Case S52

Judges: MB Hogan Ch

P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 2 July 1985.

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Dr P. Gerber (Member)

The taxpayer in this reference is a university teacher who spent part of 1975 and the whole of 1976 in the United States at two American universities. In 1975, he was at Ohio State University, his appointment straddling into 1976 (the US tax year closing on 31 December of each year). He subsequently took up a short term appointment at Lehigh. Whilst at Ohio, the taxpayer's stay in the US was on an H1 visa; when he transferred to Lehigh, his status was changed to a J visa. Once he had attained J visa status, T was no longer liable to make contributions to a Federal Insurance Fund, levied pursuant to the

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Federal Insurance Contribution Act (FICA), which in its own piquant way, is the origin of this reference. FICA contributions are deducted from salary and calculated according to the statutory formula provided for by the US Inland Revenue Code (5.85% of salary up to $US 14,000; an equal contribution being levied on the employer). To complete the factual narrative, some time in 1976, the US Inland Revenue Department wrote to T, requesting him to identify how much of his work was devoted to teaching and how much to research. T estimated the breakdown as roughly equal, and the IRS accepted this estimate. The consequence of this re-appraisal was that the research component of his salary was held not to be exempt from federal income tax pursuant to Art. XIII of the Double Tax Convention between the governments of Australia and America which only exempts income derived from ``teaching''. However, this ruling had no impact on FICA which was payable on the whole of T's salary for the period of his stay on his H1 visa. On his return to Australia, the Commissioner assessed T on the whole of his income derived during the (calendar) year 1975 and half the income earned in the US in 1976.

2. Like Sylvia, the question is: who is FICA, what is she? This ``Sylvia'' is compelled to steer the narrow passage between Scylla and Charybdis, between the shore-line where FICA is not a ``tax'' according to US revenue law, and the opposite side where FICA is characterised under our law as a tax so as to render the income ``not exempt from income tax in the country where it is derived'' (sec. 23(q)). This delicate balancing act has its origin in the two relevant provisions; Art. XIII of the 1953 US Convention (which Convention applied during the years in question). This states:

``Where a professor or teacher who is a resident of one of the Contracting States is temporarily present in the other Contracting State for the purpose of teaching during a period not exceeding two years at a university, college, school or other educational institution in that other State, remuneration derived by him for so teaching for that period shall be exempt from tax by that other State.''

Article I of the relevant Convention provides that the taxes, the subject of the Convention, are, as far as the United States is concerned, ``The federal income taxes, including surtaxes and excess profit taxes''.

Section 23(q) of our own taxing statute provides:

``The following income shall be exempt from income tax: -

• income... derived by a resident from sources out of Australia... where that income is not exempt from income tax in the country where it is derived...

Provided that this paragraph shall not apply to exempt any income unless -

• (i) Where there is a liability for payment of income tax in the country where that income is derived - the Commissioner is satisfied that the tax has been or will be paid...''

3. Turning first to the US Internal Revenue Code, sec. 3101 provides that ``(a) In addition to other taxes, there is hereby imposed on the income of every individual a FICA tax equal to the following percentages of wages received by him with respect to employment'' (followed by the appropriate rate aforementioned). Section 3102 provides that the tax imposed by sec. 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from wages as and when paid. Section 3111 provides with respect to employers ``(a) in addition to other taxes, there is hereby imposed on every employer an excise tax (FICA) with respect to having individuals in his employ equal to the following percentages of wages paid by him with respect to employment...''.

4. Is FICA a ``tax'' according to American revenue law? There can be no doubt that the US Revenue Code must be determined by American law (just as there can be no doubt that the interpretation of sec. 23(q) must be determined by our law). What, then, is the American law? Included in the Board's file is an affidavit from a legal academic with American qualifications which sets out no more than the relevant sections of the US Internal Revenue Code. In addition, the taxpayer and the Commissioner each called an expert and - as usually happens with expert witnesses on opposite sides - there was little agreement. T's expert was an Honours Laws graduate from the University of Queensland with some additional qualifications, which were extracted from him in the following dialogue.

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• Q. You have completed with pass of part of a Master of Laws at the University of Sydney? - A. Correct.

