Federal Commissioner of Taxation v. Blake.Judges:
Supreme Court of Queensland
This is an appeal from the Taxation Board of Review No. 3 in which the Commissioner appeals against the decision of the Board given in favour of the taxpayer and which upheld the latter's objection to an assessment for income tax issued by the Commissioner for the tax year ended 30 June 1981.
The taxpayer is a retired bank officer who commenced employment with the Commerical Bank of Australia Limited on 15 December 1917 and who, after 50 years of service in the Bank, retired from the employment on 29 September 1967. He was then aged 65 years, having been born on 22 September 1902. During his employment with the Bank he was a member of the Bank's superannuation scheme which originally was called the Guarantee and Provident Funds of The Commercial Bank of Australia Limited and which was renamed the C.B.A. Staff Superannuation Fund, the rules of which took effect from the 1st day of January 1970. Shortly prior to his retirement date the taxpayer was advised of the quantum of his pension entitlement from the Fund by the secretary in a letter dated 18 July 1967. In accordance with the rules of the fund he elected to capitalise 25% of that entitlement and it was
ATC 4662agreed that the balance of it would be paid to him at the rate of $2,473.65 per annum by fortnightly instalments of $94.88. The letter from the secretary of the Fund dated 22 September 1967 advised that tax instalments would be deducted ``at this office''. No question arises in this appeal as to the liability of the taxpayer to pay income tax in respect of the fortnightly pension entitlement of $94.88.
On 25 May 1967, prior to his retirement, the Board of Directors of the Bank resolved in the following terms:
``In recognition of the incidence of the increased cost of living on those senior officers of the Bank who retired prior to the improvement in the Provident Fund benefits in 1959, the Board approved of subsidies being paid by the Bank to increase pensions of such Officers...''
It would appear from the transcript of evidence taken before the Board of Review that the subsidy, as it came to be called, was a payment by the Bank and not from the Fund although the fortnightly payment of pension from the Fund and the subsidy from the Bank were received by retirees as one sum, that being a net fortnightly payment, the deduction of the appropriate amount for income tax having been made before remittance to the retiree. That situation was maintained generally from the time of the inception of the payment of subsidies.
Subsequent to the first resolution, the Bank from time to time, no doubt conscious of the erosion by inflation of the real value of the pension, reviewed the quantum of the subsidy. One such resolution was passed at a meeting of the Bank's directors on 21 January 1971, as a result of which provision was made for payment of subsidy to retired male officers of the Bank who retired in the years 1967 and 1968. The taxpayer who was retired by that time was benefited for the first time by the resolution and subsequently benefited further by later resolutions passed at meetings of the Board at which the quantum of the subsidy was reviewed. Subsequent to each review the fortnightly payment was increased so as to reflect an increase in the subsidy, and payment of the pension and of the subsidy was made in the same manner as indicated earlier.
The Bank by a letter written and signed by the Chief Manager, Personnel Division, dated 16 February 1971, advised the taxpayer of payment of the additional benefit. The letter begins in this way:
``I am pleased to advise that following a further review of pension subsidies, the bank has tentatively approved an increase of $126.35 in your pension, to $2,600.00 per annum, as from 21 January 1971.''
The reference to a tentative approval is of no relevance for present purposes. What is of some relevance is the fact that the taxpayer was advised of ``an increase of $126.35 in your pension to $2,600.00 per annum as from 21 January 1971''. It will be recalled that upon retirement the taxpayer, after capitalising 25% of his entitlement, became entitled to a pension at the rate of $2,473.65 per annum. The addition of $126.35 to that sum increased the annual rate to $2,600.00, as advised by the letter. I should point out at this stage that there was no evidence before the Board which clearly identified the way in which the Fund operated except that it was said that the Bank paid the entire administration costs of the Superannuation Fund ``even down to postage''. The effect of the evidence appears to be that once the Bank resolved to pay the subsidy, the total amount of pension and of the subsidy less income tax was paid by the one cheque drawn on the Fund which was then credited to the accounts of the respective pensioners and the amount represented by the payment of subsidy was debited to the Bank and of course the amount of the pension entitlement debited to the Fund.
