Federal Commissioner of Taxation v. Ranson

Judges:
Gummow J

Court:
Federal Court

Judgment date: Judgment handed down 5 April 1989.

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Gummow J.

These proceedings arise by way of appeal by the Commissioner of Taxation from a decision of the Taxation Appeals Division of the Administrative Appeals Tribunal, constituted by a Senior Member [reported as Case V100, 88 ATC 650]. On 1 July 1988, the Tribunal decided that the determination of the Commissioner upon an objection by the taxpayer should be varied and that the taxable income of the taxpayer for the year of income ended 30 June 1981 should be reduced by $2,025 to $3,796. Section 44 of the Administrative Appeals Tribunal Act 1977 restricts the proceedings in this Court to an appeal ``on a question of law''.

During the academic years 1979-1981, the taxpayer undertook actuarial studies at Macquarie University, in New South Wales. During that time he received financial support from T. & G. Mutual Life Society Ltd. (``the Society''), in the way of an ``actuarial cadetship''. He was notified in writing of the offer of a ``cadetship'' which he accepted in writing, but neither document was produced to the Tribunal. The taxpayer, however, produced the following document from the records of the Society:

``ACTUARIAL CADETSHIP - MACQUARIE UNIVERSITY

A limited number of cadetships are available for selected students intending to undertake full time B.A. degree course majoring in Actuarial Studies or already an undergraduate in this faculty.

The benefits and conditions relating to the course commencing in 1978 are as follows: -

Benefits

      1st Year Student       $1,900
      2nd Year Student       $2,600
      3rd Year Student       $3,400
            

During vacation employment at T & G office, the cadet will receive a salary in accordance with that laid down in the Insurance Officers (Clerical Indoor Staffs') Award.

Conditions

1. The value of the cadetship will be subject to an annual review, and the Society reserves the right to withdraw it from the student in the event of unsatisfactory examination results or poor performance during vacation work.

2. Applicants will be interviewed at the State Office concerned and the successful applicants will be required to pass a medical examination.

3. (a) N.S.W. Students

• Cadets will be expected to work at Head Office during Christmas vacation. The Society will meet the cost of the return air fare and a special living-away-from-home allowance of $10.00 [sic] while the cadet is working in Melbourne.

(b) Victorian Students

• Cadets will be expected to work at Head Office during the Christmas vacation. The Society will meet the cost of the air fares to and from Melbourne. A special living-away-from-home allowance of $10.00 per week will be payable during the Macquarie University year.

4. On graduation from Macquarie University the cadet would join the Society's staff and a condition of employment will be willingness to work in Sydney or Melbourne as the Society requires.''

The Tribunal found that this document sets out the provisions applicable to the taxpayer. The Tribunal also found that during the academic years 1979-1981, the taxpayer received the financial support described in the document and worked for the Society during the long vacations in those years. The taxpayer

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ATC 4355

did not enter the employment of the Society forthwith on completion of his studies. He declined to accept immediately a position offered by the Society, but it was arranged that he would take up a position at a later date. He did so and remained in the employment of the Society for about a year.

For the year of income to 30 June 1981, the taxpayer gave details of two group certificates from the Society. One disclosed gross income of $4,482 relating to the full twelve-month period (from which tax amounting to $343.90 had been deducted); the other disclosed gross income of $812, relating to employment with the Society in January 1981 (from which tax of $136.50 had been deducted). The taxpayer attached a letter to his return of income, claiming that $2,025 of the sum of $4,482 constituted exempt income under sec. 23(z) of the Income Tax Assessment Act 1936 (``the Act''). The sum of $2,025 was moneys received by the taxpayer from the Society in the period February to June 1981, that is, after his last long vacation. Scholarship income for the entire year was $3,670.

In the letter referred to above, the taxpayer stated that:

``Although my scholarship is nominally `unbonded' there was an agreement that I worked over the previous two Christmas holiday periods. Thus the scholarship income should, and was, considered as assessable in both 1979 and 1980 .

