessability of an amount of $10,649 received by him in the year in issue but said by him to comprise income derived in previous years.

2. It seems that the taxpayer, whom we shall call A, underwent compulsory National Service training in the years 1968 and 1969. Prior to that time he had been a law student, but upon failing in his first year he exercised an option to undergo his National Service training straight-away in order that he might not have the worry of it ``hanging over his head''. That training in the 1968-1969 period involved a 12 months' term of duty in Vietnam, but he did not serve out the full period through contracting pneumonia. Shortly afterwards, he was invalided back to Australia.

3. Whilst in Vietnam, he gave thought to the career he would like to pursue upon returning to civilian life, and decided to become a school teacher. Accordingly, upon completion of his military training he commenced a teacher's training course in early 1970. He completed it at end-1973.

4. Sometime in 1970 he learnt that he could be entitled to a salary benefit additional to the student allowance he was then receiving, arising from his service in Vietnam. He enquired at an interview with a senior officer of the Education Department as to whether that was so, but was told that the advice given to him was incorrect; no such additional payment was due to him.

5. Some eight years later, in 1978, by which time he was married and a qualified teacher, it was again pressed upon him that he was entitled to a special allowance because of his overseas war service. Resulting from further enquiries made of his employer, he made application for that allowance which was in fact paid to him later in that same year, i.e. the year of income in issue. The amount so paid was $10,649 from which tax was deducted of $2,660.

6. In lodging his tax return for the year of income in issue, he forwarded the following letter in order to provide the Commissioner with details of the further allowance paid to him:

``Dear Sir,

Following my National Service in 1968-69, I attended Teachers' Training College for the

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4 years 1970-73 inclusive, and received normal studentship allowances from the Education Department. In 1978 I became aware of a Government Regulation to the effect that in these circumstances I was entitled to full teacher's salary during the training period. I applied for the incremental amounts of pay in respect of the period and as a result was paid the sum of $10,648.83 gross (less tax of $2,660, net $7,988.83) on 13th September 1978.

I seek to adjust my income tax returns for the five financial years involved, in accordance with the attached table.

I attach letter from the Education Department of... supporting the facts as described.

The Gross Income figure shown in item 1 on the attached form for the current year excludes the gross income paid in respect of previous years. The Instalments Deducted figure on the same form includes the related instalment deducted.

Yours faithfully,

[Signature of taxpayer]

[Name of taxpayer].''

7. The letter from the Education Department referred to in A's letter was dated 20 September 1979, and was in the following terms:

``[Name of taxpayer]

Dear Sir,

This is to certify that the following amounts earned in the financial years shown, have been paid in the last financial year, and are included in the gross earnings column of your 1978/79 group certificate no....

         Financial year              Amount earned

            1969/70                    $1339.97
            1970/71                     2954.86
            1971/72                     3053.97
            1972/73                     2086.90
            1973/74                     1213.13

This letter may be used in any negotiations you may have with the Deputy Commissioner of Taxation for a possible reassessment of your income tax.

Yours faithfully,



(It may be well to mention here that the word ``earned'' may not have been strictly correct, but, whether that was so or not, it would seem that the taxpayer had a legal entitlement to the above amounts.)

8. The table to which A referred in the second paragraph of his letter reflected revised taxable income figures for each of the years 1969-1970 to 1973-1974 after adding back to previously assessed figures the yearly amounts of additional income advised in the Education Department's letter as indicated above. On that basis, which A conceded to be arbitrary because of lack of detailed information for all years, the amount of additional tax was $2,940.77 as opposed to the significantly higher figure of $4,964.61 which was imposed by the Commissioner as a consequence of his action in treating the whole of the amount of $10,649 as income of the year ended 30 June 1979. A objected and, upon that objection being disallowed, he requested the Commissioner to refer the matter to a Board of Review.

