TUBEMAKERS OF AUSTRALIA LIMITED v FC of TJudges:
Tubemakers of Australia Limited, the applicant in these proceedings, appeals to the Court in respect of amended assessments of fringe benefits tax made by the respondent Commissioner of Taxation for the fringe benefits tax years ended 31 March 1989, 1990 and 1991.
The facts are not in dispute. The applicant is a listed public company. It caused, in 1953, a scheme to be established to provide hospital, medical, pharmaceutical or like benefits for the benefit of its employees. The scheme is now known as the Phoenix Welfare Association Ltd Medical and Hospital Fund (``the Fund''). There was involved the incorporation of a company, The Phoenix Welfare Association Limited (``Phoenix''), to provide certain defined benefits and the payment by the applicant of a premium or contribution to cover the benefits payable. The nature and value of the benefits and the rate of premium changed from time to time, depending, inter alia, upon government health policy. The business of Phoenix was controlled by a council which was elected by the members to whom benefits were payable.
In approximately the mid to late 1950s, the applicant commenced to provide these benefits to its former employees as well as to current employees. To achieve this it undertook to pay to Phoenix all contributions for employees who were retired before 30 September 1958 and contributions for employees who retired thereafter, subject to certain conditions as to eligibility (for example, employees retiring after 30 September 1963 were required to have contributed to the Fund for a minimum period of five years). Details of the benefits payable, which appeared to vary depending upon the classification of the employee as being, for example, an executive officer, or a staff officer etc, are not material to the present case.
The scheme was modified in 1984 so that payments for new retirees would only commence from age 65 irrespective of the date of actual retirement and also to limit the eligibility, for all employee categories, to a minimum 25 years membership of the Fund. Despite the advent of Medicare in 1984, the cost of the scheme continued to escalate. Among the costs to the applicant of the scheme after 1986 was fringe benefits tax imposed upon the applicant as a result of the Fringe Benefits Tax Assessment Act 1986 (Cth) (``the Act''), part of a package of measures introduced as part of a reform of the Australian tax system. I shall describe the scheme of that Act in more detail later. Suffice it to say here that a weakness in
ATC 4209the income tax system at that time was the failure of the Income Tax Assessment Act 1936 (Cth) to detail with some specificity the value of benefits given by employers, or those related to them, to employees and perhaps the failure of that Act to include those values in the assessable income of the employee (but cf the provisions of s. 26(e) of the Act which arguably were adequate to deal with the problem but which were largely ignored in the administration of the Act). These difficulties were overcome by the enactment of a law which detailed with the requisite specificity the benefits to be taxed, but which imposed upon the employer (not the person obtaining the benefit) a tax at a fixed rate, being essentially the maximum marginal rate of tax payable by an individual.
The Group Personnel Manager of the applicant at the time the Act was introduced, Mr Griffiths, became aware, as a result of seminars and papers written by commentators at the time, of the impact of the fringe benefits tax and of the advantage for an employer of ``cashing out'' benefits, that is to say, of terminating the provision of the taxed benefit and in lieu thereof paying to the employee cash, so that the same benefit might be acquired by the employee out of the additional (taxed) income which he or she derived. In this way the employer would ordinarily obtain a deduction for the additional salary paid in cash to the employee and the employee would pay tax upon the amount received from the employer as income derived.
Mr Griffiths thus suggested to the management of the applicant a number of ways in which the cost of the scheme might be contained. One of these consisted of discontinuing the arrangement whereby the applicant funded the benefits payable to ex- employees and, instead, paying cash to ex- employees to reimburse them for the premium which they would become liable to pay to Phoenix, or which they could use to pay the premium.
A management meeting of the applicant on 15 December 1987 resolved to discontinue altogether contributions on behalf of newly retired employees, but:
``... in respect of employees who have already retired, contributions would be made on the following basis:
- - Retired employees over 70 years of age will be paid a sum in cash equivalent to the full Phoenix contribution.
- - Retired employees who are now less than 70 years of age will be paid a sum in cash equivalent to 50% of the Phoenix contribution.