In 1981 , with the option to terminate the scholarship still applying, however, there is no further requirement or agreement whatsoever that I work for the company and therefore under Section 23 Subsection z (23(z)) of the Income Tax Assessment Act the scholarship income earned in 1981 is not assessable although the company has treated it as assessable throughout.

I have included, then, a Pay Advice Slip showing showing [sic] my assessable income in Sydney should be $2457 and not $4482 as stated on the group certificate. Thus 4482 - 2457 = 2025 should be deducted from the Taxable Income leaving a taxable Income of $3124.''

Section 23(z) of the Act provides that:

``23. The following income shall be exempt from income tax: -

• ...
• (z) income derived by way of a scholarship, bursary or other educational allowance... by a student receiving full-time education at a school, college or university, but not including -
  • (i) an amount received by the student from a person or authority upon condition that the student will (or will if required) render, or continue to render, services to that person or authority;
• ...''

The Commissioner does not dispute that the taxpayer was receiving full-time education at a university. The sole question is whether the relevant income (viz. $2,025) falls within sec. 23(z)(i), and this turns on the meaning to be given to the phrase ``an amount received... upon condition that''.

The Tribunal found that at all material times there was an expectation on the part of the Society and the taxpayer that the taxpayer would render service to the Society as an employee during the long vacations, and that upon graduation, assuming the ``cadetship'' had not been terminated in the interim, the taxpayer would be offered a position by the Society and it was quite likely such an offer would be accepted.

On his part, the taxpayer had expressed in the letter I have set out above the view that the scholarship income had been correctly treated as assessable in both 1979 and 1980, on the footing that there had been an agreement that he worked over the two long vacations in those years. However, the taxpayer sought to have treated as exempt that proportion of the 1981 income as was referable to the period from February 1981, that is to say after the last long vacation before the ``cadetship'' came to an end.

There is some lack of clarity in the above findings of fact by the Tribunal. Before the Court, the Commissioner sought to call into question some of these findings, but, in my view, there was no footing to do so. I read these findings as dealing with the practical expectations of the parties, not with their strict legal rights and obligations. Thus, I read the findings as expressing a conclusion flowing not simply from the terms of the written document

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ATC 4356

headed ``Actuarial Scholarship - Macquarie University'' but also from what passed between the Society and the taxpayer from time to time over the period of his ``cadetship''. The taxpayer had referred to an agreement that he work over the long vacations in 1979 and 1980. This is consistent with the finding that there had been an expectation that he do so which as each occasion arose had matured into an agreement. Such a state of affairs would not be inconsistent with the document even if it had imposed a legal obligation to work in long vacations. I should add that I do not treat the Tribunal, in referring to expectations of the parties, as having meant thereby to convey that those expectations were something from which a party might not resile because there was some species of estoppel against this. It was not submitted by either counsel that the Tribunal's reasons were to be read in this way.

The Tribunal construed the phrase ``upon condition that'' in sec. 23(z) as requiring a legal obligation to render the services described in that provision; it was not enough that there was an expectation or a likelihood or a probability that services would be rendered in the future. Hence, the Tribunal held that the scholarship income in question was exempt. The question before the Court is whether the Tribunal erred in law in construing sec. 23(z) in this fashion.

The definition of ``condition'' provided by the Shorter Oxford English Dictionary viz. ``something demanded or required as a prerequisite to the granting or performance of something else; a provision, a stipulation'', refers also to the use of the word in a legal context adding ``in a legal instrument, a provision on which its legal force or effect is made to depend'' (emphasis added).

