Smith v. Federal Commissioner of Taxation.

Yeldham J

Supreme Court of New South Wales

Judgment date: Judgment handed down 27 November 1985.

Yeldham J.

Peter Lindsay Smith, who is the appellant, has been an employee of Westpac Banking Corporation (which I will call ``the bank'') since June 1973. In 1978 he commenced a Management Certificate Course at the Penrith Technical College. This course was of four years' duration; in each of the first three years he studied two subjects, and in his last year he was required to study only one unit. He successfully completed the course and received the appropriate certificate. At all material times the bank had what it called an ``encouragement to study'' policy, which was set out in r. 635 of its rule book, as modified by a circular from the general manager, personnel services, dated 5 May 1981. Rule 635, as it stood at the period with which this appeal is concerned, recited that ``the Bank recognizes the importance of study by its staff. The following assistance is provided to encourage staff to undertake courses relating to banking''. Then followed a list of a number of approved courses of study, these being courses conducted by the Bankers' Institute of Australasia, degree courses through universities, institutes of technology, and colleges of advanced education, ``which are basically commercial in content''; courses leading to admission as a barrister or solicitor; diploma courses through institutes and colleges, ``which are basically commercial in content''; certificate and associate diploma courses through colleges and institutes in management and the like; and ``other courses relating to banking as may be approved from time to time (refer to chief manager for approval)''. The rule set out that all staff, with immaterial exceptions, were eligible for the benefits under the policy; that the bank would endeavour to facilitate the placing of officers reasonably close to colleges, universities, etc., and would endeavour to assist, where necessary, where attendance at lectures during normal working hours was required; would grant special study leave; would refund excess fares incurred in travelling to lectures; and make interest-free loans for the cost of essential text books and compulsory fees. The document states ``all honoraria paid by the bank are to be applied in reduction of debt except any special payments made in recognition of outstanding results''. Under the heading ``Honoraria and cost reimbursement'' it is said that ``payments will be made as set out in the following sections''. Then follow various scales of payments, those relevant for present purposes (as increased by the circular dated 5 May 1981 which I have mentioned) being $50 for each full subject passed, and a lump sum representing the difference between $750 (being the maximum honorarium) and the sum of $50 for each full subject being paid on successful completion of the course. In addition the bank would reimburse compulsory fees and costs of essential text books upon each subject being passed. ``Other courses'' the document says ``will be considered on their merits with emphasis on the value to the bank of the course being undertaken. Apply to chief manager for approval before commencing course. Chief manager will advise honoraria and cost reimbursement applicable''. Under the heading ``Higher level passes'' it is said: ``For officers gaining highest level passes in at least half the subjects of an approved course, the bank will consider payment of a further special honorarium on completion of the course''. Payment ``will be initiated by chief manager and will appear on branch pay report''.

The circular dated 5 May 1981 said that ``increasingly the bank has a need for more qualified personnel to assist us to maintain our place in the rapidly changing climate in which we operate. Staff members who seek further education are better equipping themselves for their future progression in the service. In recognition of further education the bank has in the past offered rewards to staff gaining qualifications, as set out in rule 635. These rewards have recently been reviewed and the increases/alterations are attractive''. After summarising the principal alterations, the document proceeds to say: ``All officers should consider taking up further study to enhance their own development and career progression''.

In the year ended 30 June 1982 the appellant disclosed to the respondent, the Commissioner of Taxation, the fact that he had ``received an honoraria payment of $570 under the Bank of New South Wales Encouragement to Study Scheme''. He claimed that it was not considered to be assessable income and that it was made after successful completion of a four-year Management Certificate Course. It was made up as to $50 for each of two subjects successfully completed in the 1981 calendar year (the amount having been increased from $30 to $50) plus $470 paid on the successful completion of the entire course, this being the

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difference between $750 and the amounts otherwise received. In the three earlier years he had received $60, being $30 for each of two subjects successfully completed.

The respondent determined that the amount in question formed part of the appellant's assessable income for the relevant year. An objection lodged by the appellant against the assessment was disallowed. From that decision the appellant appeals to this Court. Although the amount involved is not great, the principle is an important one. Evidence before me showed that for many years a great many officers of the bank had benefited from payments made to them under the scheme. Other similar institutions also apparently have schemes of a somewhat similar character, although not necessarily identical.

After serving a probationary period of about six months with the bank, the appellant signed a ``staff agreement'', cl. 3 of which provides:

``3. The employee while employed by the Bank shall at whatever time or times of the day or week as may be required from time to time diligently perform all duties and tasks which may devolve upon him... and shall duly and punctually observe perform and obey all directions, instructions and regulations which shall have been or shall be given or prescribed by the Bank...''

