Federal Commissioner of Taxation v. Cooke and Sherden.

Judges:
Jenkinson J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 22 November 1978.

Jenkinson J.: Appeals by the Commissioner of Taxation from four decisions of a Board of Review.

The four respondents are two married couples. One couple were at relevant times in partnership as soft drink vendors in a suburban area near Sydney, and the other couple were similarly engaged near Melbourne. Sharpe Bros. Pty. Ltd. manufactured in Sydney the drinks which Frederick John and Lorna May Sherden sold; Judith Anne and Allan William Cooke sold drinks manufactured by Loy Bros. Pty. Ltd. in Melbourne.

Each of the Commissioner's assessments now in question in these appeals included in the assessable income of each respondent an amount in respect of a holiday which the respondent took at the invitation and the expense of the soft drink manufacturer whose product that respondent sold. The Board of Review decided that no sum of money should be included in the assessable income of any of the respondents in respect of the holidays.

In my opinion the Board's decisions were correct and the four appeals should be dismissed.

The appeals concern the years of income ended 30th June 1970, 1972 and 1973. Until February 1972, Mr. and Mrs. Cooke carried on the business of selling soft drinks

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manufactured by Loy Bros. Pty. Ltd. under an agreement in writing, the relevant provisions of which are:

``the Company agrees to give to the Purchaser and the Purchaser agrees to accept retail distributing rights (but not a sole agency) for the sale of the Company's products in the No. 22 district or such other district as may from time to time be arranged between the parties hereto on the following conditions which are hereby agreed to by both parties: -

  • (a) The Company agrees to sell to the Purchaser from the factory during factory supply hours as fixed by its Manager from time to time the goods ordered by him at the price arranged from time to time payable on the day of delivery or on such other day as may be approved by the Company;
  • (b) The Purchaser agrees regularly to supply the goods to the Customers at set prices throughout the year as laid down by the Company from time to time which prices must not be varied without the consent of the Company in writing.

(2) The Purchaser agrees to provide and maintain his own delivery vehicle provided that the Company may, if the Purchaser so desires, hire a vehicle to the Purchaser upon such terms and conditions as may be mutually agreed upon between the Company and the Purchaser.

...

(4) The Purchaser agrees that he will not at any time during the currency of this Agreement or during a period of TWO YEARS from the date of its termination either alone or jointly in partnership with or as the servant or agent of any other person or persons, company or companies whatsoever directly or indirectly either by himself or through another or others carry on or be concerned, engaged or interested in the business of the manufacture or sale of cordials or non-excisable beverages of any of the kinds supplied by the Company within any part of the district mentioned in the agreement and in any part of such district as varied, altered or added to as hereinbefore provided.

(5) If the Purchaser shall fail to observe any of the terms contained herein or in the event of dishonesty, gross misconduct or neglect, he shall not be entitled to any notice of cancellation of this agreement and shall forthwith forfeit all money or goods due to him or which may have been deposited with the Company, as liquidated damages for such default without prejudice to the right of the Company to sue in respect of breach of the agreement on the part of the Purchaser or to recover damages therefor.

(6) The Purchaser agrees to keep properly entered and up to date the round books containing a complete list of customers with records of all purchases. These books always remain the property of the Company. They will remain in the custody of the Company except only when being used by the Purchaser for the purpose of recording transactions on the round concerned. Unless by special arrangements in writing with the Sales Department.

(7) This Agreement shall commence on the SEVENTH day of APRIL 1966 and shall continue until either party terminates by giving one week's notice to the other in writing.

(8) The benefit of the Agreement shall extend not only to the present proprietors of the firm of Loy Bros. Pty. Ltd. but to any person or persons, company or companies, to whom the said business or businesses may be made over.

(9) The Purchaser shall not be at liberty to assign any of his rights, powers or benefits under this agreement without the written consent of the Company and it shall be lawful for the Company to refuse its consent to any proposed assignment by the Purchaser without assigning any reason therefor and in the event of the Company consenting to any proposed assignment it shall be lawful for the Company to attach to such consent a condition requiring the Assignee to enter into a new Agreement with the Company in terms and conditions similar to this Agreement.''

A similar, but not identical, agreement in writing was made between the manufacturer

ATC 4688

and Mr. and Mrs. Cooke on 25th February 1972. The provision of the substituted agreement which distinguishes it from the original agreement is:

``(1)(b) The Purchaser agrees regularly to supply the goods to the Customers and the prices charged by him on the sale of the said goods shall be a recommended price only and there is no obligation to comply with the recommendation.''