As a starting point, it may be noted that sec. 23(z) exempts income derived by way of scholarships, bursaries and other educational allowances, but the exemption does not include an amount received, inter alia, upon condition as described in subpara. (i). According to common usages of speech ``scholarship'', ``in the absence of expressed purposes or conditions attached to it connotes... the grant of any emolument, normally in a sum of money, to a scholar elected on merit or upon some other rational criterion'', and ``does not involve as the necessary element in the concept financial assistance to a scholar to continue his education''; accordingly, a scholarship may be a monetary prize for past performance without conditions as to the use to be made of the prize:
Re Leitch Deceased (1965) V.R. 204 at pp. 206-207 per Adam J. On the other hand, as Adam J. indicated in the same case, a bursary, in general, is concerned with financial assistance in continuing a course of study.

The conditions with which sec. 23(z) are concerned are not conditions as to the use to which the student is to put the amount received; they are thus not conditions going to the essential character of the scholarship, bursary or educational allowance. In what sense is the expression ``condition'' used in sec. 23(z) where the stipulation is not as to the application of the money by the student but that the student will (or will, if required) render or continue to render, services to the persons or authority with whom the amount is received?

Any ``condition'' as to the use to which the amount of a scholarship was to be put might be a condition with some legal effect or it might be a stipulation falling short of that. ``Condition'' is a term used in differing senses in various areas of the law; some of them are appropriate to the present universe of discourse. A ``condition'' might be imposed upon the holder of an ``actuarial cadetship'' by way of a trust obligation (cf.
Barclays Bank Ltd. v. Quistclose Investments Ltd. (1970) A.C. 567) or a personal obligation enforceable in equity (
Gill v. Gill (1921) 21 S.R. (N.S.W.) 400;
Muschinski v. Dodds (1984-1985) 160 C.L.R. 583 at pp. 605-606, 624-625). The stipulation might amount to contractual promises by the recipient of the scholarship (cf.
Wickman Machine Tool Sales Ltd. v. L. Schuler AG (1972) 2 All E.R. 1173 at p. 1180;
Moreton v. Montrose Ltd. (1986) 2 N.Z.L.R. 496). Further, even if the stipulation did not have effect as a contractual promise, a student who took the money but did not observe the stipulation might be obliged to effect fair and just restitution for the benefit derived at the expense of the Society, as one of the new or developing categories of case referred to by Deane J. in
Pavey & Matthews Pty. Ltd. v. Paul (1986-1987) 162 C.L.R. 221 at pp. 256-257. (The Commissioner did not seek to rely on any such principle in the present case.) Or, the stipulation might do no more than bind the student as a matter of honour without any attendant legal sanction.

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ATC 4357

The objective sought to be secured by the stipulation is the rendering of the services to the person or authority from whom that money is received. This is something ordinarily seen as falling within the pale of legal relations. Further, though the reliance must not be pressed too far, it is to be borne in mind that subpara. (i) of sec. 23(z) operates to identify a class of amounts which are excluded from what otherwise would be exempt income. One would ordinarily incline to construe such a provision so as to give it a specific rather than a loose meaning.

In my view, ``upon condition that'' in subsec. 23(z) is to be read as a stipulation, the fulfilment or non-fulfilment of which has an effect on legal relations, whether those relations be in terms of rights, duties, powers or immunities. The Tribunal found that at all material times there was an expectation on the part of the Society and the taxpayer that the taxpayer would render service to the Society as an employee during the long vacations, and that upon graduation, assuming the ``cadetship'' had not been terminated in the interim, the taxpayer would be offered a position by the Society, and it was quite likely such an offer would be accepted. This falls short of a finding necessary to support the conclusion that the amount received by the taxpayer during the period February-June 1981 was received upon condition that the taxpayer would (or would, if required) render, or continue to render, services to the Society.

It will be apparent from the foregoing that there are numerous ways in which legal relations may operate ``upon condition that'' a certain state of affairs exists or will come into existence. Many of these will fall within the statutory meaning of the phrase ``upon condition that'' in sec. 23(z). It is not appropriate in the present case further to explore what in other factual situations those conditions might be, but I have noted the present taxpayer's position that he worked over the 1979 and 1980 long vacations under an agreement and that the relevant receipts were not exempt income.