There will be no progression from one category to another and the payment will be conditional upon retired employees maintaining their membership with the Phoenix Welfare Fund.''
The proposed change was notified to the retired employees in a circular letter dated 24 August 1988. Relevantly, that letter said:
``From 1st October 1988 the Company will pay the value of your contribution quarterly by cheque directly to you rather than pay your contribution to Phoenix. Phoenix will then bill you separately for contributions owing for the following quarter. For the convenience of retired employees we have arranged with Phoenix to include their account when we forward you your cheque.''
Thereafter, and until around December 1989 (a period which is hereafter referred to as ``the first period''), the procedure outlined in the letter of 24 August 1988 was followed. It may be inferred that most of the ex-employees negotiated the cheque they had received to Phoenix and sent that cheque off together with the Phoenix account to that company as their contribution to the Fund. It was accepted by the Commissioner that there was no obligation upon the ex-employee so to do and that the employee could pay the Phoenix contribution and then seek reimbursement out of the applicant's cheque.
On or around 13 December 1989, the procedure changed as a result of what was described as ``technical difficulties'', a reference, it would seem, to the fact that the Commissioner did not accept that the procedure adopted to that date operated to free the applicant from fringe benefits tax. The change is recorded in a circular letter of that date which was sent to all ex-employee members of the Fund and which read relevantly:
``We wish to maintain the company's commitment to our retired employees and have agreed with the Tax Office that the payment will be treated in future as an allowance.
Any restrictions that previously required continuation of membership with the Phoenix Welfare Association are now withdrawn.
The allowance will continue to be paid in the same way, quarterly directly to you, and the amount of the allowance will be reviewed from time to time.
As an allowance, the amount will continue to form part of your taxable income...
We hope that your association with the Phoenix Welfare Association is continued.''
Thereafter, and at least until 31 March 1991, a period hereafter referred to as ``the second period'', it seems ex-employees continued to receive quarterly payments, in an amount equal to the Phoenix contribution fixed for the next quarter. If the ex-employee chose to remain a member of the Fund, the cheque received could be used either to pay the required contribution to Phoenix or to reimburse the member the contribution if paid from his or her own funds. If the ex-employee did not choose to remain a member of the Fund, he or she was free to use the cheque received in any way desired.
Despite the reference to an ``agreement with the Tax Office'', the changed procedure was ultimately thought by the Commissioner to be equally ineffective to absolve the applicant from a liability to fringe benefits tax. In a move which can only be described as ``bizarre'', having regard to the role which fringe benefits tax plays in preserving the integrity of the tax system as preventing avoidance of income tax, the Commissioner made determinations under s. 67 of the Act, the general anti-avoidance provision, on the basis, presumably, that it would be concluded that the rearrangement was entered into with the dominant purpose of paying less fringe benefits tax than would otherwise have been payable. He thus purported to be entitled to ignore the changed procedures. He did so notwithstanding that the ex- employees were clearly liable to income tax upon the payments of cash which they received. The applicant was accordingly assessed to fringe benefits tax. It is now agreed by the Commissioner, for the purpose of the present appeals, that the determinations purporting to be made under s. 67 of the Act were not valid determinations and that the only issue for decision is whether, on the facts which I have outlined, there was a liability of the applicant to fringe benefits tax in respect of the cash amounts paid to the ex-employees. To determine that issue it is necessary to refer to the relevant provisions of the legislation.
Fringe benefits tax is imposed by the Fringe Benefits Tax Act 1986 in respect of ``the fringe benefits taxable amount of an employer of a year of tax'': (s. 5). It is payable by the ``employer'' (an expression which, by s. 136(1) of the Act, includes a former employer): s. 66 of the Act. The ``fringe benefits taxable amount'' of a particular employer is, in the ordinary case, the sum of all the values allocated by the Act to the various ``fringe benefits'' provided by the employer in the current tax year: s. 136(1), definition of ``fringe benefits taxable amount''. It is a prerequisite of there being a ``fringe benefit'' that there be a ``benefit'', an expression itself defined in s. 136(1) in an inclusory definition. It is conceded that the payments to the ex-employees constituted a benefit to them.
