The Trustees of the Estate of George Adams (Deceased) v. The Commissioner of Pay-roll Tax (Victoria).

Judges: Gibbs J
Stephen J

Mason J
Murphy J
Wilson J

Court:
High Court of Australia

Judgment date: Judgment handed down 2 September 1980.

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Mason, Murphy and Wilson JJ.

The appellants are the trustees of the will of George Adams, deceased. Pursuant to the authority of the will they carry on the business of the testator known as Tattersalls, a ``sweep consultation'' business. The trustees are authorised and empowered to carry on the business ``with the fullest most complete and most absolute powers in all respects as if they were the sole owners thereof'' (cl. X). Clause Y of the will opens with the following words:

``Y. AND I DIRECT my Trustees to stand possessed of the net profits which may arise from the carrying on and continuance of my said business under the power for that purpose hereinbefore given UPON TRUST to pay the same to the persons and for the purposes hereinafter named and mentioned in the following proportions namely: -

...''

Then follows the names of twelve persons among whom eight-tenths of the net profits referred to are to be distributed in the specified proportions, and the clause concludes:

``... TO be distributed between and amongst such of the Employees for the time being engaged in the said business and in such proportions in all respects as my Trustees shall in their absolute discretion think fit one-tenth.''

During the financial year ending 30 June 1977 the trustees in obedience to the direction contained in this clause paid sums amounting in total to approximately $1.2 million to many of the four hundred persons in their employ at that time. Mr. Kilgour, the senior trustee, gave evidence before Jenkinson J. and described the payments as ``bonuses''. He said they were paid according to the value of the employee to the business. Some employees received very substantial amounts, some smaller amounts, and some none at all.

The question in the appeal is whether these payments are ``wages'' within the meaning of that term in the Pay-roll Tax Act 1971 (Vic.) (as amended) (``the Act''). The respondent Commissioner assessed the trustees to tax in respect of them, whereupon the trustees appealed successfully to the Supreme Court of Victoria ( Jenkinson J.) (79 ATC 4362). The Commissioner then appealed to the Full Court, which, by a majority ( Crockett and Marks JJ., McInerney J. dissenting), allowed the appeal and restored the original assessment of the Commissioner (80 ATC 4085). The trustees, as of right, now bring the matter to this Court.

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The Act imposes a tax upon employers in respect of certain wages. The tax is imposed by sec. 7 on all taxable wages, which are described in sec. 6. It is payable by the employer by whom the taxable wages are paid or payable (sec.8). Section 3 defines the relevant terms as follows:

``3(1)...

`employer' means any person who pays or is liable to pay any wages...

`wages' means any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employe as such and, without limiting the generality of the foregoing, includes -

• (a) any amount paid or payable by way of remuneration to a person holding an office under the Crown in right of the State of Victoria or in the service of the Crown in right of the State of Victoria;
• (b) any amount paid or payable under any prescribed classes of contracts to the extent to which that payment is attributable to labour;
• (c) any amount paid or payable by a company by way of remuneration to a director or member of the governing body of that company;
• (d) any amount paid or payable by way of commission to an insurance or time-payment canvasser or collector; and
• (e) the provision by the employer of meals or sustenance or the use of premises or quarters as consideration or part consideration for the employe's services.''

The definition of ``wages'' contains the words which are of critical importance to the resolution of the appeal. If the payments in question are to be held liable to pay-roll tax it will be because they are ``bonuses... paid... to an employee as such...''. With respect, we find acceptable the description of a bonus which was given by McInerney J. in the Supreme Court at p. 4087:

``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 contibuted 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.''

(cf. also
Mutual Acceptance Company Limited v. F.C. of T. (1944) 69 C.L.R. 389 , at pp. 396, 399, 401 and 403 ). The significance attaching to the fact that to come within the definition of ``wages'' the payments must be made ``to any employee as such '' is emphasised by Latham C.J. in Mutual Acceptance at p. 396 in the following words:

``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.''

