ABRASIFLEX PRODUCTS (WA) PTY LTD v COMMISSIONER OF STATE TAXATION (WA)

Members:
White J

Tribunal:
Supreme Court of Western Australia

Decision date: Judgment handed down 30 March 1993

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White J

This appeal arises from the rejection by the respondent of the appellant's objection to an assessment of payroll tax in respect of payments made on 30 June 1988 by the appellant to Messrs K Nixon and G Nixon, in the amounts of $499,331.00 and $140,000.00 respectively. Payroll tax has been assessed in the total sum of $35,182.24.

The facts:

The solicitors for the parties respectively agreed that the relevant facts are:

``1.1 By Agreement dated 2 July 1987 Keith Pty Ltd (`Keith') (formerly Nixon's Pty Ltd) sold the business undertaking and other property described in the Agreement to Mortlock Investments Pty Limited (`Mortlock'). A copy of the Agreement is annexed and marked Annexure KPL-1 .

1.2 On 2 July 1987 two further contracts were entered into. These were:-

• 1.2.1 A consultancy contract between Mortlock and Keith which was to expire on 30 June 1988. A copy of the consultancy contract is annexed marked Annexure KPL-2 .
• 1.2.2 An employment contract between Keith and Mr K Nixon, which was to expire on 30 June 1988. A copy of the employment contract is annexed and marked Annexure KPL-3 .

1.3 Clause 5 of the Agreement provides that settlement is to be effected on the settlement date, which is the effective date of the contract, notwithstanding the actual date of signature. The settlement date is 1 July 1987. The first sentence of paragraph 3 of the Commissioner's Statement dated 20 February 1990 is incorrect as the business was sold with effect from 1 July 1987 and not from 30 June 1988.

1.4 Clause 7 of the Sale of Business Agreement states-

• `7. At the Settlement Date, the Vendor shall terminate the services of the Employees, and ensure that all termination payments and other outstanding claims are settled, including the Vendor's Manager named in the Schedule hereto, and the Purchaser shall offer employment to all of the Employees, except the Vendor's Manager on the same or substantially similar terms to which those Employees were employed by the Vendor. In the case of the Vendor's Manager, the terms of his employment shall be substantially according to the terms contained in the draft Service Contract annexed hereto and marked "A1" and "A2".'

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  ATC 4199

1.5 On 30 June 1988 Keith made two payments to Messrs K Nixon and G Nixon of $499,331 and $140,000 respectively.

1.6 These payments were treated as, and disclosed as eligible termination payments in statements made to the Australian Taxation Office on 30 June 1988 by Keith and on group certificates issued by Keith to K Nixon and G Nixon (Certificate Nos. 9850423528 and 0850423530 respectively). Copies of the statements and group certificates are annexed and marked Annexure KPL-4 and KPL-5 .

1.7 Mr K Nixon commenced employment with Keith on 1 July 1962 and in the relevant statement of termination payment made to the Australian Taxation Office on 30 June 1988, Keith apportioned the payment of $499,331 referred to in paragraph 3 by attributing $403,271 to employment prior to 1 July 1983 and $96,060 to employment since 30 June 1983.''

The appellant, by its counsel, also stated that:

``2.1 Mr G Nixon commenced employment with Keith on 9 January 1978 and in the relevant statement of termination payment made to the Australian Taxation Office on 30 June 1988, Keith apportioned the payment of $140,000 referred to in paragraph 3 by attributing $73,147 to employment prior to 1 July 1983 and $66,853 to employment since 30 June 1983.

2.2 In Keith's pay-roll tax return for the year ended 30 June 1988 such payments were excluded from the total of taxable wages paid by the company to its employees on the grounds that such payments were eligible termination payments paid to Messrs K and G Nixon upon the termination of their employment.

2.3 At all material times, Abrasiflex was the designated group employer for the purposes of s 16I of the Act in a group which included Abrasiflex, Star Card Company Pty Ltd and Keith. On 19 October 1989 the State Taxation Department issued an assessment of Keith's pay-roll tax liability for the year ended 30 June 1988 under s 18(2)(b) of the Pay-roll Tax Assessment Act 1971 (`the Act'). The debit advice of $35,182.24 comprised assessments of $4,564.33, $38.06 and $30,579.85 for Abrasiflex, Star Card Company Pty Ltd and Keith, respectively.''

