Federal Commissioner of Taxation v. Sealy.

Judges:
Pincus J

Court:
Federal Court

Judgment date: Judgment handed down 10 December 1987.

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Pincus J.

This is an appeal from the Administrative Appeals Tribunal in an income tax matter [reported as Case U84,
87 ATC 485]. The issue in the case is one of taxation of payments in lieu of long service leave, under sec. 26AD of the Income Tax Assessment Act 1936. More particularly, the questions involved relate to the meaning of the word "office" in subsec. (1) and the word, "privilege" in subsec. (8) of that provision.

The respondent was employed as manager of a grazing partnership from August 1965 until 1972 when a new partnership agreement was made, purporting to be backdated to 1 January 1972. Under that agreement the respondent became a partner, entitled to a 5.3% interest in the profits. Clause 28 of the agreement provided as follows:

"The management of the said partnership business shall be vested in the said VICTOR ERIC SEALY and as such manager he shall have the conduct and control generally in the management thereof including the purchasing and selling of livestock and he shall be entitled to be paid for his services such sum as the partners may from time to time determine. He shall carry on and manage the business for the common benefit of the partners with such assistance as he may deem necessary and he may at his discretion delegate any of his powers."

During the year ended 30 June 1980, the properties on which the grazing business was carried on were sold, and it was decided to wind up the partnership. In the course of the winding-up, the applicant was paid an amount of $2,445. The explanation of that payment is to be found in a letter written by one of the partners to the appellant saying that the respondent "was employed to manage our family partnership from 15 August 1965 to 30 April 1980". The letter went on:

"Until the end he received no long service leave, or cash in lieu thereof. When it seemed certain we had sold the properties in 1980, I asked our accountants (a professional firm), to work out the long service leave due to him. They advised me to pay him $2445, which is for leave over the whole period."

It is the character of this sum of $2,445 which is the issue in this case.

The immediately relevant provisions of the statute are subsec. (1) and (8) of sec. 26AD:

"(1) This section applies to any amount paid after 15 August 1978 (whether voluntarily, by agreement or by compulsion of law) to a taxpayer in a lump sum in consequence of the retirement of the taxpayer after that date from any office or employment or in consequence of the termination after that date of any office or employment of the taxpayer, being an amount that is paid in respect of unused long service leave.

...

(8) In this section, `long service leave' means -

• (a) long service leave, long leave, furlough, extended leave, or leave of a similar kind (however described) to which a person has an entitlement by

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  virtue of a law of the Commonwealth or of a State or Territory, an award, determination or industrial agreement in force under any such law, a contract of employment or the terms of appointment to an office;
• (b) leave (other than leave that is annual leave for the purposes of Section 26AC) to which a person has an entitlement by virtue of a scheme or arrangement by reason of the existence and nature of which the employer of the person has secured exemption from obligations to comply with a law of the Commonwealth or of a State or Territory relating to long service leave, long leave, furlough, extended leave or leave of a similar kind (however described); or
• (c) leave that may be made available to a person as a privilege, being leave the availability of which is determined by reference to matters similar to matters by reference to which entitlement to leave referred to in paragraphs (a) and (b) is ordinarily determined."

The respondent's return for the relevant year was prepared on the basis that the sum of $2,445 fell within the description in sec. 26AD(1), with the consequence that the respondent's assessable income included an amount calculated in accordance with a formula in the section, the details of which need not be set out. The effect of the formula, if applicable in the present circumstances, is that only a proportion of the sum paid is taxable. The respondent was, however, assessed on the basis that the payment is not caught by sec. 26AD(1), and it is common ground that, if so, the whole of the payment falls into assessable income.

The respondent having unsuccessfully objected against his assessment in respect of the year ended 30 June 1980, requested that the matter be referred to a Board of Review, but the case did not come on for hearing until 25 November 1986, by which time the Board's functions had been assumed by the Administrative Appeals Tribunal: sec. 222 and 223 of Act No. 48 of 1986.

That Tribunal, on 24 March 1987, allowed the objection, holding the $2,445 payment to be caught by sec. 26AD(1) and that decision is attacked here.

