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SUPREME COURT OF NEW ZEALAND

ANDREWS AND MUIR v INLAND REVENUE COMMISSIONER (NZ)

SINCLAIR J

29 May 1979 -

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Sinclair J    There are two cases stated involved in this matter arising out of the same set of circumstances and in consequence thereof they were heard together. In view of the conclusions which I have come to, the judgment is equally applicable to both cases and therefore the judgment applies to both.

   The matter has its origin in two agreements which were entered into by the firm known as Worley Downey Muir and Associaties, with the Asian Development Bank. Worley Downey Muir and Associates carried on business in Auckland as Consulting Engineers and by virtue of the agreements, the above firm, which I will refer to as "the partnership", undertook to make one of the partners, Allan Brian Muir, available to participate as an expert in a mission which the bank proposed to send to Fiji to examine the future power requirements of the area serviced by the Fiji Electricity Supply Authority.

   Mr Muir died on 30 November 1975 but at a time when he had completed the task required of him under the above agreements.

   In furnishing a return of income for income tax purposes for the year ended 31 March 1972, the partnership declared an assessable income for the year of $81,092. In calculating the assessable income there had been deducted an amount of $10,352.72 described as income exempt from tax under art 56 of the agreement establishing the Asian Development Bank as ratified by the New Zealand Government. The Commissioner considered that that amount was not exempt from tax and on 3 October 1972 the Commissioner issued a notice of allocation of the partnership income in respect of the year ended 31 March 1972 and added back as part of the assessable income the above figure of $10,352.72. In the case of Mr Muir, his share of that income was assessed at $2416, while in Mr Andrews' case, the amount involved was $2415.

   As a result of the Commissioner's action objections were lodged on the basis that the sum of $10,352.72 should be totally exempt from income tax on the grounds on which it had originally been claimed as being exempt, and the Commissioner continued to deny the objectors' claims. In consequence the present proceedings are now before the court.

   The Asian Development Bank was established by an international agreement drawn up on 4 December 1975 and New Zealand became a party to that agreement. By the International Finance Agreements Amendment Act 1966 a statute was passed referring to this agreement, and it is set forth in full in the first schedule to the statute. The preamble to the statute refers to the existence of the agreement, the fact that New Zealand had become a signatory to it, the general purposes of the agreement, and went on to say it was desirable to make provision enabling the Government of New Zealand to meet its obligations as a member of the Asian Bank. Article 2 of the agreement sets forth the functions of the Bank and one of those functions was to provide technical assistance for the preparation, financing and execution of development projects and programmes including the formation of specific project proposals. For the purposes of this decision two articles call for special attention, they are art 55 and art 56(2). The provisions of these two articles are as follows:-

"Article 55 - Immunities and privileges of bank personnel

   All governors, directors, alternates, officers and employees of the Bank, including experts performing missions for the Bank:-

   (i) shall be immune from legal process with respect to acts performed by them in their official capacity, except when the Bank waives the immunity;

   (ii) where they are not local citizens or nationals, shall be accorded the same immunities from immigration restrictions, alien registration requirements and national service obligations, and the same facilities as regards exchange regulations, as are accorded by members to the representatives, officials and employees of comparable rank of other members; and (iii) shall be granted the same treatment in respect of travelling facilities as is accorded by members to representatives, officials and employees of comparable rank of other members.

"Article 56 - Exemption from taxation

  2  No tax shall be levied on or in respect of salaries and emoluments paid by the Bank to directors, alternates, officers or employees of the Bank, including experts performing missions for the Bank, except where a member deposits with its instrument of ratification or acceptance a declaration that such member retains for itself and its political subdivisions the right to tax salaries and emoluments paid by the Bank to citizens or nationals of such member."

   I now turn to the provisions of the agreements which were really identical in terms, but incorporated in the agreements was a term that the standard conditions of contract relating to contracts with consulting firms for provision of individual experts was deemed to form part of the actual agreement.

   In essence the partnership was referred to as "the consultant" and Mr Muir was referred to as "the expert", and by para 1(a), the consultant agreed to make available to the bank the expert for the purpose of "the mission" which was described as the Fiji Electricity Supply Project. The expert was required to perform the duties referred to in the terms of reference set forth in Sch "B" to the agreement and he was required to prepare a draft report covering the work performed in the field and submit it to the chief of the mission not later than 14 days after completion of his duties in the mission area. The report was directed to be submitted in the name of the consultant. Clause 2 related to the term of the engagement while cl 3 provided for the consultant to receive remuneration in respect of the expert at a certain stated rate, such remuneration to be paid at the end of the services.

