PAYNE v FC of TJudges:
The applicant, Janet Lynn Payne (nee Fulcher) (``Mrs Payne''), appeals to this Court pursuant to s. 14ZZN of the Taxation Administration Act 1953 (Cth) (``the Administration Act'') against the disallowance by the respondent Commissioner of Taxation (``the Commissioner'') of an objection lodged by her against a private ruling given by the Commissioner under s. 14ZAR of the Administration Act.
The legislative background to Part IVAA of the Administration Act dealing with private rulings is dealt with at some length, both in the judgment of Gummow J, with which Jenkinson J agreed, and in my judgment in
CTC Resources NL v FC of T 94 ATC 4072. I am therefore relieved of the need to discuss those provisions in detail.
The request for ruling was made by Mrs Payne on 24 February 1993 and concerned the application of the Income Tax Assessment Act 1936 (Cth) (``the Act'') to frequent flyer benefits obtained by her as a result of her participation in the Qantas Australian Frequent Flyer programme.
Mrs Payne was apparently an employee of a firm of chartered accountants. As at the time of the request she had 104,000 accumulated points in the programme which she described as being all ``referable work-related travel, the cost of which had been met by her employer''. Some, at least, of these points arose not from air travel but from hotel accommodation. She said that she intended to utilise the points later in the calendar year (presumably therefore in the income tax year 1994/95) to provide free international travel for her parents from the United Kingdom to visit her in Australia. She indicated that she understood from media reports that there was a proposal to alter the programme so that flight reward tickets would no longer be transferable to some other person. Accordingly she said that in that event she intended to use the tickets herself to visit her parents in the United Kingdom.
The only other facts stated in the request (these facts are to be gleaned from the discussion of the law which appears in it) are that her employer would have paid for the flights she undertook whether or not she had been a participant in the programme and that the membership arrangement was one made directly between her and the operator of the programme which was then called Qantas Australian Airlines. The request states, so far as can be taken to be a matter of fact, that benefits obtained under the promotion are ``a promotional reward''.
The application contained no evidence at all of the circumstances in which Mrs Payne became a member of the programme. It is not known whether a membership fee was or was not paid, nor is it known, if such a membership fee was paid, whether the payment emanated from her or her employer. Any form of application that was required to be signed was not disclosed to the Commissioner, nor is it known whether the relationship of membership arose as a result of an offer contained in advertising material accepted by Mrs Payne.
The only additional matter in evidence was a document entitled ``Welcome to the best of both worlds'' which purported to set out ``member benefits''. Much of the material in that document might be described as ``advertising matter''. However the document contains a section described as ``Program Rules'' which is of importance in the present appeal.
From that material it appears that persons who are members of the programme become eligible to earn points. This they do provided they quote their membership number when they make a flight reservation and in fact utilise the flight. Flights eligible to earn points include not only flights on what were then the two separate airlines, Qantas and Australian Airlines, but also points on Australian Airlines, regional airline subsidiaries and on Australian Asia Airlines. The number of points earned is related to the number of kilometres flown. Members receive statements, monthly or bi-monthly, showing the kilometres flown and points accrued.
The points gained may be ``redeemed'' by the issue to the member of free flight reward tickets which are available after a stipulated number of points have accrued. If the free flight reward tickets are for international travel, they are to be issued on a round-trip basis. Free flight reward tickets for travel within Australia can be on a one-way or round-trip basis. Depending upon the number of points accrued free flight reward tickets may be issued for economy, business or first-class travel. Such tickets are offered on a restricted basis and are subject to availability on off-peak flights and times and non-bookable periods.
Points accrued during the first membership year must be redeemed within two years from the date of joining or are lost. So too, points earned in the second year of membership must be used from the expiration of two years from the first anniversary of the date of joining, and so on. Presently free flight reward tickets may be ``assigned'' to any member of the family, provided that the degree of relationship is sufficiently close as to be nominated in a list of relationships contained in the booklet. Tickets may, however, not be sold or exchanged for cash or any other form of consideration and points may not be pooled, assigned or transferred to any other member of the programme.
