PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The question to be determined in this reference is whether a sum, which was indisputably assessable income, was "derived" as assessable income during the year of income ended 30 June 1984 (as the taxpayer contends); or of the year ended 30 June 1985 (as the Commissioner contends).
2. The applicant was a teacher performing classroom duties in the service of the Education Department for the State of New South Wales when, pending the hearing of certain proceedings against him, he was transferred to Head Office duties in June 1982. He continued about the performance of those duties until October 1982 when, following his conviction before a Court of Petty Sessions and the imposition of three months periodic detention, he was suspended from all duties with the Department. That suspension took effect pursuant to the regulations under the Education Act (N.S.W.).
3. He appealed against his conviction and on 26 February 1984 the District Court Judge is said to have indicated his intention to uphold the appeal, but he delayed his formal finding until 26 March 1984 to enable Crown authorities to consider the views he had expressed.
4. At the time the applicant believed that his industrial association was pursuing matters relating to his reinstatement on his behalf but this proved not to be so. On 18 May 1984 he gave notice to the Department seeking reappointment and by telegram of 13 June 1984 was notified that he had been appointed to conduct classroom duties from the following Monday. The appointment was to be taken up at a remote school. Believing at the time that, if he took up the appointment, further proceedings would be instituted against him and that he would be again suspended from duty, he sought clarification of the matter. His initial endeavours to obtain clarification were unsuccessful and it was only in the following week that he obtained assurances from a more senior officer than the officer who had previously represented the Department in these matters that no such course was contemplated. At the time he received those assurances he was advised that it would advance his claim for payment of arrears of salary if he completed a written application for payment of arrears of salary. He did so by letter of 21 June 1984. The letter said:
"I wish to apply for restitution of salary lost during my suspension. I have enclosed a Statutory Declaration of my earnings.
It would be appreciated if this matter could be handled quickly as if the amount is included as part of my 1984/85 income I will have to pay an estimated $9,000 extra tax."
The more senior officer that day marked the matter for the attention of the other officer referred to. The latter officer on that day endorsed the memorandum:
"Please advise if any other documentation is required. Do not pay salary from 18/6/84 to date on which he enters on duty at... P.S. That period will be L.W.O.P."
On 26 June 1984 the relevant section of the Department advised "documentation provided by (applicant) appears to be sufficient". The applicant had taken up his appointment at the remote school from 25 June 1984.
5. Evidence from within the Education Department was that in the ordinary way it might have been expected that payment of arrears of salary would have been effected within a week (or at least a fortnight) of 21 June 1984 and that, had that request for promptness in payment been acceded to, payment could have been forthcoming within 24 hours. The evidence was that, in circumstances where a need for prompt payment was established, a cheque would be immediately drawn manually rather than be processed by computer, with all attendant delays.
6. In August 1984 the applicant received notice from the Department advising that his gross salary from 22 October 1982 to 17 June 1984 was $42,225.60. He received a cheque for only $22,379, as $19,846.60 was withheld on account of income tax. The delay is unexplained, and in light of the evidence which was called for from the Department as to normal practices, it is at least feasible that someone within the Department deliberately caused the delay. I make no such finding, particularly against the person thought by the applicant to be most likely to be the individual responsible for the delay. However, on the view of the matter I have formed, nothing turns on my refusal to make any such finding.
7. The taxpayer subsequently presented his 1984 income tax return to the Commissioner disclosing that, apart from the salary which he had by that date received, he had a taxable income of $3,799. To that figure he added the gross salary of $42,225 he had received from the Department and returned a taxable income of $46,024. He annexed to his return an undated "Manual Salary Payment" notice from the Department and the salary calculations which attended it. The return was assessed accordingly.
8. When he presented his 1985 income tax return together with group certificate to 30 June 1985 showing gross income of $71,661 and instalments deducted $28,961.88 (figures which included the arrears of salary and tax payments already referred to) the Commissioner did two things. First, the assessed the 1985 income as including the $42,225 received in August 1984. Secondly, he
ATC 896issued an amended assessment reducing taxable income previously assessed for the 1984 year by $42,225.
9. The case for the applicant was argued on the basis that, although ordinarily "salary" is derived when it is received, when, as here, entitlement is only established after a period of uncertainty and is then acknowledged to be payable, "derivation" occurs when that entitlement is acknowledged. I find no merit in the argument.
10. The courts have clearly and consistently held that "unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles" and that the method of accounting to be adopted is that which is "calculated to give a substantially correct reflex of the taxpayer's true income"
The Commr of Taxes (S.A.) v. The Executor Trustee and Agency Company of South Australia Limited -
Carden's case (1938) 63 C.L.R. 108 at pp. 152-154 - quoted by Gibbs J. in
Brent v. F.C. of T. 71 ATC 4195.
11. In Brent's case, as Gibbs J. found, "the taxpayer did not carry on a business or profession. She had no stock in trade. Her expenditure did not correspond with, or materially contribute to, her earnings. What she received, and was entitled to receive, was only a reward for personal services."
12. The factual situation in that case in one respect was the opposite of the present. Mrs Brent had an established entitlement to receive moneys in the year in which the Commissioner sought to treat them as assessable income, but she did not ask for payment and her debtor refrained from making payment. In those circumstances, Gibbs J. said:
"In all the circumstances of the case it seems to me that the true income derived by the appellant was the amount that she actually received in the year in question."
His Honour might have gone on to say that the moneys which she might have received, but did not receive, in that year would become assessable income of a later year if received in that later year.
13. I am of the view that the same result must obtain in this case. The applicant did not receive the arrears of salary during the year of income ended 30 June 1984 and, accordingly, they did not constitute assessable income of that year. Indeed, at 30 June 1984, there was no certainty that they would become payable. The decision to pay might have been reversed and, having been reversed, might have been found to have been correct.
14. As to the question as to whether the income might be "deemed to have been derived... although it is not actually paid over... (by reason of being) dealt with on his behalf or as he directs" as provided for by sec. 19, it is sufficient once again to refer to the decision in Brent (ante). Just as in that case his Honour said that "income is not `dealt with' under sec. 19 when all that happens is that a debtor refrains from paying his debts at the request of the borrower (sic)" so, too, in my view income is not "dealt with" under sec. 19 when all that happens is that a debtor, for his own reasons or by inadvertent delay, fails to pay his debt, notwithstanding the request of the creditor.
15. Nor does it provide any basis for relief for the applicant that the Commissioner had previously assessed the income as having been derived in the year of income ended 30 June 1984. As was correctly pointed out by the Commissioner's representative at the hearing, the information provided at the time of lodgment of the 1984 return did not disclose that payment had not been received in that year. The assessment in question issued when the facts came to be disclosed and as the appropriate action was taken in issuing an original assessment that is an end of the matter. No question of limitation on power, such as might have arisen in the event of the issue of an amended assessment, arises. Furthermore, as is to be expected to occur, and usually does, in the ordinary course of due administration of the Act, an amended assessment issued relieving the applicant of the tax previously quite properly assessed in relation to the earlier year.
16. I uphold the determination of the Commissioner upon the objection.