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High Court of Australia |
FEDERAL COMMISSIONER OF TAXATION v. DIXON [1952] HCA 65; (1952) 86 CLR 540
Taxation
High Court of Australia
Dixon C.J.(1), McTiernan(2), Williams(1), Webb(3) and Fullagar(4) JJ.
CATCHWORDS
Taxation - Income tax - Assessable income - Employee - Enlistment in defence forces - Remuneration - Difference between employee's war service pay and civil remuneration - Difference paid by employer - Liability to tax - Income Tax Assessment Act 1936-1943 (No. 27 of 1936 - No. 10 of 1943), ss. 6, 23 (5), 23B, 25, 26 (d), (e) - Defence Act 1903-1941 (No. 108 of 1903 - No. 4 of 1941), s. 118A (3).
HEARING
Sydney, 1952, August 18, 19; December 11. 11:12:1952DECISION
December 11.2. The question whether the amount is assessable income depends on more than one provision of the Income Tax Assessment Act 1936-1943. The commissioner's case has been supported on the ground that according to ordinary conceptions of what is income, the derivation by the taxpayer of 104 pounds from Macdonald, Hamilton & Co. as well as the derivation of his military pay, formed his income, and therefore became part of his assessable income. Both in support of this view and as an independent ground, the commissioner has also relied upon some words contained in the definition, in s. 6 of the Income Tax Assessment Act 1936-1943, of the expressions "income from personal exertion" and "income derived from personal exertion". Those words are "bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in relation to any services rendered". The critical words here are "allowances and gratuities received in the capacity of employee or in relation to any services rendered". The commissioner further relies, but this time as an independent ground only, on the provisions of par. (e) of s. 26. By this paragraph it is provided that the assessable income of a taxpayer shall 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, goods, land, meals, sustenance, the use of premises or quarters or otherwise. There is a proviso to the paragraph excluding its application to any allowance, gratuity or compensation which is included in par. (d) of s. 26. Paragraph (d) includes in the assessable income five per cent of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or termination of, any office or employment. The proviso to par. (e) is relied upon as showing that that paragraph extends to payments made on or after the termination of an employment as well as to payments made during the employment. Otherwise, so it is said, there would be no need of a proviso excluding its application to a payment made in consequence of retirement from or termination of an office or employment. For the purposes of par. (e) and, indeed, for the purposes of the words contained in the definition in s. 6 of "income from personal exertion", the employment upon which the commissioner relied was that of Macdonald, Hamilton & Co., not the service of the Crown by the taxpayer as a soldier. In the same way the words "services rendered by him" were applicable, according to the argument for the commissioner, to the services formerly rendered by the taxpayer to Macdonald, Hamilton & Co., not to the services rendered to the Crown by the taxpayer as a soldier. We are not prepared to give effect to this view of the operation of s. 26(e). Before turning to the other grounds upon which the commissioner rested his case, we shall state our reasons for declining to apply s. 26(e) to the supplementary payments provided by Macdonald, Hamilton & Co. as allowances &c. given &c. in relation directly or indirectly to the taxpayer's employment by that firm or services rendered by him to them. There can, of course, be no doubt that the sum of 104 pounds represented an allowance, gratuity or benefit allowed or given to the taxpayer by Macdonald, Hamilton & Co. Our difficulty is in agreeing with the view that it was allowed or given to him in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him. It is hardly necessary to say that the words "directly or indirectly" extend the operation of the words "in relation . . . to". In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause. It may be conceded also that the proviso has an effect upon the construction of par. (e) of s. 26, but the effect is only to show that the allowance may be in consequence of a retirement from or termination of the office, not to show that a mere historical connection, as it may be called, is sufficient. We are not prepared to give s. 26(e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination. To overcome the possible effect of such a view of the operation of s. 26(e) reliance was placed upon s. 118A(3) of the Defence Act 1903-1941. This is a provision inserted during the war of 1914-1918 by Act No. 36 of 1917. Sub-section (3) of s. 118A is as follows:- "The rendering of the personal service or the enlistment referred to in this section shall not terminate a contract of employment, but the contract shall be suspended during the absence of the employee for the purposes referred to in this section: but