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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Wilson J.

I have had the advantage of reading the reasons for judgment prepared by Toohey J. I agree with his conclusion and generally with the reasoning that leads to that conclusion. I wish merely to add some observations of my own.

The issue between the parties turns on the proper application to the facts of this case of sec. 26(e) of the Income Tax Assessment Act 1936 (Cth) as amended. Expressed in the language of that paragraph, the question is whether the sum of money paid to the appellant by reason of the successful completion of his

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ATC 4885

course of study is a benefit given to him in respect of, or for or in relation directly or indirectly to, any employment of him.

If the payment be described as a gift, thereby emphasizing its voluntary character, that does not determine the answer to the question. The term "gift" is inconclusive, because, as Kitto J. observed in
The Squatting Investment Co. Ltd. v. F.C. of T. (1953) 86 C.L.R. 570 at pp. 627-628 :

"... it is a commonplace that a gift may or may not possess an income character in the hands of the recipient. The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances; and even in respect of a true gift it is necessary to inquire how and why it came about that the gift was made."

Counsel for the appellant relied particularly on three decisions of this Court. In
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 the Court refused to find the provisions of sec. 26(e) satisfied by circumstances where an employer made payments to a former employee to bring his army pay up to the salary he enjoyed when he was last employed. The payments in question were received during the year ended 30 June 1943. The employment relationship had terminated in July 1940. In their joint judgment Dixon C.J. and Williams J. noted, at p. 554, that only "a mere historical connection" existed between the employment and the payments, this being insufficient to bring the money received within the terms of sec. 26(e). Their Honours made it clear that for a benefit to fall within the paragraph it must at least constitute "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". There is, of course, a contemporaneous relation between the employment and the payment in the present case. McTiernan J., at pp. 558-559, distinguished between the contractual relations arising from the employment and personal or social relations between employer and employee. In his Honour's view, the scheme of supplementary payments fell outside the contractual relationship; although the taxpayer would not have received the payment but for the fact that at one time he had been in the employment, that circumstance did not necessarily make it a payment in respect of, or for or in relation directly or indirectly to, the employment. Webb J., at pp. 562-563, resolved the issue on his view of the evidence, finding that the payments were made because of, and as a reward for, the taxpayer's enlistment and for no other purpose. Fullagar J., at p. 564, expressed his view as follows:

"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 fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment. The payment does not partake in any degree of the character of a reward for services rendered or to be rendered."

His Honour thought it accurate to describe the payments in the words of Fair J. in
Louisson v. Commr of Taxes (1942) N.Z.L.R. 30 at p. 34 , as given "out of a sense of appreciation of sacrifices made on the enlistment of employees... and as a recognition of their public spirit in doing so". In my opinion, the facts in Dixon stand in marked contrast to those in the present case and little that was said by the Court in that case assists the appellant.

The decision of Fullagar J. in
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 is also, in my opinion, of little assistance to the appellant. In that case the Commissioner sought to bring to tax a gift of shares made to Hayes in 1950 by a man who had employed him as an accountant from 1939 to 1944. His Honour did not find it necessary to consider in any detail the application of sec. 26(e) because he took the view that if the receipt of the shares did not fall within the general conception of income it was not caught by sec. 26(e). The correctness of that view remains an open question. In a passing reference to sec. 26(e), his Honour said, at p. 54:

"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'."

The result of the case was determined by the finding of Fullagar J. on the facts that the gift was in no true sense a product or incident of

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any employment in which Hayes had engaged or any business which he had carried on.

The third decision upon which the appellant relies is that of Windeyer J. in
Scott v. F.C. of T. (1966) 117 C.L.R. 514 . The case is sufficiently described in the judgment of Toohey J. It is another case in which the facts bear no correspondence to the facts of this case.

Before leaving these cases, it is to be observed that the several judgments therein contain references to the fact that the benefit then under consideration did not bear the character of a reward or remuneration for services rendered. This is, of course, one test relating to the operation of sec. 26(e). But it is not the only test. The paragraph will be attracted if the benefit bears the necessary relation either to the employment of the taxpayer or to services rendered by the taxpayer. The phrase "services rendered" describes work actually performed by the taxpayer, whether in the capacity of a servant, independent contractor or otherwise. The breadth of operation of the phrase must "draw in situations not encompassed by the term `employment"':
F.C. of T. v. Cooke and Sherden 80 ATC 4140 at pp. 4150-4151; (1980) 29 A.L.R. 202 at pp. 214-215 . In such situations, in order to constitute income, the benefit must represent, directly or indirectly, a reward or remuneration for those services. On the other hand, there may be benefits which are taxable under sec. 26(e) because of their relationship to the ongoing "employment" relationship of the taxpayer to his employer. In this context, the benefit need not be related to any particular service rendered to the employer. It will be sufficient if it is allowed, given or granted to the taxpayer in respect of, or for or in relation directly or indirectly to, his employment.

The problem presented by the present case is whether the facts establish the requisite relationship between the benefit received by the appellant and his employment. It is not sufficient to find that the appellant received the benefit at a time when there was an employment relationship existing between himself and the bank. The mere temporal connection would not enable the payment to be characterized as a benefit given to him in relation directly or indirectly to his employment. It is tempting to strive to identify criteria which will assist in the process of characterization. But, however helpful such criteria may be, it is unwise to expect any paraphrase to provide a final or overriding test. Ultimately, it is the words of the statute that must prevail. Toohey J. finds it helpful to ask whether the benefit allowed, given or granted is a consequence of the employment of the taxpayer (see also Dixon C.J. and Williams J. in Dixon at p. 554). So do I. I also find it helpful to ask whether the benefit is a product or incident of the employment, as did Fullagar J. in Hayes at p. 57, and Windeyer J. in Scott, at pp. 525-526. Of course, in each of those cases the asking of the question led to a different answer from that to which I have come in this case.

On the facts of the present case, I conclude that the benefit received by the appellant was a product or incident or a consequence of his employment. The gift, if it be so described, in no sense carried the overtones of a personal gift from the donor to the donee personally (cf. Squatting Investment per Kitto J. at p. 633). Nor is it sufficiently described merely as a gift from an employer to an employee. When all the circumstances are taken into account, the benefit is the product of a scheme embodied in the rules of the bank, and administered within that organization, designed to encourage not only the efficiency of employees within it but to provide them with the incentive to advance their prospects of promotion within the bank. In my view, the requirement of a relationship between the benefit and the employment necessary to attract the provisions of sec. 26(e) is satisfied.

I would dismiss the appeal.