PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
These references arise out of the decision of a trading company to establish a ``health programme'' for some of its employees. They relate to the years of income ended 30 June 1983 to 1985 inclusive and to a period of time in which the company was operating its trading network with increasing success. According to its own accounts during that period profitability was rising year by year and came to exceed $400,000 for the year of income ended 30 June 1985.
2. The ``health programme'' had its origins in advice given in July 1982 by the newly appointed accountant to the company. On 16 July 1982 he wrote to the company as follows:
``Re: Health Programme
Further to our report on tax planning and provision of benefits for senior employees, we set out a more detailed report on the specific area of the Health Programme.
A job facility is provided in order to carry out the duties of a particular position. The facility attaches to the position and is used by the employee in the position at the time. A job facility, therefore, is provided primarily to advantage the organisation, where as [sic] a benefit is provided primarily to advantage the employee. A job facility may, of course, provide some benefit to the employee and the value of this benefit should be considered as part of total remuneration. The distinction between these two items is very important in determining a benefit policy and handling the associated taxation aspects.
A policy on senior employees' health should be proposed. A sample policy follows these recommendations. Specific recommendations are:
- 1. Introduce a system of health checks for senior executives and ensure confidential reporting.
- 2. Implement a company wide health insurance scheme for its executives.
- 3. The company should formalise a policy for its health programme which should be framed so that membership of a health insurance scheme is a requirement of employment. It is necessary to fit health insurance into a total policy in order that it is tax effective to the employee.
Sample Executive Health Policy
It is recognised that it is in the interests of the company for a comprehensive health programme to be introduced by the company for its most senior executives. The general aim of the policy is to minimise the effect that illness may have on the executive's performance and in turn on the profitability of the company. In this regard the company has adopted the following policies:
- 1. All executives are required to be medically examined yearly by a doctor nominated by the company. The results of each examination are to be categorised as either `Fit', `Fit with Reservations' or `Unfit' and this [sic] results will be conveyed to the Chief Executive with the executives [sic] consent. Executives are expected to undertake treatment or preventative action recommended by the nominated doctor.
- The aim of this procedure is to assist in the early detection and diagnosis of diseases to prevent or minimise their severity and duration.
- 2. As part of the company's overall health programme, the company requires executives to be covered by health insurance. The aims of the requirements are:
- (a) to ensure that executives and staff receive timely and comprehensive treatment so as to minimise the severity and direction [sic] of any ailment.
- (b) to ensure that the dependants of executives also receive timely and comprehensive treatment so as to minimise the consequential effects of their performance.
- (c) to ensure that stress is not placed on executives and staff by the financial burden of high medical expenses and to avoid the possibility
ATC 219of the company being obliged to meet or lend part of medical costs to employees so as to reduce any effect that these possibilities may have on the employee's performance.
- 3. Employees are to be covered for disability insurance so that in the event of their being incapacitated for any extended period their salary will largely be protected. The aims of this policy are:
- (a) To relieve the company of the liability of continuing to pay remuneration to employees during prolonged periods of illness.
- (b) To provide certainty to employees as to the continued receipt of income and the quantity of such income during periods of inability to work due to disablement through sickness or otherwise.''
3. The recommendation of the accountant was responded to with alacrity. The directors considered the recommendation on the day it was made; approved it; and, by memorandum of the same date, advised the relevant ``senior executives'' of the decision. The memorandum duplicated the text reproduced above under the title ``Sample Executive Health Policy'', differing only in that it substituted a title ``Health Policy for Senior Executives''.
The applicant was one of the employees to be so advised.
4. By letter of 2 August 1982, the accountants wrote to the health insurance fund (``the fund'') with which most of the selected employees had existing cover, advising (inter alia):
``We wish to advise that the above company has recently enacted a policy to cover a health programme for its senior employees. The health programme is much the same as that designed for other companies for which we have acted as advisers in that one of the conditions of employment is that the employees shall be adequately insured with a recognised insurance health fund.''
