HP Stevens SM
Administrative Appeals Tribunal
H.P. Stevens (Senior Member)
The question for decision in these applications is whether or not the applicant's taxable incomes for the years ended 30 June 1979 and 1980 should be reduced by amounts representing the assignment of a share of his salary and wages to his wife.
2. In his returns of income prepared by a firm of tax agents the applicant disclosed salaries of $17,947 and $19,747 from his employment as manager of the... Co-op. Soc. Ltd. less 10% of gross salary assigned to wife - the 1979 return said assignment "as per agreement dated 28 June 1979" whilst 1980 return referred to "as per deed of assignment" - being $1,795 and $1,975 respectively. Upon assessment the amounts of $1,795 and $1,975 were added back with explanation code 5 stating "adjusted to the amount shown on group certificate/tax stamps sheet". Objection was taken to each adjustment in virtually identical terms - the 1980 objection stating:
"We wish to object against the notice of assessment issued to the above taxpayer for the year ended 30th June 1980 on the grounds that the taxable income should be reduced by the amount of $1,975 which represents a valid assignment of the taxpayer's income to his wife as per Deed of Assignment. The grounds on which we rely are as follows: -
There are no restrictions under the general law against Assignments of personal income, and as a general rule rights to remuneration from personal services are assignable at the discretion of the recipient. We refer you to the following cases: -
Crouch v. Victorian Railways Commissioners (1907) V.L.R. 80;
Re Mirams (1891) 1 Q.B. 594 and
Mulveena v. The Admiralty Commissioners (1926) S.C. 842;
Sir Denis Logan (1945) L.Q.R. 240;
F.C. of T. v. Everett 80 ATC 4076.
The rule against the assignment of the benefit of contracts of personal service does not carry with it a further proposition that the servant is forbidden from assigning the money he is to receive for performing these personal services.
It is strongly contended that subsequent to the Assignment of the income by the taxpayer, that income becomes assessable in the hands of the assignee."
3. Evidence was given before the Tribunal by the applicant and his wife who were married in 1953. After marriage a joint cheque account was opened with either alone having authority to draw thereon. The applicant's wages were paid into that account and drawings made to meet normal domestic needs and for the education of their children. A joint investment account was later opened and, although details were not given, a partnership of the applicant and his wife subsequently came into existence - applicant returned as his partnership share $2,089 and $2,921 for the respective years but source of partnership income unknown. The applicant deposed that whilst seeing his tax agent to have his 1978 return prepared the agent indicated he might be able to make some adjustments (i.e. lower taxable income) if he had his wife who was not "working" sign a document. The applicant asked was this in order and upon being reassured said he was interested and was informed he could assign 10% of his employment income to his wife with his return being adjusted accordingly. He indicated the 10% would give his wife some money for personal items which she then did not have (applicant not asked re the partnership share of the wife nor the extent of the joint investment account nor indeed the state of the joint cheque account) whilst in cross-examination he agreed there was no purpose other than reducing income tax.
4. At the stage of the applicant's evidence at which he had indicated his interest he was asked to look at a document. This document comprised two pages stapled together. The first was a photocopy of an obviously pro forma form with some original typed entries thereon of which some were over white correcting fluid. The second page was a complete photocopy with the photocopied signatures of the applicant and his wife thereon. Affixed to the first page was (and is) a $3 N.S.W. stamp duty stamp but the document has never been submitted for stamping as it was agreed it should have been. The applicant having identified the signatures of himself, wife and witness and recalled he had signed it at the agent's office, counsel sought to tender the document which bore a date 28 September 1978. Objection was taken to such tender but it was admitted subject to weight and relevance.
5. In address counsel for the applicant conceded the documentation was not perfect and that the document had been tendered as a piece of paper. Counsel is indeed correct for portion of the word September in the date section is over correcting fluid and it is obvious (by using the back of the page trick) that the month originally typed was June (the month referred to in the 1979 return of income). The front page has two separate sets of staple holes in it and the second page three if not four sets. As no explanation has been tendered it is difficult to accept that the "piece of paper" tendered is what was signed by the applicant and his wife - accepting something was signed - nor that it establishes the true date of execution.
6. The document states it was between the applicant as assignor and his wife as assignee and continued:
"WHEREAS: The Assignor is deriving wages and salaries from various employers and the Assignee has agreed that for a consideration the Assignor shall assign all his beneficial right, title and interest in 10% of the income derived by the Assignor so that such income shall be derived for the purposes of the Income Tax Assessment by the Assignee and not the Assignor.
The Parties hereby Agree:
In consideration of the sum of $50 paid by the Assignee to the Assignor the receipt of which the Assignor hereby acknowledges the Assignor as beneficial recipient, assign transfers and sets over to the Assignee.
- 1. (a) All his right, title and interest in all wages and salaries derived by the Assignor to the extent of 10% of all such wages and salaries.
- (b) All his right, title and interest in 10% of the future wages and salaries earned by the Assignor from any mode of employment.
