Foster J

Federal Court

Judgment date: 15 May 1996

Foster J

The applicant, Janet Lynn Payne (``Payne'') brings two applications against the Commissioner of Taxation (``the Commissioner''). The first application (G461/1995) is an appeal against an Objection Decision given by the Commissioner by way of Notice of Objection Decision dated 14 June 1995. This Notice informed Payne that her objection dated 12 April 1995 to a Notice of Assessment dated 12 December 1994 had been considered and disallowed. The objection related to the assessment to tax of benefits received by her under a ``frequent flyer'' scheme to which I shall refer later.

The second application (G239/1995) relates to a Private Ruling given by the Commissioner in relation to the same subject matter. This Ruling, dated 22 February 1995, constituted a re-determination by the Commissioner pursuant to an order made by Hill J on 13 April 1994, in circumstances where his Honour had found that insufficient material had been placed before him to enable a decision to be made as to the correctness of the Ruling. It has been agreed in the present proceedings before me that this latter application should be adjourned pending the determination by me of the first application. The parties are in accord that the decision in the first application will enable them to resolve the second application. Accordingly, I shall order that the second application be adjourned to a date to be fixed.

The issues for determination in each application have been formulated by the parties as follows:-

``In respect of the year of income ended 30 June 1994:-

1. Whether the assessable income of the Applicant include[d] the value of the flight reward ticket between London and Bangkok issued to the Applicant's mother, pursuant to subsection 25(1) of the Income Tax Assessment Act 1936 (`the Act').

2. Whether the assessable income of the Applicant included the value to the Applicant of the ticket referred to in issue 1

ATC 4409

above, pursuant to subsection 26(e) of the Act.

3. Whether the assessable income of the Applicant included the value of the flight reward return ticket between Sydney and Tasmania issued to the Applicant's mother, pursuant to subsection 25(1) of the Act.

4. Whether the assessable income of the Applicant included the value to the Applicant of the ticket referred to in issue 3 above, pursuant to subsection 26(e) of the Act.''

The ``flight reward'' tickets referred to were issued at Payne's request to her mother as a result of her having accumulated the required number of frequent flyer points as a member of a scheme instituted by Qantas Airways Limited (``Qantas''). Before considering the issues and the parties' submissions in relation to them, I find it convenient to set out the background facts established by the material that has been placed before me.


Payne was employed by KPMG Peat Marwick, Chartered Accountants (``KPMG'') from August 1983 to December 1993. As a result of that employment she frequently travelled, for business purposes, on planes operated by Qantas. These flights were paid for by her employer, as were any accommodation expenses involved in these business trips. Qantas was a major audit client of KPMG, and it was KPMG policy that where possible its employees would travel for business purposes on Qantas flights, although this was not a requirement of Qantas.

On 13 October 1991 the applicant was travelling on KPMG business on a Qantas international flight from Los Angeles to Sydney. During this flight she was offered a brochure which was entitled ``Our Frequent Flyers Fly Free''. By this brochure she was invited to join the Qantas Frequent Flyer Program (``the Program''). A detachable application form accompanied the brochure. Payne decided to become a member of the Program. She completed the application form during the flight, detached it and returned it to a Qantas crew member. She paid the $95.00 membership fee at that time by using her own personal credit card.

Payne did not have any discussion with the crew member or any other employee of Qantas as to her being an employee of KPMG, nor did she discuss with any KPMG staff her intention to join the Program. She received no reimbursement from KPMG for the membership fee which she had paid.

Some weeks after her completion of the application form she received from Qantas a membership card for the Program, together with a booklet which contained details of the ``Program Rules'' and the ``Terms and Conditions of the Program''. She read the booklet and signed the membership card.

Thereafter she undertook several international flights with Qantas, as part of her business trips for KPMG. These flights were paid for by KPMG in the usual way, the travel having been booked directly with Qantas by KPMG's travel coordinator. In a few cases Payne made the bookings herself.

Between 13 October 1991 and 31 August 1993 Payne accumulated 190,139 membership points in the Program. 183,932 of these points related to air travel and hotel accommodation, the cost of which was met by KPMG on the basis that they were business related. The balance of the points related to expenditure incurred by her of a private nature.

In August or September 1993 Payne utilised 190,000 of the accumulated frequent flyer points to obtain airline tickets for her parents for the purpose of their travel from England to Australia to visit her. 140,000 of the points were used to obtain one business class round trip ticket between London and Bangkok (en route to Sydney) for her mother, and the remaining 50,000 points were used to provide round trip tickets between Sydney and Tasmania for both her parents. As will be seen, the frequent flyer scheme permitted the use of accumulated points of a member for the purchase of such tickets for parents.

The Commissioner assessed the value of these tickets as income of the applicant for the year ending 30 June 1994. The value has been agreed upon for the purposes of this litigation and, consequently, I am not asked to determine that issue. It is, however, necessary to determine the nature of the rights, if any, acquired by Payne upon her becoming a member of the Program, as submissions have been made to me based upon the alleged nature and content of those rights. In doing so, it is necessary to consider the terms and conditions of the Program which Payne joined.

ATC 4410

The Qantas frequent flyer program

When Qantas and Australian Airlines merged in 1992 the terms of the frequent flyer program which Payne had joined in 1991 were varied. It is agreed, however, that nothing turns upon these variations. Accordingly, I shall only make reference to the Program Rules and Terms and Conditions which applied when Payne became a member of the Program.

The invitation to join the scheme which Payne obtained on the flight from Los Angeles contained the following terms:-

  • ``• `Every single kilometre you fly earns you points: points that will quickly accumulate to reward you with a free flight...'
  • • `Additional points can be accumulated in other ways...'
  • • `You can choose to redeem your frequent flyer points for first business or economy class travel, for yourself or virtually any member of your family'.''

The application form which she filled in contained the following statement:-

``I wish to join the Qantas Frequent Flyer Program and confirm that I have read and accepted the summary of terms and conditions applicable to membership. I also accept that on occasions the facilities advertised may be modified or withdrawn at Qantas' discretion.''

Other material provisions were as follows:-

  • ``• `As a Qantas frequent flyer, every kilometre you fly with us will earn you points towards a free flight'
  • • `You can choose to redeem your frequent flyer points for a free flight reward...'
  • • `Feel free to assign any tickets you may earn through Qantas flight rewards to any member of your family covered in the list below...'
  • • `Tickets may not be sold or exchanged for any other form of consideration, and points may not be pooled or assigned to any other member.'
  • • `Tickets will be valid for one year or until December 15 of the year in which your points expire, whichever comes first.'
  • • `Reservations may be changed with the payment of a $50 per person service fee.'''