If a member is unable to travel on a free flight reward ticket the reservation may be changed upon payment of a $50 per person service fee.
Under the heading in the booklet ``Terms and Conditions'' appear the following relevant provisions which are said to govern all aspects of the Qantas Australian Frequent Flyer programme:
1.2 In the event of any conflict between these Terms & Conditions and the Program Rules, these Terms & Conditions shall prevail.
2.1 The Qantas Australian Frequent Flyer Program reserves the right at all times to make any changes to the Program Rules, including but not limited to changes to rules governing: -
- - earning of travel points
- - free Flight Rewards blackout or non- bookable periods
- - limitations on the number of seats available on particular flights
- - continued availability of awards
- - point accrual rates
- - ticketing procedures; and
- - expiry of accrued points.
2.2 These changes may be made by the Qantas Australian Frequent Flyer Program at any time, without notice, in its sole discretion.
2.3 The Qantas Australian Program is not liable for any Flight Reward not being available or being withdrawn...
3.1 The Qantas Australian Frequent Flyer Program expressly reserves the right to terminate or materially alter the Program at any time, without notice.
3.2 The Qantas Australian Frequent Flyer Program shall not be liable for any member's accumulated travel points, Qantas or Australian Flight Rewards or any other benefit. In the event of termination or other material alteration to the Qantas Australian Frequent Flyer Program such points, Flight Rewards or benefits may also terminate or be extinguished...
4. Abuses of the Program
4.1 Any breach of these Terms & Conditions or the Program Rules or any failure to comply with these Terms & Conditions or the Program Rules whether intentional or otherwise may result in termination of membership, cancellation of accrued points, free Flight Rewards or other benefits or both at the Qantas Australian Frequent Flyer Program's sole discretion.
4.2 It is a breach of these Terms & Conditions for any member in the reasonable opinion of the Qantas Australian Frequent Flyer Program to:
- - abuse any privilege accorded to him or her as a result of membership in the Qantas Australian Frequent Flyer Program;
- - act in any way which is likely to be detrimental to the interests of the Qantas Australian Frequent Flyer Program, to Qantas Airways or Australian Airlines, or any of their affiliates;
- - supply or attempt to supply misleading information, or make any misrepresentation to the Qantas Australian Frequent Flyer Program or any affiliate of the Program.
4.3 Qantas or Australian 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 The Qantas Australian Frequent Flyer Program reserves the right to cancel any ticket issued pursuant to a Qantas or Australian Flight Reward which was sold, assigned, transferred or otherwise redeemed in breach of these Terms & Conditions and Program Rules at any time, without liability.
5.1 Application for membership of the Qantas Australian Frequent Flyer Program is open to any person at least two years of age.
5.2 Only individual persons are eligible for membership of the Qantas Australian Frequent Flyer Program and each member may maintain only one Account. Membership is not available to Companies, Government Departments or Agencies or Partnerships or the like. Membership and Rewards are offered at the discretion of the Qantas Australian Frequent Flyer Program and it has the right to accept or reject any application for membership...
5.4 Subject to these Terms & Conditions membership is terminated on the death of a member or the personal bankruptcy of a member. Points accumulated prior to termination are not transferable... [emphasis added]
6.1 Signature or use by a member of his or her membership card shall be taken to be acceptance of these Terms & Conditions and membership of the Qantas Australian Frequent Flyer Program.''
The Commissioner refrained from answering that part of the request which related to what the taxation consequences might be in the event that the programme were altered. Accordingly the ruling deals only with the assessability of Mrs Payne under the programme rules and terms and conditions, to which reference has already been made. The ruling relates to the years of income ending 30 June 1993 and 30
ATC 4195June 1994. The ruling contains an assumption, consistent no doubt with the Commissioner's refusal to consider the application of the Act to flight rewards issued under rules and conditions not yet applicable, that upon receipt of the benefit the rules of the programme provide for what the ruling refers to as ``transferable benefits'' only. The relevant parts of the ruling are in the following terms:
``WHAT THIS RULING IS ABOUT:
Whether or not benefit/s for which the taxpayer is eligible to receive as a result of her participation in the Qantas Australian Frequent Flyer Program would upon receipt constitute assessable income in terms of Sections 21A, 25(1), or paragraph 26(e) of the Income Tax Assessment Act?