A benefit will relevantly be a ``fringe benefit'' if provided in the year of tax to an employee by the employer in respect of the employment of the employee, unless excluded from the definition of the expression in s. 136(1) by virtue of paragraphs (f) to (p) inclusive of the definition. It is conceded here that unless the benefit falls within paragraph (f) of the exclusionary provisions, the payment to the ex-employees will be a ``fringe benefit''. Indeed, the parties agree that it would be either an ``expense payment fringe benefit'' (see s. 20 of the Act) or a ``residual fringe benefit'' (see s. 45 of the Act).
Paragraph (f) exempts from the definition of ``fringe benefit'':
``a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936;''
The parties agree that the reference to exempt income has no relevance to the present case.
It is thus necessary to turn to the definition of ``salary or wages'' in the Income Tax Assessment Act 1936. This definition, contained
ATC 4211in s. 221A of that Act, was, in the relevant years, in the following terms, so far as is relevant:
```salary or wages' means salary, wages, commission, bonuses or allowances paid (whether at piece-work rates or otherwise) to an employee as such, and, without limiting the generality of the foregoing, includes any payments that are covered by Division lAA of Part III, any payments of amounts to which paragraph 26(eb) or section 26AC applies, any payments of amounts that are assessable retirement amounts for the purposes of this definition, eligible termination payments and any payments made-
- (c) by way of superannuation, pension or retiring allowance or by way of an annuity or a supplement to a pension or annuity;
For the purposes of this case, the parties are in agreement that the applicant can only succeed if the payments to the ex-employees fall within paragraph (c). Further, the applicant concedes that the payments do not fall within the word ``superannuation'', nor are they a ``supplement to a pension or annuity''. The short question for decision is thus whether the payments in the relevant tax years came within the meaning of the words ``pension or retiring allowance'', neither of which is defined for the purposes of the legislation.
It is convenient to consider first the meaning of the composite expression ``retiring allowance''. For an amount in a year to be a retiring allowance it must first be shown to be an ``allowance''. As Dixon J said in
The Mutual Acceptance Company Limited v FC of T (1944) 7 ATD 506; (1944) 69 CLR 389, in discussing the meaning of the word in the context of the Pay-roll Tax Act 1941 (Cth) (at ATD 514; CLR 402):
```Allowance' is one of the many words which take their meaning from a context rather than affecting or controlling the meaning of other words of the context in which they occur. For, considered alone and at rest rather than at work with other words, it means the allowing of a thing or a thing allowed. It is only by its application that you discover the kind of thing in mind.''
Latham CJ, in the same case (at ATD 510; CLR 396-397), considered that the word ``allowance'' in the context before the Court meant the:
``... grant of something additional to ordinary wages for the purpose of meeting some particular requirement connected with the service rendered by the employee or as compensation for unusual conditions of that service.''
Jordan CJ, in
Scott v FC of T (NSW) (1935) 3 ATD 142; (1935) SR (NSW) 215, in discussing the meaning of the word ``allowance'' in the context of a provision concerned with bringing to tax 5% of ``the capital amount of a retiring allowance or gratuity... paid in a lump sum'', said (at ATD 146; SR 221):
``An allowance is a definite portion or amount allotted or granted to meet requirements;
Buckingham v. Federal Commissioner 3 A.T.D. 37 at 38. A gratuity is something given generally without obligation and in return for services. Now, when one person ceases to be in the employment of another there are two different characters in which money may be paid to him by his ex-employer in relation to cessation. It may be paid to him as a recognition of, or as further remuneration for, his past services; or it may be paid to him as compensation for his being deprived of a right, or an opportunity, to continue in the service and earn further emoluments therein. In either case, the payment may be made ex gratia or in discharge of an obligation to make it. In every case, it is a question of fact in which character it is made. If it is paid in the former character, `allowance' or `gratuity' may be an apt word to describe it, according to the circumstances. But if it is paid in the latter character, and is paid in discharge of an obligation imposed by law, it is certainly not a `gratuity', nor is it an `allowance,' in any ordinary sense of either of those words.''