This witness is presently employed by a large accounting firm ``to do with United States Taxation Law''. I have no doubt that the witness does not qualify as an expert witness in the legal sense; cf. In the
Goods of Bonelli (1875) L.R. 1 P.D. 69 ;
Re Will of Lee Hing (1901) 1 S.R. (N.S.W.) (E) 199 . None the less, sitting as an Administrative Tribunal not strictly bound by the rules of evidence, I am prepared to give the evidence the weight I consider appropriate whilst noting that calling an Australian lawyer to give evidence before an Australian tribunal on American law is not a practice to be encouraged. For good measure, the Commissioner did not object to the admission of the evidence until after the witness had concluded his evidence in chief. When I pointed this out to counsel for the Commissioner, he replied: ``Frankly, Dr Gerber, it occurred to me, but I took the view that whether the man was an expert or not could not really be apparent until he had said various things about the foreign tax laws.'' This is known in the trade as ``hedging one's bets''. To give the witness his due, he was familiar with FICA, which he described as a means of raising funds for the benefit of persons age 65 who are fully insured being able to receive social security benefits. It was this witness' contention that FICA, although described as a ``tax'' is not regarded under US law as a federal income tax. Additional support for this view was sought by tendering (over the objection of the Commissioner) two publications emanating from the US Inland Revenue Services for the guidance of non-resident aliens, listing inter alia, the group which is exempt from social security tax (which is merely a gloss of the Code and is not relevant to this taxpayer) and goes on to point out that those outside the exempt status are subject to social security tax for services performed in the United States and sets out the threshold figure below which such tax is deducted from each wage payment. It goes on to add: ``The tax must be deducted even though you do not expect to qualify for social security benefits.''

5. The Commissioner's expert graduated in Business Administration from the University of Washington, after which he joined an international firm of accountants with whom he specialised in US taxation. He is currently with the Sydney branch of the firm and engaged on the US tax problems of Americans abroad. The witness is a certified public accountant in the United States; he is not, however, a lawyer in either jurisdiction. Again, whilst not technically an ``expert witness'' in the eyes of the law, he was clearly thoroughly conversant with FICA. Having said this, I must add that, apart from giving the Board clear and precise evidence on the history of FICA, its aim and purpose, I found his evidence of little assistance for present purposes. He was asked:

• Q. Are you aware of the terminology of the internal revenue code used to describe the employee's payment of his FICA contribution? - A. Yes, it is referred to as an excise tax.
• Q. Are there other excise taxes that form part of the revenue code? - A. I am not sure if there are other excise taxes.
• Q. And is that excise tax in any way levied on the levels of production, this FICA excise? - A. No, it is strictly based on the amount of wages paid by the employer.
• Q. How is the employer then entitled to treat his payment of the FICA in his own accounts and tax accounts? - A. He takes that as a deduction as an ordinary and necessary business expense.
• Q. Assuming, say, the employer taxpayer was a natural person, can you regard that as a credit against, say, the personal income tax liability for that employer? - A. No, he cannot. It is not a credit against tax at all. It is strictly a deduction, a business deduction.
• Q. So even though it is a tax, a federal tax payable by the employer, it is still a deduction? - A. That is correct.
• Q. And it is not a credit against income tax liability? - A. Exactly right.
• Q. Could you give the Board your evidence - your expert evidence - on the characterisation of FICA within the United States system? - A. Well, in my view the FICA tax - there is no reason for us to determine whether or not the FICA tax is an income tax - it is a tax that is levied under the Internal Revenue Code.
• Q. I am sorry, you said ``there is no reason for us to determine it''. Are you talking

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  about it, speaking as a US tax practitioner? - A. Speaking as a US tax practitioner, that is correct. There are no credits granted against other taxes as a result of having been subject to a FICA tax as there would be for having been subject to a foreign tax which qualifies as a foreign income tax, so I do not believe that there is any reason for us to make that sort of distinction.
• Q. So you do not offer an opinion on that, because you say that in the US tax system the question does not arise? - A. That is correct.
• Q. Whether the FICA is in its nature according to US notions an income tax? - A. That is correct. Exactly.
• Q. The taxpayer's expert seemed to be consistently giving evidence, to such extent as he was able, that as a question of US law it was not regarded as an income tax. Do you regard that as, in the light of what you have just said, as incorrect, or is simply a question that does not arise and cannot be given evidence to? - A. I think those were his conclusions, and it is a question that I have not seen arise. I do not see any reason for it to arise.