THE SUBJECT OF THE RULING:
The taxation consequences of benefits received under the Qantas Australian Frequent Flyer Program (the Program) which have arisen as a result of points accumulated from employer paid travel undertaken by the member of the program.
Paragraph 26(e) of the Income Tax Assessment Act would apply to include in the assessable income of Ms. Fulcher the fair market value of the tickets issued under the Program, either in her name or that of her parents. It is considered that the benefit of the tickets will have been allowed, given or granted in respect of, or for or in relation directly or indirectly to Ms. Fulcher's employment.
The benefit of the tickets would not constitute income according to subsection 25(1) of the Act.
Section 21A does not apply to the facts of the case. Ms. Fulcher is considered not to be carrying on a business.''
Mrs Payne was not, of course, dissatisfied with that part of the ruling that found that the benefits fell neither within s. 25(1) or s. 21A of the Act. Accordingly the only substantive issue raised in the present application is whether s. 26(e) of the Act could operate to include an amount in Mrs Payne's assessable income upon the issue to her, or use, as the case may be, of a free flight reward in the form of a ticket in her own name or that of her parents, in redemption of the points accumulated as a result of employer paid travel.
Section 26(e) of the Act provides that the assessable income of a taxpayer is to include:
``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, whether so allowed, given or granted in money... or otherwise, not being...''
It is agreed that none of the exclusions to s. 26(e) have any relevance in the present circumstances.
There was little real dispute between the parties as to the correct construction of s. 26(e). Indeed the section has been the subject of a number of cases which have authoritatively stated the principles to be applied.
Constable v FC of T (1952) 10 ATD 93 at 94; (1952) 86 CLR 402 at 415, Dixon CJ, McTiernan, Williams and Fullagar JJ posed, in reference to the facts of that particular case, three questions (really little more than a paraphrase of the words of the sub-section) the answer to which would determine that case. These questions were:
``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'?''
If any of these questions can be answered in the negative, then the taxpayer is entitled to succeed.
In that case the taxpayer had been a member of a superannuation scheme to which both the taxpayer and his employer paid contributions. The rules of the scheme provided that if the rights of members were curtailed or their obligations increased then members were entitled to then withdraw the amounts shown to the credit of their accounts in the scheme. An alteration to the regulations was made which
ATC 4196brought about the result that the taxpayer was entitled to exercise his right to withdraw the amount shown to the credit of his account. It was held that the amount received by the employee was not assessable income within s. 26(e). In so holding, the Court was of the view that what was received by the employee was not allowed, given or granted to him during the year of income. This was so because all that happened was that the taxpayer who had a contingent right to an amount in the fund became entitled to payment out of the fund by reason of that contingent right becoming absolute. As their Honours said (at ATD 95-96; CLR 418):
``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 right to present payment and payment was made accordingly.''
There is a fundamental question in the present case, however, whether any of the three questions posed by the High Court are capable of answer on the facts contained in the application for ruling. Unless it is possible on those facts to answer any one of the three questions in the negative, then the ruling will need to be set aside, in the same way as the ruling in CTC was set aside, and the matter remitted to the Commissioner for further consideration in accordance with law. It is convenient to consider each of the three questions separately.
Was there a benefit of value to the taxpayer?
It may be noted that the parties were in agreement that no issue of valuation as such arose in the present case. Nevertheless the structure of the section makes it clear that there must be found an allowance, gratuity, compensation, benefit, bonus or premium, which can be said to have some value to the taxpayer.