9. At the hearing, A was represented by his tax agent; the Commissioner was represented by one of his officers.

10. The payment which was made to A was made pursuant to sec. 74(1) of the Teaching Service Act 1958 as amended, and to reg. 5, cl. 6. The Regulation is headed: ``Student Teachers, Students in Training, and Qualified Applicants who served in the Armed Forces, and War Widows''. Clause 6, so far as it is relevant, reads as follows:

``A person honourably discharged after having served in the armed forces in connexion with the war commencing in the year One thousand nine hundred and thirtynine, or in connexion with the warlike operations in Korea after the twenty-sixth day of June, One thousand nine hundred and fifty, or in Malaya after the twenty-eighth day of June, One thousand nine hundred and fifty, or in Vietnam after the thirty-first day of July, One thousand, nine hundred and sixty-two, or a war widow eligible for training under the Commonwealth Reconstruction Training Scheme, and who, prior to the commencement of such war, was not a classified teacher or a student teacher, may be awarded a studentship -

  • (a) for a course of training for primary teachers, provided that he has served as a

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    temporary teacher for a period approved by the Director-General and that he possesses the following qualifications: -
    • (i) the applicant shall be not more than thirty-five years of age, and shall be of suitable character and personality;
    • (ii) he shall have qualified to matriculate at a... University
    • or
    • he shall have passed in five subjects, including English, at the School Leaving Examination of the... Universities and Schools Examinations Board and shall have completed satisfactorily a sixth year of secondary education at university entrance level or shall hold an approved equivalent or higher qualification or qualifications;
    • ...

Holders of studentships under the provisions of this clause shall, during the course of training, be paid allowances at the rate of salary for time being payable to adult temporary teachers, male or female as the case may be.''

11. As the Education Department found, in response to A's second enquiry, that he fulfilled the requirements detailed in the above provision, the sum total of the allowances due to him amounting to $10,649 (less tax of $2,660) was paid to him on 13 September 1978.

12. It seems clear enough that the amount so paid represents assessable income derived by the taxpayer. The Assessment Act does not contain a definition of ``income'', but ``income from personal exertion'' is defined in sec. 6, and that term includes ``allowances and gratuities received in the capacity of employee''. The case of
F.C. of T. v. Dixon (1952) 10 A.T.D. 82; (1952) 86 C.L.R. 540 is authority for the proposition that one may refer to that definition in determining whether a particular receipt constitutes assessable income. Accordingly, we consider that the amount paid by the Education Department to the taxpayer was an allowance received in his capacity as an employee, and thus formed part of his income.

13. In determining at what point in time a particular receipt or gain becomes income, the main charging provision is found in sec. 17 of the Income Tax Assessment Act. That section states:

``Subject to this Act, income tax at the rates declared by the Parliament is levied, and shall be paid, for the financial year that commenced on 1st July, 1965, and for each succeeding financial year, upon the taxable income derived during the year of income by any person, whether a resident or a non-resident''

(emphasis added).

14. ``Taxable income'' is defined in sec. 6(1) as ``the amount remaining after deducting from the assessable income all allowable deductions''. There are a number of specific provisions in the Act dealing with the assessability of income, the most important of which is sec. 25(1). It provides that a resident of Australia (such as the taxpayer) is assessable on income derived from all sources whether in or out of Australia which is not exempt income. The question requiring our determination is - was the income derived in the year it was received, i.e. in the year of income in issue, or was it more properly derived in the various years listed in the employer Department's letter, viz. the years 1969-1970 to 1973-1974, when it was said to be earned?

15. The word ``derive'' is not defined in the Assessment Act and so we must adopt its normal meaning of ``get, gain, obtain (a thing from a source)'' - see Shorter Oxford English Dictionary. Over the years there seems to have evolved two different bases for bringing to account income as derived. First, there is the cash or receipts basis which takes account of actual receipts (comprising, in the generality of cases, money and cheques) coming to hand in the year of income. Secondly, there is the accruals or earnings basis (and hereafter those two words are used interchangeably) which is a wider concept than the first, and takes account of moneys due but not paid as at the end of the financial period. Whilst over a period of years the result of consistently using one basis as opposed to the other would be little different, the result within a given period can be widely diverse, e.g. a taxpayer's debtors could rise dramatically through a temporary inability to pay because of drought; the earnings are there but the cash is not. Thus it can be a matter of major importance in a given situation as to which basis to use. The question was considered in depth in
C. of T. (S.A.) v. The Executor Trustee and Agency Co. of South Australia Ltd. (1938) 5 A.T.D. 98; (1938) 63 C.L.R. 108, which came to be known as Carden's case, and

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at A.T.D. p. 131; C.L.R. p. 154 Dixon J., as he then was, said:

``In the present case we are concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income.''