6. Accepting the technical evidence adduced on behalf of the taxpayer, I have concluded that FICA is not deemed an income tax according to the internal laws of the United States. However, in the circumstances, I have considerable sympathy with Wynn-Parry J. who in
Re Duke of Wellington (1947) Ch. 506 (on appeal (1948) Ch. 118) preferred to ignore both experts and to form his own view of the relevant foreign domestic law. In the present case, the Commissioner's expert informed the Board that there was no reason to determine whether or not FICA constitutes a tax, whilst the taxpayer's expert provided a characterisation not unlike that applied in New Zealand to the Social Security Act 1938, which was twice the subject of judicial review -
Re Hirst, Public Trustee v. Hirst (1941) 3 All E.R. 466 , and In
re Paterson (dec'd) (1942) 3 A.I.T.R. 1 - both raising the issue whether the ``Social Security Contribution'' payable under the New Zealand legislation was ``income tax''. In the Hirst case, Morton J. held:

``It seems to me clear... that the social security contribution is not properly described as `income tax payable in New Zealand,' but is a separate tax, imposed by separate legislation, which is not income tax, but is to be treated as regards the assessment, collection and recovery thereof, as if it were income tax. The words `as if it were income tax' are inconsistent with the view that the social security contribution is income tax payable in New Zealand.''

(at p. 468)

In the Paterson case, the Supreme Court of New Zealand, after an exhaustive analysis of the case law, followed Hirst. Myers C.J. concluded that ``the tax may be said to be of the character of income-tax in that it is calculated by reference to the income of the taxpayer and is a charge on that money; but it cannot properly be described as income-tax, which has a well-understood and recognized meaning of its own.''

7. Two things need to be said about these decisions. Firstly, the New Zealand Social Security legislation was not part of the income tax Acts and, secondly, the issue arose in the course of construction of wills or settlements which left annuities free of duty and income tax, a feature they share with
de Romero v. Read (1932) 48 C.L.R. 649 .

8. This gets the taxpayer over his first hurdle; FICA is not an income tax according to US revenue law. It follows that the taxpayer is not exempt under the Double Tax Convention from having to make FICA contributions, even though he is ``a professor resident in Australia and temporarily present in the United States for purposes of teaching at an American university for a period less than two years'', and thus exempt from ``normal'' United States taxes.

9. The next question is to determine whether his US income derived from teaching is exempt from income tax under our taxing Act on the basis that the taxpayer was liable for payment of income tax in the United States. This is a separate and distinct question from the one I have already decided in the taxpayer's favour; viz. that FICA is not a tax under American law. As Fullagar J. pointed out in
Mutual Life & Citizens' Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 537 at p. 553 ):

``It is important to remember that the ultimate question in this case turns on the meaning of a provision in the Australian Act.. the words `exempt from income tax' in this question import `exempt from income

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tax within the meaning of s. 23 (q) of the Australian Assessment Act. ' It is true, of course, that, in order to answer the question, we have to inquire into the law of the United Kingdom relating to income tax, and to examine the statutes of the United Kingdom which impose income tax. But the use, in a statute of the United Kingdom, of the word `exempt' in relation to income of a particular description is not necessarily decisive of the question whether that income is exempt from income tax in the United Kingdom within the meaning of s. 23 (q). So it is quite conceivable, if unlikely, that a tax, which was called an income tax in a United Kingdom statute, would not be rightly regarded as an income tax within the meaning of s. 23 (q).''

In the instant case, we are dealing with the obverse problem, viz. that an impost not called an income tax in the United States would none the less be regarded as income tax within the meaning of sec. 23(q).

10. I commence my enquiry with the oft quoted statement that ``income tax is a tax on income''. It is a charming phrase but not very helpful in the present context. The question whether an employment relief tax constitutes ``income tax'' was considered in de Romero v. Read (1932) 32 S.R. (N.S.W.) 607; on appeal (1932) 48 C.L.R. 649. In the Supreme Court the view had been expressed that an unemployment relief tax, imposed by an Act similar to the New Zealand Act, was not ``income tax'' within the meaning of sec. 83(a) of the Income Tax (Management) Act, 1928 (N.S.W.). In the Supreme Court, the Judges refer to its purposes and conclude that it is not an income tax. Thus Street C.J. in de Romero v. Read said of the Prevention and Relief of Unemployment Act, 1930 (N.S.W.):

``It is levied on income, and, as a matter of convenient administration, the Commissioner of Taxation is charged with the duty of collecting it, but it is in no proper sense of the word an income tax, and it is certainly not such a tax as could have been in the contemplation of the parties when the deed of separation was executed''

(at p. 617).