Relevant to the first question will be the answer to two further questions. First it will be necessary to know whether Mrs Payne had some contractual right to have a ticket issued to her. If she did, then her nominating to Qantas Australian Airways that this right be satisfied by the issue of a ticket to her mother would seem to qualify as a benefit to her which would be capable of some value. If, on the other hand, there was no contractual relationship between Mrs Payne and the programme, then the question whether there was a benefit to Mrs Payne by the issue of a ticket to her mother might well depend upon facts not at all known at this stage, such as whether Mrs Payne had arranged to purchase a ticket for her mother in any event so that the ticket now issued at her direction by the programme would relieve her of expenditure otherwise to be undertaken by her.
The material in the request for ruling is inadequate to enable a conclusion to be drawn whether membership of the programme gave rise to contractual rights, or if it did what the terms of that contract were. Relevant to the determination of this question would no doubt be the application form by which Mrs Payne became a member, whether a joining fee was payable and if so how that joining fee came to be paid and perhaps other literature, if there be any, in the form of an offer made by Qantas Australian of which the application for membership may have been an acceptance.
It follows that it is impossible to answer this first question.
If there were a benefit, was that benefit allowed, given or granted during the year of income?
Counsel for Mrs Payne pressed upon me the analogy between the present case and Constable's case. It was submitted that the flight reward tickets were not allowed, given or granted because they arose from Mrs Payne's entitlement under the frequent flyer scheme. That submission depends, however, upon there being a contractual relationship between Mrs Payne and Qantas Australian Airways, assuming that company to be the other party to a contractual arrangement. With great respect to counsel, unless one has all the relevant material from which a determination could be made as to whether a contractual relationship existed, it is impossible to answer this question.
In Constable the taxpayer had a binding right, it would seem, to benefit under the scheme. Indeed the majority of the High Court referred to the taxpayer as having had, in respect of a share of the fund, a contractual if
ATC 4197not a proprietary title. In the present case, I am unable to say whether Mrs Payne had any contractual right at all or whether, in the absence of any such right, the giving of a ticket to her (whether made out in her own name or that of her mother is presently immaterial) could be said to amount to an allowance, gift or grant of a benefit.
If the answers to the first two questions were in the positive, there would arise the question whether any benefit was given to Mrs Payne ``in respect of, or for or in relation directly or indirectly to, her employment or services rendered by her''.
This third question peculiarly involves a factual issue. So much is clear from the more recent decision of the High Court in
Smith v FC of T 87 ATC 4883; (1988) 164 CLR 513. That case concerned a scheme instituted by Westpac Banking Corporation under which employees of the bank received small amounts upon the successful completion of an approved course of study. The High Court divided upon the issue, Wilson, Brennan and Toohey JJ finding that the payment fell within the section and Deane and Gaudron JJ finding that it did not.
Toohey J, with whose judgment Wilson J agreed, while accepting that in the use of the words ``in respect of'', ``for or in relation to'' and ``directly or indirectly'' the legislature had used words of great width, said (at ATC 4892; CLR 530):
``It remains true, however, that, notwithstanding the breadth of the language used, there must be a connection between the benefit received and the employment of the taxpayer or services rendered by him. In the present appeal we are concerned only with the nature of the relationship between the benefit received viz. the sum of $570 and the employment of the appellant by the bank.''
After discussing the judgments in
FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540, his Honour found that the amount in question was paid by the bank in accordance with a policy designed to encourage its employees to increase their knowledge in banking related subjects and therefore to increase their proficiency as employees. So seen his Honour was of the view that there was sufficient connection between the employment of the taxpayer and the sum he received. As his Honour said (at ATC 4894; CLR 533-4):
``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 existing relation of employer and employee. It was only as an employee that the appellant qualified for the benefits payable under the scheme... there was no element of gift or personal bounty or of considerations extraneous to the appellant's employment.''
His Honour made reference also to
Hayes v FC of T (1956) 11 ATD 68; (1956) 96 CLR 47 and
Scott v FC of T (1966) 14 ATD 286; (1966) 117 CLR 514; both cases concerned with the assessability of gifts made to the taxpayer where the issue was whether the gifts were in truth rewards of the taxpayer's employment so that they could be said to be a product or incident of that employment or reward for services, on the one hand, or whether they amounted to mere gifts, on the other.
