Hill J

Federal Court of Australia

Judgment date: Judgment handed down 15 September 1994

Hill J

The applicant, the Newcastle Club Limited (``the Club'') is, I would infer, a members' club. It has employees to whom wages are paid in the ordinary course and is registered under the provisions of s. 221F(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act'') as a Group Employer.

In August 1992 the respondent Commissioner of Taxation notified the Club that it had failed to comply with its obligations to make tax instalment deductions from certain payments from salary wages etc, paid to its employees in accordance with s. 221C(1A) and of the imposition of a penalty under s. 221EAA of the Act for failure to deduct. The Club, as it was entitled to do, objected against the Commissioner's decision to impose a penalty. That objection, having been disallowed, the Club appealed to the Court against the disallowance of the objection.

The parties proceeded, by way of an agreed statement of facts, a course sometimes fraught with danger for the party upon whom the onus rested. I do not, in so saying, suggest that the

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outcome in the present case would have been affected had the case proceeded in the normal way.

The relevant facts are within short compass. The rules of the Club do not permit its members to reward employees by way of tips to show appreciation for excellent services. Instead the Club has, what the agreed statement of facts refers to as, ``a practice'' known to its employees. That practice involves the Club in or around November or December distributing a notice to members. The notice distributed during November and December 1991 was in the following terms:


I should like to draw your attention to the Annual Staff Christmas Fund.

The Committee is pleased to co-ordinate the receipt and distribution of your contributions prior to the festive season.

This is an opportunity to say thank you to a friendly, competent and loyal staff, who have again illustrated this dedication to serving the members well.''

At the bottom of the notice was a detachable authority addressed to the Club to be completed by the member authorising the member's account to be charged with the amount to be completed by the member as a contribution to the Staff Christmas Fund. As a result of that notice the Club received $17,426.95 from members in the form of cash or authorities to charge house accounts. The cash received, whether directly from members or in payment of their respective house accounts, was paid into the ordinary banking account of the Club. The cash component received was $14,463.00.

The accounting records of the Club recorded payments received presumably under an entry entitled ``Staff Christmas Fund''. That account, as at 20 December 1990, showed a credit of $218.05. There was credited to that account, as at 20 December 1991, the amount of $17,426.95, being the sum of the cash and value of the authorities given to the Club to charge house accounts with payments, making a total of $17,645.00. On or about 20 December 1991 the Committee of the Club determined to make payments in nominated amounts to various employees of the Club, having regard, inter alia, to the level of service provided by those employees to the Club and its members in the preceding 12 months. The agreed statement of facts is silent as to what other matters, if any, were considered. The nominated amounts were then paid to the various employees.

In making the payments the Club used $3,182 of its own funds. That figure presumably represents the amount for which members had signed authorities to charge their accounts but in respect of which the actual accounts had not then been paid. The club ultimately, in January 1992, received from its members the cash amount of $3,182.

The obligation upon ``an employer'' to deduct amounts from payments of salary or wages that employees receive or are entitled to receive arises under s. 221C(1) of the Act. For present purposes ``an employer'' is defined in s. 221A(1) of the Act, unless a contrary intention appears, as a person who pays or is liable to pay any salary or wages. Somewhat unhelpfully the expression ``employee'' is defined in the same sub-section relevantly as meaning a person who receives, or who is entitled to receive, salary or wages. Given these definitions and the fact that the definition of ``salary or wages'' clearly contemplates payments made by a person who is not in the ordinary legal sense an employer to a person who is not in the ordinary legal sense an employee, it would seem clear that no employment relationship need as such exist between an employer and an employee before the obligation to deduct group tax arises, provided that the payment made from the one to the other is a payment comprehended within the definition of ``salary or wages'' also contained in the same sub-section. That definition, as relevant for present purposes, is expressed as follows:

```salary or wages' means salary, wages, commission, bonuses or allowances paid... to an employee as such...''


The word ``employee'' as used in the composite expression ``employee as such'' clearly means a person in an ordinary employer/ employee relationship and to this end presents a contrary intention to the defined meaning in s. 221A(1). The consequence, as has been emphasised in cases, most of which concern the corresponding definition in State payroll tax legislation, is that it is not sufficient for the amount to be merely received by a person who happens to be an employee, the amount in question must be paid to the employee in that employee's capacity as employee. This was early recognised, for example by Latham CJ in
The Mutual Acceptance Company Limited v FC

ATC 4596

of T
(1944) 7 ATD 506 at 509-510; (1944) 69 CLR 389 at 396 where his Honour said:

``The payments (in cash or kind) which are included in `wages' are payments made `to any employee as such .' They therefore comprehend only payments made to an employee in connection with and by reason of his service as an employee or in respect of some incident of his service. Thus a merely personal gift by an employer to a person who happened to be an employee would not be included within `wages', though a bonus paid to employees because they were employees would be so included.''

The decision of the High Court in
Murdoch & Ors v Commr of Pay-roll Tax (Vic) (1980) 143 CLR 629;
The Trustees of the Estate of George Adams (dec'd) v Commr of Pay-roll Tax (Vic) 80 ATC 4424, authoritatively explored, within the context of the facts of that case, the difficulties associated with the words ``employee as such''. The employer in that case was the trustee of a will which authorised the trustees to carry on a business and directed them to distribute one-tenth of the net profits of that business amongst such of the employees for the time being engaged in that business and in such proportions as the trustees determined. It was argued for the taxpayer that the payments were made to persons who were employees in their capacity as beneficiaries of the will, rather than in respect of services rendered and accordingly fell outside the ambit of the Pay- roll Tax Act 1971 (Vic). This was an argument which appealed to Gibbs J, but not to the remaining members of the Court.

The leading judgment, that of Mason, Murphy and Wilson JJ, commenced by endorsing the definition of ``bonus'' adopted in the Court below in the following terms (at 642):