Thus in Scott it was held by majority (Stephen J dissenting) that a payment to the chairman of the Metropolitan Meat Industry Board, consequent upon the abolition of the Board by Act of Parliament, was not a retiring allowance, for it was in respect of preventing
ATC 4212the chairman from performing further services and had no relation to his past services.
Each of the payments to the ex-employees might, in the present case, at least in respect of the first period, be appropriately referred to as an allowance, a fixed amount allotted to provide a fund for payment of the health benefit contribution of the employee. The question is more difficult in the second period where the recipient of the amount might not be a contributor at all to the Fund and the payment was to be made irrespective of the payee's membership of the Fund. But that is not a matter which requires extended consideration, because, in my view, in neither period could the amount in question be properly described as a retiring allowance, even if otherwise it could appropriately be described as an allowance. In the ordinary meaning of the expression, a retiring allowance is an allowance received on retiring, an amount paid to an employee on the giving up of the employment, whether that occurs voluntarily or not. It is not without significance that the word ``allowance'' is preceded by a participle, for that emphasises the association which the allowance must have to the act of retiring. An amount agreed to be paid many years after the retirement, while still, presumably, motivated by a sense of responsibility or gratitude to the employee, is not strictly a retiring allowance for it has lost its connection with the act of retiring. It is an allowance to a retired person by the former employer, but not a retiring allowance.
There remains then the question whether the payments in either or both periods constituted a ``pension'' to the ex-employees.
The Macquarie Dictionary defines ``pension'' relevantly as:
``1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 2. an allowance or annuity.''
The word has as its origin the Latin pensio meaning ``payment''.
The Oxford English Dictionary, 2d ed. Vol XI contains the following definition relevant to the present context:
``4. An annuity or other periodical payment made by a person or body of persons, now esp. by a government, a company, or an employer of labour, in consideration of past services or of the relinquishment of rights, claims, or emoluments.''
What these dictionary definitions show is that it is a necessary characteristic of a pension that it be periodical. A series of annual payments, that is to say, payments which happen to be made annually but where each payment is determined upon at or about the time it is made, may have an income character but not be periodical. Thus the payment by an employer of amounts to employees who satisfactorily passed employment-related courses of study might be income, but, although made over a period of years, would not necessarily be periodic: cf the payments made by the bank in
Smith v FC of T 87 ATC 4742; (1987-1988) 164 CLR 513. Although perhaps irrelevant to the decision, it did not occur to the majority of the Full Court of this Court in
FC of T v Harris 80 ATC 4238 to refer to the ex gratia lump sum payments made to retired bank personnel, in that case to supplement their pensions, as themselves being pensions, notwithstanding that the payments were in fact repeated from year to year. Bowen CJ observed in that case that (at 4244):
``It is true to say, that a lump sum payment of uncertain and varying amount paid in each of five successive income years, may in a sense be described as a `periodic' payment. So might one paid every five years or every ten years. But it is not `periodic' in any sense which is of much help in determining whether the payment is, or is not, of an income nature.''
Deane J in the same case was of the view that the amounts in question were income in ordinary concepts and in reaching that conclusion took account of the fact that the payment in dispute was one of a group of a series of annual payments made in respect of successive annual periods. However at no time did his Honour refer to the payments in that case as being ``pensions''.
Counsel for the Commissioner submitted that the payments made in the present case should be characterised as an advance refund of fund contributions or a recoupment of contributions rather than as a pension. It was submitted that the payments to ex-employees should be seen in their context as related to the Fund contributions. It may be said that that becomes more difficult in the second period when the employee did not need to contribute to the Fund
ATC 4213to obtain the benefit. Counsel for the Commissioner placed emphasis upon the purpose of a payment or series of payments as being critical to the character of that payment or series of payments as a pension. Thus a pension was suggested to be:
``something paid for the purpose of generally supplementing the resources of the pensioner.''
