CASE Z16

Judges:
BM Forrest DP

Court:
Administrative Appeals Tribunal

Judgment date: 19 March 1992

BM Forrest (Deputy President)

The questions in issue in this application are whether:

  • 1. an amount of $100 received by the applicant (``the taxpayer'') was correctly included as assessable income pursuant to the provisions of the Income Tax Assessment Act 1936 (``the Act'') in her return for the year ended 30 June 1987;
  • 2. car expenses of $3,510 were incurred by the taxpayer in the course of gaining or producing assessable income pursuant to s. 51(1) of the Act.

In 1968 the taxpayer joined a long established society which was registered under the Friendly Societies Act 1958 (Vic). The taxpayer became a benefit member, subscribing to sickness and funeral benefits provided for members by the society. The society has approximately 150 branches or lodges which form the basis of the membership. For administrative purposes five or more branches are formed into groups known as districts. Each district, at the annual district conference in June elects a district officer to serve on a district management committee for a term of three years. In June 1985 the taxpayer was elected the district officer for a three-year term of a district covering some 24 branches in all, 21 suburban and three country. The basic function of a district officer is to assist in the administration of the branches which form the district, by attending branch meetings and presiding at the quarterly or half-yearly district conferences. The duties and powers of a district officer are set out in the by-laws of the society. During each year of her term the taxpayer received an honorarium of $100 from the district. For present purposes the Tribunal is concerned with the honorarium for the year ended 30 June 1987. The applicant in evidence said she understood the honorarium was paid to her as a contribution towards out of pocket and travelling expenses in supervising the branches in her district. To her knowledge a similar amount had been paid for a number of years to her predecessors. The role of district officer required the taxpayer, according to her evidence, to be ``away from home every night of the week''. She was expected to attend all committee meetings and district functions. Her duties included ensuring compliance with rules, proper record-keeping, accounting procedures, reporting to head office and general supervision and administration of each branch in the district. A component of the role was welfare work for elderly members.

In her return (Form S) for year ending 30 June 1987 the taxpayer included the honorarium of $100 as income received. Against that she claimed $3,510 (being the total amount less 20 per cent private use) for car expenses. The quantum of the car expenses for present purposes is not in issue. During the year the taxpayer was employed on a part-time basis by the Commonwealth of Australia for which she received income as included in her return. She also received a part social security pension.

Counsel for the taxpayer Mr Keely submitted that the honorarium had the element of periodicity, recurrence or regularity and the requisite relationship to services rendered by the taxpayer for it to be properly characterised as income in her hands. Alternatively he submitted the payment is assessable under s. 26(e) of the Act.

In support of his argument Mr Keely referred to
FC of T v Dixon (1952) 86 CLR 540. In that case the High Court held (by a majority) that the sum provided by an employer to an enlisted employee to make up the difference during wartime between military and civilian pay was held to be assessable income. Dixon C.J. and Williams J. in a joint judgment found the payment had the character of income (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...''

Fullagar J. who was in the majority but in separate reasons regarded the regularity and periodicity of the payments ``while not unimportant is not decisive''. The decisive factor was the object and effect of the payments to make an addition to the earnings of the taxpayer.

The relevant provisions of the Act are s. 6(1), 25(1), 26(e) and 51(1) which relevantly read:

``6(1) In this Act, unless the contrary intention appears-

...


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`assessable income' means all the amounts which under the provisions of this Act are included in the assessable income;

...

25(1) The assessable income of a taxpayer shall include-

  • (a) where the taxpayer is a resident-

the gross income derived directly or indirectly from all sources whether in or out of Australia; and

...

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-

...

51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

The term ``income'' is not defined in the Act. Whether a particular receipt of money is income is to be determined ``in accordance with the ordinary concepts and usages of mankind''. See
Scott v FC of T (NSW) (1935) 3 ATD 142 at 144; (1935) S.R. (NSW) 215 at 219 per Jordan C.J.