   The standard conditions of contract provided by cl 2(a) that in consideration of the consultant making available the expert the bank would pay to the consultant remuneration at the rate specified in the contract. That clause went on to provide that the rate would, unless the contract otherwise provided, include:-

   (a) the cost of the salary of the expert to which such rate applied;

   (b) provision for holiday, vacation and sick leave allowances and insurance and other social and welfare benefits for such expert as well as general administration, overheads and expenses of the consultant;

   (c) the fee of the consultant.

   Under the main agreement the rate of remuneration was fixed at $750 per week.

   Clause 3 related to expenses and cl 4 provided, inter alia, that the bank could pay or cause to be paid direct to the expert the subsistence allowance, travel costs and other reimburseable expenses incurred by the expert but such payment was to pro tanto discharge the obligation of the bank to make payment to the consultant thereafter.

   Clause 5(b) provided as follows:-

   

"(b) In addition to any special privileges, exemptions or immunities which the bank may have arranged with the government of the country of the assignment to be extended to the experts and to the consultant in connection with the services, it is agreed that during the term of the engagement the experts shall have the status of experts performing a mission for the bank for the purposes of art 8 of the articles of agreement of the bank and shall accordingly be entitled to receive in member countries of the bank the privileges, immunities and exemptions accorded to experts under art 8. The bank hereby indemnifies the consultant and the experts against any taxes which may be levied in the country of the assignment on payments made to the consultant and the experts in respect of the services, except taxes levied upon citizens or nationals of such country."

   At this point the reference to art 8 is an error appearing in the documents and the reference should be to ch 8. Both Mr Molloy and Mr Jenkins are in agreement on this matter.

   Clause 6 made provision for the consultant to provide medical evidence to the bank that the expert, before commencing his services, was in good health. It went on to provide that if the expert was unable to perform or complete the services in an adequate manner then the bank had the option of either terminating the contract in relation to the services of the expert or, alternatively, of requiring the consultant to replace him with another qualified expert acceptable to the bank and at a rate of remuneration no higher than that agreed for the previous expert.

   Clause 7 has no real relevance to the matter in issue and the final clause, cl 8, made it plain that the relationship between the consultant, the expert and the bank was that of independent contractor and not employer and employee.

   Mr Muir, being a partner in the firm referred to as the consultant, performed the services required of him in consequence of which the payment in question was made to the partnership. In view of the dates with which I am concerned the appropriate statute is the Land and Income Tax Act 1954 and it is plain that s 88(1) of that statute brings into account for taxation purposes the income of persons in a partnership and by s 10(1)(b)(i) the partners were required to make a joint return of income of the firm.

   Mr Molloy as part of his argument submitted that the fact that the payment was made to the partnership was really of no significance because the law was such that in relation to partnership income one partner was entitled to the receipts of the partnership income in common with his other partners. He submitted that each partner had an individual beneficial interest in each receipt and that when a payment was made to the partnership it was made to him in common with the other partners and he could insist that it be applied to the purposes of the partnership for its legitimate pursuits, and consequently when a payment was made to a partnership in respect of each individual partner it was in reality a payment to each of them and each could regard it as his beneficial property notwithstanding that the receipt was in common with the other partners. He cited in support of his argument FC of T v Everett (1978) 9 ATR 211; Livingston v Comr of Stamp Duties (Qld) (1962) 107 CLR 411 per Kitto J at 453. In essence I agree with Mr Molloy's submissions and I do not understand Mr Jenkins to submit otherwise as he indicated that he accepted Mr Molloy's submission in this particular aspect.

   I agree with Mr Molloy's submission that there could be no question of Mr Muir being regarded as an employee because he was plainly not. He was a partner working as a partner and was not even in the category of a salaried person - even if he had been a salaried partner I doubt whether that in law would really affect the situation. If any authority is required for the fact that Mr Muir could not be regarded as an employee then it may be found in Ellis v Joseph Ellis & Co [1905] 1 KB 324.

   To my mind the real question in issue is the correct interpretation and application of the provisions of art 56(2). This was Mr Jenkins' approach and it was only in this area that there was any difference of opinion as between him and Mr Molloy.