nothing in this section shall render the employer liable to pay an employee for any time when he is absent from employment for the purposes referred to in this section". The enlistment referred to includes voluntary enlistment. It does not appear to us, however, that the applicability of s. 26(e) can depend upon the difference between the suspension of the contract of employment and its termination. The contention that the allowance, gratuity or benefit was allowed or given to the taxpayer in relation to his employment by Macdonald, Hamilton & Co. or in relation to services rendered by him to them, cannot turn upon the difference between ending and suspending the operation of the contract of employment. That difference is only between the notional existence of a relationship, the actual rights and duties of which cease until upon a contingency they arise once more, and the cessation of the relationship itself, real or notional, so that the rights and duties are incapable of arising again, except by a new contract. (at p554)
3. For the taxpayer it was suggested that the National Security (Reinstatement in Civil Employment) Regulations 1939-1944 were inconsistent with the continued operation of s. 118A(3). Regulasion 3 and in the case of the Citizen Forces reg. 7 may have amplified and particularized the rights of the serviceman, but for any purpose relevant to the commissioner's argument they did not so far as we can see detract from the operation of s. 118A(3), whatever may be the effect of s. 8 of the Re-establishment and Employment Act 1945-1948. The use of the word "reinstatement" in reg. 7 does not imply that the employment is terminated and not suspended: cf. Commissioner for Railways (N.S.W.) v. McCulloch [1946] HCA 27; (1946) 72 CLR 141, at p 150 . But giving s. 118A its fullest application we remain unable to ascribe to s. 23(3) the effect claimed for it on behalf of the commissioner. We therefore put that provision aside and proceed to deal with the contention that the payment is income, and forms part of the assessable income, according to ordinary principles. (at p555)
4. Section 25 of the Income Tax Assessment Act 1936-1943 provides that the assessable income of the taxpayer shall include the gross income derived directly or indirectly, according to his residence from all sources or from all sources in Australia. Section 6 defines "assessable income" to mean all the amounts which, under the provisions of the Act, are included in the assessable income. As a result of s. 25 what is gross income derived directly or indirectly from all sources or all sources in Australia, as the case may be, depends upon what is income. The Commonwealth Act, unlike the Income Tax Act 1952 (15 & 16 Geo. VI. & 1 Eliz. II. c. 10) (Imp.), does not make the question of what is assessable or taxable income depend upon a series of express provisions dealing with the various kinds of income, such as those in schedules A, B, C, D and E of the British Act. It begins with the general conception of gross income and specifies in s. 23 what is exempt and in s. 26 and other sections particular classes of income that are to be included. Sometimes these classes of income appear to be specified simply for greater certainty, sometimes because they do not fall within the natural understanding of gross income, as, for example, in the cases mentioned in s. 36. The definition in s. 6 of "income from personal exertion" or "income derived from personal exertion" has always been used as a possible guide or test in cases where the question is whether a particular receipt is income or not. It is true that the definition is concerned only or chiefly with the difference, for the purposes of the rates of tax, between income from property and income from personal exertion, but, where any of the expressions contained in the definition are relevant, it is logical enough to use them as an indication that a given receipt is income. (at p555)
5. In the present case we think the total situation of the taxpayer must be looked at to see whether the receipts of the taxpayer from Macdonald, Hamilton & Co. are of an income character. He was employed at a salary. The war placed him, in common with many others, in a position in which he felt it was incumbent upon him to enlist. At the same time to do so meant that the earnings upon which he and possibly his dependants subsisted would be much reduced. His employers recognized this fact and intimated that they would do their best to see that if he decided to join the fighting forces his military pay and allowances would be supplemented so that it would not mean a financial loss. The motives of his employers for doing this were, no doubt, predominantly patriotic, but their patriotic motives were doubtless reinforced by considerations of what was right and proper in relation to the staff and by a desire of providing some inducement to the members of the staff to return to the firm at the conclusion of the war. From the taxpayer's point of view, it is not unlikely that when he decided to enlist in the armed services, he relied to some extent upon the