Smith v. Federal Commissioner of Taxation.
Judges: Wilson JBrennan J
Deane J
Toohey J
Gaudron J
Court:
Full High Court
Toohey J.
In his income tax return for the year ended 30 June 1982, the appellant disclosed that he had received "an Honoraria Payment of $570 under the Bank of New South Wales `Encouragement to Study' scheme". Although the appellant claimed that the amount of $570 did not form part of his assessable income, the respondent included that amount and assessed the appellant to tax accordingly. The appellant's objection was disallowed, his appeal to the Supreme Court of New South Wales was allowed, but that decision was reversed by the Full Court of the Federal Court ( Neaves and Wilcox JJ., Sheppard J. dissenting) [reported at 86 ATC 4463].
The amount is small and the issues are narrow. Yet as things stand, two Judges ( Yeldham J. in the Supreme Court of New South Wales and Sheppard J. in the Federal Court) decided in favour of the appellant and two Judges ( Neaves and Wilcox JJ.) held for the respondent. The appeal to this Court was argued largely by reference to sec. 26(e) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). That paragraph includes in the assessable income of a taxpayer:
"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 number of exceptions, none of which is relevant in the present case. Some reference must also be made to sec. 25(1) of the Act, but first it is necessary to say something of the circumstances surrounding the payment of the $570.
The appellant was at all material times an employee of Westpac Banking Corporation. The "Encouragement to Study" scheme
ATC 4891
referred to in his income tax return is a scheme that the bank has had on foot for some years. It is set out in the bank's staff rules. Rule 635 begins:"The Bank recognises the importance of study by its staff.
The following assistance is provided to encourage staff to undertake courses related to Banking."
The list of "approved courses of study" for which financial assistance is given may be taken at a range of tertiary institutions. They are particular courses described in the rules as "related to Banking", together with a catch-all reference to other courses related to banking "as may be approved from time to time".
Staff generally are eligible for the benefits of the policy. The bank endeavours to facilitate the placing of officers reasonably close to a place of study, assists where attendance at lectures during normal working hours is required, grants special study leave, refunds excess fares incurred in travelling to lectures, and makes interest free loans for the cost of essential textbooks and compulsory tuition fees. It makes payment, in accordance with a scale, for subjects passed as well as then reimbursing the cost of essential textbooks and compulsory tuition fees. There is one amount payable when each subject is passed and a further amount, in respect of that subject, when the course itself has been completed. An amount payable to an employee is paid together with his or her regular salary.
There is no doubt that the bank saw the advantage of the scheme to it as leading to the provision of better qualified staff and in turn better service to its customers. In a circular dated 5 May 1981, addressed to "All Personnel", the general manager, personnel services, said:
"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 within 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.
...
All officers should consider taking up further study to enhance their own development and career progression."
In 1978 the appellant began a four year management certificate course at Penrith Technical College. He completed that course in the financial year ended 30 June 1982. The sum of $570 referred to in his return was made up of two payments of $50 each for completing particular subjects together with an end of course payment of $470. In evidence the appellant said that he took the course to accelerate the progress of his career with the bank, to increase his chances of promotion while with the bank and to broaden his "market appeal" if he looked for employment elsewhere.
Although not formally stated, there was an assumption underlying the argument of counsel for the respondent that if the sum of $570 was not assessable by reason of sec. 26(e), it was not assessable under sec. 25(1). The precise relationship between sec. 25(1) and 26(e) was therefore not fully argued. As
Gibbs
J. pointed out in
Reseck
v.
F.C. of T.
75 ATC 4213
at p. 4215;
(1975) 133 C.L.R. 45
at p. 47
.
"Speaking generally, sec. 26 does not limit sec. 25 but includes as assessable income some receipts that might not ordinarily have been regarded as income."
Whether receipts falling within sec. 26(e) are within that description is a question that has not yet been determined.
Gibbs
J. left the matter open in
Reseck
for that case was concerned with the operation of sec. 26(d). In
Hayes
v.
F.C. of T.
(1956) 96 C.L.R. 47
at p. 54
Fullagar
J. said:
"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."
Because of the way in which this appeal has been argued, it is unnecessary to try to resolve the doubt raised by Fullagar J. The matter must remain open though, having regard to the breadth of language used in sec. 26(e), there
ATC 4892
are strong arguments for the conclusion that receipts that might not ordinarily be regarded as income are included. There is, however, one aspect that, I think, must be dealt with.Counsel for the appellant relied on what he said was a view expressed more than once in this Court (the cases were not identified) to the effect that sec. 26(e) found its way into the tax legislation to overcome a problem arising from the decision of the House of Lords in
Tennant
v.
Smith
(1892) A.C. 150
. The question in that case was whether, in estimating the appellant's total income from all sources, there should be included the yearly value of a privilege of free residence in a house owned by the bank by which the appellant was employed. The answer given was that the yearly value of the privilege of free residence could not be brought into account. Several judgments were delivered by their Lordships; but in general the view was taken that the relevant schedules of the taxing statute were concerned with actual receipts of money or at any rate with things capable of being turned into money, and not with the value to the taxpayer of the benefit of living in premises rent free.