In arriving at its conclusion, the Tribunal used the provisions of sec. 19 of the Industrial Conciliation and Arbitration Act 1961 (Qld), providing for payment of long service leave to employees not subject to an award or industrial agreement under that Act or to an award, industrial agreement or determination under a Commonwealth law. It held the appellant to have been paid the $2,445 pursuant to an entitlement under sec. 19. That line of reasoning depended upon a view, which the Tribunal adopted, that the respondent was an "employee" within the meaning of the State Act. The Tribunal held that he was, relying upon the following extended definition of the word:

"Any employee, whether on wages or piecework rates, or a member of a buttygang:...

In every case where four or more persons being or alleging themselves to be partners, are working in association in any calling or industry, each of such persons shall be classed as and be deemed to be an employee; and the partnership firm constituted by them or alleged so to be shall be deemed to be the employer of each such person."

The process whereby the Tribunal arrived at the conclusion just mentioned is to be found in para. 17 [at p. 488] of its reasons:

"In the overall context of the Act it is clear that the Parliament has sought to grant working partners, such as the applicant, rights to long service leave as if those working partners were employees in the ordinary sense of that word. It was not established before the Tribunal whether any other partners were working partners. Exhibit 1 which is the partnership income tax return for the year ended 30 June 1980 discloses that the applicant was paid a salary of $11,819 and another partner was paid a salary of $750. This is relevant in considering the words `working in association'. Is a distinction to be drawn between those partnerships where there are four or more working partners who are paid a salary and those partnerships where, as in the present case, only two partners are paid a salary? I think the words working in association refer to active participation in an industry. I am prepared to infer that the

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definition applies in this case. The consequence is that the applicant is an employee and the firm an employer for the purposes of the Act."

Mr Watson, for the appellant, argued that in so holding the Tribunal erred in law, in that there was no evidence upon which it could properly have been held that there were four or more partners "working in association" within the meaning of the definition.

There were numerous partners, but Mr Watson argued that, the onus being upon the respondent (before the Tribunal), it was not shown, nor was there any evidence upon which it could properly have been held, that four or more of them were "working in association" in the business. The material before the Tribunal showed that the respondent was engaged in the day to day business of the partnership and was accordingly paid a salary and that another partner received a small salary. There was no evidence that, apart from those two, any partner did any work directly in the partnership's business.

Assuming that the Tribunal was right in thinking that "the words working in association refer to active participation in an industry", it is not easy to see how its conclusion on this aspect of the case can be supported. It is clear that the Queensland Parliament cannot have intended to achieve the result that, for the purposes of the Industrial Conciliation and Arbitration Act, all partners are deemed to be employees of one another. Mr Watson referred to a decision of the Industrial Court of Queensland, in
Toohey v. Veronese - Queensland Industrial Gazette, 30 September 1953; that tends to support the construction of the definition at which the Tribunal arrived - i.e. as requiring active participation on the part of the persons said to be "working in association". I accept that view, but am unable to see that a conclusion favourable to the respondent can follow from it; in the absence of evidence that more than two persons were active participants, the extended definition was inapplicable.

It follows that, in so far as the Tribunal's reasons are based on the view that the respondent was an "employee" within the extended definition in the Industrial Conciliation and Arbitration Act 1961 (Qld), I cannot, with respect, accept them.

The Tribunal, however, advanced a second reason for its conclusion, to meet the contingency that the one just dealt with might be incorrect. It held, in effect, that there was a retirement from an office, namely the position of manager, that "the partnership had grounds for believing that it was liable under the Act for long service leave due upon termination of the" respondent's services as manager and that accordingly the matter fell within sec. 26AD(8)(c), set out above.

It was accepted by the Tribunal, and common ground before me, that the respondent could not, for the purpose of sec. 26AD, be treated as having retired from the employment of the partnership of which he was a member and reference was made to
Rose v. F.C. of T. (1951) 84 C.L.R. 118. It is not, in my opinion, clear beyond argument that in Queensland a partner may not effectively make a contract of employment with the partnership - i.e. with the members of the partnership including himself. Doubt on that score arises from the provisions of sec. 50 of the Property Law Act 1974 of the State of Queensland, which came into force on 1 December 1975. Section 50 reads as follows:

"(1) Any covenant, whether express or implied, or agreement entered into by a person with himself and one or more other persons shall be construed and be capable of being enforced in like manner as if the covenant or agreement had been entered into with the other person or persons alone.