An agreement in writing under which Mr. and Mrs. Sherden bought and sold by retail soft drinks manufactured by Sharpe Bros. Pty. Ltd. subsisted at relevant times until 20th April 1972. The relevant provisions of that agreement read as follows:

``... WHEREAS

(A) The Company manufactures and sells by wholesale cordials non-excisable beverages and other products.

(B) The Company has agreed to sell to the Retailer for resale in the North Ryde district (the boundary of which shall be indicated to him) or in such other district or districts as may from time to time be mutually agreed upon by the parties such of the Company's products as may be ordered by the Retailer subject to the conditions hereinafter set out WHEREBY IT IS AGREED AS FOLLOWS:

  • (1) The Company shall sell to the Retailer and the Retailer shall purchase from the Company such of the Company's goods available for sale by the Company as the Retailer may from time to time order.
  • (2) The prices payable by the Retailer to the Company for such goods shall be such prices as may be fixed from time to time by the Company and such prices shall be payable by the Retailer to the Company on the day of delivery of the goods to the Retailer or on such other days as may be approved by the Company.
  • (3) The Retailer agrees with the Company that he or any person who may be employed by him to assist in his business will sell the said goods only to persons who are resident in the said district or are carrying on business therein and that the prices charged by him on sale of the said goods shall be such prices as shall be from time to time determined by the Company by notice in writing to the Retailer provided that the Retailer shall be given not less than seven days' notice in writing by the Company of any variation in such prices.
  • (4) The Retailer also agrees with the Company to charge deposits of such amounts as the Company may from time to time fix on cordial and aerated water bottles which deposits he agrees to refund to his customers on return by them of the bottles in good order.
  • (5) The Retailer further agrees to keep and to deliver regularly to the Company at its registered office at such intervals of time as may be specified by the Company a written record containing the following particulars:
    • (a) the names and addresses of each of his customers, and
    • (b) particulars of all purchases made by each customer.
  • (6) This agreement shall commence on the FIRST day of JULY 1969, and shall continue until either party terminates it by giving not less than one week's notice in writing to the other of such termination.
  • ...
  • (8) The Retailer shall not at any time during the currency of this Agreement or during a period of two years after the date of its termination either alone or jointly with or as the employee or agent of any other person or persons directly or indirectly be engaged or concerned or interested in the business of manufacturing or selling within any district or part of a district which has during the currency hereof been the subject of this agreement, cordials or non-excisable beverages of any type manufactured and sold by the Company.
  • (9) The Retailer shall not be at liberty to assign the benefit of this Agreement without the consent in writing of the Company which consent the Company shall be at liberty to refuse without

    ATC 4689

    assigning any reason therefor and in the event of the Company consenting to any proposed assignment the Company may impose a condition requiring any Assignee to enter in a new Agreement with the Company on terms and conditions similar to those set out in this Agreement.
  • (10) The Retailer agrees to provide and maintain his own delivery vehicle provided that if the Retailer has not a suitable vehicle of his own the Company may if it thinks fit hire a vehicle to the Retailer upon such terms and conditions as may be mutually agreed upon between the Company and the Retailer.
  • (11) The Company shall not have the right to direct the Retailer in any way as to the manner of conducting his business nor in any way to restrict the Retailer from engaging in any other business, calling or occupation except as provided in Clause 8 hereof.
  • ...
  • (13) If the Retailer shall commit a breach of any of the conditions of this Agreement or be guilty of gross misconduct the Company may forthwith cancel this Agreement without the necessity of giving notice to the Retailer as hereinbefore provided and may sue the Retailer for breach of Contract and pending the ascertainment of the damages payable by the Retailer to the Company the Company may retain any goods or moneys in its possession belonging to the Retailer as security for any damages or compensation which may be awarded or become payable to it as a result of the Retailer's default.''

The two clauses of that agreement which I have not set forth were omitted from an agreement in writing dated 20th April 1972 and made in substitution for the prior agreement. Clause 3 of the substituted agreement provides:

``(3) The Retailer agrees with the Company that he or any person who may be employed by him to assist in his business will sell the said goods only to persons who are resident in the said district or are carrying on business therein and that the prices charged by him on sale of the said goods shall be a recommended price only and there is no obligation to comply with the recommendation, but the selling price must not at any time exceed the price recommended in writing from time to time by the Company.''