```A bonus imports, in the case of an employee or agent, something given or paid over and above what is due and payable for his services. Often it is paid out of profit realised, in reward to those whose services have contributed to the making of the profit.... in the case of an employee the payment of a bonus is ordinarily made as a voluntary gift, ex gratia, in recognition of the extent to which the services of that employee have contributed to the making of the profit'.''

In the present case no argument was put against the proposition that the payments in question could fall within the description of ``bonus'', in that the amounts received by employees were paid over and above what was due and payable for the services of the employee.

In Murdoch the High Court then proceeded to consider whether the payments in question had been made ``to any employee as such''. Because what is said in that case is critical to the outcome of the present case, it is necessary to quote at some length from what is said in the leading judgment (at 644):

``In our opinion, such legal character of the payments as may be deduced from the terms of the will are not determinative. In other words, the Act, like all taxing statutes, takes a pragmatic line. So understood, in order to attract the tax the payments must satisfy three requirements: they must be paid by the employer; they must answer the description of `wages' as defined; and they must be paid to employees as such.... The appellants were in fact the employers of those who received the payments, and it is not to the point that in doing so they may have acted in obedience to a trust.

The second and third requirements are closely related, in the sense that one cannot be satisfied without at the same time satisfying the other. It is helpful to consider the circumstances of this case in the light of the test suggested by Latham C.J. in the Mutual Acceptance Case... Is it possible to describe the payments in question as `a merely personal gift by an employer to a person who happened to be an employee'? The key word in this question is the word `personal'. It calls for a relationship which goes beyond that of employer and employee. A legacy may often reflect the existence of such a personal relationship between the testator and his legatee, but that can hardly be said of this legacy which is to be distributed, in the discretion of trustees, among a class of people having no `personal' relationship with either the testator or his trustees. It is the business, and only the business, that establishes the class from whom the recipients are to be chosen.

The key features of the payments are their source and their destination. They came from the net profits of the business, and they were made only to persons who were employees for the time being of that

ATC 4597

business. In our opinion, therefore, they were `wages' paid to `employees as such'... Our conclusion does not rest on the criteria applied by the trustees in making the distribution. On the other hand, although we do not regard those criteria as irrelevant, they certainly support the conclusion.''

Stephen J, who was also of the view that the payments in question came within the description of ``wages'', referred to the terms of the will and the manner of exercise by the trustee of their discretion as both combining to bring the payments within the definition. His Honour said (at 639):

``Their combined efforts have resulted in payments being made by persons, the appellants, who are undoubtedly employers, to persons who are no less clearly their employees. And because these payments were made to particular recipients solely because they were employees whose services proved of particular value to the employers, they could not better answer the description of amounts paid to `employees as such'.''

His Honour was of the view that the fact that the payments were made pursuant to the terms of a will was an irrelevant matter.