The general concept of income was discussed by Windeyer J. in
Scott v FC of T (1966) 8 ATD 286 at 293; (1966) 117 CLR 514 at 526-527:

``Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance. It is apposite to quote here a passage from the judgment of Kitto, J. in The Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation. His Honour said: `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'. An unsolicited gift does not, in my opinion, become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered. It was said for the Commissioner that if a service was such as the recipient was ordinarily employed to give in the way of his calling, and the gift was a consequence, however indirect, of the donor's gratitude and appreciation of that service, then it must necessarily be part of the donee's income derived from the practice of his calling, and caught by s. 26(e). But as thus expressed, this proposition is, I think, a mistaken simplification. It was based upon the fact that in Hayes' Case, Fullagar, J. regarded as decisive that it was impossible to relate the receipt of the shares there given to any income-producing activity on the part of the recipient. In the present case the taxpayer was engaged in an income-producing activity, his practice as a solicitor, to which it was said the gift could be related. But because the absence of a particular element was decisive in favour of the taxpayer in one case it does not follow that the presence of that element is decisive in favour of the Commissioner in another case. The relation between the gift and the


ATC 186

taxpayer's activities must be such that the receipt is in a relevant sense a product of them.''

Mr Sergovich a departmental officer submitted the honorarium did not have the character of income in the taxpayer's hands because it was neither expected nor received as a regular periodic payment.

It was further submitted for the respondent that the payment is not ``income'' for the purposes of s. 25(1) and s. 26(e) of the Act because it was not made in the course of an employer/employee relationship nor in respect of any contractual relationship; the by-laws of the society make no mention of any requirement or obligation to pay a district officer any sum of money for performing his or her duties and furthermore the duties performed by the elected district officers are purely philanthropic; the payment is a gesture or token by the members to compensate a district officer for the work which he or she has performed for the members.

The submission for the respondent that there has to be a relationship of employer and employee before a payment by the former to the latter can be said to be income cannot stand with the decision in Dixon (supra) unless it could be said the circumstances in that case were exceptional, as was pointed out by Carter J. in
FC of T v Blake 84 ATC 4661 at 4664.

In Case No. E31 5 T.B.R.D. 193 the taxpayer received the annual sum of 300 pounds paid quarterly to her by the society for which she performed voluntary services. In that case the taxpayer had been an employee of the society until retirement in 1935. In 1947 she resumed working for the society in a voluntary capacity. The minute recording the decision to pay her £ 300 per annum included the statement that the taxpayer be considered as former headquarters staff. In that case it was contended on behalf of the taxpayer that as she had no contractual rights to the sums paid they should be regarded as a series of gifts and not income.

Two members of the Board of Review decided that the payments were assessable income as a gratuity under s. 26(e) for services rendered. The third member decided the payments had the character of income within ordinary concepts under s. 25(1)(a).

In Case No. E10 5 T.B.R.D. 57, the taxpayer was an honorary secretary of a voluntary association for several years until he suffered a breakdown in health and was unable to continue. He then received an ex gratia allowance of 130 pounds per annum from the association for two or three years. The Board, Mr Owen (Chairman) and Mr Webb (Member) held the payment was assessable under s. 26(e) and also was income because of the circumstances and nature of the payment. At p. 60 they said:

``The questions which have to be answered in determining whether a particular receipt falls within the terms of s. 26(e) upon which the Commissioner's representative relies have been set out by the High Court as follows: 1. Can the sum or any part of it be described as an allowance, gratuity, compensation, benefit, bonus or premium? 2. If yes, can it be said of it that it was `allowed, given or granted' to the taxpayer during that year? 3. If an affirmative answer is given to both these 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?' (See
Constable v. Federal Commissioner of Taxation (1952) 86 C.L.R. 402 at p. 415.)''

The respondent submitted that Cases E10 and E31 (supra) support the view that for a gratuity to be assessable it must be given or granted, in respect of directly or indirectly to any employment or services rendered by a taxpayer which are of a contractual nature and are similar to an employer and employee relationship.

These cases cannot in my opinion be cited as authority for that proposition. The fact that the payment was made voluntarily and not subject to any legal obligation to do so is not determinative of the issue. It is a well established principle that the fact a taxpayer has no contractual right to a payment does not preclude it from being income. See Dixon at 556.

In the New Zealand case
G v Commissioners of Inland Revenue (NZ) 12 ATD 378, the Supreme Court held that voluntary unsolicited donations made to an evangelist by Open Brethren Assemblies were assessable. No contractual relationship existed between the taxpayer and any Assembly of Brethren nor was there any relationship of master and servant.


