Federal Commissioner of Taxation
v Dixon

Judges: Dixon CJ and Williams J
McTiernan 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)

SYDNEY

Judgment by:
Fullagar J

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 ^[F26] , 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.

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, 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.) ^[F27] 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" ^[F28] . 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" ^[F29] . The authority of these passages is not affected by the fact that the position which actually arose in Scott's Case ^[F30] is now covered by s. 26 (d) of the Commonwealth Act.

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.

The first case is Louisson v Commissioner of Taxes ^[F31] . 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 PD453 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 PD453 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" ^[F32] . 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" ^[F33] .

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 PD612, 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 ^[F34] . 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" ^[F35] .

The point to be observed about the second Louisson Case ^[F36] 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 ^[F37] and Stedeford v Beloe ^[F38] , 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 ^[F39] 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.

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 ^[F40] , at p. 570 and Atkinson v Federal Commissioner of Taxation ^[F41] . 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 ^[F42] . 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 ^[F43] 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" ^[F44] 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" ^[F45] .

The question asked by the case stated should, in my opinion, be answered: Yes.