I have referred to a certain element of ambiguity in the findings of fact by the Tribunal in the present case. This makes it necessary to consider the submissions to the Court by counsel for the Commissioner made on the footing that at all material times the relations between the taxpayer and the Society were governed exhaustively by the terms of the document headed ``Actuarial Cadetship - Macquarie University''. The submission was that that document contained provisions which applied to the facts such as to make the amount received by the taxpayer in the period February-June 1981 one received by the taxpayer upon condition that he would (or would, if required) render, or continue to render, services to the Society within the meaning of sec. 23(z). Counsel for the Commissioner submitted that certain provisions of the document established conditions in the sense that there were contractual obligations imposed upon the taxpayer.

Reference was made first to the passage in the document reading:

``Cadets will be expected to work at Head Office during Christmas vacation. The Society will meet the cost of the return air fare and a special living-away-from-home allowance of $10 (sic) while the cadet is working in Melbourne.''

This provision is directed to New South Wales students (of whom the taxpayer was one) and appears in the third paragraph under the heading ``Conditions''. Further, the first paragraph appearing under the heading ``Conditions'' stipulates that the Society reserves the right to withdrawal of the cadetship from the student in the event of unsatisfactory examination results or poor performance (which undoubtedly includes non-performance) during vacation work.

Reading these ``conditions'' together, the student's right to the cadetship is dependent (and therefore conditional) upon his rendering his services to the Society during the Christmas vacations. However, the Tribunal found that the sum in question was the proportion of moneys received from the Society in the period February-June 1981, that is to say after the last long vacation for which the taxpayer had undertaken to work for the Society. That amount could not have been received by the taxpayer from the Society upon condition that he would continue to render services to the Society in respect of further long vacations. No such services remained to be performed. Hence, the amount in question was not received upon a condition such as to take the amount outside the exemption provided for in sec. 23(z).

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ATC 4358

It might well be that the right of the Society to withdraw the cadetship remained extant up to June 1981, and that it might have been exercised, for example, if the poor quality of the taxpayer's long vacation work did not become apparent until after the vacation had expired. But payments made after the final long vacation were not made upon condition that the taxpayer would (or would, if required) render or continue to render services. Accordingly, the Commissioner's argument based on para. 3 must fail.

Finally, it was submitted for the Commissioner that the amounts received in the period February-June 1981 were made upon condition that the taxpayer would join the Society upon graduation. The fourth paragraph under the heading ``Conditions'' in the document in question states:

``On graduation from Macquarie University the cadet would join the Society's staff and a condition of employment will be willingness to work in Sydney or Melbourne as the Society requires.''

Counsel for the taxpayer submitted that this amounted to no more than an agreement to agree, noting in particular that the contemplated employment contract would be entered into only if the student were willing to work in Sydney or Melbourne as the Society required at some future time. It also is to be noted that the paragraph is expressed in the conditional (``the cadet would join'') rather than the imperative mood (``will join'') which otherwise appears uniformly in the document. In my view, the fourth paragraph does not constitute a ``condition'' in the required statutory sense of one affecting legal relations. It may be that there was an expectation or moral obligation on the part of the taxpayer to enter into employment upon graduation, but, as I have earlier indicated, any such moral prescription would be too indeterminate to provide the criterion for the operation of a provision excluding amounts from what otherwise would be exempt income.

It follows that the Court should affirm the decision of the Tribunal dated 1 July 1988 which varied the determination of the Commissioner upon the applicant's objection and reduced the taxable income of the applicant for the year of income ended 30 June 1981 by $2,025 to $3,796.

The parties informed the Court that the Commissioner had undertaken to pay the reasonable costs of the respondent, and that this would be honoured without the sanction of a Court order for costs. Accordingly, I make no order as to costs.