Under the heading ``Terms and Conditions'' the following appeared:-

  • ``2.1 Qantas reserves the right at all times to make any changes in the program rules, including but not limited to changes [to] rules governing... continued availability of awards... and expiry of accrued points.
  • 2.2 These changes may be made by Qantas at any time, without notice, in its sole discretion.
  • 2.3 Qantas is not liable for any Qantas flight reward not being available or being withdrawn.
  • 3.1 Qantas expressly reserves the right to terminate or materially alter the Qantas frequent flyer program at any time without notice.
  • 4.1 Any breach of these terms and conditions... may result in... cancellation of accrued points Qantas frequent flyer rewards or other benefits.
  • 4.3 Qantas flight rewards, tickets and any accumulated points cannot be sold, assigned, transferred or otherwise redeemed (whether for valuable consideration or otherwise) except in accordance with the program rules.
  • 4.4 Qantas reserves the right to cancel any ticket issued pursuant to a Qantas flight reward which was sold, transferred, assigned or otherwise redeemed in breach of these terms and conditions and program rules at any time without liability.
  • 5.2 Qantas reserves the right to... refuse carriage to any passenger it suspects to be travelling in breach of these terms and conditions and the program rules.
  • 6.1 Signature by a member of his or her membership card shall be taken to be acceptance of these Terms and Conditions and membership of the Qantas Frequent Flyer Program.''

Payne signed her membership card and accordingly became a member of the Program. It is not contested that the points that she earned through travel with Qantas and in other aspects of the Program were duly earned by her as a member.

Legal effect of membership of the program

The Commissioner contended that no contract existed between Payne and Qantas until such time as either an air travel ticket was issued to Payne's parents or, construing the

ATC 4411

ticket as an offer of carriage upon stated conditions, that offer was accepted by the undertaking of the flight. As I apprehend it, the submission is important to the respondent as a basis for a further submission that the benefit of free travel in this case was not causally connected with any valid and enforceable contract between Payne and Qantas.

The submission that no contract existed relied upon certain passages in the judgments of Barwick CJ and Jacobs J in
MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125. The question for determination in that case was whether the airline ticket customarily issued by the airline to its passengers was an ``agreement or any memorandum of an agreement'' chargeable with stamp duty under the relevant provisions of the Stamp Act 1921-1971 (WA). The ticket incorporated certain ``conditions of carriage''. One of those conditions stipulated that the airline company was not a common carrier and reserved ``the right to refuse to carry any passenger... without assigning any reason therefore''. Another condition furnished to the company ``the right at any time to abandon any flight or... to cancel any ticket or booking of any passenger...''. Barwick CJ (at p 132-133) said:-

``It is, in my opinion, clear that the issuing airline operator does not by the terms of the ticket assume or offer to assume any obligation to carry the intending passenger. Clauses 2 and 5 made this particularly clear. The case is not, in my opinion, one in which an obligation is assumed or an offer of an obligation made from or upon which obligations, exemptions or limitations are stipulated. The exemption of the ticket in this case fully occupies the whole area of possible obligation, leaving no room for the existence of a contract of carriage.''

He further said that the issue of the ticket was ``mainly a receipt for the payment of the fare...'', that the fare itself was a prepayment which the airline operator earned when it conveyed the passenger, and that ``the airline operator was not in contractual relations with the intending passenger until it had provided him with a seat on the aeroplane''.

Both Stephen and Jacobs JJ decided the case on the basis that the ticket as such did not constitute an agreement or memorandum of agreement. It was an offer only and no contract came into existence until the intending passenger presented the ticket and embarked upon the carriage. The document was therefore not dutiable. However, Jacobs J appears to be in accord with the reasoning of Barwick CJ, as a further ground for rejecting the dutiability of the ticket. He refers to the condition giving to the company the right to abandon any flight and says of it (at p 148):-

``By this clause, any enforceable promise to carry which might on the present assumption be implied between airline and passenger from the issue of the ticket is negative. The ticket may be cancelled by the company at any time and all that will then happen will be that the passenger shall be entitled to a refund, and the company shall not under any circumstances be under any further liability to the passenger. If there could be extracted otherwise from the document an agreement between the appellant and the passenger it would, by such a clause, be made nugatory. The appellant undertakes no executory obligation which creates rights in an obligee.''

The case, quite obviously, depended upon its own special circumstances and the wording of the conditions in question. In the circumstances of its decision it is by no means clear that the cited passages form part of its ratio decidendi. In any event I do not regard them as evincing any intention on the part of Barwick CJ and Jacobs J to lay down any general principle of contractual construction. This would appear to be the view taken by Wilson and Toohey JJ in
Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197, a case involving a passage ticket for a cruise on a vessel operated by the appellant company. Their Honours made reference to MacRobertson Miller at pages 206-207, where their Honours referred to the passage cited above from the judgment of Barwick CJ as to the exemption occupying the ``whole area of possible obligation'', but remarked that ``this could not be said of the conditions set out in the ticket issued by the present appellant''. Their Honours also said (at 207):-

``The ratio decidendi of the decision in MacRobertson Miller Airline Services lies in the proposition that there was no agreement or memorandum of agreement in writing, hence nothing that was chargeable with stamp duty.''

ATC 4412

Brennan J, at pages 226-227 made remarks to the like effect.

I am quite satisfied that Payne, on payment of the consideration of $95.00, acquired contractual rights against Qantas. The contract was of the type considered in
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537. The condition enabling Qantas to make changes in the Program Rules, including those relating to the availability of awards and the expiry of accrued points, and to terminate the Program at any time without notice were not, in my view, conditions precedent to the formation of a binding contract; they were conditions subsequent, upon which, in certain circumstances, Qantas could rely to avoid its obligations under the contract. Their existence did not prevent the contract coming into existence.

Under the contract which, in my view, came into existence when Payne's offer to join the Program and her payment of $95.00 were accepted and membership granted to her, Payne was entitled to accrue points in accordance with the Program. Upon the accrual of the prescribed number of points she was entitled to apply for the issue of a ``reward ticket''. Under the terms of the contract she was entitled to request that the ticket in fact be issued to her parents. This occurred within the rights conferred upon her by the contract. The fact that the actual contract of carriage for her parents' flight might not have come into existence until they actually embarked upon the flight is, in my view, nothing to the point.

It follows from what I have said that I do not accept what appeared to be an alternative argument on this aspect of the case advanced by the Commissioner, namely that no contractual rights existed prior to the issue of the flight ticket. In this argument it was submitted that the Program amounted to no more than a standing offer or perhaps only an invitation to treat conferring no immediate contractual rights. For reasons already given I reject this analysis of the situation.

I turn, then, to the questions whether Payne incurred any liability to tax under ss 25(1) or 26(e) of the Income Tax Assessment Act 1936 (Cth) (``the Act'').

Was there liability to tax under s 25(1)?

In the Private Ruling which was the subject of hearing before Hill J referred to above, it appears that the Commissioner eschewed any reliance upon s 25(1), being satisfied, at that stage, that nothing received by Payne pursuant to her membership of the Program could be characterised as income according to ordinary concepts. However, in this appeal, the Commissioner has submitted that the provision, at Payne's request, by Qantas of the relevant flight tickets to her parents constituted a derivation of ``income'' by her pursuant to that section.