The two agreements are not otherwise different in any material respect.

Each couple carried on the business of selling the manufacturer's drinks in the area assigned to that couple. Each chose to hire from the manufacturer the truck on which the bottles were carried and each of the male respondents habitually drove the truck and delivered bottles to the customers' residences. The truck was marked with the manufacturer's name and colours. No sale was made to a person other than a consumer and delivery was always at the purchaser's premises or in the street. Custom was gained in the first place by taking over from a predecessor the customers recorded in the ``round book'' kept by the predecessor and the respondents sought to increase their trade by personal contact and, sometimes, by calling in aid canvassers employed by the manufacturer, for whose canvassing the respondents were not charged any fee. Orders for drinks placed by consumers with the manufacturer by telephone or letter were passed on to the respondents who called at the manufacturer's premises several times each week to take delivery of stock and to pay for stock previously delivered to them. Payment by each couple was required whenever the couple took delivery of bottles, for so many of the bottles sold and delivered to the couple on previous occasions as were not still on their truck nor held at their home, with the manufacturer's approval, as a small reserve of stock. Payment was required for bottles lost or destroyed after delivery to the respondents.

Mr. and Mrs. Sherden normally sold the manufacturer's products at the recommended prices, but had given discounts for large orders. Mr. and Mrs. Cooke had not only given discounts, but had also sold at a price above the recomended price, in a country town.

The respondents carried on their businesses on days and during periods of their own choosing and when one of the male

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respondents was unable to drive his truck the couple could hire the services of a driver from the manufacturer, if they did not choose to engage other labour. When trade was heavy an assistant unconnected with the manufacturer was engaged by the partners to help in delivering from the truck.

In the winter of each of the three years of income under consideration each couple took a holiday of about a week's duration at a place in Queensland, or outside Australia in the Pacific Ocean. The manufacturer offered to pay the charges for transportation and accommodation and in fact did bear those charges. Each holiday was taken by the respondents, and provided by the manufacturer, by way of participation in a ``holiday scheme'' controlled by the manufacturer. The manufacturer claimed to exercise a discretionary and gratuitous benevolence to those who satisfactorily performed agreements of the kind to which the respondents were parties. Each of the manufacturers published at different times within the relevant period statements about the schemes. One example will indicate the terms on which holidays might be offered:

``Rules For Holiday Scheme

The Committee in charge of the administration of the Holiday Scheme consists of the following: - 

      Managing Director          Mr. J.H. Sharpe
      General Sales Manager        Mr. W. Sprott
      Consultant                  Mr. J. Stewart

As you are aware, every Retailer is a self employed franchise operator. The franchise rules require him to fulfil many obligations, but the amount of satisfaction and earnings is almost limitless. The help of friends and wives increases his earnings just as though he were operating his own shop or small business.

The Island Holiday Scheme is designed to encourage every Retailer to do his best to promote his sales during the year commencing 1st July, 1970, and although this is purely a gratuitous gesture by the Management and no legal rights are conferred upon any retailer by reason of the Scheme, the Management is anxious to see that the efforts of Retailers who reach their allotted quotas of sales are recognised.

The following general rules have been prepared to cover the arrangements:

  • (1) The holiday period is to be approximately one week taken during the months of June and July unless the Committee otherwise determines.
  • (2) No cash payment in lieu of the holiday trip will be made.
  • (3) Each Retailer, in order to be considered, must be a fully effective Retailer at the time of the holiday trip.
  • (4) Each Retailer accepted by the Committee will receive one ticket for himself and one ticket for his wife for the holiday trip. He is not at liberty to transfer either ticket to any other person but must go himself and take his wife.
  • This is only a discretionary holiday scheme for Retailer and Wife, not a negotiable reward. Our objective is to give the Retailer's wife a holiday as much as the Retailer. If the wife cannot go or if a Retailer is single (unattached) a second ticket may be issued to a lady companion in lieu of a wife, provided the Committee considers that this person is genuinely in lieu of a wife and not just a fill-in for someone because the Retailer thinks there is a free ticket to be used.
  • (5) Any Retailers who negotiate any transferring of stock or trading in sales between one another in order to indicate an apparent increase in individual sales or otherwise take part in any practice considered unfair by the Committee will be automatically disqualified for two years.
  • (6) The Committee will exclude from further participation in the Scheme any individual or individuals reported by the Manager of a Scheme Holiday Resort to have misconducted or misbehaved in any way.
  • (7) The Committee may, without notice, exclude any individual or individuals from the Scheme.
  • (8) The decision of the Committee on any matter arising in connection with the scheme shall be final.