The above passage was expressly approved by the High Court, per Mr. Justice Windeyer, in
Henderson v. F.C. of T. 69 ATC 4049 at p. 4051. In giving his judgment in Carden's case as one of the majority, Dixon J. went on to state at A.T.D. p. 132: C.L.R. p. 155:

``Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form.''

16. In applying his test of appropriateness to the situation before him, which involved determining whether the income of a deceased medical practitioner should be said to be his cash receipts as opposed to his earnings so as to include unpaid professional fees, Dixon J. considered that the cash receipts of the practice represented in substance a reward for work done, and that the deceased taxpayer's expenditure contributed to that reward only in a minor way. Thus he was of the view that ``... according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income'' (see A.T.D. p. 134; C.L.R. p. 158). He contrasted the situation before him (where essentially there was a sale by the taxpayer of his professional skills) with an income producing pursuit where there was a pattern of buying, manufacturing and selling; where there was ``a stock of vendible articles to be acquired or produced and carried by the taxpayer''; where there existed a ``fund of circulating capital from which income or profit must be detached for actual enjoyments'' (see A.T.D. p. 134; C.L.R. p. 158). In such cases the learned Judge considered that profits or income must be computed according to a commercial profit and loss account prepared in accordance with recognised commercial principles. He went on to expressly approve the distinction between trading income required to be brought to account for tax purposes on an accruals basis, and other than trading income which should be brought to account on a cash or receipts basis. He quoted from Shaw and Baker's Law of Income Tax (at p. 111) as follows:

``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.''

17. Hence, the majority of the Court in Carden's case (the judgment of Latham C.J. being a dissenting one) was of the view that, for most professional incomes, the receipts basis of accounting was the more appropriate.

18. The cash receipts basis for bringing income into account was again found to be the appropriate one in
F.C. of T. v. Firstenberg 76 ATC 4141. There the taxpayer was a solicitor conducting a ``one man'' practice and for many years had adopted a cash (or receipts) basis for calculating the income derived by him from his practice. Arising from the Full High Court's decision in Henderson v. F.C. of T. 70 ATC 4016, where the Court ruled that the earnings basis was the appropriate basis for assessing a large accounting practice, the Commissioner changed the basis for assessing Mr. Firstenberg, and assessed him on an earnings basis. Upon referral of the Commissioner's decision to a Board of Review, this Board, as then constituted, overruled by a majority the Commissioner's decision and ruled that the correct method of calculating the taxpayer's professional income was on a cash basis, finding ``that the taxpayer's system of accounting seems apt to deal with any of the problems that arise so as not to produce any distortion in the picture of his income which his accounts present'' (see Case E35,
73 ATC 295 at p. 308). The Commissioner appealed from that decision to the Supreme Court of Victoria, where the decision again went against him, McInerney J. finding that the cash basis was the correct one for assessing professional practices of the kind then before him. The majority of the

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Board and the learned Judge were at one in stating that the earnings basis is appropriate in cases where income is necessarily quantified by reference to the net result of the commercial activities of an enterprise, which term would include a partnership, certainly one of the substantial size under examination in Henderson's case; however, where such reference was not a consideration, the cash receipts basis for arriving at the income derived was the correct one. At p. 4155, McInerney J. stated:

``I am of the view that the `accruals basis' is, in the case of a practice such as this taxpayer's, an artificial, unreal and unreasonably burdensome method of arriving at the income derived... The books of account kept by the taxpayer were adequate for ascertaining the income received by him in any year of income. His return of income received, based on the information contained in those books, constituted a full and complete statement of the total income `derived' by him during the year as income and ought to have been accepted by the Commissioner, for the Commissioner was, by that return, enabled to make an assessment of the taxable income derived by the taxpayer.''