The taxpayer in later years after a review of the subsidy in each such year was advised of the terms of the review by a letter from the secretary of the Fund or by an officer of the Bank. The terminology used by the writer of each letter is not precisely the same. On some occasions the retired employee was advised of an increase in ``your pension'' (1971, 1972, 1976, 1978) and on others (1975, 1980) advised of an increase in ``pension plus subsidy''. It is argued that nothing turns on the language used in this correspondence and with that I agree. The character of the payment is to be determined by reference to other matters.
In each year prior to the tax year in question the amount of money received as ``subsidy'' was returned by the taxpayer in his annual return of income to the Commissioner and income tax
ATC 4663was assessed and paid in each year in respect of it. Again, it is argued that nothing turns on that fact and with that I also agree. It seems that objection to payment of income tax in respect of the subsidy was first taken in the tax year ended 30 June 1981 and later an objection was lodged on behalf of the taxpayer by the Australian Bank Employees' Union to the assessment of the Commissioner, which assessment sought to include as income those amounts received as subsidy for the determination of the taxpayer's liability for income tax in that year. Perhaps that objection was inspired by the decision of the Federal Court of Australia in
F.C. of T. v. Harris which was handed down on 2 June 1980: 80 ATC 4238. It is the substance of that objection which is the subject-matter of this appeal.
The case for the appellant Commissioner is that the amount received by the taxpayer as an increment to the amount received by him as a pension is assessable income and accordingly liable to income tax. The case for the taxpayer is that the increment is not part of the taxpayer's assessable income since the payment is properly classified as a personal gift to the taxpayer by the Bank, being a voluntary payment by the Bank which was unsolicited by the taxpayer.
From the beginning, and both in the evidence before the Board of Review and in the appeal, the payment has been called a subsidy. That term was no doubt chosen in the beginning by officers of the Bank as a convenient tag to identify the payment. The nomenclature is unimportant. It is common ground that the payment in question is a payment by the Bank from its own funds made to its former employees to supplement their income and it is included with the payment of fortnightly pension from the Fund ``in recognition of the incidence of the increased cost of living on those senior officers of the Bank who had earlier retired''. It is also common ground that the payment is one made voluntarily by the Bank, that is, without legal obligation to make it, and it was unsolicited by the taxpayer. It is also common ground that the payment has been included with fortnightly payments of pension made from the Fund at least since the resolution of 25 May 1967.
The question whether the receipt of money by a taxpayer is assessable income has been asked in many cases. I do not propose to review them all. A reading of many of them, however, has persuaded me that particular words and phrases, which have been selected by Judges in particular cases as a convenient means of expression for the purposes of that case, have later been taken hold of and used in argument to support one conclusion rather than another. The words themselves seem to have been regarded as having an intrinsic value and are often quoted as being decisive for the purpose of determining the character of a particular receipt and accordingly the result of different case. In my view the most that can be said is that the Courts have identified certain relevant criteria which will be of assistance in characterising a particular receipt of money. In the absence of a statutory definition of ``income'' I find the following dicta of Jordan C.J. in
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 at p. 219 a useful starting point:
``The word `income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind.''
Therefore, one may ask, is it in accordance with the ordinary concepts and usages of mankind to say that one can properly characterise as income the receipt of money paid by an employer to a former employee in order to supplement the fortnightly income of the latter, the real value of whose pension, the entitlement to which derives from the former employment, has been eroded by inflation and whose standard of living has been reduced accordingly. I think it is. The ``ordinary concepts and usages of mankind'' are not constant but changing. In this day and age the ravages of inflation are often identified as one of the modern day economic ills of our society. Governments are intent upon reducing it, those in receipt of income are intent upon increasing their level of income in order to counter it. One knows and reads of the process of indexation - of wages, of pensions, of rental payments and of other cost items. The payments in question in this case were initiated and no doubt continued because of a current social factor, namely the increased cost of living. There was apparently no machinery available to the trustees of the fund to index the taxpayer's pension; there was clearly no legal liability in the trustees to increase the payments by
ATC 4664reference to an indexation formula. Therefore, the directors of the Bank voluntarily took a series of decisions which were designed to protect to some extent the standard of living of those former employees now living in retirement. There was no attempt to discriminate between them. Irrespective of their individual financial status, those in receipt of a pension payment from the Fund had that payment increased or supplemented by an increment, the measure of which was selected by their former employer. As a result of it, the amount of money available to the taxpayer for his daily living was increased. In my view it accords with ordinary concepts and usages to include it in that which one normally regards as one's income and at the same time it accords with modern day usages to say that the payment in this case was, in the tax year in question, a regular increment to that which was admittedly the taxpayer's income and was itself income. The payment is in my view income ``according to ordinary principles'' and falls ``within the natural understanding of gross income'' (per Dixon C.J. and Williams J. in
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 555). It falls within ``the general conception of income'' (per Fullagar J. in
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 53). It was ``income according to ordinary concepts'' (per Deane J. in F.C. of T. v. Harris 80 ATC 4238 at p. 4244). It is a receipt ``which by reasonable understanding might fairly be regarded as income'' (per Starke J. in
Resch v. F.C. of T. (1941-1942) 66 C.L.R. 198 at p. 213). The test is fundamentally an objective one (per Fullagar J. in Hayes v. F.C. of T. (supra) at p. 55).