The concept of ``income'' was fully considered by a Full Court of this Court in
FC of T v Cooke and Sherden 80 ATC 4140; (1980) 29 ALR 202, where a comprehensive review of earlier decisions was undertaken at ATC pages 4146-4150; ALR pages 210-214.

Their Honours, Brennan, Deane and Toohey JJ (at ATC 4147; ALR 211) referred to the well-known words of Halsbury LC in
Tennant v Smith [1892] AC 150 at 157:-

``I come to the conclusion that the Act refers to money payments made to the person who receives them, though, of course, I do not deny that if substantial things of money value were capable of being turned into money they might for that purpose represent money's worth and be therefore taxable.

The illustration given in the argument of the mode of arriving at a trader's profits, and the mode of treating his stock-in-trade, suggests that money's worth may be treated as money for the purposes of the Act in cases where the thing is capable of being turned into money from its own nature.''

Cooke and Sherden was a case where the taxpayers sold soft drinks door-to-door. The soft drink manufacturers, as an incentive scheme, offered to provide holidays to their retailers who met certain performance criteria. The holidays were expressly made non- transferable and no cash payment was made in lieu of them. The Commissioner for Taxation had sought to include in the taxpayers' income the cost to the manufacturer of the holiday. The Court said (at ATC p 4148; ALR p 212):-

``If a taxpayer receives a benefit which cannot be turned to pecuniary account, he has not received income as that term is understood according to ordinary concepts and usages.

The conversion of an item into money may occur, of course, in a variety of ways. It is

ATC 4413

not desirable (even if it be possible) to define in advance the ways in which conversion may possibly occur in order that a non-pecuniary item of receipt might be treated as an item of income. However, it will not often occur that a benefit to be enjoyed by a taxpayer cannot be turned to pecuniary account if the benefit be given up, or if it be employed in the acquisition of some other right or commodity.

If one were so to vary the facts of the present case that the tickets with which the taxpayers were provided could be surrendered by them for cash, the benefit which, on that hypothesis, the taxpayers would have received would have been converted into money, and would have constituted income if the origins of the receipt gave that character to it. Indeed, as the authorities show, it is not necessary that the pecuniary alternative be available by way of direct conversion of the benefit received (
Heaton v Bell (1970) AC 728;
Abbott v Philbin (1961) AC 352).''

After further consideration of authority the Court continued in a passage, a portion of which was italicised (at ATC 4149; ALR 213):-

``... the respondents in the present cases could not have turned the benefits in fact received by them to pecuniary account. It is immaterial that the respondents would have had to expend money themselves had they wished to provide the holidays for themselves. If the receipt of an item saves a taxpayer from incurring expenditure, the saving is not income: income is what comes in, it is not what is saved from going out. A non-pecuniary receipt can be income if it can be converted into money; but if it be inconvertible, it does not become income merely because it saves expenditure.''

The analogy with the present case is obvious. The reward tickets available because of the accrual of the required number of points could be used only by the Program member or his or her permitted nominee. They were not transferable and, if sold, were subject to cancellation. They were not money and, in my view, could not be turned to pecuniary account. They could not therefore be regarded as ``income'' within the meaning of s 25(1).

I should note that a submission was but faintly made on the part of the Commissioner that it was conceivable that the recipient of a ticket under the scheme could transfer it to a permitted family nominee in consideration of an undisclosed payment. Such a transaction would be in flagrant breach of the terms of the contract, would render the ticket liable to cancellation and would, undoubtedly, smack of fraud. I cannot entertain the submission as having been seriously put. I reject it.

Accordingly, in my view, the benefit received by Payne, in the form of tickets issued to her parents, was not taxable under s 25(1) of the Act.

Is the benefit taxable under s 26(e)?

Considerable argument has been addressed as to the meaning and application of this section, and it is desirable, at this stage, to set it out in full as follows:-

``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...''

It was argued on behalf of Payne that this section could not apply to attract into the tax net the benefits accruing to her through membership of the Program. Reference was made to the seminal case of
Constable v FC of T (1952) 10 ATD 93; (1952) 86 CLR 402, in which the High Court of Australia gave detailed consideration to the section. In that case, a provident fund had been established by the appellant's employer into which employee members paid 10% of their salaries and employer members paid a similar amount. An alteration to the regulations governing the fund enabled the appellant employee to withdraw from it the amounts shown in his account. The Commissioner of Taxation included in his assessable income for the relevant year so much of the sum withdrawn as corresponded with contributions made for him by the employer, together with interest thereon. It was held that these monies were not caught by the section.

ATC 4414

The majority (Dixon CJ, McTiernan, Williams and Fullager JJ) said, in relation to the section (at ATD 94; CLR 415):-

``Upon the text of the paragraph it would seem that the liability of the sum, or any part of the sum, received by the present taxpayer during the year of income to inclusion in his assessable income must depend upon the answers to one or other or all of the following questions. Can that sum or any part of it be described as an allowance, gratuity, compensation, benefit, bonus or premium? If so can it be said of it that it was `allowed, given, or granted to him' during that year? If an affirmative answer is given to these two 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'? The employment or services must be employed by, or services rendered to the Shell Company of Australia Ltd [the employer]. It is evident that it is enough for the taxpayer if any of the foregoing questions is answered in the negative.''

Thus, there are relevantly three requirements under s 26(e), all of which must be met before the flight reward tickets can be treated as assessable income. First, there must be a ``... benefit...''. Secondly, that benefit must be ``allowed, given or granted'' to Payne. Finally, the benefit must be allowed, etc, ``in respect of... any employment... or services rendered'' by Payne. I turn first to the second of these requirements.

Is the benefit ``allowed, given or granted''?

The majority in Constable decided that case on the basis that the second requirement was not fulfilled. They considered the regulations governing the administration of the fund and the basis upon which the taxpayer had withdrawn the relevant monies. They then said (at ATD 95-96; CLR 417-8):-

``On these facts we are of the 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 etc. `allowed given or granted to him' during the year of income under assessment.

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 s. 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 s. 26(e) (there being no other applicable imposition of liability) it is not part of the assessable income.''

This reasoning was relied upon by counsel for Payne. In the same way as the payment to Constable occurred by virtue of a contingent contractual right becoming absolute and was not, therefore, the ``allowing, giving or granting to him of any... benefit'', the provision of the free airline ticket in the present case, which occurred by reason of the crystallising of a contractual entitlement, did not fall within the wording of the section.

