Federal Commissioner of Taxation v French

98 CLR 398

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(Judgment by: Williams J)

Between: Federal Commissioner of Taxation
And: French

Court:

Judges: Dixon CJ
McTiernan J

Williams JKitto J
Taylor J

Subject References:
Taxation and revenue
Income tax
Exempt income
Whether derived 'from a source out of Australia'

Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 (No 27) - the Act
Judiciary Act 1903 - s 18

Hearing date: 27 August 1957; 28 August 1957;
Judgment date: 18 November 1957

SYDNEY

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Judgment by:
Williams J

Taylor J. has stated a case under s. 18 of the Judiciary Act 1903-1955 for the opinion of the Full Court in an appeal by the Commissioner of Taxation of the Commonwealth of Australia under s. 196 of the Income Tax and Social Services Contribution Assessment Act 1936-1951 from a decision of the Board of Review No. 3 upon the reference of an objection to that board by the respondent Richard Oxley French to the inclusion by the appellant in his assessable income of PD110 derived during the year ended 30th June 1951.  

The facts can be briefly stated. The taxpayer was at all material times a resident of New South Wales and was employed as an engineer under an oral contract by the Colonial Sugar Refining Co Ltd , a company incorporated in New South Wales which carries on business in that State and in some of the other States of Australia, Fiji and New Zealand, where it is registered under Pt. XII of the Companies Act 1933 (No. 29) of New Zealand as a company incorporated outside New Zealand carrying on business within New Zealand. During each year since 1943 the respondent has spent two or three weeks in New Zealand as inspecting engineer for the company in its New Zealand business. In pursuance of an arrangement made between the respondent and the company, the company for many years past has paid the salary of the respondent monthly and such salary (less deductions for income tax, contributions to superannuation and other moneys) has been paid into an account kept by the respondent with a bank in Sydney. In the month of November 1950, the company sent the respondent to New Zealand there to perform, and between 22nd November and 8th December 1950 he did perform services as an inspecting engineer for the company in its business in New Zealand. Upon the completion of those services the respondent returned to Sydney and continued his service with the company in New South Wales. The salary payable by the company to the respondent in respect of the period during which he performed the services in New Zealand amounted to PD110 and was included in two monthly payments made by the company to the credit of the respondent's bank account in Sydney on 28th November 1950 and 21st December 1950.  

By notice of assessment dated 9th May 1952, the appellant assessed the respondent to income tax upon his income for the year ended 30th June 1951, including the sum of PD110. The respondent objected to the assessment contending that this sum "was not exempt income in New Zealand and should therefore be exempt from tax in Australia in accordance with s. 23 (q) of the Income Tax Assessment Act". The appellant disallowed the objection and it was referred to the Board of Review. The Board of Review by a majority upheld the objection. It was agreed between the parties for the purpose of the reference to the Board of Review and it is agreed between them for the purposes of the case stated that the sum of PD110 was "not exempt from income tax in New Zealand within the meaning of those words in s. 23 (q) of the Income Tax and Social Services Contribution Assessment Act 1936-1951". The question asked in the case stated is "Was the salary, which was paid to the respondent by Colonial Sugar Refining Co Ltd in respect of the period during which he performed services for the company in New Zealand (being the sum of PD110) income derived by the respondent from a source out of Australia within the meaning of s. 23 (q) of the Income Tax and Social Services Contribution Assessment Act 1936-1951?".  

Section 25 (1) of the Income Tax and Social Services Contribution Assessment Act provides that the assessable income of a taxpayer shall include-

(a)

where the taxpayer is a resident-the gross income derived directly or indirectly from all sources whether in or out of Australia and

(b)

where the taxpayer is a non-resident-the gross income derived directly or indirectly from all sources in Australia, which is not exempt income.

Section 23 of the same Act provides that the following income shall be exempt from income tax-

"(q) 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 ...".

It will be seen that the amount involved in the appeal is small but the case is apparently a test case brought to decide the question whether in the case of a contract of employment the source of income is the place where the services are rendered or where the services are paid for. The general principle of law relating to contracts of employment is clearly established. It is thus stated by Dixon J., as he then was, in Automatic Fire Sprinklers Pty Ltd v Watson: ^[F10]