By contrast, where the payment was made for the particular purpose of defraying the contribution which the recipient was liable to make, there was no pension. The fact that in the second period there was no requirement upon the recipients to contribute was said to be irrelevant.
With respect, I think that this submission places too much weight on the purpose of the payments and too little upon the form in which the payments are made. An employer may agree to make regular periodical payments to enable the employee to defray, say, increased rental expenses, but the payments may nevertheless be characterised as pension payments. In my view, the essential characteristic of a pension (which may of course be voluntary and need not be paid because of some legal obligation) is only that there be periodical payments and not a series of lump sum payments, albeit that those lump sum payments may be paid on a periodical basis.
I shall deal first with the second period. In this period there was no necessary connection between the payment to a particular ex- employee and the contributions by that employee to the Fund. The payment would be forthcoming to the employee irrespective of continued contributions. On the other hand, the payment still had relationship to the quantum of contribution required of a participant in the Fund. In this second period the company had effectively agreed to pay indefinitely, or at least until death, amounts each year to ex-employees related in amount to the amount required to fund a contribution to the Fund by a contributing member.
Does the fact that the quantum of the regular payments so made depends upon the amount necessary to fund a contribution to the Fund by a person who is a member of the Fund take the payment out of the category of payments capable of being classed as a pension? The answer in my view is no. It was submitted for the Commissioner that for an amount to be a pension it had to be either a fixed amount or at least an amount determined by reference to some objective and independent criterion. Thus, for example, it was conceded that an annual amount which might be varied year by year in accordance with a cost of living index would, it was accepted, be a pension. An amount which the payer might arbitrarily determine year by year would, on this submission, not be. There is a difficulty about the submission in that pensions payable by the government, for example war widows' pensions, are periodical payments, but the amount of the payment may be determined by the government from time to time by budgetary decision. The payments are still described as pensions. The point is that the government pension is clearly a periodical payment and the fact that the quantum might vary by resolution of Parliament hardly seems to alter the character of the payment as a pension.
In the present case, it seems to me that once it is possible to characterise the payment as being a periodical payment, and that is clearly the case in the second period, then the fact that the quantum of the payment may vary at the discretion of the payer does not affect the characterisation of the payment. But if I be wrong on this and it be a criterion of a pension that the amount, if capable of variation, be fixed by reference to some independent criterion, that requirement is satisfied here. I see no reason why a periodical payment might not be a pension where the yearly rate is determined by reference, for example, to the annual contribution rate of, for example, Medibank Private. If that be the case, it can scarcely matter that the contribution rate chosen is not Medibank Private, but the rate charged by Phoenix. After all, Phoenix is a separate legal entity from the applicant and in fact is controlled independently of the applicant.
I have greater difficulty in characterising the payments in the first period. The question is whether, in this period, the payments should be viewed as periodical payments or whether they should be viewed as a series of annual lump sum payments because each year it was necessary to determine whether each ex- employee was still a member of the fund before the payment was made to him or her. It is really a question of impression. However, on balance, I think that in the first period it is proper to regard the applicant as paying to its ex-
ATC 4214employees periodical amounts related to the fund contributions, those periodical payments continuing until the death of the ex-employee, an ex-employee ceasing to be a contributor to the fund or the applicant discontinuing its payments for any other reason. So seen, the payments in this period are periodical and likewise are pensions.
It follows, in my view, that in both periods the payments in question were properly to be characterised as pension payments. That being the case, they were excluded from the provisions of the Act as being fringe benefits. The appeal should accordingly be allowed with costs.
THE COURT ORDERS THAT:
(1) Appeal allowed.
(2) The amended assessments for the fringe benefits tax years ended 31 March 1989, 1990 and 1991 be set aside.
(3) Objection decision of the respondent set aside and in lieu thereof it is ordered that the applicant's objection to the assessment of fringe benefits tax for the fringe benefits tax years ended 31 March 1989, 1990 and 1991 be allowed.
(4) Respondent to pay the applicant's costs.