Counsel also relied on two further cases in support of this argument. In
Freeman & Ors v FC of T 83 ATC 4456, the taxpayers were directors of a company which carried on a consulting business. The company ceased to carry on the business and sold it to another company controlled by the same directors. Some six months after the sale it was decided by the directors that they should seek payment to them of entitlements under a superannuation fund established for their benefit by the old company. These payments were made to them by the trustees of the fund. It was contended by the Commissioner of Taxation that the amount

ATC 4415

of the payments were assessable under s 26(e) of the Act. It was held by a Full Court of this Court that the payments were not so assessable. Northrop and Fisher JJ in their judgments (at 4473) said:-

``... The Commissioner contended that each amount was assessable under sec. 26(e) of the Act. In respect of these amounts it cannot be disputed that each of the taxpayers had, in law, pursuant to the terms of each of the trust deeds, a contingent or conditional entitlement. Counsel for the taxpayers based his submissions upon the statement of principle of the majority of the High Court in Constable v. F.C. of T. (1952) 86 C.L.R. 402 when dealing with what in our opinion was a very similar situation. In Constable's case the taxpayer was in certain specified circumstances entitled to withdraw from the fund and obtain payment of his benefits. In the present case the taxpayers contended they were, on the old company ceasing business, each entitled to require payment of his respective share of the assets of the particular fund.''

Their Honours set out the passages from Constable's case which I have cited above.

Having held, after consideration of submissions to the contrary, that each taxpayer was entitled to the particular sum which he had received from the trustees of the directors' fund, their Honours continued (ATC 4474):-

``Counsel for the Commissioner sought to distinguish Constable's case on the ground that in this matter, by way of contrast with the facts of Constable's case, the act which effected the indefeasible vesting, namely the cessation of business, was the act of the old company. In our opinion this is nothing to the point, and in any event as it happens the relevant act in Constable's case was effected by the trustees with the consent of the companies and for the purpose of relieving them from their obligations under the terms of the deed. The relevant question is whether the act or event which caused the indefeasible vesting could be characterised as the granting of an allowance or gratuity and not the extent to which the old company was, directly or indirectly, a party to the particular event. We reject this submission as we would reject the attempt to distinguish Constable's case on the ground that there the employee's act or election brought about the vesting. In our opinion there is no ground upon which Constable's case can be distinguished either in reliance upon a different fact situation or the terms of the particular deeds. The end result is that the taxpayer's appeal should in respect of payments received from the directors' fund and the staff fund be allowed, on the ground that sec. 26(e) has no application and each amount is a capital sum.''

It may be noted that the Court, in holding that s 26(e) did not apply to the receipt, was not unmindful of the fact that the original employer company, as in Constable's case, had not been entirely unconnected with the making of the payment. The point was that the payment itself could not be characterised as the granting or giving of a relevant benefit within the meaning of the section, it being the paying out of a contractual entitlement.

Reliance was also placed by counsel for Payne upon the decision of the Full Court of this Court in
FC of T v McArdle 89 ATC 4051 as a further illustration of the application of the reasoning in Constable's case. I do not need to consider this case in these reasons. I am satisfied that the submission made on behalf of Payne is correct. The provision of the free travel by Qantas to her parents at her request, consequent upon the accrual to her of the requisite number of ``points'', resulted from a personal contractual entitlement on her part and could not be properly characterised as a ``benefit... given'' within the meaning of the section. I should add that it was conceded that those were the relevant words of the section upon which attention should be focussed in this aspect of the case.

Are the flight reward tickets a ``benefit'' within s 26(e)?

In relation to the first requirement referred to by the majority in Constable's case, it was also submitted on behalf of Payne that there was no ``benefit'' for the purposes of s 26(e) insofar as the ``benefit'' contemplated by the section must be one which could properly be described as a receipt of ``income'' according to ordinary custom and usage. This submission is based upon earlier decisions which have to a significant extent been called into question by the decision of the High Court of Australia in
Smith v FC of T 87 ATC 4883; (1987) 164 CLR 513.

ATC 4416

The present position has been set out by Hill J in
First Provincial Building Society Limited v FC of T 95 ATC 4145 at 4153 where his Honour said:-

``In relation to para. (e), the view was expressed that that paragraph did not bring to charge any receipt which was not income according to ordinary concepts: Hayes v FC of T (1956) 11 ATD 68 at 72; (1956) 96 CLR 47 at 54; Scott v FC of T (1966) 14 ATD 286 at 292-293; (1966) 117 CLR 514 at 525-526. That view was rejected by Brennan J in Smith v FC of T 87 ATC 4883 at 4888; (1988) 164 CLR 513 at 523, specifically left unresolved by Toohey J (at ATC 4891-4892; CLR 529) with the additional comment, however, that:

`... having regard to the breadth of language used in sec. 26(e), there are strong arguments for the conclusion that receipts that might not ordinarily be regarded as income are included.'

It was not referred to at all by Wilson J, the remaining member of the majority who agreed generally with the reasoning of Toohey J and whose judgment considered only the specific statutory language of the paragraph. The minority judgment of Gaudron J, with whose judgment Deane J agreed, also made no reference to the problem.''

As I consider that this case can be disposed of on other grounds, I think it both unnecessary and undesirable that I further consider this submission. I have, of course, already held that the benefit conferred upon Payne as a result of her membership of the scheme, could not amount to ``income'' according to ordinary concepts because of its non-transferability for value.

Are the flight reward tickets sufficiently connected to Payne's employment?

The remaining question in the case was one to which considerable argument was directed. That is whether the provision of free travel to Payne was ``in respect of, or for or in relation directly or indirectly,'' to her ``employment'' with KPMG. It was the Commissioner's contention that this requirement was clearly satisfied insofar as the relevant points would not have been earned by Payne under the Program had she not undertaken the necessary flights in the course of her employment, it being emphasised that the flights (and also qualifying accommodation expenses) had been paid for by her employer.

In making this submission, counsel for the Commissioner relied heavily upon Smith's case. Before considering this case, however, it is necessary to have regard to several earlier decisions of high authority in relation to the interpretation of this aspect of the section. To this end, reference should first be made to the decision of the High Court in
FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540.

In that case the taxpayer, Dixon, had left the employment of his employer for the purpose of enlisting for service as a soldier in the Australian Army in the Second World War. He did so in circumstances where there was no agreement or understanding that he would return to that employment after the war. Nevertheless, the employer made regular payments to him of amounts representing the difference between his Army pay and the salary he would have received had the employment continued. The Commissioner was, in fact, successful in bringing these payments to tax on the basis that they were income receipts according to ordinary concepts. However, he also argued that they were assessable pursuant to s 26(e) of the Act. This submission was unsuccessful on the basis that the section's requirement of connection with employment was not made out. Dixon CJ and Williams J (at ATD 83-84; CLR 553-4) dealt with this aspect of the case in the following terms:-

``... There can, of course, be no doubt that the sum of £104 represented an allowance, gratuity or benefit allowed or given to the taxpayer by Macdonald, Hamilton & Company [the employer]. Our difficulty is in agreeing with the view that it was allowed or given to him in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him. It is hardly necessary to say that the words `directly or indirectly' extend the operation of the words `in relation to'. In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause.... We

ATC 4417

are not prepared to give s. 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination.''