ATC 187

An English case referred to during submissions on the question of income was
Temperley (Inspector of Taxes) v Smith [1956] 3 All ER 92. In that case a hospital board as a gesture of appreciation of the services rendered voluntarily by members of the honorary medical staff took out, in the name of the board, policies on the lives of individual medical staff. The Court on appeal found the surrender value of the policy was a payment which came to the taxpayer within the scope of his profession and not as a mere present and was therefore assessable as income.

Vaisey J. said at 95:

``A voluntary payment to the holder of an office or employment is a profit of that office or employment if it accrues to the holder in virtue of his office or employment, notwithstanding that there may not be any legal obligation to make the payment.''

In FC of T v Harris 80 ATC 4238; (1980) 30 ALR 10 the Federal Court, Bowen C.J. at ATC p. 4242; ALR p. 16 cautioned against the use of the English cases which in the main depend upon the particular provision of the English legislation which is not to be found in the Australian Act.

In Scott (supra) Windeyer J. said of s. 26(e) at ATD 293; CLR 525-526:

``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 recognised 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. If, instead of being paid fully in money, he is remunerated, in whole or in part, by allowances or advantages having a money value for him they must be taken into account. The enactment does not bring within the tax-gatherer's net moneys or moneys' worth that are not income according to general concepts. Rather it prevents receipts of moneys or moneys' worth that are in reality part of a taxpayer's income from escaping the net.''

Looked at objectively, can it be said that the honorarium which on the taxpayer's understanding of it was made to her ``to help defray travelling costs when you were doing your duties as the district officer'' is income according to ordinary concepts.

In my opinion it does not accord with ordinary concepts to say that the payment is income. Whether a payment was made or not depended on the goodwill of the members to make the payment. There was nothing in the material before the Tribunal making any reference to any entitlements of district officers although on the evidence of past practice it was reasonable for the taxpayer to anticipate that a payment similar to that paid to a previous incumbent would be paid to her although there was no assurance or certainty that the payment would be forthcoming from year to year.

An object in payment of the honorarium was not to supplement pension entitlements paid to former employees as broadly speaking was the factual sub stratum in a number of the decided cases. See Blake and Harris (supra) or to make up pay of an employee on war service as in Dixon: Nor was it geared to the receipt of assessable income; Case H49 76 ATC 435.

The activities of the taxpayer as district officer bore no relevance to any income producing vocation or calling. It cannot be regarded as a reward of the taxpayer's employment or calling. Nor does the honorarium on any view bear any relation to the time and energy the taxpayer expended on voluntary work for the society. Rather as the taxpayer said in evidence the payment was ``to help defray travelling costs''. While the motives for payment do not determine the issue they are relevant: See Scott. What may be said is that the intent behind the payment sheds some light onto its character.

It is true the payment came to the applicant by virtue of her office. It seems to me that it is safe to draw the inference that the honorarium was paid to the taxpayer by the members not as a payment they were obliged to make but implicitly in recognition the applicant had incurred out of pocket expenses by virtue of her office, of which running her car was but one. The honorarium would help defray those expenses. The evidence indicated that it had been for some years an established custom to pay the incumbent district officer $100 per annum. In the case of the taxpayer it bore no


ATC 188

relation to the quantum of her expenses. Nor was there anything in the evidence to suggest the honorarium was motivated by genuine commercial considerations.

The character of the receipt in the hands of the taxpayer as the recipient of the honorarium is to be determined. In so doing consideration of the motive of the donor in making the payment is a factor for consideration:
Hayes v FC of T (1956) 11 ATD 68 at 72-73; (1956) 96 CLR 47 at 55. It was not a payment to supplement income. It does not have the character of a payment for which it is substituted and that to which it was added as in Dixon.

The amount of the honorarium was miniscule when ranged alongside the time and effort expended by the taxpayer although it must at once be said that the quantum of the payment is not the decisive factor. A situation may arise when the quantum of a payment is a factor to be considered in determining whether it should be characterised as one for services rendered rather than some reimbursement for expenses. The fact of the taxpayer holding office in the society explains the payment to her but does not characterise it.

The facts in this matter do not persuade me that the honorarium paid to the taxpayer has the quality of income in her hands. It is not in my opinion a payment intended to be caught in the net of assessable income.

Given the conclusion that the honorarium is not assessable income it follows there is no nexus between the travelling expenses and the gaining of assessable income for the claimed deductions to satisfy s. 51(1).

Accordingly the objection decision under review will be affirmed.


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