intimation he received from his employers. The result was to keep his income up to the standard that would have been maintained had he not enlisted. We have advisedly used the word "income" because, from his point of view, the contribution made by his employers meant that the periodical receipts upon which he depended for the maintenance of himself and his dependants remained at the same level as his civilian employment would have given. From his point of view therefore the word "income" would be clearly applicable to the total receipts from his military pay and allowances and from his civilian employers. It does not seem to matter whether these employers are regarded as his former employers, as his future employers or as the other party to a suspended employment. In the definition of "income from personal exertion" the expression "allowances and gratuities received in the capacity of employee or in relation to any services rendered", while it does not appear to us to include, as a matter of meaning, allowances and gratuities received by an employee after he has ceased to render any services and after his employment has completely terminated, nevertheless does seem to indicate that no contractual right to the allowance or payment need exist. Indeed, it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognized incident of the employment or work. This may be seen from such cases as Cooper v. Blakiston [1908] UKHL 1; (1907) 2 KB 688; (1909) AC 104 , Herbert v. McQuade (1902) 2 KB 631; 4 Tax Cas 489 , Chibbett v. Joseph Robinson & Sons (1924) 9 Tax Cas 48 , Slayney v. Starkey (1931) 16 Tax Cas 45 , Hunter v. Dewhurst (1932) 16 Tax Cas 605 and Calvert v. Wainwright (1947) 1 All ER 282 . (at p557)
6. In the present case the employment or service, as we would emphasize, is as a soldier. The circumstances in which the taxpayer entered into that service were such as to enable him to rely with more or less confidence on the periodical payments from Macdonald, Hamilton & Co., as well as from his military pay, making up an "income" of the level appropriate to civilian service. Such an understanding is not confined to this particular employment. A widespread policy amongst employers both in Australia and in England led to this sort of thing being done. Decided cases in England dealing with other aspects of the matter show how widespread it must have been: see National Association of Local Government Officers v. Bolton Corporation (1943) AC 166 ; Lally v. Durham County Council (1945) 1 All ER 311 . How extensive the practice or policy must have been is further shown by the two cases in New Zealand of Louisson v. Commissioner of Taxes (1942) NZLR 30; (1943) NZLR 1 upon which counsel for the taxpayer so much relied. We do not think it necessary to say more concerning these two decisions than that, as will be seen from the reasons we have given, the difference in the conclusion we have reached arises chiefly in the difference of the conception we have formed of the character, as part of his income, of the regular periodical payments made to the soldier. Because the 104 pounds was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income, and therefore to form part of the gross income within the meaning of s. 25 of the Income Tax Assessment Act 1936-1943. (at p557)
7. Unfortunately supplementary payments, of the description in question, made to servicemen by their former employers during the war do not appear to fall within the exemption conferred by s. 23(s) of the Income Tax Assessment Act 1936-1946 or s. 23B of the Income Tax and Social Services Contribution Assessment Act 1936-1951. (at p557)
8. For the foregoing reasons we answer the question in the case stated that the sum of 104 pounds referred to in the case was assessable income of the respondent taxpayer for the period of twelve months ended 30th June 1943. (at p557)
McTIERNAN J. In my opinion the question in the case stated should be answered: No. (at p558)
2. The Commissioner of Taxation contended that the sum of 104 pounds, as to which the case was stated, was included by par. (e) of s. 26 of the Income Tax Assessment Act 1936-1943 in the respondent's assessable income. The material terms of this paragraph are "all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him" (the taxpayer) "in respect of, or for or in relation directly or indirectly to, any employment of or services rendered". It may be conceded that the 104 pounds was of the nature of one or more of these amounts. (at p558)