McTiernen J (at ATD 87; CLR 559) dealt with the matter as follows:-

``The scheme under which Macdonald, Hamilton & Company paid the £104 to the respondent grew out of relations engendered by the contractual relationship. The scheme was ultra that relationship. It had nothing to do with the cash nexus between the firm and the respondent. But for the circumstance that he was in their employment when he enlisted he would not have received the 104. This is not a circumstance which necessarily made it a payment in respect of, or for or in relation directly or indirectly to, his employment. The case stated does not show that the sum flowed from the respondent's employment or his military service. It was a voluntary contribution made for a special purpose. The scheme under which it was paid was devised to save the firm's employees from financial loss due to enlistment. There was no connection between the payment and the services rendered by the respondent for Macdonald, Hamilton & Company or between the payment and his military duties.''

The operation of the section was also considered by Windeyer J in
Scott v The Commissioner of Taxation (1966) 117 CLR 514. In that case a solicitor had acted for a particular client over many years and had received fees for so acting on a professional basis. The two had become friends over the period and the client gave the solicitor the sum of 10,000. This payment was found to be a gift not being made or received in discharge of any obligation. The Commissioner sought to bring the amount to tax pursuant to s 26(e). Windeyer J held that it was not caught by the section. His Honour having set out the text of the section discussed it (at 524-526) as follows:-

``Counsel for the Commissioner pointed to the wide words `in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him' and said that they must be given their full meaning and effect. This of course is so. But what is their full meaning and effect? That is the question. It is no doubt an orthological question. But it is not to be answered by reading the words in the abstract with the aid of a dictionary. Their meaning and the limits of their denotion must be sought in the nature of the topic concerning which they are used. They are in an income tax statute. Dixon C.J. and Williams J. said in the judgment that I have mentioned, `We are not prepared to give s. 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination' (1952) 86 C.L.R., at p. 554. This remark was inverted in the argument for the Commissioner to support a proposition that if a payment could be said to be in any sense directly or indirectly a consequence of services rendered its receipt was income. But so put the proposition merely shifted the question into a new semantic area in which emphasis was placed upon the words `indirectly' and `consequence'. It was said that if a testator left by will a legacy to a servant in his employment whose wages had been fully paid, and by his will expressed the legacy as given because of long and faithful service, it would be within the words of s. 26(e) and thus be income of the legatee. I do not think that the words of s. 26(e) compel that conclusion. And I do not think that a legacy given by a grateful testator to, say, his physician would ordinarily be income in his hands. And the position would, it seems to me, be no different if the same gifts were made, not by will but by the donor in his lifetime. That is not because the words of s. 26(e) could not describe such gifts but because it stands in an Act the purpose of which is to impose a tax on income. To take another illustration: suppose members of a society made a gift to a man because he had rendered some special services to the society. In terms such a testimonial gift, whatever form it took, money or plate or a

ATC 4418

picture, although the product solely of the donors' appreciation of the donee's services would be within the words of s. 26(e). But would it therefore necessarily be income of the recipient liable to tax? I think not. And would a person who on restoring lost property to its owner was given a reward for his services be taxable on the basis that the reward was part of his income? Again I think not, but again the words of s. 26(e) would cover the case.

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 recognized 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 taxgatherer'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.''

Although his Honour has used the expression ``income according to general concepts'' it is, in my opinion, clear that he was not suggesting that s 26(e) was restricted in its operation to receipts to a taxpayer of money or benefits which were capable of being converted into money. This is quite clear from his earlier reference to receipts including ``the value to him of everything that he in fact gets, whether in money or in kind and however it be described''. Consistently with the whole theme of the passage quoted his Honour was, I feel confident, merely emphasising that, if it were to fall within the section, the receipt or benefit having value to the taxpayer should also bear the impress of something earned through employment or in the rendering of service.

There is another passage in his Honour's judgment (at 527) which I find of considerable assistance in the resolution of the present case. It reads as follows:-

``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 v. Federal Commissioner of Taxation (1956) 96 C.L.R. 47, at p. 56 Fullager 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 taxpayer's activities must be such that the receipt is in a relevant sense a product of them.''

His Honour finally held (at 528) that the receipt was not ``in a relevant sense given or received as a remuneration or recompense for services rendered so as to form part of his assessable income''.

In the case of
Hayes v FC of T (1956) 11 ATD 68; (1956) 96 CLR 47, referred to in the passage cited above, Fullager J, after setting out the text of the section, said (at ATD 71-72; CLR 54):-

``... I doubt very much whether s. 26(e) has the effect of bringing into charge any receipt which would not be brought into charge in any case either by virtue of the general conception of what constitutes income or by virtue of the definition of `income from personal exertion' in s. 6. The words `directly or indirectly' are doubtless intended to cast the net very wide, but it is clear that there must be a real relation between the receipt and an `employment' or `services'.''

ATC 4419

The case was one in which the Commissioner sought to bring to tax the value of shares received by the taxpayer Hayes in circumstances to which it is not necessary to make reference. His Honour, however, (at ATD 73; CLR 56) made a statement in relation to this receipt which is of general import in relation to the construction and application of the section. His Honour said:-

``... What is decisive, in my opinion, is the fact that it is impossible to relate the receipt of the shares by Hayes to any income- producing activity on his part. It is impossible to point to any employment or `personal exertion,' of which the receipt of the shares was in any real sense an incident, or which can fairly be said to have produced that receipt.''

It is clear, of course, that these statements of principle present severe obstacles to the Commissioner's claim to tax the value of the Frequent Flyer tickets as part of Payne's income for the relevant year. The Commissioner, however, submits that, as I understand it, these principles must be seen as having undergone considerable dilution as a result of the decision of the High Court in Smith's case. Put simply, the Commissioner's contention is that, as a result of that case, the mere fact that the relevant points were earned by Payne on flights paid for by her employer, and through utilisation of accommodation similarly financed, is sufficient to bring the value of the tickets into the tax net. This result is irrespective of the fact that the provision of the ticket came as a result of a purely personal contractual relationship between Payne and Qantas in respect of which the employer KPMG at no time played any part. I turn, then, to consider Smith's case.

The decision in Smith's case

It may be noted at the outset that, in Smith's case, the Commissioner was successful in the High Court by a majority of three to two, the point in issue being attended by such doubt and difficulty as to be productive of such a division of opinion.

The facts of the case may be stated briefly. A bank, pursuant to its policy of encouraging employees to further their knowledge of banking by undertaking relevant courses of study, introduced a scheme called the ``Encouragement to Study'' scheme. Under this scheme payments were made to employees, in accordance with a scale, for the successful completion of approved courses. Pursuant to this scheme the taxpayer Smith, an employee of the bank, received the amount of $570.00 upon completion of an approved course. The payment was not one for reimbursement of expenses incurred. It was paid purely as a consequence of the successful completion of the course. It was held by the majority (Wilson, Brennan and Toohey JJ) that the payment was assessable income under s 26(e) of the Act.