A quarter of a century separated Tennant v. Smith from the Income Tax Assessment Act 1915 (Cth), the first statute in which the content of sec. 26(e) appeared. The counterpart of sec. 26(e) in the 1915 legislation was sec. 14(g) which included in the income of a taxpayer:
"all allowances, gratuities (except retiring allowances and gratuities paid in lump sums) bonuses, and premiums, whether in money or goods or sustenance or land allowed given or granted to a taxpayer in respect of or for or in relation to any employment or service of such taxpayer to the amount of the value of such allowances, gratuities, bonuses and premiums respectively..."
Section 14(g) was repealed and re-enacted as sec. 16(g) in the Income Tax Assessment Act 1922 (Cth), at which time the words "directly or indirectly" were added. The third report of the Royal Commission on Taxation in 1934 drew attention to the anomaly that would exist if subsidiary benefits arising out of employment were not taken into account in assessing income. Paragraph 896 of the report reads:
"We recommend that the rental value of a residence or quarters provided by an employer for use of an employee be included as part of the taxable income of the employee."
Section 26(e) found its way into the legislation of 1936. It was then that the notion of equating the income of the taxpayer with the value to him of certain benefits mentioned was established. But, leaving aside the question of value, subsidiary benefits had been the subject of legislation since 1915 and in a form that, at the outset at any rate, was not designed to meet any problems arising from Tennant v. Smith.
There can be no doubt that, in formulating sec. 26(e), the legislature chose words of wide import: "in respect of", "for or in relation to", "directly or indirectly". It remains true, however, that, notwithstanding the breadth of the language used, there must be a connection between the benefit received and the employment of the taxpayer or services rendered by him. In the present appeal we are concerned only with the nature of the relationship between the benefit received viz. the sum of $570 and the employment of the appellant by the bank.
Consideration of the scope and operation of sec. 26(e) often begins with a passage from the joint judgment of
Dixon
C.J. and
Williams
J. in
F.C. of T.
v.
Dixon
(1952) 86 C.L.R. 540
at pp. 553-554
:
"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 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 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."
ATC 4893
This passage should not be divorced from the context in which it was written. Mr Dixon had been employed by Macdonald, Hamilton & Co., shipping agents, as a clerk in its Sydney office. In 1940 he voluntarily enlisted for service in the Australian Imperial Forces, and from shortly after that date until his discharge in 1945 he served in those forces in Australia and overseas. In 1946 Mr Dixon began to work again for Macdonald, Hamilton & Co. At no time had he given any undertaking that he would return to the company upon completion of his war service nor had the company given him any undertaking that it would re-employ him. However, during the period of Mr Dixon's war service, his employer paid to him a sum of money equal to the difference between the rate of his military pay and the rate of pay being received by him at the time of his enlistment.
The amount received by Mr Dixon from Macdonald, Hamilton & Co. in the year in question was held to be part of his assessable income. But it was held to be so, not because of the operation of sec. 26(e) but in the words of Dixon C.J. and Williams J. at p. 557:
"Because the £ 104 was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income, and therefore to form part of the gross income within the meaning of s. 25 of the Income Tax Assessment Act 1936-1943."
Fullagar J., who was among the majority, took the view that the sum paid was within sec. 25 but that it was not so related to any employment of the taxpayer as to fall within sec. 26(e). McTiernan J., by implication, held that the sum did not fall within sec. 25 or 26(e). Webb J. held that the sum was not within sec. 26(e); he did not advert to sec. 25.
What can be derived from the passage quoted from the judgment of Dixon C.J. and Williams J., and perhaps all that can be derived, is the notion that for sec. 26(e) to operate the allowance or benefit must in some sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee.
Judgment in
Dixon
was delivered on 11 December 1952. On the same day judgment was delivered in
Constable
v.
F.C. of T.
(1952) 86 C.L.R. 402
. No reference is made in the judgments in the one case to the judgments in the other.
Constable
concerned the assessability of moneys withdrawn by an employee from a provident fund into which he and his employer had paid. The Commissioner of Taxation included in the employee's assessable income so much of the sum withdrawn as corresponded with the contributions made by the employer and interest thereon, and with the interest on the contributions made by the employee. The Commissioner did not include any amount representing the employee's own contribution.
Dixon
C.J.,
McTiernan, Williams, Webb
and
Fullagar
JJ. held that the moneys were not assessable within sec. 26(e). In a passage which has not attracted the same attention as the passage already quoted from
Dixon, Dixon
C.J.,
McTiernan, Williams
and
Fullagar
JJ. said of sec. 26(e) at p. 415:
"Upon the text of the paragraph it would seem that the liability of the sum, or any part of the sum, received by the present taxpayer during the year of income to inclusion in his assessable income must depend upon the answers to one or other or all of the following questions. Can that sum or any part of it be described as an allowance, gratuity, compensation, benefit, bonus or premium? If so, can it be said of it that it was `allowed, given, or granted to him' during that year? If an affirmative answer is given to these two questions, then is it correct to say of the amount or any part of it that it was so allowed, given or granted to him `in respect of, or for or in relation directly or indirectly, to any employment of him or services rendered by him'?... It is evident that it is enough for the taxpayer if any of the foregoing questions is answered in the negative."