While Davidson J. said:

``It is true that the tax in question is levied on income, but it is materially different in its nature from any income tax in force at the time of the execution of the deed. Although the provisions of the Income Tax Act are made applicable for certain purposes, the tax does not go directly to consolidated revenue, but to a special fund to be employed for a particular purpose. Also, on salaries and wages, it is deducted at the source, and not in pursuance of an assessment. In other instances it is required to be paid upon assessment but it is of an extraordinary nature, directed to meeting an emergency, and, in the ordinary acceptation of the term, would not be described as income tax. In s. 14 of the Act itself the `tax' is defined to mean `unemployment relief tax'.''

(at p. 629)

On appeal to the High Court, only Evatt J. considered this issue, the other Judges concluding that sec. 83 did not apply to the agreement in question. Evatt J. took a contrary view and it became necessary for him to consider whether the unemployment relief tax was an income tax within the meaning of sec. 83 of the Income Tax (Management) Act, 1928. He relied upon
Morris Leventhal v. David Jones, Ltd. (1930) A.C. 259 , and expressed the view that:

``Too much has, I think been made of the fact that the unemployment tax goes to a special fund and must be used for a special purpose. It seems to me that the judgment of the Privy Council in Morris Leventhal v. David Jones, Ltd. gives no countenance to such a distinction. In that case, as was pointed out by Lord Merrivale (at p. 270), the bridge tax did not extend to land generally throughout New South Wales, but only within a limited area, and the purpose of the tax was to provide funds, not for the common purposes of the State, but for a particular scheme of betterment. None the less, it was held that the impost was `land tax' within the meaning of a certain covenant.''

11. Schemes like FICA are not unknown in this country. Thus, in 1945, the Commonwealth passed the Social Services Contribution Assessment Act (No. 39 of 1945) and the Social Services Contribution Act (No. 40 of 1945). The Assessment Act was administered by the Commissioner of Taxation (sec. 7). Contribution was levied ``upon the contributable income derived during the year of income'' and payable by both employer and

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employee. For good measure, the sums collected under the Assessment Act went into consolidated revenue. It is unnecessary to consider whether the social services contribution levied under this Act constituted an ``income tax'' for purposes of sec. 23(q). However, I have little doubt that when these Acts were repealed and became the Income Tax and Social Contribution Assessment Act (No. 48 of 1950) and the Income Tax and Social Services Contribution Act (No. 49 of 1950), the matter was put beyond doubt. The latter Act contained in its preamble that it was ``an Act to impose upon Incomes a Tax by the name of Income Tax and Social Services Contribution''. For good measure, the Assessment Act ``shall be incorporated and read as one with this Act''. Once amalgamated, the whole constitutes a tax even though the legislation continues to refer to a ``Social Services Contribution''.

12. Applied to the present case, I have concluded that FICA constitutes ``income tax'' for purposes of sec. 23(q). The obligation to make the payment is part of the US Internal Revenue Code, it is paid by the employee ``in addition to other taxes'' (sec. 3101), is stated to be tax to be struck as a percentage of wages (up to the limit imposed by statute). In practice, a proportion of salary is withheld for FICA out of each and every instalment of salary. It follows that even though the tax is limited to only part of salary, none the less it is deemed to be a tax on the whole of the amount. (``If you impose tax on a proportion a/b of x, you are taxing x'';

per Fullagar J. Mutual Life & Citizens' Assurance Co. Ltd. ante at p. 550.) For good measure, sec. 3102 states ``the tax imposed by section 3101 shall be collected by the employer of the taxpayer by deducting the amount of tax from the wages as and when paid''. The result is undoubtedly a paradox where American law regards the impost as not constituting a tax for purposes of its revenue laws whilst by our characterisation the opposite result is reached. So be it. It is not without reason that Private International Law has been renamed the Conflict of Laws.

13. We were referred to a decision of this Board -
9 T.B.R.D. 162 Case 135 - in which this Board, as then constituted, reached an identical result on identical facts, but by a form of legal reasoning vastly different from mine. The Board in the earlier case stressed that it did not have the benefit of expert evidence. This may well account not only for the diverse views formed by the various members, but also for the different view I formed of the law. It is with no disrespect to my distinguished predecessors that I decline to follow their reasoning.

14. I would uphold the taxpayer's objection.

Claim allowed