Wilson J, who agreed with the conclusion and generally with the reasoning of Toohey J, held the payment to be taxable. His Honour, after stating that the fact that the payment was a voluntary gift by the bank was inconclusive, entered upon a consideration of Dixon, Hayes and Scott. In relation to Dixon his Honour, after remarking that the payments in that case were received during the year ended 30 June 1943, the employment relationship having terminated in July 1940, made (inter alia) the following comments (at ATC 4885; CLR 517-518):-

``... In their joint judgment (1952) 86 C.L.R., at p: 554 Dixon C.J. and Williams J. noted that only `a mere historical connection' existed between the employment and the payments, this being insufficient to bring the money received within the terms of sec. 26(e). Their Honours made it clear that for a benefit to fall within the paragraph it must at least constitute `a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination'. There is, of course, a contemporaneous relation between the employment and the payment in the present case. McTiernan J. (1952) 86 C.L.R., at pp. 558-559, distinguished between the contractual relations arising from the employment and personal or social relations between employer and employee. In his Honour's view, the scheme of supplementary payments fell outside the contractual relationship; although the taxpayer would not have received the payment but for the fact that at one time he had been in the employment, that circumstances did not necessarily make it a payment in respect of, or for or in relation directly or indirectly to, the employment.

ATC 4420

J. (1952) 86 C.L.R., at pp. 562-563, resolved the issue on his view of the evidence, finding that the payments were made because of, and as a reward for, the taxpayer's enlistment and for no other purpose. Fullager J. (1952) 86 C.L.R., at p. 564, expressed his view as follows:

`The payments were made irrespective of any services given by an employee as employee. The same bounty was available to one who had served for one month or for ten years... The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment. The payment does not partake in any degree of the character of a reward for services rendered or to be rendered.'''

His Honour said (at 518) of Dixon that its facts stood ``in marked contrast to those in the present case and little that was said by the Court in that case assists the appellant''.

His Honour also found Hayes of little assistance, in that Fullager J had not found it necessary to ``consider in any detail the application of s 26(e)'', the result of the case being ``determined by the finding of Fullager J on the facts that the gift was in no true sense a product or incident of any employment in which Hayes had engaged or any business which he had carried on''.

So far as Scott was concerned, he found that the facts in that case bore no correspondence to the facts under consideration.

His Honour then made the following observations arising from a consideration of the judgments in those cases (at ATC 4886; CLR 519):-

``Before leaving these cases, it is to be observed that the several judgments therein contain references to the fact that the benefit then under consideration did not bear the character of a reward or remuneration for services rendered. This is, of course, one test relating to the operation of sec. 26(e). But it is not the only test. The paragraph will be attracted if the benefit bears the necessary relation either to the employment of the taxpayer or to services rendered by the taxpayer. The phrase `services rendered' describes work actually performed by the taxpayer, whether in the capacity of a servant, independent contractor or otherwise. The breadth of operation of the phrase must `draw in situations not encompassed by the term ``employment'' ': FC of T v. Cooke and Sherden 80 ATC 4140 at pp 4150-4151; (1980) 29 A.L.R. 202 at pp. 214-215. In such situations, in order to constitute income, the benefit must represent, directly or indirectly, a reward or remuneration for those services. On the other hand, there may be benefits which are taxable under sec. 26(e) because of their relationship to the ongoing `employment' relationship of the taxpayer to his employer. In this context, the benefit need not be related to any particular service rendered to the employer. It will be sufficient if it is allowed, given or granted to the taxpayer in respect of, or for or in relation directly or indirectly to his employment.''

The problem in the case was, according to his Honour, whether the facts established the requisite relationship between the benefit received by Smith, and his employment, a mere temporal connection between the employment and the payment being insufficient to establish that relationship. His Honour pointed to it being unwise ``to expect any paraphrase to provide a final or overriding test'' as ultimately it was ``the words of the statute that must prevail''. However, he found it helpful to ask whether the benefit was ``a consequence'' of the employment or whether it was a ``product or incident'' of it.

His Honour found that the payment to Smith could properly be characterised as a product, incident or consequence of his employment, being ``the product of a scheme embodied in the rules of the bank, and administered within that organization, designed to encourage not only the efficiency of employees within but to provide them with the incentive to advance their prospects of promotion with the bank''.

Brennan J also considered the effect of Dixon, Hayes and Scott. He referred to the passage already cited from the judgment of Dixon CJ and Williams J in Dixon as indicating that ``some causal relationship is required'' between the payment to the taxpayer and ``either his employment or services he has rendered''. He was satisfied that it was sufficient to attract s 26(e) ``that the allowance be paid to an employee in consequence of his employment''. He then considered the question ``when is an allowance paid in consequence of

ATC 4421

employment?''. His Honour approached this question by consideration of the judgments of Fullager J in Hayes and Windeyer J in Scott. His Honour stated that these cases raised two related issues for consideration, the first being, ``does s 26(e) bring to charge only those pecuniary benefits that are `income according to general concepts'?'', and the second being ``must a gift to an employee be paid in consequence of an income producing activity on the part of the employee if it is to fall within s 26(e)?''.

His Honour differed from Windeyer J in relation to the first issue, on the basis that Windeyer J was unduly restricting the ambit of s 26(e) by confining it to ``the value of those benefits which are, according to general concepts, of an income nature, being benefits received in kind rather than in money''. Of course, this comment depends upon a view that Windeyer J in Scott was indeed seeking so to restrict the ambit of the section. For reasons I have already given and, of course, with due respect, I tender the view that Windeyer J was not seeking to impose this restriction. That aside, however, it is clear that Brennan J's judgment emphasised that a benefit can fall within s 26(e) even if it has value only to the taxpayer and cannot otherwise be turned to pecuniary account. Thus, in the present case, the non-saleability of the ticket entitlement would not take that entitlement outside the ambit of the section.

In respect of the second issue Brennan J pointed to the fact that when Fullager J and Windeyer J spoke of income-producing activity ``as if it were synonymous with employment or... services rendered'', they could have been making a distinction between income-producing and non-income-producing aspects of employment, which had no basis in s 26(e). Whether or not this distinction was so intended, Brennan J interpreted this part of the section in the following way (at ATC 4888; CLR 523):-

``... Employment is more than the activity for which an employee is remunerated: employment comprehends all aspects of the relationship of employer and employee in the particular case save those aspects which are merely personal. If a distinction is to be drawn between the income-producing activity which is an aspect of employment and the entirety which constitutes employment, sec. 26(e) looks to the relationship between the entirety and the payment of the allowance.''