3. The question which arises is whether the grant of this sum of money had a relation to the employment of the respondent or to services rendered by him. If the grant of it had the relation required under par. (e) either to the respondent's employment as a clerk with Macdonald, Hamilton & Co. or his military employment, the provisions of par. (e) would have been satisfied. Was this sum of money given to the respondent in respect of either of such employments? The case stated shows that it was not a remuneration relating to either employment. It shows, however, that, but for the circumstance that the respondent was in the employment of Macdonald, Hamilton & Co. and left it in order to join the Army, they would not have paid the sum of money to him. It was not paid upon any legal basis: the whole of it was paid at the mere will of the firm. This fact, by itself, does not, of course, prevent the sum from being included by par. (e) in the respondent's assessable income. It is plain from the terms of par. (e) that taxation was not meant to be escaped by reason of the special fact that payments made to an employee in respect of his employment were voluntary. The words of par. (e) are wide, but, I think, not wide enough to prevent an employer from giving money or money's worth to an employee continuing in his service or leaving it, without incurring liability to tax in respect of the gift. The relationship of employer and employee is a matter of contract. The contractual relations are not so total and all embracing that there cannot be personal or social relations between employer and employee. A payment arising from those relations may have no connection with the donee's employment. The contract creates the cash nexus upon which their mutual rights and obligations rest. The employee performs his part of the contract for money or money's worth, which may be paid as a matter of obligation or sometimes may be paid in part upon no legal basis. It is true to say of such amounts that they are paid or given in respect of the employment of the recipient, whether paid during the employment or after it has ceased. (at p559)
4. The scheme under which Macdonald, Hamilton & Co. paid the 104 pounds to the respondent grew out of relations engendered by the contractual relationship. The scheme was ultra that relationship. It had nothing to do with the cash nexus between the firm and the respondent. But for the circumstance that he was in their employment when he enlisted he would not have received the 104 pounds. This is not a circumstance which necessarily made it a payment in respect of, or for or in relation directly or indirectly to, his employment. The case stated does not show that the sum flowed from the respondent's employment or his military service. It was a voluntary contribution made for a special purpose. The scheme under which it was paid was devised to save the firm's employees from financial loss due to enlistment. There was no connection between the payment and the services rendered by the respondent for Macdonald, Hamilton & Co. or between the payment and his military duties. (at p559)
5. The Court was referred to statutory provisions dealing with the industrial rights or privileges of employees while in the army. It is not possible to discern any connection between the payment and the statutory relations produced by these provisions. (at p559)
6. The sum of 104 pounds was assessed as income from personal exertion. This class of income is defined by s. 6(1) of the Act. The definition is exhaustive. It includes "allowances and gratuities received in the capacity of employee". The commissioner contended that the sum was in this category of income from personal exertion. The sum of 104 pounds was the total of a number of voluntary payments. All were made at the mere will of Macdonald, Hamilton & Co.: none was made upon any legal basis. They were at liberty to decline to make any of them. Indeed they made it clear that they might at any time cease to continue the payments. These were accidental additions to the respondent's financial means, so long as he was on active service and his military pay was less than his civilian pay. Were these payments received by the respondent in the capacity of employee? Lord Alverstone cited in Cooper v. Blakiston (1907) 2 KB 688, at p 697 some observations made by Stirling L.J. in Herbert v. McQuade (1902) 2 KB 631, at p 650 which are in point. "I think that a profit accrues by reason of an office when it comes to the holder of an office as such - in that capacity - and without the fulfilment of any further or other condition on his part". It was necessary for the respondent to fulfil two other conditions besides being an employee. These were, to join the Army and to be in receipt of military pay less than his pay as a clerk. The measure of the sum of 104 pounds was this difference. It did not relate back to his employment as a clerk: it was not a payment in respect of services rendered as such nor in respect of military services. The sum was paid under a scheme designed to give financial relief to those employees of the firm who suffered financially because they enlisted. The payment of this sum of 104 pounds to the respondent was determined by this personal equation. The fact that the payment was voluntary is not per se a reason why the sum should not be taxable. It is an element in the scheme. The sum was a special contribution made to the respondent by reason of the circumstance that he sacrificed some of his income by enlisting. This was the dominant and determining factor. The sum was in a sense paid to him honoris causa. (at p560)