If the payment had come into the hands of the taxpayer because of some provision having been made for it at its source, that is, if the Fund had provided for incremental payments according to a formula established by the scheme to reflect the increased cost of living, then in my view it could not be said that there was any basis for discriminating between the base payment and the increment. Both would be income according to ordinary concepts. However, for the taxpayer it was contended that because the increment was unsolicited by the taxpayer and in the nature of an ex gratia payment by the Bank it did not qualify as income. A review of the authorities suggests that whilst such a consideration is indeed a most relevant one it is not decisive. The payment in F.C. of T. v. Dixon (supra) and the transfer of shares in Hayes v. F.C. of T. (supra) were both unsolicited by the recipient and voluntary ex gratia contributions by the giver. The former was held to be assessable income; the latter was not. Those apparently conflicting results however are quite consistent if judged according to ordinary concepts and usages as to what constitutes income in the general sense having regard to the facts and circumstances of those individual cases.
Again, it is urged for the taxpayer that, except in a rare case, ``there has to be a subsisting relationship of employer and employee'' before a payment by the former to the latter can be said to be income within the meaning of sec. 25 of the Act. That submission cannot stand with the decision in Dixon v. F.C. of T. (supra) unless it is said that that was a rare case or a rare set of circumstances justifying an exception to the rule. I do not believe that such a view accords with the reasoning of the majority in the judgments.
One can easily identify different sets of circumstances. On the one hand, there is the gift of money in the true sense, in common parlance - a real windfall; on the other hand, there is the gratuitous payment of money by one to the other such as was made in Dixon's case. If those examples represent extremes, and I am not suggesting that they do, there will lie in between many different sets of circumstances in which the question will arise. How it will be answered will depend on all of the relevant facts and circumstances. What factor will have greater relevance in one case and what may be seen as being more relevant in another will vary from case to case. I do not understand the authorities taking collectively to establish a fixed set of criteria against which a particular receipt has to be measured in order to determine whether it qualifies as income or not. The cases identify some of the considerations which have been referred to and which will be useful in arriving at a result, such as, the periodical nature of the payment, the recipient's reliance or otherwise on the payment for regular expenditure on himself and his dependants, the expressed object of the payment and its effect in the hands of the recipient, the relationship, if any, between the payment and the taxpayer's employment or former employment. These considerations form part only of the litany of useful criteria.
In the instant case I have indicated my view that the payments during the tax year in question
ATC 4665were part of the income of the taxpayer in that year and fall within what I perceive to be the general conception of income. Some of the so-called criteria have weighed with me in reaching this result and I mention them not because I am of the view that one or other of them is decisive but because they have assisted me in defining the quality of the payment in the hands of the taxpayer (see Windeyer J. in
Scott v. F.C. of T. (1966) 117 C.L.R. 514 at p. 526). The taxpayer had been in receipt of the payment for some years and had a reasonable expectation that in this tax year he would every fortnight receive this increment to his pension; it was received by him as a regular thing and formed part of the receipts to be used by him in meeting the cost of living; it was a periodic and regular payment; it was received by him because he was in receipt of the pension, which in turn was his entitlement only because of the former employment which he had undertaken with the Bank; it was a voluntary payment within the discretion of the Bank but nevertheless it was a payment made because of ``genuine commercial considerations'' (per Deane J. in
F.C. of T. v. Harris 80 ATC 4238 at p. 4245). The payment was what the ordinary concepts and usages of our time would regard as part of the taxpayer's income. It was not therefore merely a personal gift as the taxpayer's counsel has submitted. I accept counsel's admission that the payment was voluntary, that it was unsolicited by the taxpayer, that it was made without guarantee that payments would continue after the year in question, that payments in later years were within the discretion of the Bank, that the payments were not income from property or from carrying on a business or made by way of remuneration for services nor income in the nature of an annuity properly so called. Nevertheless, I am satisfied that it was income within the meaning of sec. 25.