"A contract for the establishment of the relation of master and servant falls into the same general category of agreements to pay in respect of the consideration when and so often as it is executed, and is, therefore, commonly understood as involving no liability for wages or salary unless earned by service, even though the failure to serve is a consequence of the master's wrongful act. It is, of course, possible for the parties to make a contract for the payment of periodical sums by the master to the servant independently of his service. Indeed that is, in effect, what the Duke of Westminster persuaded the majority of the House of Lords he had done in Inland Revenue Commissioners v Duke of Westminster. ^[F11] But, to say the least, it is not usual. The common understanding of a contract of employment at wages or salary periodically payable is that it is the service that earns the remuneration and even a wrongful discharge from the service means that wages or salary cannot be earned however ready and willing the employee may be to serve and however much he stand by his contract and decline to treat it as discharged by breach. See Archard v Hornor; ^[F12] Snelling v Lord Huntingfield, ^[F13] at p. 978]; Smith v Hayward; ^[F14] Fewings v Tisdal; ^[F15] Emmens v Elderton, ^[F16] more particularly the advice of Crompton J. to the House; Brace v Calder, ^[F17] at p. 263; Petrie v Mac Fisheries Ltd ^[F18] ". ^[F19]

In the present case the services which earned the remuneration of PD110 were rendered in New Zealand and the whole of the reasoning in the previous decisions of this Court relating to the meaning of the word "source" would lead to the conclusion that the source of this income was in New Zealand where the services were rendered and the income earned and not in Sydney where the salary was paid. This was the opinion of the majority of the Board of Review upon the reference where the relevant decisions of this Court are cited. None of them is a direct decision upon the source of the income in the case of a contract of employment. They all relate to the source of income derived from the carrying on of a trade or business. They are referred to in Federal Commissioner of Taxation v United Aircraft Corporation. ^[F20] They are based upon the principle that the source of income is "a practical hard matter of fact", ^[F21] "something which a practical man would regard as a real source of income" ^[F22] and this view has been adopted by the Privy Council in Liquidator, Rhodesia Metals Ltd v Commissioner of Taxes. ^[F23] The result is that income may be derived from more than one source where it is derived from trade or business activities carried on in more than one place and may have to be apportioned for the purposes of taxation between the sources. If the principle of these decisions is applied to a contract of employment it would seem to require the conclusion that the locality of the source of the income must be the place where the duties of the employment are performed and that where these duties are performed in more than one place the income is derived from more than one source.  

In two Australian decisions this conclusion has been reached. One is the decision of the Full Supreme Court of New South Wales in Commissioner of Taxation v Cam & Sons Ltd ^[F24] and the other that of the Full Supreme Court of Queensland in Diamond v Commissioner of Taxes (Q.). ^[F25] To the contrary is that of the Supreme Court of New South Wales, Herron J., in Hall v Commissioner of Taxation, ^[F26] where his Honour adopted the meaning placed upon the word "possessions" in the phrase "income arising from possessions out of the United Kingdom" in Case V of Schedule D of the Income Tax Act 1918 (Imp.) in relation to a contract of employment. This Act broadly stated taxed a resident in the United Kingdom upon the whole of his income wherever the source may be but this general liability was subject to a partial exemption under Case V in the case of income derived wholly from such possessions. The word "possessions" has been given a very wide meaning. It has been held to include contracts of employment where the locality of the income arising from the employment is entirely outside the United Kingdom. The resident is taxed upon only so much of the income of such a possession as is received in the United Kingdom from remittances payable in the United Kingdom or in certain other specified ways: Colquhoun v Brooks; ^[F27] Foulsham v Pickles; ^[F28] Bennett v Marshall; ^[F29] Bray v Colenbrander; Harvey v Breyfogle. ^[F30] Those cases have decided that in the case of a contract of employment the locality of the source of the income for the purposes of Case V is not the place where the duties of the employee are performed but the place where payment for the employment is made. But "decisions on the words of one statute are seldom of value in deciding on different words in another statute" ^[F31] per Lord Atkin, delivering the judgment of the Judicial Committee in Liquidator, Rhodesia Metals Ltd v Commissioner of Taxes, ^[F32] and it would be quite wrong to attempt to determine the meaning of the word "source" when used in the Australian Income Tax and Social Services Contribution Assessment Act by applying to that word the meaning placed upon "income arising from possessions out of the United Kingdom" in Case V of Schedule D of the Income Tax Act (Imp.) where the "possession" was a contract of employment. However general the statements in the judgments and the speeches in those cases may be, they relate to legislation widely different from the Australian legislation. Case V provides for a resident in the United Kingdom being taxed only upon the income arising from possessions outside the United Kingdom which is remitted to the United Kingdom and this provision clearly indicates that the income arising from such a possession must be income which is capable of being remitted to the United Kingdom or in other words income which has been paid to the resident outside the United Kingdom. As Jordan C.J. pointed out in Cam's Case ^[F33] this feature of Case V was strongly relied upon by their Lordships in Foulsham v Pickles. ^[F34] See the speech of Viscount Cave, ^[F35] that of Lord Dunedin ^[F36] and that of Lord Buckmaster. ^[F37] Lord Cave said:

"there are no words in the rule which can comprise money arising and payable here". ^[F38]

In view of this provision it is not surprising that their Lordships should have held in the case of a contract of employment under which an employee worked abroad, but was paid for his services in the United Kingdom, that the locality of the source of income was where the payment was made, or that in the converse case, where the employee worked in England but was paid abroad the source of income was outside the United Kingdom. To have held that the locality of the "possession" was where the services were rendered would have led to the quandary whether in the case of an employee who worked abroad but was paid in the United Kingdom, the whole income was taxable because it had reached the United Kingdom although it never had been remitted from abroad or the whole of the income should be exempt because, although it had reached the United Kingdom, it had never been remitted. The Australian scheme is altogether different from the English scheme. Under the Income Tax and Social Services Contribution Assessment Act a resident of Australia is taxed upon his income derived from all sources other than upon exempt income. One class of exempt income is that described in s. 23 (q). The purpose of this sub-section is to exempt from tax income which is not exempt income in the country where it is derived or in other words to prevent double taxation. Provided it is derived from a source out of Australia and is taxable there, it is exempt from Australian tax wherever it is paid to the Australian resident and whether it is remitted to Australia or not. In Bennett v Marshall, ^[F39] Romer L.J., after pointing out that as regards a trade the question of the locality of the "possession" that arose under Case V had been decisively solved and solved in the way one would have expected it to be solved, that is by having regard to the place where the business was done, that is, the place where the trade was carried on, said that he would have expected to find that in the case of an employment the locality of the source of income was the place where the employment was actually carried on by the employee, that is to say, the place where the activities of the employee were exercised because

"I should have thought it would be held consistently with the cases relating to trade that the activities of the employee were the source of the income which he derived from his employment". ^[F40]

It is interesting to note that this inconsistency has now been removed by the Finance Act 1956 (Imp.), Pt. II. There is no difficulty under the Australian Act in holding that, as in the case of a trade or business, so in the case of a contract of employment, the source of the income is where the duties of the employee are performed and that where they are performed in more than one place there should be an apportionment.  

This conclusion is assisted by the fact that s. 6 of the Australian Act contains a definition of income from personal exertion and also a definition of income from property. These definitions were inserted in the Act so that the respective incomes might be taxed at different rates and in the relevant year-that is the year of income ended 30th June 1951 - income derived from property was taxed at a higher rate than income derived from personal exertion. Section 6 of the Income Tax and Social Services Contribution Assessment Act provides that, unless the contrary intention appears, "income from personal exertion" or "income derived from personal exertion" means income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in relation of any services rendered, the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person, any amount received as a bounty or subsidy in carrying on a business, the income from any property where that income forms part of the emoluments of any office or employment of profit held by the taxpayer, and any profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme, but does not include-

(a)

interest, unless the taxpayer's principal business consists of the lending of money, or unless the interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by him in the course of his business; or

(b)

rents or dividends;

and that "income from property" or "income derived from property" means all income not being income from personal exertion.

For the purposes of s. 25 (1) of the Act the locality of the source of "income from property" or "income derived from property" must be the place where the property is situated. For the same purposes the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered surely must be where such personal exertion took place, and the locality of the source of the proceeds of any business where the activities of the business are carried on. The definition of income from personal exertion includes the income from any property where that income forms part of the emoluments of any office or employment of profit held by the taxpayer, and the inclusion of this income as income from personal exertion indicates that the locality of the source of this income would be where the taxpayer performed the duties of the office or employment and not where the property was situated from which the income was derived. The definition of income from personal exertion also includes any profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme. This provision is consequential upon s. 26 (a) of the Act which includes such profits in the assessable income of a taxpayer. Apart from s. 26 (a) such profits or at least profits from the sale of any property acquired for the purpose of profit-making by sale might have been considered to be a capital profit. The locality of the source of such a profit would ordinarily be where the property is situated. But as it is placed in the category of income from personal exertion the source of the profit may well be where the activities which produced it were performed. Be this as it may, the determination of its true locality, even if it be the place where the property is situated, can throw no real light on the question of the locality of the source of income derived from what may truly be described as income from personal exertion in the sense that it is the personal exertion which produces the income whether that personal exertion be exertion in the capacity of an employee or in the rendering of services or in the carrying on of a business. In these two cases the real source of the income in any practical sense must be the place where this personal exertion takes place.  

Applying these principles the locality of the real source of the income of PD110 was in New Zealand and the question in the case stated should be answered "Yes".