7. The commissioner relied strongly upon the following statement made by Buckley L.J. in Cooper v. Blakiston (1907) 2 KB, at p 703 . "The question is not what was the motive of the payment, but what was the character in which the recipient received it? Was it received by him by reason of his office?" If this test is applicable here, it seems to me that it is not to the commissioner's advantage to apply it. What was the character in which the respondent received the sum of 104 pounds? I should say, that upon the facts found by the stated case, the respondent did not receive the sum in the character of an employee. He would not have received it unless he ceased to be an employee and it was not in any sense an augmentation of the remuneration paid to him as a civilian. As regards his military capacity, it was extraneous to that employment and a mere fortuitous addition to his military pay. It came to him merely in consequence of the bounty of his former employers. They made the payment in respect of his enlistment from their service. It was an acknowledgement of that fact not of his services for them. The bounty would diminish if he was promoted or his military pay was increased. The sum was not paid to impose any obligation upon the respondent to resume his former employment. If it is a material matter the respondent did not request that the payment be made. Neither the firm nor he contemplated that if he enlisted it would be a term of his employment that he would receive such a payment. The scheme contemplated that no payment would be made until further service with the donors was impossible owing to the respondent's enlistment. The respondent had no right to receive anything under the scheme. (at p561)
8. All the facts clearly point to this not being a payment in respect of the respondent's employment or in respect of services rendered by him or a payment to the respondent in his capacity as an employee. (at p561)
9. The case of Cooper v. Blakiston (1907) 2 KB 688 concerned Easter offerings received by the incumbent of a benefice. That decision was unfavourable to him. It seems to me that the decision proceeded upon distinctions which are very favourable to the respondent in the present case. Lord Loreburn said in the course of his judgment upon the appeal [1908] UKHL 1; (1909) AC 104, at p 107 :- "In my opinion, where a sum of money is given to an incumbent substantially in respect of his services as incumbent, it accrues to him by reason of his office. Here the sum of money was given in respect of those services. Had it been a gift of an exceptional kind, such as a testimonial, or a contribution for a specific purpose, as to provide for a holiday, or a subscription peculiarly due to the personal qualities of the particular clergyman, it might not have been a voluntary payment for services, but a mere present". An earlier case of Turner v. Cuxon (1888) 22 QBD 150 dealt with a voluntary payment to which the second part of these observations would apply. Subsequent cases which provide examples of payments of the same kind are Cowan v. Seymour (1920) 1 KB 500 ; Seymour v. Reed (1927) AC 554 ; and Corbett v. Duff (1941) 1 KB 730 . In my opinion the 104 pounds could be classed with payments of the kind which Lord Loreburn said were not taxable. However, decisions upon the English Act need to be used with care in interpreting the present Act. I refer to them only because they were used to support the commissioner's contention that the 104 pounds was assessable income. (at p561)
10. Stedeford v. Beloe (1932) AC 388 is another case in which the taxpayer
succeeded. There the question was whether an annual pension
granted out of the
school funds to a headmaster on his retirement was taxable. The governing body
of the school which granted the
pension had the right at any time to rescind
it and to cease making payments to the headmaster. Viscount Dunedin said:-
"It (the pension) is not given to him in respect of his office as headmaster,
because he no longer holds that office of headmaster.
It is only given to him
because he is no longer headmaster . . . . Now it must be a real profit under
Schedule D, and it has been
held again and again that a mere voluntary gift is
not such a profit because it is not, in the true sense of the word, income. It
is merely a casual payment which depends upon somebody else's good will"
(1932) AC, at p 390 . Lord Warrington of Clyffe said: "Here
each payment is
wholly voluntary. The case is only an instance of a succession of voluntary
payments, each of which is voluntary
and none of which need necessarily be
continued" (1932) AC, at p 391 . Lord Thankerton adopted this quotation to
describe the pension
(1932) AC, at p 391 . "It was a mere donation given each
year with no certioration that it would be repeated the year following".
Lord
Macmillan concurred. The sum of 104 pounds resembles the headmaster's pension
in these respects. It was a succession of voluntary
payments: it had the
quality of periodicity: it became payable when the respondent left the civil
employment: it was in the absolute
discretion of the firm whether it would
carry out the scheme: it was not bound to make any payment to the respondent.