The appellant said, and I accept, that although at the time he joined the bank there were rule books which ``were the thing that guided us in what we did'' he did not become aware of the ``encouragement to study'' scheme until about 1975 or 1976, although there is no doubt that, had he inquired, he could have familiarised himself with its existence and its details at the outset of his employment. He said that one of the reasons for choosing the management course was ``it was a course that had relevance to management in general; it does not necessarily relate solely to the bank itself. One of the reasons I chose it was because it was not specifically for banking; it was a general course''. He said also that the payments which he received were made to him together with his regular salary payment at the time. In his affidavit he said:

``6. The benefits which I perceived from undertaking the course were threefold. In the first place, it broadened my `market appeal' in the sense that, if I decided not to pursue a career with the Bank, my employment prospects with potential employers would be brighter. In the second place, if I decided to stay with the Bank, my prospects of promotion might be improved as a result of having done the course. Finally, the completion of the course would give me an opportunity to accelerate the progress of a career with the Bank, as many other officers of my grade at the Bank were some three to five years younger than I, as a result of having started work at the Bank at ages between 16 and 18 years, instead of 21 years.''

Mr Gorrell, who has been with the bank since 1958 and had himself taken advantage of the ``encouragement to study'' policy, has been responsible since November 1982 for its administration. He said that the policy was first instituted prior to 1948. He himself was encouraged to undertake study when he joined the bank and he ascertained from the then current rule book and from oral information given to him the various details of the scheme. Mr Gorrell said in evidence that ``promotion is independent of the encouragement to study policy'', and explained that in this fashion:

``Well, you don't get promoted because you study, you get promoted because you are suitable for promotion and your work performance indicates that you are capable of more responsibility, different responsibility. I suppose if you study, perhaps you have prepared yourself, but some people, no matter how much study they do, don't improve their performance.''

In cross-examination he said:

``Q. What is your understanding of the advantages to the bank of this scheme? - A. It provides people with some expertise gained by study.

Q. That is what you say the only advantage to the bank is? - A. The end advantage?

Q. The only advantage? - A. It provides the bank with staff suitably qualified.

Q. And that is to, no doubt, improve the services the bank is able to offer its customers? - A. That would be one result.

Q. One of the advantages is, is it not, to the bank of having more qualified staff? - A. It would be that they would provide better service...

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Q. It makes the staff happy to have a scheme like this? - A. They would be pleased to have it, yes.''

He said also that the payment is made upon successful completion of each subject or of the course, but only to persons who remain in employment at the time when payment is made. He said also ``You are promoted on performance. If you have done a course that improves your performance, you are promoted''.

Although Mr Hill, senior counsel for the respondent, submitted that the payment of the ``honoraria'' was something to which a person undertaking a course indicated in the ``encouragement to study'' scheme was contractually entitled under the terms and conditions of his employment, I do not think that this is so. I do not construe cl. 3 of the staff agreement, the relevant terms of which I have earlier set out, as imposing any obligations at all upon the bank. It is this clause upon which the Commissioner principally relied. The absence of any contractual obligation by the bank to make any of the payments in question is not necessarily decisive one way or the other, although it is plainly of some relevance. It is, I think, correct to say that the nature of the scheme was such that there was a strong expectation that the payments in question would be made to a person who undertook an approved course. Such payments are described as ``honoraria'', and although the label given to them by the parties is not necessarily decisive of their character, none the less it is, in the present circumstances, a proper description of them in the sense that, although there was, as I have said, a strong expectation by participants in the scheme that they would be paid to them, there was none the less no legal obligation upon the bank to make them. The scheme left many matters to the complete discretion of the bank, including the nature of the courses which would be approved, and also the amounts of money which would, in some circumstance, be paid. Other factual matters to which I should refer are these:

  • the payments made by the bank are not to be regarded as a payment for undertaking study, but as a reward for examination success, no amounts being paid at all unless the study resulted in the passing of examinations;
  • the scheme operated to encourage bank officers to undertake further education by rewarding success, in circumstances where it was not obligatory upon the officer to undertake it, and it was not conditional upon his agreeing to remain in the employment of the bank;
  • and further, whilst there was a general relationship between the course of study undertaken by the appellant in the present case, and the acquisition by him of knowledge and skills which would make him more useful as an employee of the bank, there was no necessary or particular relationship in that regard.

Mr Smith was attracted by the reimbursement of his study expenses, but his principal reason for undertaking further study was a desire to improve himself and his qualifications. On the other hand, the bank was motivated principally by its desire to retain employees who had the initiative to study and the ability to pass examinations, providing an incentive for those persons to remain in the employment of the bank during the course of study and thereafter, and also to produce better bank officers and improved service to its customers.

Section 25(1) of the Income Tax Assessment Act 1936, as in force at the relevant time, provided that the assessable income of a resident taxpayer should include the gross income derived directly or indirectly from all sources. Section 26 provided that the assessable income of a taxpayer should include (inter alia):

``(e) 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, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise...''