(2) This section applies to covenants or agreements entered into before or after the commencement of this Act, and to covenants implied by statute in the case of a person who conveys or is expressed to convey to himself and one or more other persons, but without prejudice to any order of the Court made before such commencement."

Under this provision, referred to by Mr Robb for the respondent, a contract by partner A to become an employee of the partnership of A and B is, on the face of it, to be construed and is capable of being enforced as if A had merely contracted with B. However, the corresponding New South Wales provision has not been so read:
Stewart v. Hawkins (1960) 60 S.R. (N.S.W.) 104. It was there said that "The section validates the agreement that has been

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entered into, it does not convert it into some other agreement" (p. 107). If that is so, the agreement just postulated should be treated as a contract by A with himself and B and the contract presently in question should be regarded as one by the respondent with himself and all the other partners, under which contract he agreed to serve as manager.

I have found it unnecessary, however, to reach a conclusion on the application of the Property Law Act, because I am satisfied that, for other reasons, the appeal must fail.

It will have been noted that sec. 26AD(1) covers payments of lump sums made voluntarily, as well as those made by agreement or compulsion of law. The word "voluntarily" imports that there is no entitlement. Paragraph (c) of subsec. (8), quoted above, refers to "leave that may be made available to a person as a privilege". In my opinion, that expression should be read, in the light of reference to voluntary payments in subsec. (1), as referring to leave to which there is no entitlement, but which, nevertheless, "may be made available". It appears from the evidence that, although the respondent was a member of the partnership, he was treated as if he were an employee entitled to long service leave and the availability of that was determined as set out in para. (c) of subsec. (8). In those circumstances, it is my opinion that the leave in lieu of which the payment was made was leave falling within para. (c) of subsec. (8).

But that is not the end of the matter, for Mr Watson contended that the payment was not in consequence of retirement from any office or employment. As I have mentioned, it was common ground that there was no employment, because of the supposed impossibility of a partner's being an employee of the partnership. Mr Watson said that the post of manager of the business was not an "office" and referred to the decision of the House of Lords in
Edwards v. Clinch (1982) A.C. 845, apparently as supporting the contention that to be an "office" within the meaning of the relevant section, the position must have an existence independently of its holder from time to time. Mr Watson referred to Lord Wilberforce's statement in that case that:

"... the word must involve a degree of continuance (not necessarily continuity) and of independent existence: it must connote a post to which a person can be appointed, which he can vacate and to which a successor can be appointed"

(p. 861D).

Lord Wilberforce also referred to previous authority for the view that the word in English tax legislation referred to a "subsisting, permanent, substantive position".

I doubt if it is sound to assume that the Australian parliament necessarily intended this definition of "office", established in the construction of the United Kingdom's tax legislation, to be applied in construing sec. 26AD. The word "office" has a range of meanings: see Collins English Dictionary (meaning no. 7), Shorter Oxford English Dictionary (meaning 4),
Great Western Railway v. Bater (1921) 2 K.B. 128 at pp. 136-137. In some contexts, it refers to a position of authority in a governmental or other public organisation. I see no reason so to restrict its meaning here. The intention apparently was to cover the case in which, there being no cessation of an employment, a payment of the character mentioned is made in respect of retirement from or termination of an office. It is difficult to think of any reason why the legislature should have intended to confine the concession given by the section to instances in which the terminated position is one of a public character or of any high degree of permanency. Presumably, no one would dispute that the position of managing director of a public company could be regarded as an "office". I cannot see why that of managing partner of a grazing partnership should not be so regarded.

In summary:

1. The sum in question was paid in consequence of termination of the respondent's office, namely as managing partner of a substantial enterprise.

2. It was a payment in respect of unused long service leave, being leave of the kind mentioned in para. 8(c) of sec. 26AD of the Act.

It follows that the appeal must be dismissed, and with costs.