You may be assured that the Comittee will do its best to see that no injustice is done to any Retailer.''

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Another example reads:

``August 28, 1972.

Retailer Island Scheme

Each Retailer, as a self employed man, is expected to promote sales to the utmost in the Territory franchised to him and the longer he stays on that Territory the more he is accepted by customers, the better is his sales performance and the greater is his financial reward.

Frankly we are mainly interested in the man who wants to settle into a Territory and develop it as his own permanent business over a major part of his working life.

Our present Island Scheme will therefore be enlarged to include a great many satisfactory Retailers of long standing with our Company who, at times, have missed Island Holidays due to vagrancies(?) of weather. It will also be widened to provide encouragement to those Retailers who have accepted the challenge to build up newer territories in our developing Brands and who have not been able to participate because the qualifying targets are those usually achieved on established territories.

This expanded System will mean an Island Holiday for well over double the number of Retailers presently participating and to help offset the large additional expenditure involved we are favouring Hayman Island because no other Island offers a more complete and relaxing holiday.

The rules will be altered to include:

  • 1. The qualifications necessary for a Retailer to participate are: -
    • (a) He must have completed a financial year with the Company (from week 1 to week 52) as a Retailer, completely free from subsidy.*
    • (b) He must own his own Credit and be financially independent of the Company by the time his holiday falls due.
  • 2. Hayman Island is the only venue until after three years when an alternative may be offered.
  • 3. For his first year a Retailer qualifies for one week at Hayman Island with his wife or a lady companion. For subsequent years he qualifies for two weeks at Hayman with his wife. His children under 12 years of age will be subsidised by the Company.
  • 4. Current Retailers who have already qualified for three Island visits up to 1st July, 1972, may next year elect to: -
    • (a) go to Hayman Island for two weeks with wife and concessions for children under 12 years; or
    • (b) go to Fiji for 10 days with wife.

Although some may be disappointed, the vast majority of Retailers will wholeheartedly welcome this gesture by the Company giving all Retailers an equal chance to participate in these `Holidays of a Lifetime'.

*For this current year of 1972/73 he has until Week 14 to be free from Subsidy.

Bill Sprott,

National Sales Manager.''

The references to freedom ``from subsidy'' and to ownership ``of his own credit'' require explanation. A person who entered into an agreement with one of the manufacturers of the kind to which the respondents were parties would be paid by the manufacturer a weekly amount sufficient to bring his weekly income to a modest competence during the initial period of performance of the agreement. He was not required to repay that supplement or ``subsidy''. He would habitually allow credit to many customers, some of whom delayed or defaulted in payment. The manufacturer would sometimes, at its discretion, itself allow some credit to him in respect of bottles he had sold when he was experiencing difficulty in recovering money owing to him by consumers. But the manufacturers limited that assistance to exceptional occasions and the retailer was expected to ``own his own credit''.

Once each year the manufacturer paid each retailer the aggregate amount of a discount per bottle on bottles of soft drink purchased by the retailer during the preceding year.

The parties to the appeals chose to place before this court a transcript of the evidence adduced before the Board of Review as part

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of the evidentiary material upon which the appeals should be decided, as well as tendering in evidence the documents which were before the Board. (See
F.C. of T. v. Berry Motors Pty. Ltd. 78 ATC 4306.) No other but formal evidence was adduced on the hearing of the appeals. No submission was made which involved any denigration of the credit of a witness before the Board.

The male respondents, who alone gave evidence before the Board of Review, believed the assertion to be true which is contained in the manufacturer's ``Rules for Holiday Scheme'', that ``No cash payment in lieu of the holiday trip will be made'', and the parties to the appeals made their submissions on the assumption that those persons for whose transportation and accommodation in connection with a holiday the manufacturer offered to pay had no means of obtaining any other benefit in lieu of what was offered.