They went on to identify the employees who, with one exception, were all covered by the fund and requested that ``all appropriate documentation'' be completed so that the program could commence from 1 October 1982. They also requested that accounts be rendered quarterly. Thereafter, accounts were so rendered by the fund addressed to the company by its name, referring to ``Group No....''. The first account which was rendered related to the period from 1 October 1982. It charged for the full quarter in relation to all employees save one in respect of whom the fund advised that he was ``currently paid to 17/11/82''. A discount was given by the fund but the basis for doing so was not identified. The evidence was that there was no other documentation from the fund acknowledging the terms of any arrangement or the existence of any arrangement between the company and the fund.
5. What provision (if any) was made for ``disability insurance'' was not disclosed. Further, the relevance of the objectives referred to in para. 2(b) and (c) of the proposal to the profitability of the company was not the subject of detailed explanation.
6. The speed with which the accountant's recommendation was considered and adopted may be thought less surprising when it is considered that three of the senior executives were directors of the company. They were working directors and brothers to each other. There were two other non-working directors who had retired. Their relationship to the Applicant, who was one of the three directors, was not stated in evidence. The nine other persons proposed to be so covered were senior employees of the company.
7. From that point forward the company continued to pay premiums in relation to those employees and their families on a family scale basis. Although annual medical examinations had been proposed, they were not carried out on the basis contemplated by the proposal. In due course the arrangements came under notice during a field audit of the company's affairs. It appeared that the company had claimed a deduction for the premiums so paid under the general heading: ``insurance''. The claim of the company to such a deduction was not challenged but instead the Commissioner issued amended assessments against the applicant along with others. As the only matter to proceed to a hearing was that involving the applicant, I shall hereafter refer to only his circumstances.
8. The applicant at all material times was a married man with a young family. For several
ATC 220years he had been insured with the fund on a family basis in relation to all members of the family. There is nothing in the evidence to suggest that any other person than the applicant was the policy holder under that policy. As a director of the company he was privy to the decision of the company to implement the proposal and that knowledge, coupled with the documentary advice contained in the company's circular of 16 July 1982, prompted him to take no further steps in the way of confirming the continued existence of any or any sufficient insurance cover for his family and himself. In the circumstances, it seems that it was unnecessary for him to do so. Prior to the implementation of the arrangement, accounts for health insurance had been forwarded to the company and paid on his behalf by the company: the amount paid being debited to his loan account. He or his wife held the claims book and made rebate claims as appropriate. Under the new arrangement, accounts for premiums continued to be rendered in the manner described above and paid in such a way as to not trouble or concern the applicant. In the years ended 30 June 1983 to 1985 the premiums paid by the company in respect of insurance cover for the applicant and his family amounted to $656, $749 and $593. In the same period the amounts of benefits paid by the fund were as follows:
Year Ended First Second 30 June Applicant Spouse Child Child $ $ $ $ 1983 416 1,001 25 - 1984 154 158 37 18 1985 60 - - -
There were discrepancies in the figures produced in evidence by the parties, although each claimed to have drawn on the same source: the fund. As the applicant bears the onus of proving his claim, I have adopted the higher figures in each instance where a discrepancy arises.
9. The evidence presented before the Tribunal did not establish the nature and constitution of the legal entity constituting the fund but its rules and by-laws as at 1 June 1987 were presented in evidence and, so far as is material for the purposes of this decision, I find as a fact that there was no material difference between the rules so presented in evidence and those operative at material times. Some material provisions of the rules and by-laws were as follows:
``RULE 1. Definitions
- In these Rules unless there is something in the subject or context inconsistent therewith:
- `Contributor' means a person accepted for membership who pays contributions either weekly, monthly, quarterly, half-yearly or yearly, or on whose behalf contributions are paid and includes dependants.
- `Dependant' means:
- (a) the spouse of the contributor.
- (b) a child of the contributor who is 17 years of age...
Rules 2 and 3 deal with membership and probationary membership period respectively. I do not propose to set them out in detail. Instead I observe that, having regard to the nature of the insurance and the terms of the by-laws, I am satisfied that only natural persons can be either contributors or members.