The Pay-roll Tax Assessment Act 1971

The assessment in dispute has been raised pursuant to the Pay-roll Tax Assessment Act 1971 (``the Act''). It is convenient to set out certain relevant sections of the Act for ease of reference.

Section 3 contains a definition of wages, namely:

```wages' means any wages, salary, commission, bonuses, allowances, or other benefits paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employee 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 office under the Crown in right of the State of Western Australia or in the service of the Crown in right of the State of Western Australia;
• (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;
• (ca) the provision of any wages, salary, commission, bonuses, allowances, or other benefits whether in cash or in kind to or in relation to an employee by any person acting for or in concert or under an arrangement or undertaking, whether formal or informal and whether expressed or implied, with the employer;
• (d) any amount paid or payable by way of commission to an insurance or time- payment canvasser or collector;
• (e) the provision by the employer of meals or sustenance or the use of premises or quarters as consideration or part consideration for the employee's services; and
• (f) any amount paid or payable by way of remuneration by an employment agent directly or indirectly to a person who was engaged to perform services for a client of the employment agent, or to some

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  ATC 4200

  other person in respect of those services, as a result of which engagement the employment agent receives directly or indirectly payment, whether by way of a lump sum or an ongoing fee, during or in respect of the period when the services are provided by that person to the client.''

Section 7 provides:

``7 Subject to, and in accordance with, the provisions of this Act, there shall be charged, levied, collected and paid on all taxable wages pay-roll tax at such rate or rates as Parliament shall from time to time... enact.''

The questions of law or fact to be determined in this Appeal are:

``(a) were the payments made by Keith Pty Ltd to Messrs K Nixon and G Nixon at the time of the disposal of Keith Pty Ltd's business, wages for the purposes of the Act?

(b) How are the costs of the Appeal to be borne and paid?''

The appellant submitted that ``an ex gratia payment made to Messrs K and G Nixon subsequent to their retirement from employment does not fall within the definition of `wages' for the purposes of s 3 of the Act''.

The appellant referred to
FC of T v Harris 80 ATC 4238, in which it was held that a gratuitous supplementary payment to a retired employee by a former employer was not assessable income for the purposes of attracting income tax. The taxpayer, Harris, retired from the Bank's employment in November 1974 and became entitled to a pension under the Bank's staff pension scheme. Some eighteen months later, in April 1976, he received an ex gratia lump sum payment of $450.00 from the Bank, such payment being unsolicited and unexpected. The Bank made similar payments to a large number of its retired employees at that time, intending to moderate the adverse effects of inflation on pension incomes.

The facts of that case were, of course, quite different from those of the instant case.

Subsequently, the Income Tax Assessment Act has been amended so as to include within the definition of ``salary or wages'' ``eligible termination payments''.

Several cases were cited to me which were concerned with the question whether a specified payment constituted ``income'' for the purposes of the Income Tax legislation. FC of T v Harris was one and others included:

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FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540, where the Court concluded that a sum provided by an employer to make up during the war the difference between the military pay of an employee who had enlisted and the pay he would have received in his civilian occupation forms part of the soldier's assessable income.

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Hilton v FC of T 92 ATC 4534, a case in which the taxpayer, the managing director and chairman of a company, purported to resign ad was paid a resignation benefit of $202,642, as calculated by the manager of his superannuation fund. The case turned on the question whether, in the circumstances, the payment was an eligible termination payment under the income tax legislation. To my mind, this decision is not in point.

Of course, in the present case, I am concerned, not with the question whether the payments made were assessable income or whether they constituted ``eligible termination payments'' within the meaning of the income tax legislation, but with whether they fall within the definition of ``wages'' contained in the Act. While the questions are, no doubt, closely related to one another, they are not by any means identical.

The starting point is the definition of ``wages'' in the Act, which I have set out above. For convenience, I repeat the primary terms of the definition:

```wages' means any wages, salary, commission, bonuses, allowances, or other benefits paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employee as such.''