The male respondents also believed that any person who purchased from the manufacturer and paid for a specified number of bottles during a year under an agreement with the manufacturer of the kind to which they were parties would be offered a holiday under the scheme in respect of that year, unless his conduct of his business had been seriously unsatisfactory in the judgment of the manufacturer. Letters in the Commissioner's files relating to the assessments, which files were tendered in evidence, supported such a belief. They were letters from the respondents' solicitors, who represented themselves to the Commissioner as acting also for the manufacturers, which were said to be members of a group of related corporations.

The amount which the Commissioner added to the aggregate of assessable income in respect of each respondent's holiday in each year of income was that amount which the manufacturer expended in payment for the transport and accommodation provided to the respondent in respect of that holiday.

It was submitted by Mr. Myers, who appeared for the appellant Commissioner, that the benefits which each respondent received by reason of the manufacturer's payments for the holidays were income within sec. 25(1) of the Income Tax Assessment Act 1936. The further submission was advanced that the value to each respondent of the benefit he or she received was to be included in the assessable income because it fell within the description expressed in sec. 26(e) of the Act.

In support of the latter submission Mr. Myers contended that the relationship between each respondent and the manufacturer whose soft drink he sold was one of ``employment'', within the meaning of that word in sec. 26(e). Section 26(e) provides:

``The assessable income of a taxpayer shall include -

  • (e) 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:
  • Provided that this paragraph shall not apply to any allowance, gratuity or compensation which is included in the last preceding paragraph or which under any provision of this Act is deemed to be a dividend paid to the recipient.''

The parties debated the question whether there had been ``employment'' of the respondents on the basis, which I think to be correct, that in sec. 26(e) the word signifies the relationship of master and servant. Mr. Myers pointed to the integration of the activities carried out by the respondents in performance of their agreements into what he submitted was the business of the manufacturer: the production and sale to consumers of bottled soft drink. The male respondents worked in the manufacturer's uniform on the manufacturer's truck, receiving information as to the work to be done from the manufacturer's book, the ``round book'', and from customers' messages received and passed on by the manufacturer. The performance of the work was subject to the manufacturer's supervision in the initial period of what was said to be employment and thereafter was subject to some surveillance by the

ATC 4693

manufacturer. Canvassing of customers was undertaken by the manufacturer. Neither respondent was really in business on his own account, in Mr. Myer's submission, and the work of each was done as an integral part of the manufacturer's business. (See
F.C. of T. v. Barrett & Ors. 73 ATC 4147; (1973) 129 C.L.R. 395 and the cases there cited.)

The respondents bought the products which they sold. They determined which of the manufacturer's products they would from time to time buy, and in what quantities, and the period during which they would do the work of selling. If a respondent's performance of the agreement with the manufacturer failed in any respect to satisfy the manufacturer, neither the terms of the agreement nor any custom or practice of which there was evidence sanctioned any direction by the manufacturer of the respondent as to how he or she should sell or deliver the products to the customers. The agreement required that the respondents have a delivery vehicle for the performance of the agreement and that they make, or cause to be made, the appropriate entries in the ``round book''. Their selling area and their capacity to determine the selling prices of their stocks were restricted. The rest was in their discretion. They might, without breach of the agreement with the manufacturer, perform the agreement by their servants or agents and contribute no labour of their own. In my opinion no relationship of master and servant subsisted between the manufacturer and any of the respondents.

Submission was made on the Commissioner's behalf that, if the holidays were not granted in relation to any employment of the respondents, they were granted in relation to services rendered by the respondents to the manufacturer and that therefore the value of each holiday to each respondent was brought into assessable income by sec. 26(e). The ``services'' which in Mr. Myers' submission the respondents had rendered, he grouped into three categories. The first category comprehended the service of distributing the manufacturer's products to the consumers. The promotion of sales of those products which the male respondents furthered by advertising the manufacturer's name on their uniforms and trucks and stationery constituted the second category of services. The third was the provision of information to the manufacturer by recording the customers and their purchases in the ``round book''.

The context in which the expression ``services rendered by him'' is found in sec. 26(e) in my opinion requires that the expression be understood in the sense in which the expression ``work and labour done'' is understood by lawyers, and that it be understood as not referring to those benefits which might be comprehended by use, in a different context, of the word ``services'' in a general sense. (cf.
Employers' Mutual Indemnity Association Ltd. v. F.C. of T. (1943) 68 C.L.R. 165;
Scott v. F.C. of T. (1966) 117 C.L.R. 514 at 524-526 and
Dwyer v. Hunter (1951) N.Z.L.R. 177.)