Although the contrary was not argued on behalf of Payne, it is clear from this interpretation that travel on behalf of her employer, even if not income-producing as such, must relevantly be regarded as an aspect of her employment for the purposes of the section.

Brennan J went on to indicate (at ATC 4888; CLR 523) that:-

``The difficult problem which arises under s. 26(e) is to identify the nature and degree of the relationship, if any, between the allowing, giving or granting to a taxpayer of an allowance, etc. on the one hand and the taxpayer's employment or the services rendered by him on the other.''

He said (at ATC 4889; CLR 524) in this regard:-

``... The allowance was paid because the bank had a scheme for paying allowances to its employees and the appellant fulfilled the two requirements on which the payment of allowances under the scheme depended: the appellant was employed by the bank and he completed a prescribed course. The question of law that arises on those facts is whether such a payment was made in consequence of the appellant's employment.''

Smith's case was, of course, concerned with voluntary payments made by the employer, there being no contractual obligation to provide them. There is undoubtedly a similarity between such payments by an employer to an employee and payments made to an employee by some third person who does not make them as a result of any contractual obligation to the employer or employee. To that extent, of course, statements made in Smith relating to voluntary payments by the employer are of not inconsiderable assistance in the resolution of the present case. In this regard, the following passage in the judgment of Brennan J should be recorded here.

His Honour said (at ATC 4889; CLR 525):-

``... An allowance paid voluntarily to an employee for reasons extraneous to the employment is outside sec. 26(e). But if the payment of the allowance is made because of some aspect of the employment it is within the tax net, whether or not the

ATC 4422

material aspect of the employment is an income-producing activity.''

His Honour then considered the facts and aspects of the judgments in Dixon, a case where, it will be remembered, voluntary payments were made to the ex-employee soldier by the employer, the Court unanimously holding that the payments were not made in respect of or in relation to the previous employment by the employer. His Honour referred (at ATC 4890; CLR 526), with evident approval, to a passage from the judgment of Fullager J in which the reason for payment to Dixon was explained. This passage is as follows:-

``The whole substance of the matter is accurately stated by Fair J. in
Louisson v. Commissioner of Taxes ((1942) N.Z.L.R. 30 at p. 34), where his Honour speaks of such moneys as `given out of a sense of appreciation of sacrifices made on the enlistment of employees... and as a recognition of their public spirit in doing so'. The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment.''

After stating that difficult questions of fact will frequently be involved, his Honour summed up what he held to be the appropriate principles governing the operation of the section and then applied them to the determination of the case, in the following passage (at ATC 4890; CLR 526-527):-

``... if the employment (or some aspect of the employment) is the reason or one of the reasons why the allowance is paid, the allowance falls within sec. 26(e). A reason which is an insubstantial cause of the payment is immaterial, as the judgments in Dixon illustrate. But if an employee's employment or some aspect of that employment is a substantial reason why the allowance is paid, it cannot be said that the allowance is merely personal or that the payment is made for reasons extraneous to-or ultra - the employment. As the requisite relationship may be indirect as well as direct, it is immaterial that there is another reason why the allowance is paid or even that the other reason is the dominant one.

In this case, an allowance was payable only to those in the bank's employment, and the scheme provided for payment of the allowance to any employee who qualified by completing a prescribed course. Although no course of study was mandatory for any employee, the approved courses were calculated to improve the skills of the bank's employees. The scheme was an aspect of their employment. The allowance was not paid as a mere mark of an employer's personal esteem for particular employees. I am quite unable to say that the allowance was paid for considerations extraneous to the employment. On the contrary, the allowance was paid because it was an incentive to an employee to improve his skills to his own advantage and to the anticipated advantage of the bank. The relationship between the employment of the appellant and the payment of the allowance was substantial. In my opinion, the employment was a direct cause of the payment. It follows that the allowance was paid `in consequence of' the employment, and thus was paid `in respect of... or in relation... to' the employment. The relationship prescribed by sec. 26(e) was established.''

Toohey J also upheld the assessability of the payment under s. 26(e). He considered the passage from the judgment of Dixon CJ and Williams J in Dixon which I have set out above. After a consideration of the facts of the case his Honour said (at ATC 4893; CLR 532):-

``What can be derived from the passage quoted from the judgment of Dixon C.J. and Williams J., and perhaps all that can be derived, is the notion that for sec. 26(e) to operate the allowance or benefit must in some sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee.''

His Honour appears to have attached particular significance to the word ``consequence'' in the passage from Dixon. He used it in the final formulation of his determination of the case where he said (at ATC 4894; CLR 533):-

``... There was an evident connection between the appellant's employment and the sum he received. And in a very real sense the payment was a consequence of the

ATC 4423

existing relation of employer and employee. It was only as an employee that the appellant qualified for the benefits payable under the scheme.''

His Honour also referred to a portion of the judgment of Windeyer J in Scott which I have set out above, in which his Honour referred to the necessity of what the employee gets being a ``product or incident of his employment''. Toohey J says of this (at ATC 4895; CLR 535):-

``... if this passage be thought to impose a test different to that which asks whether the benefit allowed, given or granted was a consequence of the employment of the taxpayer, I respectfully adhere to the latter test.''

In the dissenting judgment of Gaudron J, agreed with by Deane J, her Honour found an absence of any significant causal nexus between the payment and the employment relationship. In her view the payment was simply occasioned by the employee's successful completion of the course in question. It was not, in any relevant sense, consequent upon or produced by the taxpayer's employment with the bank.

The effect of Smith's case in the present context

The Commissioner puts a simple argument. He says that whatever might have been the previous effect of the judgments in Dixon, Hayes and Scott, the situation since Smith is transparently simple. If the payment or benefit sought to be brought to tax under s 26(e) is a ``consequence'' in a completely objective sense of the employment relationship, then it is caught by the section. It is sufficient if the employment relationship is a mere causa sine qua non, even though there be another cause of the payment or benefit which could be described as the causa causans or the predominant or effective cause.

In this respect, reliance is also placed upon the passage from the judgment of Dixon CJ and Williams J in Dixon, cited above, in which two degrees of causation are referred to. These arise from the use of the words ``directly or indirectly'' in the section, an indirect cause being a mere ``contributory cause''.

Payne's free ticket was a ``consequence'' of her employment in that the flights which earned the necessary points were undertaken in the course of her employment and paid for by her employer. By parity of reasoning her employment was a ``contributory cause'' of the receipt of a free ticket.

There can be no doubt that if the section requires only a ``but for'' or ``causa sine qua non'' connection between employment and receipt, then Payne's free ticket can be attributed to her employment, and the section brought into play.

Does Smith's case require this result? In my view, it does not.