A proviso to that paragraph is not relevant to the present case and I need not refer to it.

By sec. 6 ``income from personal exertion'' is defined to mean (inter alia) ``income consisting of earnings, salaries, wages... bonuses... allowances and gratuities received in the capacity of employee or in relation to any services rendered...''.

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As Windeyer J. pointed out in
Scott v. F.C. of T. (1966) 117 C.L.R. 514 the definition of ``income from personal exertion'' in sec. 6 does not 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, but that is all and otherwise it is irrelevant. So also in relation to sec. 25, ``what is gross income derived directly or indirectly from all sources or all sources in Australia, as the case may be, depends upon what is income'' per Dixon C.J. and Williams J. in
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 555. In the present appeal, likewise, the critical question is whether or not the payments made by the bank and received by the appellant in the particular period constituted ``income''. If, within sec. 26(e), there was a direct or indirect relation between the payments made and the appellant's employment by the bank, that would suffice to render the receipt of the moneys income which is taxable in the hands of the appellant. If sec. 26(e) has no application the moneys received may none the less be assessable income within sec. 25.

In Scott's case (ante) at pp. 525-526 Windeyer J. said:

``As I read s. 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 moneys' 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.''

``I return to the general concept of income. Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance.''

F.C. of T. v. Dixon (ante) to which Windeyer J. referred, and which was much relied upon in the present appeal, involved the question whether a sum provided by an employer to make up, during the war, the difference between the military pay of an employee who had enlisted, and the pay that he would have received in his civilian occupation, formed part of the soldier's assessable income. This question the majority of the High Court (Dixon C.J., Williams and Fullagar JJ. with McTiernan and Webb JJ. dissenting) answered in the affirmative. Dixon C.J. and Williams J., in the course of a joint judgment, held that moneys paid by the former employer were an expected periodical payment which had the character of income and therefore formed part of the taxpayer's gross income within the meaning of sec. 25. Their Honours rejected an argument based upon sec. 26(e), stating that the additional payments made represented an allowance, gratuity or benefit allowed or given to the taxpayer by his former employer, and added (at pp. 553-554):

``Our difficulty is in agreeing with the view that it was allowed or given to him in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him. It is hardly necessary to say that the words `directly or indirectly' extend the operation of the words `in relation... to'. In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is

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the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause... We are not prepared to give s. 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or comtemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination.''

In the same case Fullagar J., one of the majority, said (at pp. 563-564):

``The second thing which seems to me to be clear is that the receipts in question are not so related to any employment of the respondent as to fall either within the terms of the definition of `income from personal exertion' in s. 6 of the Income Tax Assessment Act 1936-1943 or within the terms of s. 26(e) of that Act. The moneys would not, of course, have been paid if the respondent had not been employed by Macdonald, Hamilton & Co. up to the date of his enlistment. But nothing that he had done in his employment by Macdonald, Hamilton & Co., or might thereafter do if he re-entered their employment, provided the occasion of the payments. The payments were made irrespective of any services given by an employee as employee. The same bounty was available to one who had served for one month or for ten years... The payment does not partake in any degree of the character of a reward for services rendered or to be rendered.''

His Honour continued by saying that the receipts in question may be assessable income from personal exertion, although not comprehended within the definition in sec. 6 or within the terms of sec. 26(e). He said that it was an unavoidable conclusion that the receipts did constitute assessable income, adding (at pp. 567-568):

``They were regular periodical payments - a matter which has been regarded in cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient... This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent... What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payment. It acquires the character of that for which it is substituted and that to which it is added.''

It is plain from these authorities, and from others, that sec. 26(e), like sec. 25, is not limited to receipts by a person who is an employee. Section 26(e), it should be observed, distinguishes between ``employment of'' a taxpayer and ``services rendered by him''. Scott's case illustrates the distinction. Conversely, of course, as has been pointed out in a number of the authorities, and in Dixon's case in particular, the fact that the relationship of employer and employee is the occasion of the payment does not produce the consequence that it is necessarily a reward for employment. The question really is whether or not the relationship of employer and employee is the explanation of how the payment comes to be made, which will not suffice to make it taxable income, or whether it is in truth a reward of the employment, an allowance or advantage given to him instead of his being paid fully in money.

Hayes v. F.C. of T. (1956) 96 C.L.R. 47 Fullagar J. said (at p. 54):

``I doubt very much whether s. 26(e) has the effect of bringing into charge any receipt which would not be brought into charge in any case either by virtue of the general conception of what constitutes income or by virtue of the definition of `income from personal exertion' in s. 6. The words `directly or indirectly' are doubtless intended to cast the net very wide, but it is clear that there must be a real relation between the receipt and an `employment' or `services'.''