The words, ``any employment of or services rendered by him'', evoke by their collocation the twin concepts of contracts of service and for services. (In another context the expression ``services rendered'' was thought to suggest the work of a servant:
Associated Newspapers Ltd. v. Grinston & Anor. (1949) 66 W.N. (N.S.W.) 211 at 212.) No doubt it is not essential that there be a contractual origin of the obligation in discharge of which ``services'' within the contemplation of sec. 26(e) are rendered. (cf.
Commonwealth v. Quince (1944) 68 C.L.R. 227.) Nor is obligation of any kind essential. Services may be rendered gratuitiously, in hope of gratuitious reward for them. But where work is done in performance of a contract it is essential, in my opinion, that the work be done as the consideration for reward offered in exchange for the work, if the work is to answer the description expressed by the words ``services rendered'' in that subsection. And I think that to be so, notwithstanding that what is brought into assessable income by sec. 26(e) may be allowed given or granted by somebody other than him who has offered and provided the reward in exchange for the work. (cf.
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at 556.)

When reward is offered in exchange for several benefits, some but not all of which may be described as ``services rendered'', it may be difficult to determine, for the purposes of sec. 26(e), whether what has been ``allowed, given or granted'' was so allowed given or granted ``in respect of, or

ATC 4694

for or in relation directly or indirectly to'' the services rendered, on the one hand, or whether, on the other hand, the allowance, the giving or the granting was in respect only of those other benefits which could not be described as services rendered. But no real difficulty of that kind is, in my opinion, to be found in the circumstances disclosed in these appeals. The manufacturers offered no reward in exchange for any work. They promised to sell goods to the respondents in exchange for the respondents' promises to resell the goods to consumers in a particular area. Neither the promise to sell the goods to the respondents, nor any sale by a manufacturer in performance of its promise, was offered as a reward for the respondents' work of selling to consumers. And the work of selling the goods to consumers could be described as a service to the manufacturers only by use of the word ``service'', or ``services'', in what Starke J. called its ``general sense'' (Employers' Mutual Indemnity Association v. F.C. of T. (1943) 68 C.L.R. 165 at 181).

Nothing was offered in exchange for advertising the manufacturers' products. The respondents chose to hire their trucks from the manufacturers and there was no evidence that it was not by choice that they used the uniforms and stationery provided by the manufacturers. The work of providing the manufacturers with the information recorded in the ``round books'' ought not, in my opinion, to be regarded as services rendered as consideration for reward offered in exchange for those services, but as performance of an obligation ancillary to the agreement for sale and resale of the products.

The other principal submission on behalf of the Commissioner - that the benefit accepted by each respondent in taking the holiday for which the manufacturer paid added to the respondents' assessable income under sec. 25(1) - depends for its success upon acceptance of the notion that income, within the meaning of that word in sec. 25(1) of the Income Tax Assessment Act 1936, was derived by the respondents in connection with the acceptance of that benefit. It is no obstacle to acceptance of that notion that the manufacturer's bestowal of the benefit was voluntary, and was not in performance of any legal or moral duty (
F.C. of T. v. Squatting Investment Co. Ltd. (1954) 88 C.L.R. 413). And the evidence justifies a finding that the manufacturers were during the relevant period making regular annual offers to confer the benefit, so that there was in the holiday benefits what Lord Phillimore called ``an element of periodicity'', which facilitates characterisation of those benefits as income (
Seymour v. Reed (1927) A.C. 554 at 559, 569-570; F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at 556-557, 567-568).

Mr. Hulme Q.C., who appeared with Dr. Spry for the respondents, sought to rely upon the authority which he submitted that
Tennant v. Smith (1892) A.C. 150, provided that a benefit which cannot be converted by the recipient into money is not income within sec. 25(1) of the Income Tax Assessment Act. He cited
Abbott v. Philbin (1961) A.C. 352, and
Heaton v. Bell (1970) A.C. 728, to demonstrate the acceptance accorded in England to the reasoning in Tennant v. Smith. The reasons of Mr. R.K. Todd, with which the other members of the Board of Review agreed in deciding the references which are the subjects of these appeals, revealed the extent to which consideration of the concept of ``income'' in Tennant v. Smith was influenced by the verbiage of the English income tax schedules, and thereby those reasons raised doubts as to whether the reasoning of the members of the House of Lords in that case elucidated the concept of ``income'' in sec. 25(1).