Rule 14 provides:
Any members making a claim for benefits must conform with the procedure as laid down by the Association and must supply all information asked for in such a manner and form as requested.''
Rule 19 states:
Ex-gratia payments may be made at the discretion of the Board or the Public Officer.''
10. It was suggested in the course of evidence that the arrangements made by the company were made solely in its interest and
ATC 221not with a view to conferring any benefit upon the applicant or any other of the senior executives to be covered under the ``health policy''. In so far as such evidence was intended to suggest that there was no advantage and, in particular, no income tax advantage to be had by the employees flowing from the arrangement, I reject it. The proposal arose out of a consideration of ``tax planning and provision of benefits for senior employees'' and was founded in a concept that
``a job facility (is)... provided primarily to advantage the organisation, whereas a benefit is provided primarily to advantage the employee''
and a contention that the
``distinction between these two items is very important in determining a benefit policy and handling the associated taxation aspects''
with the result accordingly that it was
``necessary to fit health insurance into a total policy in order that it is tax effective to the employee.''
I am satisfied that the objective of the proposal was to maximise benefits to employees at minimum cost in tax to those employees. That was a legitimate objective. Maximising one's tax obligations is not obligatory. The real question for determination is whether the arrangement as proposed and implemented was to be as ``tax effective'' for employees as those who devised the program thought it would be.
11. The argument for the Commissioner is that, in those circumstances, the amount expended by the employer constituted assessable income for the applicant because of the terms of sec. 26(e) of the Income Tax Assessment Act 1936 (``the Act''). Section 26(e), so far as is material - it is common ground that the provisos were not material - provided:
``26. The assessable income of a taxpayer shall include -
- (e) 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, not being -
12. The solicitor for the applicant, in a closely reasoned argument, contended for a contrary conclusion. She conceded that the provision by the employer of insurance fell within the description of ``allowances, gratuities, compensations, benefits, bonuses and premiums''. She also conceded that the ``benefit'' (as I shall describe it for convenience) was conferred in respect of the employment of the applicant so that the requirement of an employment nexus was satisfied. Her contention was that the essential questions for determination are ``what was the allowance or benefit provided?'' and ``what was the value to the taxpayer (if any) of the benefit or allowance so provided?''.
13. The first argument was posited upon the proposition that the benefit conferred was the provision of insurance cover pursuant to a policy of insurance which made provision for the payment only upon the occurrence of a contingency: namely, the right to receive a monetary benefit if, and only if, a person insured suffered the need for medical attention and was put to expense in that regard; and then only upon condition that the policy conditions as to the nature of claims and presentation of claims were complied with.
14. If that contention is soundly based, it would seem to follow that an employer could provide for his employees' insurance cover against death or personal injury; against damage to their homes and contents, to cars, to yachts and to racehorses; and insurance cover against damage done by any of the foregoing or the family dog, all without attracting any liability to tax in the employees. That thought might be surprising but it is said to be well founded as a matter of law. It was contended that a decision of the High Court of Australia in
Constable v. F.C. of T. (1952) 86 C.L.R. 402 established that such a contingent entitlement fell outside the scope of sec. 26(e) of the Act.
15. It is appropriate to carefully consider the circumstances considered by the High Court in that case. Constable was an employee of the Shell Company of Australia Ltd. (``Shell''). Shell contributed to the provision of future
ATC 222superannuation benefits for its employees by participating in the Provident Fund of the Combined Petroleum Companies. The fund was established in and controlled from The Hague. Shell and its employees were entitled to contribute. Members' accounts were maintained by the fund for each member and year by year the employer's contributions, initially credited to a special account, were transferred either to members' accounts or to a suspense account pending transfer to members' accounts. Provision was made for payment of amounts standing to the credit of a member's account in the event of death or retirement but provision was also made that a member infringing provisions as to inalienability might, at the discretion of the administrators, forfeit the benefit of the company's contributions but not of his own. In addition, failure of the member to keep up his own contribution exposed him to exclusion from membership and forfeiture of the benefit of the company's contribution, but again not of his own. In addition, power was conferred upon the administrators, with the consent of the founding companies, to alter the regulations by notarial act. In that event, should the rights of members be curtailed or their obligations be increased, they would be entitled to withdraw the amounts shown to their credit. The regulations were altered and thereon the taxpayer exercised his right to withdraw the amounts shown by his right to withdraw the amounts shown by his account. The Commissioner included in the assessable income of the taxpayer so much of the sum withdrawn as corresponded with the contributions made in respect of the taxpayer by Shell and interest thereon and the interest on the moneys ascribed to the contributions made by the taxpayer.