Counsel for the Club conceded that if the payments in question had been made from the Club's own funds to its employees by way of Christmas bonuses, there would have been a clear obligation to deduct tax from them. In making this concession counsel was clearly correct. It was submitted, however, that the funds in question were not beneficially the funds of the Club but were trust moneys. Murdoch's case was, it was submitted, distinguishable because in that case the source of the funds had been the very business from which profits had been made by the payer of the amounts. Here the source of the funds was not from the business but from contributions made by members. In the alternative, it was submitted, that the payments were made by the Club as agent for its members and presumably therefore the Club, not being the payer of the amounts, could not become liable to deduct tax. The submissions glided gracefully over the difficulty that, at least in respect of $3,182 of the amount paid to employees, these could neither have been trust funds nor paid as agent for any person because they were paid by the Club from its own funds.

It may be accepted, as counsel for the Club submitted, that no particular form of words is necessary to create a trust:
Farrar v Commr of Stamp Duties (1975) 5 ATR 364 at 368. All that is required to show an express trust will be an intention to create a trust, ordinarily the intention of the alleged settlor:
Commr of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178 at 181. As Gummow J said in
Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia & Ors (1991) 30 FCR 491 at 503:

``The relevant intention is to be inferred from the language employed by the parties in question and to that end the court may look also to the nature of the transaction and the relevant circumstances attending the relationship between them: see
Walker v Corboy (1990) 19 NSWLR 382; Scott, The Law of Trusts (4th ed, 1987), §25.2.''

It is equally trite law that the terms of the ``trust'' must be capable of ascertainment so that there is certainty of object. That is to say, it must, at the time of distribution, be possible to ascertain those persons who are entitled to the trust property: Jacobs' Law of Trusts in Australia (5th ed, 1986) at paras. 522-6.

The Commissioner's submission is simply that there is no or alternatively insufficient evidence of intention to be found in the present agreed statement of facts and it is impossible to determine the precise terms of any trust in respect of which there might otherwise have been the necessary intention.

In a case such as the present where a payment is made for the benefit of third parties, there are obviously three possibilities. First the payment might merely be a loan to the payee to fund some benefit to a third person, second the payment may constitute a trust for the benefit of the third person or, as in the Australian Elizabethan Theatre Trust case, the payment might represent a gift for the benefit of the payee albeit expressed in precatory terms. The language employed in the notice to members and attached payment authority does not suggest a donative intention in favour of the Club nor does it suggest in any way a loan. Proof of the intention to create a trust may be facilitated both by proof that the funds in question are kept separate from other funds of the payee, for example, by placing them in a separate bank account: cf Re Australian Elizabethan Theatre Trust at 498, and by the

ATC 4598

fact that they are accounted for separately. No separate bank account was maintained by the Club to receive the so called trust moneys. While this is a significant factor, it will not necessarily be determinative. On the other hand, the accounting records of the Club at least distinguished between the Staff Christmas Fund account and other accounts of the Club.

The greatest difficulty with the submission that a trust has been created in the present case is that it is impossible to ascertain what the terms of that trust are. It is clear enough that the contemplation is that the amounts in question are to go for the benefit of the staff of the Club. Counsel for the Club submitted that the terms of the trust required that the moneys be distributed to such persons as might, at the time of distribution, be staff of the Club, such distinction to be at the discretion of the Club. But when is the time of distribution? Are all funds donated by members before Christmas to be distributed to those persons who are employees at that time? Or may the Club, as it apparently did in 1990, carry forward an unspent amount for application at some later time?

The terms of the trust were no doubt expressed by counsel in the way they were to endeavour to accommodate the way in which the practice had operated in the period from December 1990 to December 1991. For my part, if the intention to create a trust is to be inferred the more likely terms of that trust would be that the moneys in question be used in the year of donation for distribution to employees at Christmas in that year.

If the trust were to fail on the basis that the terms of the trust were too uncertain but otherwise an intention to create a trust was to be found, the moneys in question would be held upon a resulting trust for members who contributed, no doubt pro rata, to those contributions. Although reference was made in the course of argument to the decision of the House of Lords in
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, no submission was put that this case created some new and special class of purpose trust, an argument effectively and convincingly dismissed by Gummow J in Re Australian Elizabethan Theatre Trust.

I do not think that it is necessary in the present case to determine whether an effective express trust has been created or not. I am prepared to assume in favour of the Club that either it holds the moneys upon trust to distribute them under a trust, the terms of which are as suggested by counsel, or if such an express trust failed, that the funds were held upon resulting trust for the members contributing them. The question is whether in either case the Club would have an obligation to deduct group tax from the payments.

