Smith v. Federal Commissioner of Taxation.

Judges: Wilson J
Brennan J
Deane J
Toohey J

Gaudron J

Court:
Full High Court

Judgment date: Judgment handed down 13 October 1987.

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Gaudron J.

The appellant was at all relevant times an employee of the Bank of New South Wales, now known as Westpac Banking Corporation. That bank maintains an "Encouragement to Study" policy under which employees who undertake courses of study approved by the bank receive certain payments described in the policy as "honoraria". Payments are made for the successful completion of subjects passed in the approved course, and for the successful completion of the courses.

The evidence establishes that to receive payment, the person undertaking the course of study must be in the bank's employ at the time of the successful completion of the subjects or the course of study, and also at the time when the payment is made.

The appellant, Mr Smith, successfully undertook an approved course of study, and on completion of the course received payment of the sum of $570. That sum was included by the Commissioner of Taxation in the appellant's assessable income for the year ending 30 June 1982, and income tax was assessed thereon. An objection was disallowed by the Commissioner. An appeal by the taxpayer was allowed by the Supreme Court of New South Wales, but subsequently disallowed by the Full Court of the Federal Court [reported at 86 ATC 4463]. An appeal is now brought from the judgment and orders of the Full Court of the Federal Court.

The question for determination in this appeal is whether the payment made to the taxpayer falls within the provisions of sec. 26(e) of the Income Tax Assessment Act 1936 (Cth). That paragraph provided, at the relevant time, that the assessable income of a taxpayer shall include:

"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."

There follows a proviso by which is excepted certain benefits which are not relevant to the present matter.

The relationship to which sec. 26(e) is directed is the relationship between benefit allowed, given or granted and "employment of or services rendered". Although the operation of the paragraph in relation to "services rendered" is to include benefits received in relation thereto by a person rendering services otherwise than as an employee, the juxtaposition of "employment" and "services rendered" also indicates that the benefits referred to in the paragraph must relate to the employment of the taxpayer, and not merely to the existence, present or past, of an employer and employee relationship (see
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at pp. 56-57 ). Thus the fact that eligibility to receive payments under the bank's "Encouragement to Study" policy depended on a continuing employer and employee relationship at the time of successful completion of the subjects or course and at the time of payment does not of itself constitute a relationship sufficient to satisfy the paragraph.

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ATC 4896

The necessary relationship between the benefit given and the employment of the taxpayer was expressed in negative terms in a passage, which was much relied upon in argument, in the joint judgment of Dixon C.J. and Williams J. in
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 554 . That passage reads:

"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 contemporaneous 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."

Expressed positively, in relation to a taxpayer whose employment is continuing (as is here the case), the passage identifies the necessary relationship as:

• (1) recompense for the relationship of employer and employee; or
• (2) consequence of the relationship of employer and employee; or
• (3) reward for services rendered.

The subject payment of $570 to the taxpayer was neither recompense for the relationship of employer and employee nor reward for services rendered. It was recompense or reward for completing an approved course of study which, although approved by the bank, was required neither as a condition of the relation of employer and employee, nor as a qualification necessary for the rendering of services in that relationship.

The consequential relationship between payment of the benefit and the relation of employer and employee is not constituted simply by a definitional requirement of a continuing employer and employee relationship as a condition of eligibility to receive payment, for the paragraph is concerned with the allowing, giving or granting of the relevant benefit, and not with eligibility to receive the benefit.

In the present case the Commissioner of Taxation relies on a number of matters, additional to the eligibility requirement, to establish that the amount paid was paid in consequence of the employment relationship. Those matters are the highly organized nature of the bank's "Encouragement to Study" policy, the large number of employees who have participated therein, the publication of the policy within the bank's staff rules, the bank's requirement that the courses undertaken have some relevance to banking, the advantages to the bank of having suitably qualified staff, and the bank's practice of making payments pursuant to the policy in the same manner and at the same time as ordinary salary. It seems to me that, apart from the two matters relating to the nature of approved courses and the advantages to the bank of having suitably qualified staff, these are matters of administration, rather than matters indicative of a relationship between employment and the payment in question. On the other hand, the advantages to the bank of the policy and the bank's requirement that courses have relevance to banking indicate that the bank's motives in the establishment, maintenance and administration of the policy are employment-related. But the motivation of the bank in establishing and maintaining the policy does not provide any relevant causal link between the employment of the taxpayer and the making of any particular payment. The proximate cause of that payment is the successful completion of a subject or a course of study. Less proximate causes of the payment include the employee's undertaking the requisite course work, and enrolling in the course of study. Still less proximate is the existence of the bank's policy under which payments are made. The fact that the policy exists because of the advantages to the bank in having suitably qualified employees does not serve, in my view, to make the payment a payment made in consequence of the relation of employer and employee, or in the words of the paragraph "in respect of, or for or in relation directly or indirectly to, [the] employment of" the taxpayer, for the paragraph looks not to a relationship between payment and employment-related benefits to an employer, but to a relationship between a particular benefit allowed, given or granted to a taxpayer and his employment.

I would allow the appeal, and set aside the judgment and orders of the Full Court of the Federal Court.