   It was submitted on behalf of the objectors, and accepted by Mr Jenkins, that art 56 had the status of a statutory provision. There is no question but that it is an international agreement and s 3(5) of the International Finance Agreements Amendment Act 1966 provides as follows:-

   

"Articles 49 to 56 and 58 of the Asian Bank Agreement (which relate to status, immunities and privileges) shall have the force of law in New Zealand, Niue, and the Tokelau Islands."

   To my mind that is conclusive of the situation but if more is required then it is plain that by virtue of the provisions of s 5(h) of the Acts Interpretation Act 1924 the agreement being contained in a schedule to this statute is deemed to be part of the statute. Before an international agreement or treaty can become part of the domestic law of a particular country, it is necessary that it be incorporated in some way in the statute law of that country. This is made plain by the decision of the Privy Council in Attorney-General for Canada v Attorney-General for Ontario [1937] AC 326 per Lord Atkin when at 347 he said: "Within the British Empire there is a well-established rule that the making of a treaty is an executive act, while the performance of its obligations, if they entail alteration of the existing domestic law, requires legislative action."

   To the same general effect are the decisions in Bitter v Secretary of State of Canada (1944) 3 DLR 482 and Te Heueu Tukino v Aotea District Maori Land Board [1941] NZLR 590.

   In consequence of the agreement under review having become part of the statute law in New Zealand, Mr Molloy submits that as it has an exempting provision in relation to revenue matters s 5(j) of the Acts Interpretation Act 1924 should be applied when construing it so that it would receive a fair, large and liberal construction and interpretation. That such an approach can be made in relation to an exempting provision in a revenue statute has been acknowledged in this country by the decision in IR Comr (NZ) v International Importing Ltd [1972] NZLR 1095.

   On the other hand Mr Jenkins submits that such an approach is not warranted and that the test in relation to the interpretation of treaties should be applied and that test is set forth in Halsbury, 4th Ed, Vol 18, para 179S . In general it is said that a treaty must be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. He therefore submits that having regard to the difficulty in ascertaining what are the appropriate rules of construction to be applied in the instant case, the court should apply the test of ascertaining the true meaning of the words. There may be some force in this argument and I intend to adopt that approach. It may well be that in this particular case there is no real difference between the two tests.

   I therefore proceed to consider what is the true interpretation and construction of art 56(2). It is obvious at the outset that a distinction is drawn in that article between salaries and emoluments. Both counsel are content to accept the definition of these words as found in the Shorter Oxford English Dictionary. The word "salary" is defined as "a fixed payment made periodically to a person as compensation for regular work; now usually for non-manual or non-mechanical work". "Emolument" is defined as "profit or gain from station, office, or employment; dues; remuneration, salary". That there is a distinction between the two words has been recognized by the courts on more than one occasion. I refer firstly to the decision Re The Industrial Conciliation and Arbitration Act 1908 (1909) 28 NZLR 933 per Williams ACJ at 940 when he said:-

   

"The term 'salary' is ordinarily used to signify the periodical remuneration paid to professional men, clerks, or persons whose duty it is to superintend, and who have in every case an appointment of some permanency. It is never ordinarily used as signifying the remuneration of manual labour, or of any labour when the element of permanency of employment is absent."

   In Shelford v Mosey [1917] 1 KB 154 , the court was concerned with interpreting the word "emoluments" in the Merchant Shipping Act 1894 where Lord Reading said at 159:-

   

"It is not necessary to define 'emoluments', which is a term not usually applicable to wages payable to a sailor, but it was meant to include something paid to him for his work over and above the wages actually agreed to be paid."

   Mr Jenkins submits that emolument contemplates an employer/employee relationship and not the independent contractor situation which exists here and that in reality when one looks at the payment which was made to the partnership it was fees paid to an independent contractor and therefore not within the exemption created by art 56(2). He further pointed to the provisions of the agreement earlier referred to that if Mr Muir became incapable of carrying on his work then the obligation was upon the partnership to provide another expert at the same remuneration. In aid of that submission he referred to Mr Andrews' affidavit wherein it was stated that Mr Muir was the only person in the firm who would have been capable of doing the work so that if he had become unfit the partnership would have had to look for an expert outside of its own firm. He further pointed to para 20 of Mr Andrews' affidavit wherein it was stated that the charge-out rate adopted by Mr Muir for the purposes of the mission under consideration was less than would have normally been charged, this being by reason of the fact that Mr Muir believed that payments made by the bank in respect of the mission would be tax free. Mr Jenkins is quite right when he says that if that assumption is wrong, and Mr Muir had had to be replaced by an outsider at a higher rate then the partnership would have had to have borne the loss.