The Macquarie Dictionary contains the following relevant definitions of ``wage'', ``salary'', ``commission'', ``bonus'' and ``allowances'', respectively:

```Wage' 1. (oft. pl.) that which is paid for work or services, as by the day or week; hire; pay.

`Salary' a fixed periodical payment, usu. monthly, paid to a person for regular work or services, esp. work other than that of a manual, mechanical or menial kind.

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ATC 4201

`Commission' 12. a sum or percentage allowed to an agent, salesman, etc., for his services.

`Bonus' 1. something given or paid over and above what is due.

`Allowance' 1. a definite amount or share allotted; a ration. 2. a definite sum of money allotted or granted to meet expenses or requirements.''

If one applies the ``ejusdem generis'' principle in construing the meaning of the expression ``or other benefits paid or payable...'' in the definition of ``wages'', the phrase must be understood as meaning: ``or other benefits, of the same nature as wages, salary, commission, bonuses, or allowances, paid or payable...''. The feature that those words have in common seems to be that they are all payments made to reward services rendered by an employee to his or her employer.

Were Messrs KM and GN Nixon employees when paid?

In order to attract liability for payroll tax, the payment must have been made to an employee as such - so much is apparent from the definition of ``wages'' set out above.

Both persons concerned had been employed by the Appellant for varying periods and their employment was terminated on the same day as, and immediately before, the payment was effected. The question then arises whether a payment to a former employee who is no longer in the employ of the payer when such payment is made, can ever constitute ``wages'' as defined. I am firmly of the opinion that, so long as a payment is made to a person, in respect of that person's employment, it is irrelevant that he may no longer be employed at the time payment is made. Any other view could readily lead to abuse: if an employee is engaged to work for a month at a monthly salary of $x but is not paid until the day following the termination of his month's employment, it seems a nonsense to suggest that the payment so made is made otherwise than to an employee as such. In
Henry (Inspector of Taxes) v Foster (1931) 145 LT 225 at 232 (a case to which I shall again refer hereunder) Lord Hanworth MR said, of a payment made as compensation for termination of office:

``The fact that it falls to be paid after the office has come to an end does not divorce it completely from the office...''

In any event, the moneys would certainly be payable to an employee as such, during his employment, even if paid later. Accordingly, I consider that there is no substance in the contention that, simply because the employment had ceased immediately before payment was made, such payment could not fall within the definition of ``wages'' on the basis that such payment was not made to an employee as such. That is not to say that the payments were in fact made to employees as such, but only that a payment made after termination of the employment could constitute a payment made to an employee as such.

The nature of the payments

It was said by the appellant, and this was not the subject of challenge by the respondent, that the payments were made ``ex gratia'' subsequent to and in consequence of the retirement from employment of the two persons concerned.

Payments made to employees or former employees by way of retirement benefits and to compensate for the termination of their employment are, in my opinion, not benefits which can properly be said to be ejusdem generis as wages, salaries, commission, bonuses, or allowances payable to an employee as such. The nature of such benefits is quite different from payments made as a reward for services rendered by an employee to an employer and quite different from the ordinary meaning of the word ``wages''. See
FC of T v J Walter Thompson (Australia) Pty Ltd (1944) 7 ATD 401 at 405-406; (1944) 69 CLR 227 at 234.

In Henry (Inspector of Taxes) v Foster, the fact that the director who received the payment had a contractual right to it was treated as important and as the basis which distinguished that case from
Cowan v Seymour (1920) 1 KB 500, in which the secretary of a company had acted without remuneration for more than 4 years, from the incorporation of the company to its voluntary winding up, when he was appointed as liquidator, again without remuneration. The shareholders resolved to award to him a moiety of the balance of funds in the company at the conclusion of the winding up and he was in due course assessed to income tax in respect of the amount so paid. By a majority decision of the Court of Appeal, it was held that the payment having been made to him after his office had terminated as a tribute or

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ATC 4202

testimonial for his services in the past and not as a payment for those services, he was not assessable to income tax in respect of it.

The evidence does not indicate that the payees had any pre-existing enforceable right to the payments in question and they clearly had been paid for the services which they rendered to the company from time to time during their employment. In such circumstances, as it seems to me, the payments do not fall within the definition of ``wages'' under the Pay-roll Tax Assessment Act and it follows that the appeal succeeds.