Federal Commissioner of Taxation v Dixon
86 CLR 540(1952) 10 ATD 82
[1953] ALR 17
[1952] HCA 65
(Decision by: Dixon CJ and Williams J)
Federal Commissioner of Taxation
v Dixon
Judges:
Dixon CJ and Williams JMcTiernan J
Webb J
Fullagar J
Subject References:
Taxation and revenue
Income tax
Assessable income
Enlistment of employee in defence forces
Remuneration
Difference between war service pay and civil remuneration paid by employer
Liability to tax
Legislative References:
Income Tax Assessment Act 1936 No 27 - ss 6; 23(5); 23B; 25; 26(d); 26(e)
Defence Act 1903 No 108 - s 118A(3)
Judgment date: 11 December 1952
SYDNEY
Decision by:
Dixon CJ and Williams J
DIXON C.J. AND WILLIAMS J. The question in the case stated is in effect whether 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 that he would have received in his civilian occupation forms part of the soldier's assessable income. The taxpayer was, up to 12th July 1940, employed as a clerk by Macdonald, Hamilton & Co , a firm of shipping agents. His remuneration was PD245 14s. 0d. per annum. On 12th July 1940 the taxpayer voluntarily enlisted for service in the Australian Imperial Forces and served both in Australia and overseas from shortly after that date until 13th December 1945, when he was discharged from the Army. The year of income under assessment is that ended 30th June 1943, and during that year Macdonald, Hamilton & Co paid the taxpayer PD104 to make his military pay up to the amount which he would have received had he been in their employ. On 22nd December 1939 Macdonald, Hamilton & Co had sent a circular notification to the members of their staff concerning the policy with respect to their staff which they proposed to follow during the war. It included the following paragraph: "In regard to those members of our staff who may enlist for home defence or service outside Australia, for the duration of the War, we shall also endeavour to make up the difference between their present rate of wages and the amounts they will receive from the Naval or Military Authorities, but of course circumstances may compel us to review this decision at some later stage".
This notification was inserted in their Staff Memorandum Book and there the taxpayer read it before he enlisted. Shortly before his discharge on 13th December 1945 he ascertained that Macdonald, Hamilton & Co wished him to resume work with them and on 2nd January 1946 he commenced his duties with that firm. He had not, however, at any time given them an undertaking that he would return to their employ upon completion of his war service, nor had they given him an undertaking that they would re-employ him upon completion of his war service. Having regard to the foregoing facts, the commissioner included the amount of PD104 in the taxpayer's assessable income for the year ended 30th June 1943. The taxpayer brought in objections and, upon them being disallowed, requested that they should be referred to a Board of Review. The Board of Review decided that the amount provided by the employers as the difference between military pay and the pay the soldier would have received had he remained in their service did not form part of the taxpayer's assessable income. From that decision the commissioner has appealed to this Court.
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 PD104 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 etc given etc 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 PD104 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.
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). Regulation 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 [F1] , 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.
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.
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 [F2] , Herbert v McQuade [F3] , Chibbett v Joseph Robinson & Sons [F4] , Slayney v Starkey [F5] , Hunter v Dewhurst [F6] and Calvert v Wainwright [F7] .
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 [F8] ; Lally v Durham County Council [F9] . 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 [F10] 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 PD104 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.
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.
For the foregoing reasons we answer the question in the case stated that the sum of PD104 referred to in the case was assessable income of the respondent taxpayer for the period of twelve months ended 30th June 1943.