   However, Mr Molloy contends that Mr Muir as an expert and as a partner in the firm was in a particular position with regard to this mission. By the specific words of art 55 he would have been entitled to the immunities and privileges therein set forth. I am in complete agreement with him on that submission and I do not think Mr Jenkins contends otherwise.

   In regard to art 56(2) he contends that on the plain words of the article Mr Muir was an expert performing a mission for the bank in respect of which an emolument was paid, using that word as distinguished from the word "salary", and that therefore the partnership and, in turn, each of the partners was entitled to the benefit of the tax relief afforded by the article. He submitted that one of the purposes of the article was to encourage experts to go to inhospitable places to discharge New Zealand's duty under the treaty. I think that that submission is sound but I think it may also be said that the New Zealand Government recognized it had some obligations under the agreement and that it was prepared to forgo tax on moneys paid to experts performing missions for the bank as part of the government's contribution to the purposes of the agreement. Additionally, I am of the view that the fact that no tax was to be payable in such circumstances was an inducement to experts to undertake such work at a lower rate than normal, thus assisting the bank to discharge its obligations by obtaining top class expert advice at a discounted rate.

   When one looks at the facts there is no doubt that Mr Muir was an expert performing a mission for the bank and in respect of his services a payment was made which was a remuneration or at least an advantage obtained as a result of giving those services, and it is to be noted that the secondary dictionary meaning of emolument is "advantage".

   While the article in question refers to directors, officers or employees of the bank, it also refers to experts and I am of the view that a true approach to the construction of the article in relation to experts is that it obviously contemplated persons who had no connection with the bank in either a directorate or employment situation. One must also pay some attention to the actual wording of it in relation to tax because it refers to the fact that no tax shall be levied on or in respect of emoluments paid by the bank to the specified persons. The words "or in respect of" require a wider application of the provision rather than a narrower one.

   While it is dangerous to rephrase a particular provision of a statute or an agreement, sometimes it can be of assistance. If that is done in this case in relation to experts then I think the real intent of the article can be readily ascertained. Therefore, if one reads it as applying but to experts it would then read as follows: "No tax should be paid on or in respect of … and emoluments paid by the bank to … experts performing missions for the bank."

   Consequently, I am of the view that the payment made to the partnership in respect of Mr Muir's services is not subject to income tax in this country and should be excluded from the assessable income of the partnership for the year in question.

   Therefore, both objections are upheld and I think the proper course is to remit the matter to the Commissioner for him to deal with the 1972 income year in accordance with the terms of this judgment. By adopting this method I am acceding to Mr Jenkins' request so that any question of expenses incurred in earning this particular income and which might have been included in the partnership accounts can be taken into account.

   Before completing this judgment I refer to one matter which was raised by both counsel. It is quite obvious that so far as New Zealand is concerned there is an instrument of ratification in existence as it is referred to in the United Nations Treaty Series No 8303 of 1966. However, neither counsel could obtain a copy of it and it may well have had some relevance in relation to art 56(2) if, in the instrument of ratification, there was any reference to the reservation of the right to tax salaries and emoluments paid by the bank to citizens or nationals of this country. This judgment has proceeded on the basis that there is no reference in the instrument of ratification to this aspect of the matter. I am fortified in this belief in that in the United Nations Treaty series there is reference to the Government of Ceylon in its instrument of ratification retaining for itself, pursuant to art 56(2), the right to tax salaries and emoluments paid by the bank to citizens and nationals of Ceylon, resident or ordinarily resident there. There is no similar such reference in relation to the instrument of ratification of New Zealand and this factor may in itself afford evidence of the fact that the New Zealand Government did not intend payments such as those paid in respect of Mr Muir's services to be taxed. (As a matter of convenience it may well be that copies of such instruments of ratification and similar documents should be held at some central office where they can be made available to those who may be affected by them).

   The objectors having succeeded they are entitled to their costs which I fix at $500 to cover both objections.