In my view, the question is answered by Murdoch's case. It is true that the amounts in question in the present case were not paid from the profits of the Club if one puts to one side at least the $3,182 of its own funds which the Club paid over to employees but was subsequently reimbursed. But that, in my view, does not matter.

To paraphrase the judgment of Mason, Murphy and Wilson JJ in Murdoch, the payment in question was made by the Club and the Club was the employer. It is not to the point here that the moneys paid are paid by the Club in a trustee capacity any more than it was to the point in Mudoch's case. Second, it could hardly be said of the payments that they were ``a merely personal gift''. Just as in Murdoch there was no personal relationship between the Club on the one hand and employees on the other, the same is true here. The occasion of the payments was no doubt the Christmas season but the payments were made, at the very least having regard to the Club's notice to members, to reward the service rendered by the staff to members during the year.

The third question is, as the High Court observed, related to the second, namely, whether the amounts were paid to employees as such. The answer to the second question, as the High Court suggested, really answers the third. But to the extent to which the third question is to be separately considered, the destination if not source of the payments suggests that the payments were received by the employees not because they were beneficiaries of some trust but because of the employment relationship which existed between the Club and them and the services which employees had rendered.

In Murdoch the criteria used to select members were not regarded as conclusive but said to strongly support the conclusion reached. Those criteria, as appears from the dissenting judgment of Gibbs J at 634, depended upon the value of each employee to the business assets. But even that criterion, favourable to the

ATC 4599

taxpayer's argument as it was, supported, the majority suggested, the liability to payroll tax.

In the present case, so far as one can determine the criteria of distribution from the agreed statement of facts, distribution took place in accordance with ``the level of service'' provided by the particular employees to the Club and its members. If by level of service is meant the quality of service, that would reinforce the point. Even if level of service were intended to refer to gradations within the organisation from the most humble to the most highly rewarded, I do not think that any different conclusion would follow.

It follows, in my view, that even if a trust relationship existed of the kind suggested in argument by counsel for the Club, the Club would still be liable to deduct group tax from the amounts it paid to the employees.

There remains to be noted the subsidiary argument. There was some doubt as to whether this subsidiary argument was covered by the Club's notice of objection but, there being no prejudice to the Commissioner, I gave leave to the Club to rely upon a new ground formulated after argument had been completed.

No doubt where a person makes a payment as agent for another and the question arises as to who has made the payment, it may be possible to say that the payment has been made by the other. So, in the context of death duty where the issue arose whether certain policies of assurance on the life of a deceased person had been ``wholly kept up'' by the deceased, Lord Simons in
Barclays Bank, Limited v Attorney- General [1944] AC 372 at 382 said:

``... if, to take the simplest case, the hand that pays is the hand of his agent acting according to his direction - I should have no difficulty in saying that he keeps up the policy, but, equally, where the payment is made by a trustee whose duty and right it is to pay whether the settlor wills it or not, it is not he but the trustee who pays the premiums and keeps up the policy.''

and see
Wayne v Commr of Stamp Duties (1966) 85 WN (Pt 1) NSW 301.

If the payment were really made by the Club as agent for members, such that it was the members' payment rather than the Club's payment, the Club itself could have no liability to deduct group tax because it would not have been the person making the payment. But it is difficult in the present case to see the relationship between the members and the Club as one of mere agency. To start with there is the difficulty of the $3,182 of the moneys which went from the Club to employees from its own funds. No agency could obviously exist there. The terms of the so-called agency are certainly not certain. How a particular member's contribution is to be used is not spelt out and obviously at the end of the day is intended to be at the discretion of the Club. In any event on the facts of the present case, as disclosed by the agreed statement of facts, I am unable to find an agency relationship.

It may well be argued that the context of the present legislation is different from that discussed in the death duty cases. Be that as it may I think the present is a case where the payment in question was made unquestionably by the Club from its own bank account using either its own moneys or, if the trust relationship be accepted, using mixed funds. In either case the payment having been made by the Club, it was made to the employees of the Club in respect of the services which those employees had rendered during the year and as such the liability to deduct group tax arose.

I would accordingly dismiss the application with costs.


1. Grant leave to the applicant to rely upon the ground of objection contained in the document, initialled and dated this day and placed with the papers.

2. Application dismissed with costs.

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