- 2. The words `future salaries and wages' as used in this Agreement mean salaries and wages which but for this Agreement of Assignment would for the purposes of the Income Tax Assessment Act, otherwise have been derived by the Assignor from the entering into and performance of labour in the course of carrying on his employment with various employers.
- 3. This Agreement shall be effective for a period of eight (8) years from the date of the first derivation of salaries and wages by the Assignee of the future income assigned.
- 4. It is hereby declared no Agreement shall operate, to vary or modify this Agreement unless such Agreement is in writing and executed by both parties hereto.
- 5. During the period of this assignment the Assignor hereby covenants with the Assignee as follows: -
- (a) That he will, to the best of his endeavours, continue in full time employment and will not wilfully cause any diminution in the salaries and wages to which he would become entitled.
- (b) That he will give notice in writing of this assignment to the payers of all future income as a result of the Assignor entering into this Agreement."
Despite the provisions of cl. 5(b) the applicant never informed his employer. Both witnesses deposed that $50 was paid (left on his desk) to the applicant.
7. The applicant no doubt conscious of having said his wife had no money for her personal use deposed that the execution of the document gave his wife the right to draw money for herself and that she exercised it regularly and still exercises it (even though he ceased work in 1980 and has been on a pension since 1981). However his wife in chief (no cross-examination) said there had been no change in the way cheques had been drawn, that there had been no change in purpose, that she did not draw for her own personal use (except medical benefits) and that the situation after execution was the same as before execution. The Tribunal prefers the evidence of the applicant's wife who frankly admitted she had signed cheques for years. The applicant in re-examination reiterated the personal needs aspect and when asked which purpose (i.e. personal needs or to reduce tax) was more important answered 50/50. In the light of the overall evidence before the Tribunal (including the wife's evidence of no change in practice or purpose and the evidence of other funds available albeit unexplained) the Tribunal is of the view the balance is predominantly weighted in favour of a tax reduction purpose even if the cross-examination answer of no other purpose is not wholly correct.
8. Turning to the merits of the claim (accepting for this purpose a document was executed in terms as set out in para. 6 above and the date of execution was 28 September 1978) counsel for the applicant conceded the 1979 claim was incorrect (only 10% of gross wages after the date of execution which figure was not however quantified) but argued that otherwise the claims should be upheld. In this regard he submitted:
- (a) there can be an assignment by a wage and salary earner of his wages under a contract of employment or of the right to receive amounts payable under a contract of employment;
- (b) that which is assigned is a right to receive a proportion of the assignor's wages or salary;
- (c) the effect of the assignment is to deflect that proportion from the assignor to the assignee; and
- (d) the consequence of such deflection is that this proportion becomes income derived by the assignee.
Reference in support was made to the cases referred to in the notices of objection (para. 2) and it was said that:
- (i) the English decisions did not support certain unquoted Board of Review decisions which had decided assignment was ineffective;
- (ii) certain unreferred to New Zealand decisions were not binding in Australia and were, in any event, wrong; and
- (iii) the decision of the High Court in
F.C. of T. v. Everett 80 ATC 4076; (1979-1980) 143 C.L.R. 440 left the issue open.
9. For the Commissioner counsel submitted that neither at general law nor tax law could there be an assignment of the present type of income. In Everett's case (supra) there was a chose in action (interest in a partnership) capable of being assigned but here there was not. The present case was in the same category as
Norman v. F.C. of T. (1962-1963) 109 C.L.R. 9 and all that the assignee could claim was the fruits after they had been first derived by the applicant. He also referred to the terms of the document and said it was unclear as to what type of operation was intended and that by its terms it only operated on amounts "derived by the Assignor". In the alternative it was submitted that the document was not intended to have any effect (evidence demonstrated no difference whatsoever in family arrangements which still continue after applicant's retirement the same as before execution of document). It was also submitted that even if there was an effective assignment the provisions of sec. 260 would apply -
Tupicoff v. F.C. of T. 84 ATC 4851 which was not in conflict with anything said in
F.C. of T. v. Gulland and Pincus v. F.C. of T. 85 ATC 4765.
10. In reply counsel for the applicant said the Commissioner's argument proceeded on a misapprehension. There was a contract underlying a person's employment and this was a chose in action capable of being assigned. He said if his friend was correct then Everett's case (supra) had been wrongly decided because what accrued was what accrued from the work of the partners. Counsel submitted that, although in law the amount came home to the assignor, in equity it came to the assignee and this was a complete answer to the Commissioner's arguments. He denied there was a sham and sec. 260 was inoperative because it was an arrangement of a family or domestic nature and in any event there was a single dominant purpose.