In a separate judgment, Wilson J indicated that his Honour found it helpful to ask whether the benefit in question was a product or incident of the employment. In the circumstances involved in Smith his Honour was of the view that the benefit was.
Brennan J pointed out that the word ``employment'' as used in the section comprehended all aspects of the relationship of employer and employee, save those aspects which were merely personal. Thus s. 26(e) looked to the relationship between the entirety of the employment and the payment of the allowance. His Honour said (at ATC 4890; CLR 526):
``Of course, it will frequently be a difficult question of fact to decide whether a particular allowance which is paid voluntarily is paid for a reason which brings the allowance into or for a reason which carries it out of the tax net. But 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... 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
ATC 4198payment 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.''
Gaudron J, with whose judgment Deane J agreed, expressed the view that the relationship in Smith's case between the payment and the employment was too remote.
Smith's case was concerned with a payment made by the employer. It is not in dispute that a benefit or payment made otherwise than by the employer could, in a particular factual situation, fall within s. 26(e): cf Hayes v FC of T (supra).
Counsel for Mrs Payne submitted that it was insufficient that the fact of employment brought about the benefit, that is to say that the employment was a mere sine qua non for the obtaining of the benefit. There needed to be a more substantial connection. With this submission I would agree but whether there is a sufficient connection in the present case may well depend on matters of fact not stated in the application for ruling or the ruling itself.
Counsel for Mrs Payne submitted that the only source of entitlement to receive the travel reward was membership in the scheme. He pointed to the fact that Mrs Payne's employment with her employer could be terminated before she took the tickets but she would still be entitled to the tickets. He sought to distinguish the facts of the present case from those involved in
Kelly v FC of T 85 ATC 4283, where a payment was made to a footballer for being the best and fairest player in the season. It was said that there was no connection at all between Mrs Payne's employer and Qantas Australian Airlines. But whether that is true or not depends upon the facts. One might imagine a case where, if membership required payment of a fee, the employer paid the fee. Whether or not there was a contractual arrangement in such a case the connection between the member's employment and the benefit would become greater. Other factors may equally be imagined which would either strengthen or diminish the necessary connection between the travel benefit reward, on the one hand, and Mrs Payne's employment on the other. Without a factual inquiry being made as to all relevant facts, it seems to me that I am unable to answer this third question as well.
It follows that, just as in CTC, I should uphold the appeal and remit the ruling back to the Commissioner to make further inquiries and make a ruling in accordance with law. I do so with some regret because this case demonstrates now for the second time the difficulty inherent in what at first blush appears a relatively simple procedure. It is true, of course, that persons applying for rulings will in many, if not most, cases be unsophisticated and perhaps unaware of what the relevant factual matters are which need be known to sustain a ruling. I should add that the present applicant is not in that category. Likewise it may be said that applications for rulings might well be processed by officers of the Australian Taxation Office who are equally not attuned to the need for all relevant facts to be stated before a determinative answer can be given. But when the matter comes before the Court, the Court itself cannot inquire into potential facts. The power so to do is conferred upon the Commissioner and not upon the Court. The result is that the parties are caused further expense and time is lost which may well be significant in many cases. The problem is one which I would commend to the legislature for further consideration.
Neither party can be said to be wholly at fault in respect of the failure to supply information. The Commissioner had the power to request further information if it was needed but did not exercise such power. Mrs Payne sought to have the Court determine the matter, notwithstanding that all necessary facts were not before it. In these circumstances the proper course is, as counsel for the Commissioner agreed, to make no order as to costs. Accordingly I would make the following orders:
1. The respondent's objection decision dated 20 September 1993 be set aside.
2. The applicant's objection against the private ruling the subject of that objection decision be remitted to the respondent for determination according to law.
3. No order as to costs.
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