Earlier he had said:

``Indeed, from many points of view it [the accruals basis] might be a very misleading guide as to what `income' was `derived' during the relevant period by a professional man practising on his own account. The tax position of such a man, is in my view, more readily assimilated with that of a wage earner or salaried man who would ordinarily be understood as having derived only the income which he had received into his hands or which he had under his control.''

19. It was part of the taxpayer's submission that, had he received the allowance in each of the years when he was entitled to it, his marginal rate of tax would have been considerably lower than appertained in the year of income, because of his meagre salary then earned as a teacher in training. Accordingly, the tax impost would have been a far lower figure than that now levied on him as a qualified and experienced teacher. But (and here we use a hypothetical situation), had he received advice from the Education Department on say 25 June 1970 that an allowance (arising from his service in Vietnam) would become payable to him for the 1969-1970 year, but would not be paid over until the first week in July, he would have been most disinclined, we suggest, to include it in his income for the 1969-1970 year; rather, he would tend to consider that the gain had not ``come home'' to him in that year, and in fact would regard it only in that light when the Department's cheque was actually received by him. His feelings would tend to re-echo the adage that ``for income tax purposes, receivability without receipt is nothing''.

20. In
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 14 A.T.D. 98, the Full High Court was called upon to determine whether fees received in advance for dancing lessons constituted assessable income in the year of receipt. There, the Court quoted with approval the dictum of Dixon J. in Carden's case detailed in para. 15 (supra) at the end of that paragraph, and added at pp. 99 and 100:

``The word `gains' is not here used in the sense of the net profits of the business, for the topic under discussion is assessable income, that is to say, gross income. But neither is it synonymous with `receipts'. It refers to amounts which have not only been received but have `come home' to the taxpayer; and that must surely involve, if the word `income' is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust or charge in favour of the payer - not only that they have been received beneficially - but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived.''

In the result, the Court unanimously ruled that a receipt of fees for a specified number of dancing lessons to be given over a future period was not assessable income in the year of receipt.

21. In our view, the amount of $10,649 only ``came home'' to the taxpayer in the instant case when he actually received it; only then was the gain completely made; only then did he have control over it. In our view also, there is no commercial practice or principle of accountancy that would require A to treat the incremental amounts as assessable income of those past

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years in which it was said he became legally entitled to them; rather there is authority for the proposition that supplementary receipts of income in a later year related to activities in an earlier year generally will be regarded as derived in the later year (ref.
Squatting Investment Co. Ltd. v. F.C. of T. (1953) 10 A.T.D. 126 at p. 152, also
F.C. of T. v. Squatting Investment Co. Ltd. (1954) 10 A.T.D. 361 at pp. 371-372).

22. We are mindful that the allowances which A received might be said to be different in kind to the fee income receipts derived by both taxpayers in Carden's case and Firstenberg. For one thing, they were in different categories as taxpayers, A being a salaried employee and the two in the cited cases being professional men operating their own practices. But we consider that the differences are not material. The amount of the war service allowance which A derived was based on the salary payable to an adult temporary teacher and was properly included in his group certificate as a component of his gross salary, and we have seen that the Supreme Court of Victoria in Firstenberg was prepared to equate, so far as derivation of income was concerned, the position of a salary earner with that of a professional man practising on his own account. Accordingly, we consider that the factors which led to the High Court and Victorian Supreme Court ruling in favour of a cash receipts basis in Carden's case and Firstenberg respectively are apposite in the instant case.

23. The taxpayer's representative contended that the Commissioner should have exercised a discretion in not assessing his client in the way he did, and pointed to the harsh result it gave rise to and asked us to exercise a like discretion. However, discretionary powers are given to the Commissioner only under specific provisions of the Act, and no such power is given to him in the terms of sec. 25 (see generally on this matter, Henderson v. F.C. of T. supra at p. 4018). Similarly, Boards of Review, whilst having ``all the powers and functions of the Commissioner in making assessments, determinations and decisions'' (see sec. 193(1)), do not possess any blanket-type discretionary power. Thus, the taxpayer's submissions must fail.

24. For the reasons given above, we uphold the Commissioner's decision on the objection and confirm the amended assessment.

Claim disallowed

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