Hill J

Cooper J
Kiefel J

Full Federal Court

Judgment date: Judgment handed down 3 August 1995

Hill, Cooper and Kiefel JJ

The Court:

The Commissioner of Taxation appeals from the decision of the Administrative Appeals Tribunal constituted by a Senior Member. In dispute between the parties is the question of whether an amount of $23,381, paid in the year of income ended 30 June 1993, to Mr Holmes, the respondent, for his part in the successful salvage of an oil tanker the Kirki was either income in ordinary concepts or made assessable income pursuant to the provisions of s 26(e) of the Income Tax Assessment Act 1936 (``the Act''). Mr Holmes was successful before the Tribunal.

The appeal lies in the original jurisdiction of the Court. Pursuant to s 44(3)(b)(ii) of the Administrative Appeals Tribunal Act 1975 an order was made that it was appropriate for the appeal to be heard and determined by a Full Court. The appeal is, pursuant to s 44(1) of that Act, an appeal on, that is to say limited to, a question of law. There is no dispute that the present appeal does involve a question of law, that being whether the facts (none of which are in dispute) had, of necessity, to result in the conclusion that the payment in question was assessable income; cf
FC of T v Cooper 91 ATC 4396 at 4409; (1991) 29 FCR 177 at 194.

The case proceeded substantially by way of a statement of agreed facts. That statement is set out in full, subject to a deletion necessary to protect confidentiality, in the Tribunal's reasons for decision. It is unnecessary to set the facts out here in the detail to be found in the Tribunal's reasons. A short statement of them will suffice.

Mr Holmes was at relevant times employed by P & O Maritime Services Pty Ltd (``P&O'') as a marine engineer on the Lady Kathleen, an anchor handling tug and supply vessel at the time on charter to an oil company. In response to a MayDay message broadcast by the oil tanker the Kirki which at the time was bound for Kwinana from the Arabian Gulf laden with a cargo of Murban light crude oil. The Lady Kathleen sailed to the assistance of the Kirki. By the time the Lady Kathleen arrived the Kirki had been evacuated, and the Kirki was drifting towards the shore in circumstances where there was a considerable risk of damage to the environment and of a total loss of both the Kirki and its cargo.

In dramatic circumstances involving considerable bravery, particularly on the part of three seamen, (Mr Holmes was not one of them) a towing connection was made between the Lady Kathleen and the Kirki, and the Kirki was towed north by the Lady Kathleen for some three days. Ultimately the Lady Kathleen was replaced by another tug and towage to the north continued. In all three vessels were involved in the salvage operation. In the result the Kirki, its cargo and bunkers were successfully salvaged and ultimately reached safety.

Although it is not material to the question in issue, it seems that a salvage agreement was entered into between United Salvage Ltd, as Head Contractors of the salvage operation, and the Kirki's managers in the standard Lloyds' Form. There was also an agreement between P&O, as subcontractor, and United Salvage Ltd. The consequence of the head salvage contract was that if the Kirki was successfully salvaged, the salvors were entitled to a salvage reward by way of payment. There was no entitlement to compensation if the vessel was lost. That principle repeated itself in the subcontracting agreement. Mr Holmes was not a party to the subcontracting agreement, although his employer, P&O, appears to have purported to enter that contract on behalf of its employees and itself.

Ultimately an arbitration award, to which Mr Holmes was not a party, determined the

ATC 4478

respective rewards to be paid in respect of the three vessels which had participated in the salvage operation. A subsequent opinion was obtained from the arbitrator as to the distribution of so much of the reward as was attributable to P&O, between that company and its crew who had participated in the operation. Four individuals were singled out in this opinion for the receipt of special payments. The balance attributable to the crew was divided between them in pro rata to their respective salary entitlements. As a result Mr Holmes received a primary payment of $23,381 in the year of income. He received a subsequent amount representing interest in another year of income, but this is not the subject of the present dispute.

In summary therefore, it can be said that Mr Holmes, a seaman who participated in a successful salvage operation, became entitled under the common law of Admiralty to a reward. The question is whether the receipt of that reward constitutes assessable income to him.

The Tribunal in concluding that the payment to Mr Holmes was not income in ordinary concepts emphasised that Mr Holmes was in receipt of his normal salary or wages in accordance with the relevant award and that the right he had to payment arose not from his employment with the Lady Kathleen but out of the success of the salvage operation. The Tribunal said:

``The applicant had no right nor any expectation that he would receive anything over and above his normal wages except in the circumstance that the salvage was successful and that success was a condition precedent to the applicant's entitlement (and expectation) to a share in the salvage award, ultimately fixed by the arbitrator.

It is the condition precedent which severs the link between the applicant's services rendered on board the Lady Kathleen with the ultimate payment to the applicant of his share of the salvage award. That payment was made to the applicant because he was a person eligible to participate in the apportionment of the salvage award and because the salvage was successful. The payment was not made to the applicant for services rendered....

The payment received by the applicant was a classic `windfall gain', which does not have the attributes of income according to ordinary concepts and usages.''

Likewise the Tribunal rejected a submission on behalf of the Commissioner that the payment received by Mr Holmes was made assessable income under s 26(e). In so doing, the Tribunal placed emphasis upon the fact that in no sense could the amount paid to Mr Holmes be said to have any relationship with his employment with P&O, albeit that if he had not been an employee of that company he would not have been on board when the salvage operation took place. Accordingly the Tribunal concluded that the payment received by Mr Holmes fell outside s 26(e).