Lord Phillimore
said in delivering judgment in Seymour v. Reed (1927) AC, at p
571 :-
"My Lords, I do not feel compelled by any of these authorities to hold that an
employer cannot make a solitary gift to his employee
without rendering the
gift liable to taxation under Sch. E. Nor do I think it matters that the gift
is made during the period of
service and not after its termination, or that it
is made in respect of good, faithful and valuable service". The authorities in
question were in the line of cases upon which the commissioner relied. The
judgment in the case of Stedeford v. Beloe (1932) AC 388
shows that Lord
Phillimore's observations could be extended to a succession of mere voluntary
payments. (at p562)
11. The case for the inclusion of the sum of 104 pounds is no stronger because its measure was the difference between the military and civil pay. If the measure were different, more or less - that circumstance could not have distinguished any greater or smaller sum, for the purposes in hand, from the present sum of 104 pounds. (at p562)
12. In my opinion, as already stated, the question should be answered in the negative. (at p562)
WEBB J. As I view the evidence the moneys sought to be taxed were paid to the taxpayer because of, and as a reward for, his enlistment and for no other purpose. This fact remains, although the taxpayer when he enlisted was in the employ of the company that paid him the reward, and he qualified for the reward because he was its employee; and although the reward was conditional upon the military pay of the employee being less than his pay as the company's employee, and was limited to the amount of the difference. The commissioner in claiming that the reward is taxable overlooks the essential nature of the reward as one solely for enlistment and concentrates on the limitation of the reward to particular recipients, being employees of the company, and its quantification with regard to the difference in their military and civil pay. But the essential nature of the reward as one solely for enlistment remains, notwithstanding this limitation and quantification. It is true that the quantification made the reward the equivalent of the loss of pay as a result of enlistment; but on the other hand the amount of the reward bore no relation to length of service with the company: a soldier who had long been employed by the company but with short military service might receive a mere fraction of the reward paid to a soldier employed by the company for a brief period but with long military service. (at p563)
2. The quality of the reward is not determined by the yardstick used to quantify it. (at p563)
3. The purpose of the payment by the company, as I see it, was to encourage enlistments among its employees, but its motive may have been to induce them to return to their employment with the company after discharge from the forces; many would, no doubt, have enlisted in any event. However, the purpose of, and not the motive for, the payment is the test of its nature. (at p563)
4. In my opinion the reward was not given or received "in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by" the taxpayer, and so does not come within s. 26(e) of the Income Tax Assessment Act 1936-1943. (at p563)
5. I would answer the question in the negative. (at p563)
FULLAGAR J. I have not regarded this case as by any means free from difficulty, but two things seem to me to be clear. The first is that neither the provisions of s. 118A of the Defence Act 1903-1941 nor those of the National Security (Reinstatement in Civil Employment) Regulations 1939-1944 have any bearing on the question raised. The character of the receipts in question cannot depend on enactments creating special rights and duties for a limited purpose between employers and employees. The second thing which seems to me to be clear is that the receipts in question are not so related to any employment of the respondent as to fall either within the terms of the definition of "income from personal exertion" in s. 6 of the Income Tax Assessment Act 1936-1943 or within the terms of s. 26(e) of that Act. The moneys would not, of course, have been paid if the respondent had not been employed by Macdonald, Hamilton & Co. up to the date of his enlistment. But nothing that he had done in his employment by Macdonald, Hamilton & Co., or might thereafter do if he re-entered their employment, provided the occasion of the payments. The payments were made irrespective of any services given by an employee as employee. The same bounty was available to one who had served for one month or for ten years. The whole substance of the matter is accurately stated by Fair J. in Louisson v. Commissioner of Taxes (1942) NZLR 30, at p 34 , where his Honour speaks of such moneys as "given out of a sense of appreciation of sacrifices made on the enlistment of employees . . . and as a recognition of their public spirit in doing so". The fact of the respondent's employment explains the selection of him as a recipient, but it in no degree characterizes the payment. The payment does not partake in any degree of the character of a reward for services rendered or to be rendered. (at p564)