11. As counsel for the applicant indicated it has been held by Boards of Review that it is not possible to escape tax upon salary or wages by "assignment". In Case J27
(1958) 9 T.B.R.D. 136 a taxpayer by deed assigned to his wife an amount to be paid out of his salary and his employers acted in accordance with the terms of the deed. In that case Mr Webb said at p. 138:
"Unfortunately for the taxpayer this issue appears to have been concluded against him upon substantial authority. In
Parkins v. Warwick ((1943) 25 Tax Cas. 419), Parkins assigned to one Pietersen portion of his emoluments as managing director of a certain company. The issue before Macnaghten J. was whether in view of this assignment and the subsequent loan of part of the moneys by the assignee to the assignor it could be said that the emoluments assigned remained part of the income of Parkins. In holding that they did, Macnaghten J. said (at p. 423): `I do not think I need refer to any of the cases which have been cited to me, except perhaps the case of
Smyth v. Stretton ((1904) 5 Tax Cas. 36), which relates to the emoluments of a master of Dulwich College, emoluments from which certain deductions had to be made in accordance with a scheme that the governors of that celebrated college had forward.' In that case, on p. 42, Channell J. said: `A sum receivable by way of salary or wages is not the less salary or wages taxable because for some reason or another the person who receives it has not got the full right to apply it just as he likes.' It did not, I think, occur to Channell J. that it would be possible for anyone to argue that where the recipient of an emolument had got the full right to apply it just as he liked, he could by any assignment release himself from the obligation to pay Income Tax on it. In the present case Mr Parkins was free to deal
ATC 158with these emoluments as he pleased. He could, and he did, make them over to Mr Pietersen. But the fact that he did so does not render the emoluments any the less assessable to Income Tax!"
(1958) 9 T.B.R.D. 264 concerned a university lecturer who by deed assigned his first term's salary to his wife and who upon receipt of the university's cheque endorsed it and paid it into his wife's bank account. The claim was rejected on the same reasoning as applied in Case J27. A similar result followed in Case K75
(1959) 10 T.B.R.D. 396 when an assurance agent endeavoured to have his remuneration treated as part of the income of a partnership of himself and his wife.
12. It is true that no reference was made in the Board cases to the case of Re Mirams (supra) relied upon by the applicant nor was reference made to it in Smyth v. Stretton (supra) and Parkins v. Warwick (supra). However Parkins v. Warwick was an assignment case and it is difficult to accept that such an experienced revenue Judge as Mr Justice Macnaghten would have overlooked Re Mirams (supra) if it was relevant. The question in Re Mirams was whether a charge given by a bankrupt clergyman on his salary as a chaplain was void on the ground of public policy and it was held that it was not. However such question is entirely different to whether such assignment means the amount involved is not income of the assignor. A contract of employment is clearly not assignable "though wages and salary due to the employee are normally assignable by him" (Chitty on Contracts 25th ed. para. 1296). The necessary work under the contract of employment having been performed then wages or salary become due for the employee to deal with as he wishes. He may in order to meet debts or to benefit his family agree that once amounts are available from this source they shall be dealt with in a particular manner but that does not alter the fact these amounts had to be first earned by him. It follows in the Tribunal's view that the decisions reached in Cases J27 and J51 are correct.
13. As stated in the Australian Commentary on Halsbury's Laws of England (4th ed.) Ch. 25 Choses in Action at p. 5 referring to Norman v. F.C. of T. (supra) and other authorities "it is a question of construction of the language employed... subject to the qualification that, even if the language of assignment has been employed, the fact that the subject matter of the purported assignment is a future, as distinct from a present, chose in action, may require the transaction to be treated as no more than an agreement to assign, under which even in equity nothing is regarded as capable of passing until the subject matter has come into existence". In the present case the language used makes it perfectly clear that what is assigned is a proportion of the "wages and salaries derived by the Assignor" (emphasis added) - that is future subject matter to come into existence. Accordingly the Tribunal agrees with the submission that the present case is governed by the decision in Norman's case (supra).
14. In so far as the decision in Everett's case (supra) is concerned the above views fit precisely within the words of Barwick C.J., Stephen, Mason and Wilson JJ. at ATC p. 4081; C.L.R. pp. 450-451 viz.:
"... an equitable assignment of present property for value, carrying with it a right to income generated in the future, takes effect at once whereas a like assignment of mere future income, dissociated from the proprietary interest with which it is ordinarily associated, takes effect when the entitlement to that income crystallizes or when it is received, and not before."
Everett assigned "a share of his interest in the partnership which carried with it the right to a proportionate share of future income attributable to his interest" and "the assignment became effective at once" (at ATC p. 4082; C.L.R. p. 452). However here the applicant could not assign his contract of employment carrying with it a right to future income but only the "mere future income". It is therefore incorrect to say that in the present situation Everett's decision leaves the matter open and it is unnecessary to deal with more than the situation before the Tribunal.
15. With reference to the New Zealand cases which were said to be wrong but which were never even cited it is sufficient to say there is no need to refer to them herein.
16. Turning to the alternative arguments advanced on behalf of the Commissioner the Tribunal does not wish to say any more than that, having regard to its finding at para. 7
ATC 159above, it would, if it had been necessary, have found the provisions of sec. 260 to be operative.
17. For the above reasons the Tribunal affirms the Commissioner's decisions upon the applicant's objections to his assessments for the years ended 30 June 1979 and 1980.