The conclusion of the Tribunal that the salvage payment to Mr Holmes was unrelated in any relevant sense to his employment with P&O was clearly correct. The law of Admiralty imposes on the owner of properties salved an obligation to pay those who save them. The obligation does not rest in contract. As Bruce J said in
The Hestia [1895] P 193 at 199-200:

``But salvage claims do not rest upon contract. Where property has been salved from sea perils, and the claimants have effected the salvage, or have contributed to the salvage, the law confers upon them the right to be paid salvage reward out of the proceeds of the property which they have saved or helped to save.''

Salvage reward is, as Stephen J said in
Fisher v The Ship ``Oceanic Grandeur'' (1972) 127 CLR 312 at 318:

``... payable to those rendering salvage services, that is to say, to those whose voluntary services to another vessel either save or assist in saving that vessel when in danger or recover or assist in recovering it from actual loss.''

(See also
``The Loretta'' v Bubb [1971] WAR 91 at 94;
The Ship ``Margaret Philippa'' v The Ship ``Santo Rocco di Bagnara'' (1991) 101 ALR 491).

The discretion exercised in assessing a salvage reward is very wide:

``looking not merely to the exact quantum of services performed, but to the general interests of the navigation and commerce of the country which are greatly protected by exertions of this nature.''

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(Per Street DJC in
The North Coast S.N. Company v the Ship ``Eugene'' (1909) 9 SR (NSW) 246 at 250; see also
Brown v The Ship ``Honolulu Maru'' (1924) 24 SR (NSW) 309 at 312, 315;
Hodson & Ors v Owners of the Ship ``Super Sport'' (1990) 26 FCR 157 at 167-169).

The right to a salvage award is personal to the salvor who renders the salvage service. It is not, in the case of a crew member, a derivative right through the ship owner or employer. The right may be enforced personally against the property saved by an action in rem or against the owner of the property by an action in personam.

Neither the Master nor the ship owner can by agreement bind the crew member in respect of salvage services already given by the crew member: see
Huddart Parker Ltd v The Ship ``Mill Hill'' (1950) 81 CLR 502 at 510; The ``Oceanic Grandeur'' at 334). Such right as a Master may have to bind the crew prior to the provision of salvage services is limited to the services to be performed, the conditions governing their performance and the remuneration, and may only be exercised out of necessity arising from the exigencies of or the circumstances existing at the time the services are needed: The ``Mill Hill'' at 510-511; The ``Oceanic Grandeur'' at 334.

We find it unnecessary to determine whether the payment made to Mr Holmes constituted income in ordinary concepts. If the payment falls within s 26(e) of the Act it will constitute assessable income and it would no longer seem to matter whether it might also form part of assessable income by virtue of being income in ordinary concepts within s 25:
First Provincial Building Society Limited v FC of T 95 ATC 4145 at 4151-4153. Neither party sought to argue to the contrary.

Section 26(e) includes in assessable income relevantly:

``... 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... services rendered by him...''

The words of the section are broad indeed, although not without limit, cf
FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540. They exclude, for example, a payment which is received by the recipient as a mere gift:
Scott v F C of T (1966) 117 CLR 514. To fall within s 26(e) there must be ``a real relation between the receipt and... services'':
Hayes v FC of T (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 54. Or, as Fullagar J put it in F C of T v Dixon (supra at ATD 90; CLR 564) the payment must have the ``character of a reward for services rendered or to be rendered''.

Smith v FC of T 87 ATC 4883; (1988) 164 CLR 513 Brennan J pointed to the width of the language of s26(e) reflected in part by the words ``in respect of'' and in part by the words ``directly or indirectly''. His Honour emphasised that a liability under the subsection would not arise merely because a taxpayer had rendered services to the person from whom the allowance etc was received. There must exist the necessary connection between the payment and the services rendered. His Honour pointed to the difficulty which arises where the allowance was paid voluntarily rather than pursuant to a legal obligation. That difficulty divided the Court in Smith.

There is no question in the present case, however, of the payment to Mr Holmes being voluntary. He had a legal right to it, even if it can be said that his participation in the salvage operation which gave rise to that obligation was voluntary.

Toohey J, in Smith (at ATC 4894; CLR 533) (in a judgment with which Wilson J agreed), cited with approval, as illustrating the width of the language of s 26(e), what was said by Dickson J of the Supreme Court of Canada in
Nowegijick v R (1983) 144 DLR (3d) 193 at 200:

``The words `in respect of' are, in my opinion, words of the widest possible scope. They import such meanings `in relation to', `with reference to' or `in connection with'. The phrase `in respect of' is probably the widest of any expression intended to convoy some connection between two related subject-matters.''

The question thus becomes whether there was a real connection between the payment received by Mr Holmes and the services rendered by him in the course of the salvage operation. Once the question is posed it is difficult to see how it can be answered other than in favour of the Commissioner. The fact that the obligation to make a payment to Mr Holmes arose only in the event that the salvage operation was successful can hardly operate to

ATC 4480

break the connection between the payment and the rendering of services. To the contrary, it renders clear that which the law of Admiralty itself makes clear, that the payment to a person participating in a successful salvage operation is a payment in recognition of the services which the participant in the salvage has performed. The payment to Mr Holmes was a reward for the services rendered by him and, as such, falls squarely within the language of s. 26(e).

It follows, in our view, that the appeal should be allowed; the decision of the Administrative Appeals Tribunal set aside and in lieu thereof it be ordered that the objection decision be confirmed.

In the absence of any agreement between the parties, the applicant must pay the Commissioner's costs. The order of the Court should be stayed for seven days in case the parties should notify the Court that there has been an agreement for costs, in which event the Court would give effect to that agreement.


(1) The Appeal be allowed.

(2) The decision of the Administrative Appeals Tribunal be set aside and in lieu thereof the objection decision of the Deputy Commissioner of Taxation be affirmed.

(3) No order as to costs.

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