In order for Smith's case to be properly analogous to the present case, its facts would require alteration. It would be necessary for the employer to have required the employee to undertake the courses at the expense of the employer and as part of his employment. If, in those circumstances, the employee, through zealous application to his studies, had been so successful as to receive a money prize awarded independently by the institution providing the courses then a more clearly analogous question would have arisen. Would that independently awarded prize have been taxable in his hands as a benefit caught by s 26(e)? In my view, if those had been the facts in Smith's case, the decision would have been against taxation of the benefit.

To take a similar set of facts in a different area, suppose a law firm, being impressed with the obvious capacity of an employed solicitor, pays her fees for the obtaining of a higher legal qualification at a university. The employee succeeds in the course to the extent of winning a prize from the university. Would that prize be taxable under the section? Again I would venture to say no.

The reason for my expressing this opinion lies in the fact that the section must be read as a whole. Leaving aside words which are extraneous for present purposes, it reads ``the value to the taxpayer of all... benefits... given or granted to him in respect of, or for or in relation directly or indirectly to any employment of... him...''. The words ``given or granted'' add significance to what follows. In this respect they may be significantly contrasted with the words of the Canadian Income Tax Act considered in the case of
Mommersteeg et al v The Queen 96 DTC 1011, where the corresponding words are ``received or enjoyed by him''. In that case, which also involved a Frequent Flyer Scheme, an employee in the same position as Payne was taxed under the corresponding Canadian section. The case is

ATC 4424

relied upon by the Commissioner in argument before me. I am satisfied, however, that it is clearly distinguishable on the basis of this difference in wording.

In my view, s 26(e) clearly requires that the relevant benefit be given or granted by the donor or granter in view of the taxpayer's employment by himself or some other employer. Although questions of motive may not require any close examination, in my opinion, the section, nevertheless, requires a recognition on the part of the donor or granter of the relationship between the benefit granted, and the employment of the donee or grantee taxpayer. In other words the employment must be either wholly or partly the reason for the donor or granter making the gift or the grant. It is for that reason that, in my view, the university prize referred to in the example postulated above would not be taxable. It would not be awarded to the recipient because of her employment by the firm which had required and paid for her participation in the course. Likewise, in the present case, Qantas provided the free ticket not because of Payne's employment with KPMG, but because she had become entitled to it under Qantas' own scheme.

I consider that this analysis of the situation is consistent with the approach to the section adopted in the lengthy passage that I have cited above from the judgment of Windeyer J in Scott. I am also satisfied that it is in accord with the passages I have cited from the judgment of Wilson J, Brennan J and Toohey J in Smith's case. It must be remembered that there were significant differences between the facts in Smith's case and those in the instant case, and statements in the judgments in Smith must be read against the background of those differences. In Smith, the payment was made by the employer. It was made pursuant to a scheme instituted by the employer. It was a scheme from which the employer derived benefit, namely enhancement of its employees'skills in the performance of their work. The payment was intended to be an encouragement to employees to undertake the extra training involved in the scheme. It was accepted as such by the employees who undertook the training.

In the present case, these features are totally lacking. The benefit was received under a scheme instituted by Qantas for its benefit. The employer had no part in the scheme as such. The employer did not arrange for the employee to participate in the scheme. It did not pay for the employee's participation in the scheme. It did not even, so far as the facts show, encourage its employees to participate in the scheme. It did nothing to provide the benefit alleged to be taxable in the employee's hand.

In my opinion, it is the factors present in Smith's case but absent in the present case which must be kept squarely in mind when reading and considering the passages which have been cited above. When Wilson J (at ATC 4886; CLR 519-520) found it helpful to ask whether the benefit was given as ``a consequence of the employment of the taxpayer'', a reference to the words of Dixon CJ and Williams J in Dixon, and also to ask whether the benefit was ``a product or incident of the employment'', a reference to the words of Fullager J in Hayes and Windeyer J in Scott, he derived that assistance against the background to which he makes explicit reference. It was ``the product of a scheme [of the bank] designed to encourage not only the efficiency of employees within it but to provide them with the incentive to advance their prospects of promotion within the bank''.

Again, where Brennan J (at ATC 4889; CLR 525) said ``if the payment of the allowance is made because of some aspect of the employment it is within the tax net'' [my emphasis], he is making that statement against the background which he sets out (at ATC 4889; CLR 524) when saying ``the allowance was paid because the bank had a scheme for paying allowances to its employees and the appellant fulfilled the two requirements on which the payment of allowances under the scheme depended: the appellant was employed by the bank and he completed a prescribed course''.

Brennan J and Toohey J also made use of the phrase ``in consequence of'' in their reasons. The Commissioner, in argument, has, in effect, taken their Honours' acceptance of this phrase as indicative of a radical departure from the reasoning in the earlier cases and as embracing an approach which would allow a mere causa sine qua non connection with employment to bring a beneficial receipt into the s 26(e) tax net. I do not apprehend that their Honours use of this phrase involves any such departure. Toohey J (at ATC 4894; CLR 533) in a passage already cited, speaks of the payment to Smith

ATC 4425

being in a very real sense a consequence of the existing relation of employer and employee. This was because ``it was only as an employee that the appellant qualified for the benefits...'' [emphasis added].

In my view, the judgments in Smith illustrate rather than depart from the view of the section established in Dixon, Hayes and Scott insofar as those cases established, in my opinion, that, for a benefit, etc, to be caught by the section, there needed to be a role played by the employer in the giving, etc, of the benefit.

In Smith's case there was a clear and positive role played by the employer, which is totally lacking in the present case.

It is important, in my view, to note that, in Smith, it is not suggested that the decisions in the earlier cases were wrong. In all of those cases there was an employer/employee relationship, ``but for'' the existence of which the relevant receipts by the taxpayer would not have occurred. The relationship in each case was a mere causa sine qua non connection which was clearly found to be insufficient to bring the section into play: (see e.g. per McTiernan J, in the passage cited above from Dixon). The same may be said of the decisions in McArdle and in Freeman. Indeed, it could be said, that the connection of the receipt with the taxpayer's employment was in those cases even stronger than it is in the present.

Finally, I should say that the cases of
Kelly v FC of T 85 ATC 4283 and
FC of T v Holmes 95 ATC 4476 do not cause me to alter the view which I have formed, that Payne's employment should not, in the present case, be regarded as an effective cause of the benefits received by her under the Qantas Frequent Flyer Scheme. Also, for reasons I have already adverted to, I regard the case as significantly different from the Canadian decision in Mommersteeg.

Accordingly, this application succeeds. The applicant's appeal against the Commissioner's Objection Decision of 14 June 1995 is upheld. The objection is allowed in full with the result that no amount is assessable to the applicant in connection with the issue to her of the relevant tickets.

The Commissioner must pay the applicant's costs of the application.


1. The second application (NG 239 of 1995) be adjourned to a date to be fixed.

2. The applicant's appeal against the Commissioner's Objection Decision of 14 June 1995 be upheld.

3. The Commissioner pay the applicant's costs of the application.

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.