The Court held that the amounts in question were not assessable; it did so because it delivered a negative answer to the first question.
It is true that the passage from Constable does little more than restate the language of sec. 26(e) itself. But, for the purposes of the
ATC 4894
present appeal, it does isolate the one question upon which the outcome of the appeal depends. Was the amount received by the present appellant allowed, given or granted to him in respect of, or for or in relation directly or indirectly to his employment by the bank? The answer to that question must, I think, be yes.Whether the expressions "in respect of" and "in relation to" are synonymous may be arguable. But I would adopt the following passage from the judgment of the Supreme Court of Canada in
Nowegijick
v.
The Queen
(1983) 144 D.L.R. (3d) 193
at p. 200
, delivered by
Dickson
J.:
"The words in respect of' are, in my opinion, words of the widest possible scope. They import such meanings as `in relation to', `with reference to' or `in connection with'. The phrase `in respect of' is probably the widest of any expression intended to convey some connection between two related subject-matters."
The passage was endorsed by the Supreme Court of Canada in
The Queen
v.
Savage
83 DTC 5409
at p. 5414
. In
Savage
the taxpayer, who was employed by a life insurance company as a research assistant, received a sum of money from her employer as an award for passing three life insurance courses which she had taken voluntarily. A majority of the Court (
Ritchie, Dickson, Lamer
and
Wilson
JJ.) held that the amount at issue was a benefit in respect of the taxpayer's employment and was therefore subject to income tax unless exempted by another section of the
Income Tax Act 1970
(Can.). The Court then held unanimously that the payment was exempt as falling within the phrase "prize for achievement in a field of endeavour ordinarily carried on by the taxpayer".
The amount received by the present appellant was an amount allowed, given or granted to him in respect of his employment. It was paid by the bank in accordance with a policy designed to encourage its employees to increase their knowledge in subjects relevant to the banking industry and therefore to increase their proficiency as employees. It is not to the point that the courses might stand employees in good stead if they later changed their employment. The sum paid to the appellant was one of many such sums paid by the bank to its employees under its "Encouragement to Study" scheme. There was an evident connection between the appellant's employment and the sum he received. And in a very real sense the payment was a consequence of the existing relation of employer and employee. It was only as an employee that the appellant qualified for the benefits payable under the scheme. Borrowing the language of the majority in Savage at p. 5414, there was no element of gift or personal bounty or of considerations extraneous to the appellant's employment.
It is necessary to make reference to three decisions of this Court relied upon by the appellant. In my view, except to the extent that the judgments contain express reference to sec. 26(e), they do not assist in the disposition of this appeal.
Dixon has already been mentioned and the point has been made that the sum received by Mr Dixon was regarded as income according to ordinary concepts. The decision does not provide an authoritative answer in the circumstances of the present appeal.
In Hayes v. F.C. of T. the taxpayer was an accountant who had been employed on a full-time basis from 1939 to 1942. Two years later, his employer's business was taken over by a proprietary company and the taxpayer became a shareholder and a director and secretary of the company. In 1947, the business having deteriorated, Mr Hayes' former employer agreed to resume control of the business but only on condition that he held all the shares in the company. Mr Hayes, who had become a shareholder after he ceased to be a full-time employee, reluctantly parted with his shares at a price he considered to be less than their potential value, his former employer telling him that he would make it up to him some day. On the incorporation of the company as a public company some years later, the former employer received a large number of shares some of which he gave to Mr Hayes. Fullagar J. held that the receipt of shares by Mr Hayes was not a receipt of income and was no more than a simple gift of property. In the view of Fullagar J., if the receipt of the shares did not fall within the general conception of income it was not caught by sec. 26(e). It was therefore unnecessary for his Honour to consider the full implications of sec. 26(e).
Scott
v.
F.C. of T.
(1966) 117 C.L.R. 514
concerned a solicitor who had acted for a client
ATC 4895
for many years and who, in addition to proper remuneration for his services as a solicitor, was given a large sum of money by his client. Windeyer J. held that the gift did not fall within the general understanding of income. He also took the view that sec. 26(e) did not bring to tax moneys or money's worth that were not income according to ordinary concepts. Scott was of course not concerned with the relation of employer and employee. Nevertheless it is true that 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."
What his Honour said concerning sec. 26(e) was obiter. But if this passage be thought to impose a test different to that which asks whether the benefit allowed, given or granted was a consequence of the employment of the taxpayer, I respectfully adhere to the latter test.
In my view the appeal should be dismissed.
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