His Honour added that if the receipt in the case there under consideration did not fall

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within the general conception of ``income'' it was not caught by sec. 26(e). Fullagar J. continued (at p. 54):

``A voluntary payment of money or transfer of property by A to B is prima facie not income in B's hands. If nothing more appears than that A gave B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a `gift' in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A or to a business carried on by B, that it is, in substance and reality, not a mere gift but the product of an income-earning activity on the part of B, and therefore to be regarded as income from B's personal exertion. A very simple case is the case where A employs B at a salary of £1,000 per annum, and at the end of a profitable year `gives' him a `bonus' of £100. Obviously the bonus is income. It is paid without obligation, but it is clearly in truth part of what B has earned during the year.''

Reference was made in the present appeal to a number of cases decided in England, upon provisions which were different, but where the result was substantially the same as that achieved in the various High Court cases to which I have referred. But it seems to me that it is not instructive to consider the English cases, not only because of the differences in the legislation but, especially, because the answer to the question whether the moneys received by the appellant constituted income depends upon the application of principles well-established in Australia to the facts of the present appeal.

On behalf of the respondent, Mr Hill submitted that because the payments were available to each employee who complied with the rules, there was the strongest expectation that they would be paid, they were motivated by the reasons that I have earlier set out, and were adjusted having regard to changing values from time to time, they were in consequence an ordinary and common incident of the appellant's employment as an officer with the bank, such employment being one of the contributory causes of or reasons for them. He submitted also that they were a recognized incident of the employment, there was a direct, or at least an indirect, relationship between payment and employment, and that hence the various payments fell squarely within the words of sec. 26(e). Mr Hill referred to a number of authorities which state the well-known fact that the words ``in respect of'' and ``in relation to'' are very wide and signify any relation between the benefit and the employment, direct or indirect. He relied in part upon a decision of the Supreme Court of Canada in
The Queen v. Savage 83 DTC 5409 in which payments received by an employee of a life assurance company for passing three life insurance courses which he had voluntarily undertaken were sought to be rendered liable to taxation. A majority of the Court held that the amount at issue was a benefit in respect of employment, and therefore subject to income tax, unless exempted by another section of the Act. The Court unanimously concluded that the amount was exempt under a section dealing with ``a prize for achievement''. However, once again, as with the English cases, I do not think that any great assistance is to be derived from decisions of courts of other countries upon statutes which, in some respects at least, are differently worded. The relevant expression in the Canadian Act was ``... other benefits of any kind whatever... received or enjoyed by him in the year in respect of, in the course of, or by virtue of an office or employment''. These are, of course, words of the greatest width, and I do not think it is instructive to discuss that case further.

I have come to the conclusion that the payments here under consideration are not to be regarded as ``income''. There was no obligation upon the employee to study, sit for any examinations, or pass them; the payments were not for services already rendered or later to be rendered; the fact that the appellant was an employee explained why the bank made the payments to him in relation to the success of the study which he undertook, but such payments were not in relation to anything done by him as part of his employment; they were not recurrent, and were made only in the event of success. None of these matters is, by itself, decisive but, taken together and looked at in the light of the scheme as a whole, they persuade me to the view that what the appellant received were personal rewards relating to his academic achievement. The only connection with his employment was that they were bestowed by

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his employer, which obviously was motivated to encourage and reward him and others, the motivation being in some measure the benefit to be derived by the bank. But I am satisfied that the fact that the employment was the occasion of the payments, which would not have been made if the relationship of employer and employee had not existed, is not by itself sufficient to render such payments income and therefore liable to taxation. I do not regard them as being ``for or in relation directly or indirectly to any employment of'' the appellant by the bank, hence they are not within sec. 26(e). The various amounts, in my view, were truly an honorarium on each occasion that they were paid; they were not any reward for what he was doing for the bank, nor were they some kind of supplementary benefit for doing work that he was employed to do. The moneys he received were not income within sec. 25.

Such payments are to be contrasted with gratuitous payments made in recognition of long or meritorious service (Weston v. Hearn (1943) 2 All E.R. 421) and with ordinary tips (
Calvert v. Wainwright (1947) 27 T.C. 475) as well as with an ordinary bonus, which is normally properly regarded as a reward for services rendered or to be rendered, and payments of the type considered in Laidler v. Perry (1966) A.C. 16 where all staff employees received at Christmas an equal cash gift regardless alike of their positions in the company and their personal circumstances.

Because I am of the opinion that the payments made by the bank and received by the appellant were not income, whether in its ordinary meaning or in its expanded definition as found in sec. 26(e), I am of the opinion that the appeal should be upheld. I therefore allow the appeal and remit the matter to the Commissioner to reassess the tax payable by the appellant in respect of the year ended 30 June 1982 in accordance with the opinions which I have expressed. I order the respondent to pay the costs of the appellant.

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