16. In a joint judgment Dixon C.J., McTiernan, Williams and Fullagar JJ. said (at pp. 417-418):
``On these facts we are of opinion that, whether or not the payment or any part of it may be described as an allowance, gratuity, compensation, benefit, bonus or premium in respect of or for or in relation to the taxpayer's employment or services rendered by him, it cannot correctly be said that it was such an allowance, &c. `allowed given or granted to him' during the year of income under assessment.''
Their Honours went on to say:
``It appears to us that the taxpayer became entitled to a payment out of the fund by reason of a contingency (viz.: an alteration of the regulations curtailing the rights of members) which occurred in that year enabling him to call for the amount shown by his account. It was a contingent right that became absolute. The happening of the event which made it absolute did not, and could not, amount to an allowing giving or granting to him of any allowance, gratuity, compensation, benefit, bonus or premium. The fund existed as one to a share in which he had a contractual, if not a proprietary, title. His title was future, and indeed contingent or, at all events, conditional. All that occurred in the year of income with respect to the sum in question was that the future and contingent or conditional right became a right to present payment and payment was made accordingly. This, in our opinion, cannot bring the amount or any part of it within sec. 26(e). The amount received by the taxpayer from the fund is a capital sum, and, unless it or some part of it falls under sec. 26(e) (there being no other applicable imposition of liability), it is not part of the assessable income.''
However, it is a matter of special significance in the argument for the applicant that their Honours went on to say:
``While we prefer to place our decision of the case upon the simple ground stated, that does not mean that we think that the actual payments by the company to the fund in respect of the taxpayer formed, in the year in which they were so paid, any part of his assessable income.
It is not, of course, a matter that arises for decision in the present case, but, to avoid misunderstanding, it is, we think, desirable to say that on the frame of the regulations we find it by no means easy to see how the sums so contributed can be regarded as allowed granted or given to the employee when they are paid to the administrators of the fund. It is only after the administrators have exercised their discretion that any moneys paid to the special account are reflected in the member's (employee's) account, and even then that does not mean that the member becomes presently entitled to the moneys credited to that account.''
Webb J. reached the same conclusion as the majority but for different reasons. However, on the question as to whether superannuation contributions by an employer constituted sec. 26(e) benefits to employees from year to year as they were made, his Honour took a different view to his brothers - a view which would cause consternation in the ranks of superannuated employees. He said (at p. 422):
``I think that the moneys paid into the fund by the company were, as counsel for the Commissioner submitted, really part of the remuneration of the appellant, or in any event were a `benefit... given or granted to him in respect of, or for or in relation directly or indirectly to' his employment, within sec. 26(e). Moreover, I think they became a benefit to the appellant as from the time when the company paid them into the fund. Upon such payment into the fund they ceased to be the property of the company and the payment then enured for the benefit of the appellant, although contingently on his serving for the necessary period to qualify to receive them (art. 16), which the appellant did in 1941. But I do not think that because the moneys in fact paid out of the fund to the appellant purported to be identified, in the yearly accounts given to him under art. 10 and in the receipts which he gave for these moneys, with moneys paid in by the company and interest thereon, that the moneys when paid out of the fund to the appellant still retained their identity as remuneration of the appellant and interest thereon.''
I accept that the view so expressed is not to be accepted in preference to the view of the majority.