Doubt has been cast by Bowen C.J. in Eq., in
Donaldson v. F.C. of T. 74 ATC 4192 at pp. 4205-4206; (1974) 1 N.S.W.L.R. 627 at pp. 641-2, on the contemporary validity of the proposition that convertability into money is an essential characteristic of a benefit which is income. His Honour said:

``Counsel for Donaldson argued that sec. 26(e) is concerned only with items which: (i) are of an income nature according to ordinary concepts; (ii) can be valued and the value of which can be cast in money terms; and, (iii) have a present value to the taxpayer and are enjoyed or were capable of being enjoyed by him in the income year.

Counsel for the Commissioner was disposed to agree with (i) and (ii), but not with (iii). He argued that sec. 26(e) looks first to see what is `allowed, given or

ATC 4695

granted' to the taxpayer, and then includes in the taxpayer's assessable income the value to him of the benefit so conferred. If it appears there is conferred a benefit of an income nature which can be given a monetary value, then it is assessable income of the taxpayer.

Forensic or judicial glosses upon the section are no substitute for its words, which seem plain enough. However, the points raised do concentrate attention on specific areas of contention in the application of the section. As to (i) the words of sec. 26(e) suggest that any item which falls squarely within its terms is rendered assessable income. So far as the words of the section are concerned, it seems to matter not whether the item would otherwise be of an income or capital nature according to ordinary concepts. There is little difficulty with meals. They operate in relief of the taxpayer's purse as well as his stomach. So too, I think, the use of premises or quarters, which also operate in relief of his purse and save him from having to pay rent, would be regarded as being of an income nature, at least in these days, if not eighty years ago: cf. Tennant v. Smith. But what of an outright gift of a house or a car? Are these capital receipts which fall outside sec. 26(e)? Of course, a benefit does not come within sec. 26(e) unless it is `allowed, given or granted' to the employee in respect of or for or in relation directly or indirectly to any employment of or services rendered by him. If it answers this description, is it thereby transmuted into income according to ordinary concepts, whatever it may be? Perhaps the proposition is not so much that sec. 26(e) applies only to income and not to capital items, but rather that it is so worded that there is nothing it covers which would not be of an income nature in any event.

It is unnecessary for present purposes to pursue this. Counsel for both parties are agreed that sec. 26(e) applies only to items of an income nature, and they are strongly supported by what was said by Fullagar J. in
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at 54, and by Windeyer J. in Scott v. F.C. of T. (1966) 117 C.L.R. 514 at 525-6. Did the rights which Donaldson acquired in the present case constitute a benefit allowed, given or granted which was of an income nature? It is not unusual for companies to give to senior employees rights of varying kinds to take up shares upon terms which are beneficial to the employee. Methods vary. It may be by way of allotment of shares for an amount less than market value in pursuance of a particular offer to the employee without any legally enforceable option having been conferred upon him: (see
Salmon v. Weight (1935) 51 T.L.R., 333;
Ede v. Wilson and Cornwall (1945) 1 All E.R. 367; cf.
Bridges v. Hewitt (1957) 1 W.L.R. 674). It may be by way of legally effective option rights which entitle the employee to take up shares in the future at a time when their market value may exceed the price fixed by an option agreement: Abbott v. Philbin. These cases turn upon the provisions of the English income tax legislation - in particular Sch.E of the Income Tax Acts, ranging from the Act of 1842 to the Act of 1918, and later the Act of 1952. The wording of these provisions is markedly different from our sec. 26(e), particularly with its reference to `perquisites' of office or employment, but in its practical application in many respects it is not dissimilar. I think it is fair to say that in these days, such benefits are regarded as being in the nature of a bonus or an addition to salary and are of an income nature, whether they are conferred in relation to employment or to services rendered. My conclusion in the present case is that a benefit was allowed, given or granted to Donaldson of an income character.''

``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, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts:
A.G. of British Columbia v. Ostrum ((1904) A.C. 144 at

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147);
Lambe v. I.R. Commrs. ((1934) 1 K.B. 178 at 182-3).''

(Per Jordan C.J. in Scott v. C. of T. (1935) S.R. (N.S.W.) 215 at 219.)