I have to deal with the decision of the Federal Court of Australia in F.C. of T. v. Harris (supra) which is binding on me. Those who constituted the majority in the Board of Review regarded this case as indistinguishable from Harris. If therefore that case is indistinguishable from the present I must discard what I have said above and conclude, as did the majority in the Board of Review, that the payments in question are not income and therefore not assessable.
The decision in F.C. of T. v. Harris would obviously be decisive in characterising the payments made by the Bank to all of those recipients of whom Harris was one. The case does not lay down any specific principle as part of its ratio decidendi. It is authority for the proposition that the payments made to Harris in the particular year, and to the others in the circumstances of that case, were not part of the assessable income of each recipient for that year. Are the material facts in the instant case any different from those in Harris' case? There are obvious factual differences but the question is whether those differences are material. Firstly, the payment in Harris was a lump sum payment, secondly, it was made for the first time to Harris in the 1976 tax year, the year to which the assessment relates, thirdly, Harris had no knowledge of the fact that the Bank had first made a payment of this type in 1975 and apparently he had no expectation in the tax year in question that similar payments would be made in the future, fourthly, the Bank had in fact only in the previous year, 1975, first made such payments, fifthly, it was specifically found by the primary Judge that the taxpayer was in other employment and was not in need of the payment in order to support himself.
In my view those matters taken collectively distinguish Harris' case from this case.
In this case the taxpayer had continuously and regularly during the eight financial years prior to the tax year in question received fortnightly in one sum his pension entitlement and the increment, which were entirely indistinguishable in the one sum of money which was paid to the credit of his Bank account and which was used by him for his upkeep. In the tax year in question the taxpayer was not working and had he not received the additional payment ``things might have been difficult without it'' and as he said, had he not received it ``the alternative was that I do some other work''. That summary of factual matters in this case is in my view sufficient to distinguish the case from Harris' case in material respects. After all has been considered in the individual case, the final question must be whether the receipt should be regarded as income according to ordinary concepts. The facts in Harris' case persuaded the majority of the Court that the payment there should not be so regarded having regard to all of the circumstances. The lump sum payment of $450.00 to Harris, whilst made for the same reason as the payments here in question, was, in the hands of Harris, a first
ATC 4666time payment and to his knowledge unprecedented. It was a payment he neither expected nor needed. In fact, it had only been paid once before and so far as Harris was concerned there was no real basis for any expectation of payment in the future. One can well conclude in such a case that, in accordance with the ordinary concepts and usages of mankind, such a payment should not for the tax year in question be regarded as income. What its fate might be in different circumstances does not have to be considered.
I do not wish to be understood as saying that because one payment was in a lump sum and the other was paid periodically and regularly that that is conclusive in characterising this payment. Depending upon the existence or otherwise of other factors in the particular case, it is my view that an annual lump sum payment may well qualify as income within the terms of sec. 25. Nor am I saying that the fact that a recipient is otherwise not in employment and needs the additional money to provide for his upkeep is a conclusive factor. Those facts, if they are present, may be relevant more or less depending upon the whole of the circumstances.
I am of the view therefore that in this case I am not bound to the same conclusion as that arrived at by the majority of the Federal Court of Australia in Harris' case.
I would allow the appeal and confirm the decision of the appellant on the objection.
I was informed at the outset of the hearing that this appeal had been instituted by the Commissioner as a test case and that the Commissioner had agreed that even were the appeal to succeed he would submit to an order that he pay the respondent's costs of the appeal to be taxed. I therefore order that the appeal be allowed and I further order the appellant to pay the respondent's costs of and incidental to this appeal to be taxed.