It is common ground that in fact the payments in question were paid to employees of Tattersalls by their ``employer'', and that they were paid out of the net profits of the business. It is also accepted that in choosing the recipients and in determining the amount of the payment in each case the ``employer'' had regard to the value of the services rendered to the business by the particular person. If that were all, then it would seem to follow without doubt that the payments were subject to pay-roll tax.

But Mr. Hulme Q.C., Counsel for the appellant, argues that this is not so. The payments were not ``wages'' within the meaning of the Act. They were moneys paid to the recipients, who happened to be employees, by the trustees of the will of the late George Adams, who happened to be the employer, in the performance of a trust. The employees received the payments, not because they were employees, but because they were the beneficiaries of the generosity of the testator. If the employer neglected to make the distribution contemplated by the

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ATC 4431

will, the remedy would be provided by the law relating to breach of trust rather than master and servant. The payments were therefore not made to any employee `` as such ''. The fact that the trustees, in the exercise of their discretion, have regard to the value of the contribution of each employee to the profitability of the business may provide a connection between the payments and the business, but even if that be so it is not a relevant connection. It is within the range of discretion according to the trustees to vary the criteria governing the distribution, so as to have regard to poverty, family needs, education requirements, or sickness none of which have any immediate connection with the business. Mr. Hulme argues that the particular considerations attending the payments in a particular year were not material, and that the Court should rely on the provisions of the will and nothing more to discover their true character. He observes that it is within the discretion of the trustees to convert the business into a company in which the employees for the time being might hold shares and receive the share, of the profits which it was within the contemplation of the will that they should receive in the form of dividends and that moneys bearing such a character clearly would not attract pay-roll tax.

On the other hand, Mr. Merralls Q.C., Counsel for the Commissioner, argues that there is no necessary dichotomy between the competing propositions, and that the payments are caught by the Act notwithstanding, if it be the case, that they are made, pursuant to a trust, to beneficiaries under a will. He does not concede that the latter description is apt, having regard to the observations of Dixon J. in
Blair v. Curran (1939) 62 C.L.R. 464 at p. 527 directed to the particular clause in this same will:

``Upon the bare construction of the provision for distributing one-tenth of the profits among the employees, I should have thought that employees for the time being were beneficially interested in the discretionary trust. But this means that a class took a beneficial interest who were not necessarily ascertained within the period limited by the rule against perpetuities. If this were so, the provision would be void. Indeed there is no escape from the conclusion that the provision contravenes the rule against perpetuities, unless it is construed as giving the employees no title as a class beneficially interested in the discretionary trust and as being no more than a direction operating for the benefit of the named persons sharing in profits, a direction, in effect, to distribute a bonus among employees, not for their benefit, but to obtain better service in the interests of the business.

The order of Street J. has declared the provision good, and it may, therefore, be right to adopt some such construction.''

Of course, there being no challenge in this case to the validity of the bequest, we are concerned only with its proper construction. If the alternative construction suggested by Dixon J. were to be accepted, then the submission of the appellants would be seriously disadvantaged. However, in the light of the conclusion which which we have reached, it is unnecessary to pursue the distinction.

In our opinion, the solution to the problem is to be found in the application of the provisions of the Act to the particular circumstances of the case. 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. Mr. Merralls drew attention to the definition in the Act of ``employer'' as tending to denude the term of any significance beyond the fact that it refers to any person by whom wages are paid. On the other hand, the concept of ``wages'' would seem necessarily to ground the relationship of payor and payee in that of master and servant. In any event, we find the first requirement to be satisfied. 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

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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 Mutual Acceptance to which we have referred. 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 clasp 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 business. In our opinion, therefore, they were ``wages'' paid to ``employees as such'', and the Commissioner was correct in assessing them to pay-roll tax. 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. But even if other criteria, as suggested in argument, were adopted, in our opinion it does not follow necessarily that the payments would not attract liability to pay-roll tax. Ordinarily they would still seem to be rightly described as remuneration paid to employees because they were employees.

We would dismiss the appeal.

ORDER:

Appeal dismissed with costs.