2. I understood Mr. Wallace to contend that the conclusion expressed above must be the end of the matter, and that, if the receipts in question could not be brought within the definition of "income from personal exertion" in s. 6 or within s. 26(e), they could not be treated as assessable income under the Act. This argument is not without an appearance of logic, but, in my opinion, it cannot be accepted. The truth is that, in spite of its form, it is impossible to regard the definition in s. 6 as exhaustive. It is only necessary to look at s. 26 to see that this is impossible. Section 26 brings into charge - notably in par. (e) and in pars. (f) and (h) - receipts which would never be treated otherwise than as income from personal exertion, and which are yet outside the scope of the actual words of the definition. And s. 26 uses the word "include". And s. 25, which works together with ss. 17 and 48 to provide the fundamental basis of taxation, provides that the assessable income of a taxpayer shall be his gross income from the respective sources described. Whatever is "income" is thus brought into charge unless some special provision can be found which keeps it out. In Scott v. Commissioner of Taxation (N.S.W.) (1935) 35 SR (NSW) 215; 52 WN 44 Jordan C.J., dealing with an Act which was the same in relevant respects as the Act now under consideration, said:- "The definition section, where it deals with income, does not define it, because the word 'income' appears on both sides of the equation. Nor does it define 'income from personal exertion'. It merely enumerates, by way of illustration, various forms of income which are to be treated as derived from personal exertion" (1935) 35 SR (NSW), at p 220; 52 WN 44 . A little earlier his Honour had said:- "The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind" (1935) 35 SR (NSW), at p 219; 52 WN 44 . The authority of these passages is not affected by the fact that the position which actually arose in Scott's Case (1935) 35 SR (NSW) 215; 52 WN 44 is now covered by s. 26(d) of the Commonwealth Act. (at p565)
3. For the reasons given, the receipts in question may be assessable income from personal exertion although not comprehended within the terms of the definition in s. 6 or within the terms of s. 26(e). And the conclusion seems to me to be unavoidable that those receipts do constitute assessable income. Before stating reasons for this conclusion, however, it is desirable to refer to two decisions of the Supreme Court of New Zealand, on the latter of which the respondent strongly relied, and to which great weight was naturally given by the Board of Review. One of them has already been incidentally referred to. The circumstances attending the payments in question in those cases seem to have been the same as those attending the payments in question in the case before us. But in one of the New Zealand cases the money was paid (or was treated as having been paid) in a single lump sum, whereas in the other there had been a series of periodical payments. In the present case there is no express statement as to how the moneys were paid, but it seems safe to infer from certain evidence given by the respondent before the Board of Review that payments were made periodically at regular intervals. (at p565)
4. The first case is Louisson v. Commissioner of Taxes (1942) NZLR 30 . The relevant statutory provisions were contained in s. 79(1)(b) and (h) of the Land and Income Tax Act 1923-1939 (N.Z.). The section provided that the assessable income of any person should be deemed to include all sums received or receivable by way of emolument of any kind in respect of or in relation to the employment or service of the taxpayer: (h) income derived from any other source whatsoever. Paragraph (b) may be regarded as corresponding to s. 26(e) of the Australian Act, and par. (h) to s. 25. The New Zealand taxation year ended on 31st March. On 1st October 1939 the appellant taxpayer enlisted in the armed forces of New Zealand, and on the same date the directors of the company which employed him passed a resolution that, in the case of members of the staff enlisting, the difference between their pay as employees and their military pay would be paid by the company up to 31st March 1940, the position to be further reviewed after that date. In pursuance of that resolution a sum of 453 pounds was paid to the appellant. Fair J. held, in the first place, that the money was not received in respect of or in relation to the employment of the appellant by the company, and the passage quoted above occurs in that part of his judgment which deals with this question. His Honour then proceeds to consider whether the receipt constituted "income" within the meaning of par. (h) of s. 79(1). This question also he answers in the negative. He treats the sum of 453 pounds as having been received in a lump sum, and it is clear, I think, that this forms the whole basis of his decision. He says: "Income has a meaning that is well established by the cases as something which usually involves periodical payments" (1942) NZLR, at p 35 . He concedes that a payment of a single sum may constitute income, but thinks that the payment in this case, despite the method of its computation, does not. "It may", he says, "be regarded as a grant to cover the transition period from civil to military life" (1942) NZLR, at p 36 . (at p566)