As the ordinary concepts and usages of mankind are mutable, the contrast which Bowen C.J. in Eq. suggests between these days and eighty years ago may serve to reconcile his observations about the use of premises and the observations on the same subject by members of the House of Lords in Tennant v. Smith. I do not desire to cast any doubt on the relevance of Tennant v. Smith to the understanding of sec. 25(1) of the Income Tax Assessment Act. But I shall suppose, without expressing any opinion, that the passage of time may have enabled a benefit inconvertible into money to be conceived by Australians, and to be described without affront to Australian usage, as income. If it were so, it would in my opinion be so only because the inconvertible benefit is in the recipient's hands one of those goods or services which are required or commonly desired by persons in his situation in life for the normal maintenance and comfort of themselves or their dependants, so that it is possible to conceive the benefit as a provision, upon which the recipient depends for the satisfaction of a constant or a recurring need, made in substitution for a pecuniary receipt by the expenditure of which he would have satisfied the need himself. (cf. F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at 557 and 568.)

Neither the evidence of the male respondents nor my own experience provides a basis for regarding the holidays here in question as benefits required or commonly desired as incidents of the lives of the respondents, or of Australians generally, or of any class of Australians within which any substantial number of those who retailed the manufacturers' products might be expected to be found. The evidence of both male respondents showed that they and their wives would not, either before or after they entered into commercial relations with the manufacturers, have contemplated taking holidays in hotels at distances of more than a thousand miles from their homes, if they had not been offered free transport and accommodation. One of the male respondents expressly indicated that he and his wife did not always have an annual holiday away from home before the manufacturer's offer was made. I infer from the evidence of the other respondent that he and his wife were in like case. I think that I may take judicial notice of the fact that the costs involved in holidays of the kind the manufacturers offered deter a very substantial proportion of the adult Australian population from undertaking such holidays, except in special circumstances. The provision of these holidays, unlike the use of premises or quarters and the provision of meals, of which Bowen C.J. in Eq. spoke, did not ``operate in relief of the taxpayer's purse'', for his purse would not have been opened to pay for such holidays. Even if the holidays provided had been quite inexpensive, the enjoyment away from home of an annual vacation is in my opinion not yet so commonly expected an incident of Australian life as to be regarded as a recurring need, satisfaction of which by an employer or commercial associate may in accordance with the ordinary concepts and usages of mankind be treated as involving the derivation of income.

Reference was made to sec. 21 of the Income Tax Assessment Act in support of the submissions on behalf of the Commissioner, and I had the benefit of written submissions concerning that section, which reads:

``Where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given.''

It is unnecessary to say more of that provision than that, although it contemplates the possibility that income may be derived otherwise than in cash, it affords no guidance in determining what ``consideration paid or given otherwise than in cash'' may constitute income within sec. 25(1), in my opinion. It does not direct that for the purposes of the Act money shall be deemed to have been paid, but that for those purposes the money value of the consideration shall be deemed to have been paid or given. The provision thus operates, in my opinion, after determination of the

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question whether a benefit is ``assessable income'', and gives direction for quantification of the amount to be included in assessable income in respect of that benefit, if it answers the description ``consideration paid or given otherwise than in cash''.

I gratefully adopt the words of Mr. R.K. Todd for the expression of my conclusion:

``In truth what we are left with is the question whether the value of the holidays to the retailers, expressed in terms of the cost of them to the suppliers, is income within ordinary parlance, according to ordinary concepts. I do not think that it is. Nothing came in. Nothing was received which could be converted into something that would come in. There was simply a discharge by the suppliers of an obligation which had arisen on the part of some person, probably the supplier itself, to pay various accounts for fares and accommodation. The accommodation, etc., having been arranged, the retailer could either avail himself of the offer or not. He received no money, nor did he even take the benefit of the discharge of an obligation. All that he received was the product, unconvertible into money in his hands, of expenditure by another. The sums in question did not become income simply by being capable of being expressed in money terms. Thus, despite the obvious link between the provision of the holiday and the commercial relationship of the suppliers to the retailers, the cost of the holidays is nevertheless not income of the retailers.''

The order of the court in each appeal is that the appeal be dismissed.

(After discussion):

His Honour: There will be an order that each of the appeals in respect of Judith Ann Cooke be consolidated; an order that each of the appeals in respect of Allen William Cooke be consolidated; an order that each of the appeals in respect of Frederick John Sherden be consolidated, and an order that each of the appeals of Lorna May Sherden be consolidated.

There will be an order that in each of the consolidated appeals the respondent's costs be taxed and paid by the appellant.

 

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