17. It was argued for the applicant that the ``contingency'' spoken of in Constable was of the same nature as the ``contingency'' which would be a condition precedent to any claim under the health policy. I reject that. In Constable, the taxpayer was a member of a superannuation fund, which fund was initially planned to continue in existence until at least such time as he died or retired. What entitlements, or range of entitlements, would arise and who would benefit would depend upon the nature of the contingency: death; or retirement at a specified age, or after a particular period of service; or ``early'' retirement; or dismissal. It was always possible that the original expectations as to continuity would not be fulfilled. One such possibility was recognised in the drafting of the constitution of the fund when provision was made to deal with the possibility of an alteration in the regulations which could curtail the rights of members. When that contingency eventuated the applicant made an election which entitled him to the money he received. The Judges were unanimously of the view that that circumstance did not constitute the moneys received as assessable income pursuant to sec. 26(e).
18. In my view that is quite unlike the situation under consideration before me. The outlay by this employer conferred an immediate advantage upon the applicant: he was immediately insured and immediately entitled to the benefits of being insured, being all of the benefits which would have flowed had he effected that insurance himself and at his own expense. Those benefits were themselves something of value. The insurance was a present entitlement to be indemnified in accordance with the terms of the policy if a need for medical advice and assistance arose. In contrast, Constable did not have any present entitlement to the benefit he actually received until such time as an appropriate alteration to the regulations occurred and, that contingency having occurred, he elected to convert that new and valuable opportunity to a matter of present entitlement when he elected to claim payment.
19. Even so, the argument for the applicant is that the observations expressed as obiter dicta by the majority of the Judges in Constable should be applied. The submission is that here, as in that case, the employer paid moneys to a third party: something which prompted their Honours to say:
``We find it by no means easy to see how the sums so contributed can be regarded as allowed, granted or given to the employee when they are paid to the administrators of the fund.''
Their Honours so held for two reasons: firstly, that ``it is only after the administrators have exercised their discretion that any moneys paid to the special account are reflected in the members' (employees') account'': and secondly, ``even then that does not mean that the member becomes personally entitled to the moneys credited to that account''. But, in my view, the analogy fails. The making of
ATC 224superannuation contributions to a fund which confers benefits at discretion is to be distinguished from effecting a policy of insurance which confers immediate enforceable rights. In this instance the entitlement of the insured did not depend upon any exercise of discretion on the part of the fund. That was so even though, without obligation to do so, the fund as an act of discretion might have made an ex gratia payment, that is to say, a payment which would not be made as a matter of legal obligation or received pursuant to any legal right. Further, in relation to at least this class of insurance, there is nothing akin to the concept of any entitlement, contingent or otherwise, on the part of the insured to any interest in the funds of the insurer.
20. The next question to be determined is what sum should be established as ``the value to the taxpayer...'' of the benefit so conferred. In my view, that question has two aspects. One is whether the value to the taxpayer should be restricted to the value to him of the provision of medical insurance in relation to the applicant alone or whether it should extend to embrace the provision of medical insurance for his wife and children. In my view, the latter answer is to be preferred. In the circumstances appearing from the evidence, the husband bore the burden of making provision financially for his wife and children. In the past that had extended to him bearing the cost of providing medical insurance. Just as that had been his expense, so too the provision of that insurance by his employer constituted the benefit to him.
21. The second aspect of the question is whether the value should be determined to be the cost to the employer of securing the benefit or some other cost. It is certainly not true to say that in all circumstances the cost to the provider of a benefit of providing that benefit is to be identified with the ``value'' to the recipient of that benefit. The value of the benefit in the hands of the recipient may be greater or less than the cost to the employer of providing the benefit. However, in this instance, the conclusion seems to me to be inescapable that, when the benefit is the provision of the status of being an insured person and the cost to the employer of securing that status for its employee is the same amount as that for which the employee could have secured the status for himself, then the value to the employee is the cost to the insurer.
22. In the view I have taken of the matter, the provision of the status of being insured is the benefit conferred. That being so I reject any contention that the value to the applicant is to be assessed in terms of the financial indemnities actually provided for him in light of the claims which were made.
23. Accordingly, the determinations of the Commissioner upon the objections under review are to be upheld.