5. It is clear that the decision of Fair J. is distinguishable from the present case. But on 23rd July 1940 the directors of the same company passed another resolution to the effect that, in the case of members of the staff enlisting, the company would, from 31st March 1940 to 30th September 1940, pay to them the difference between their pay as employees and their military pay. On 2nd October 1940 it was resolved that the same thing be done for the period from 30th September 1940 to 31st March 1941. During the income year ended 31st March 1941 Mr. Louisson received from the company in pursuance of the resolutions a total sum of 612 pounds, which was paid to him by equal monthly payments. The commissioner again treated this sum as income, and Mr. Louisson again appealed. The matter came, on case stated, before the Court of Appeal consisting of Myers C.J., Blair J., Kennedy J. and Northcroft J. - Louisson v. Commissioner of Taxes (1943) NZLR 1 . The decision of the Court in favour of the appellant was unanimous. They rejected a contention (which had not been developed in the earlier case before Fair J.) that the sums in question had been paid by the company "in respect of or in relation to" an employment of the appellant by the Crown in the armed forces. I would respectfully agree with this. The payments were not in any real sense rewards for services rendered to the Crown. For the rest, the learned Judges accept the decision of Fair J. as correct and express the opinion that periodicity of payment affords no ground for distinguishing between the two cases. Myers C.J. and Northcroft J. in a joint judgment say:- "Nor do we think that what is referred to in some of the cases as the 'periodicity' of the payments makes any difference" (1943) NZLR, at p 9 . (at p567)
6. The point to be observed about the second Louisson Case (1943) NZLR 1 is that it proceeds wholly on s. 79(1)(b) of the Land and Income Tax Act 1923. The question in connection with which Fair J. in the earlier case had regarded the "lump sum" character of the payment as relevant was the question whether the case fell within s. 79(1)(h), that is to say, the question whether, apart from any category specifically mentioned in the Act, the payment fell within the ordinary conception of "income". But in the later case no reference appears to be made to this latter question either in the argument of counsel for the commissioner or in any of the judgments. Counsel seems to have proceeded on the view that, if the receipts in question could not be related to any employment in the relevant sense, they amounted to "mere gifts" and could not be "income" within the meaning of the Act. Some colour may be said to be given to this assumption by such English cases as Beynon v. Thorpe (1928) 14 Tax Cas 1 and Stedeford v. Beloe (1932) AC 388 , but it is to be remembered that the sole question in England in such cases has been whether a particular receipt falls within the terms of a particular description in a schedule which deals with profits or gains arising from an office or employment. At any rate no such assumption can be made with respect to the Commonwealth Income Tax Assessment Act, and for this reason it appears to me that the second Louisson Case (1943) NZLR 1 should be regarded as supporting the view that this case falls outside the definition of "income from personal exertion" and outside s. 26(e), but otherwise as having no bearing on the present case. (at p567)
7. It seems to me that the appellant's receipts from Macdonald, Hamilton & Co. must be regarded as having the character of income. They were regular periodical payments - a matter which has been regarded in the cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient, see e.g. Seymour v. Reed (1927) AC 554, at p 570 and Atkinson v. Federal Commissioner of Taxation [1951] HCA 64; (1951) 84 CLR 298 . This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent. What the employing firm decided to do, and what it really did, in relation to the respondent and others in the same position, was "to make up the difference between their present rate of wages and the amount they will receive". What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added. Perhaps the nearest parallel among the many cases cited to us is to be found in Commissioner of Taxes (Vict.) v. Phillips [1936] HCA 11; (1936) 55 CLR 144 . Phillips was managing director of a company under a contract for a term of years. That company entered into an agreement with another company which necessitated the retirement of Phillips from his position. By way of "compensation" the company agreed to pay Phillips the same amounts at the same times as it would have been obliged to pay him if he had continued in his position until the expiration of his term of employment. The payments made by way of "compensation" were held to partake of the same nature as the payments which would have been made if the employment of Phillips had continued. The payments in that case were made in pursuance of a binding contract, whereas the payments in the present case were voluntary. But the nature of the payments was the same in both cases, and what was said in Phillips's Case (1936) 55 CLR 144 applies mutatis mutandis to this case. In a joint judgment Dixon and Evatt JJ. said:- "No prima facie reason exists for regarding as instalments of capital annual payments which are taken in place of the contractual rights" (1936) 55 CLR, at p 156 given by the original contract. And again:- "In these circumstances they" (i.e. the payments under the substituted contract) "must . . . be regarded as of the same nature as the payments they replace" (1936) 55 CLR, at p 157 . (at p569)
8. The question asked by the case stated should, in my opinion, be answered: Yes. (at p569)
ORDER
Question in the case stated answered: Yes. Costs of the case stated reserved for the Justice disposing of the appeals.
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