Case V163

Members:
IR Thompson DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 21 November 1988.

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I.R. Thompson (Deputy President)

The relevant facts in this matter are not in dispute. The applicant is an ambulance officer; he had been so employed for some years before 1 July 1985. He is, and at all relevant times has been, paid a salary; PAYE deductions are and have been made by his employer. By 1 July 1985 he had accumulated a sufficient entitlement to long service leave and annual leave for him to be granted leave of absence from 1 July 1985 to 22 January 1986. Part of the period related to his long service leave entitlement and part to his annual leave entitlement. On 27 June 1985 his employer paid him $5,952.89 in respect of the annual leave and $6,051.20 in respect of the long service leave. When the employer prepared his group certificates for the 1985 tax year, it included both those amounts in it.

2. The respondent assessed the applicant's taxable income for the 1985 tax year as $38,645, including the two amounts referred to above. As a result the tax payable was assessed as $13,581. For the 1986 tax year the respondent assessed the applicant's tax at $2,358 on the basis that he had received taxable income of only $13,774, that is to say salary from 23 January 1986 onwards.

3. It is the applicant's case that, because the two payments made on 27 June 1985 related to leave taken wholly within the 1986 tax year, those two amounts were not income derived by him during the tax year which ended on 30 June 1985 but were income derived by him in the tax year which ended on 30 June 1986. On that basis his taxable income for the 1985 tax year would have been $26,642, with $7,494 payable as tax, and his taxable income for the 1986 tax year would have been $25,777, with $6,963 payable as tax. The total of those two amounts is $1,482 less than the total of the amounts assessed by the respondent for the two tax years.

4. At the hearing the applicant was present represented by his tax agent, Mr W. Berry; the

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ATC 1082

respondent was represented by Mr F. Camerota, a departmental officer. In answer to a question from the Tribunal, Mr Berry stated that the applicant's employer was legally obliged to make the payments to the applicant on 1 July 1985 and that, if the applicant had died before the expiration of his period of leave, no part of either of the two amounts paid to him would have been repayable to the employer. Mr Camerota did not dispute that.

5. Mr Berry informed the Tribunal that the applicant had had no control or influence in respect of the date on which the payment of the two amounts was made to him; Mr Camerota accepted that. Mr Berry said that at the time the applicant was not aware that his receipt of that money before 1 July 1985 would disadvantage him. The applicant, who made a brief statement to the Tribunal, said that he had dealt honestly at all times with the respondent; he had not sought to practise any tax evasion. In the circumstances he considered that the respondent's approach to the assessment of his tax for the 1985 tax year had been too rigid and that he had been unfairly penalised for receiving the two amounts on 27 June 1985 when he had not been aware of the consequences which would flow from that.

6. Mr Berry did not rely on any decisions of the courts, the Taxation Boards of Review or the Administrative Appeals Tribunal in support of his submission. Instead he referred to dictionary definitions of ``derived'' and ``received'' to support an argument that, although the two amounts were received by the applicant on 27 June 1985, he did not derive that income until on or after 1 July 1985. He said that the applicant had simply been prepaid amounts which were in fact payable to him on that date. He acknowledged that in a number of earlier cases Boards of Review and the Tribunal had decided that, where money was received in advance for periods of leave, it had to be treated as income derived in the tax year in which it was received. However, he sought to distinguish the present case from those cases on their facts. Whereas in those cases parts of the leave had been taken in the tax year in which the payment was made and part in the following tax year, the applicant's leave had been taken wholly in a different tax year from that in which the payment was made.

7. Mr Camerota referred the Tribunal to the provisions of sec. 17 and 25(1) of the Income Tax Assessment Act 1936 (``the Act'') and submitted that, in the applicant's case, income was derived when it was received. He referred to the alternative methods of determining the amounts of income derived by a taxpayer, that is to say the cash receipts method and the accruals method, and to
Brent v. F.C. of T. 71 ATC 4195 at p. 4200 where Gibbs J. (as he then was) discussed the principles to be applied and referred in turn to
The Commr of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Limited (1938) 63 C.L.R. 108 (Carden's case) at pp. 152-154. His Honour said:

``The Court in that case was concerned with the question whether an accounting on an earnings basis appropriately reflected the professional income of a medical practitioner as regards each year which had ended before his death and it was held in respect of those years that his professional income was properly assessed upon actual receipts. In the course of a judgment with which Rich and McTiernan JJ. concurred, Dixon J., as he then was, said (at p. 155):

• `Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form.'

However the decision itself shows that his Honour did not intend to hold that moneys realisable, but not received, in an accounting period should always be treated as income derived during that period. Indeed, Dixon J. went on to advert to the distinction between trade and other sources of income drawn by Sir Houldsworth Shaw and Mr Baker in their Law of Income Tax in the following passage which he cited (at p. 155) -

• `There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something `coming in'; that is, for income tax purposes, receivability without receipt is nothing.'

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ATC 1083

His conclusions on the question whether a receipts basis appropriately reflected the professional income of a medical practitioner were expressed as follows (at pp. 157-158) -

• `Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income. But this is subject to one qualification. There must be continuity in the practice of the profession.'''

8. Whenever the Boards of Review and the Administrative Appeals Tribunal have been required to review objection decisions relating to the assessment of income of salaried employees, they have expressly or implicitly adopted the reasoning of Dixon J. in Carden's case and have decided that the receipts basis formed a fair and appropriate foundation for determining the income of the employee in any tax year.

9. In
Arthur Murray (N.S.W.) Pty. Limited v. F.C. of T. (1965) 114 C.L.R. 314 the High Court dealt with a situation where money was received by the taxpayer in one tax year in respect of fees for dancing lessons to be given over a future period in the following tax year. If the lessons had not been given, the money would have had to be refunded to the person who had paid it. The Court decided that in those circumstances the amount of fees paid for lessons in the following tax year did not ``come home'' to the taxpayer until the lessons had been given and the taxpayer had become entitled to retain the money received as fees for those lessons. However, that case is to be distinguished from the present case on two grounds. First, it relates to prepayment under a contract to provide a service, whereas in the present case the payment is made to a salaried employee under the terms of a contract of service. Second, the fees would have had to be refunded if not earned in the following tax year, whereas in the present case the payments made for the periods of leave taken in the 1986 tax year had been fully earned by the end of the 1985 tax year. In Case M6,
80 ATC 59, the payment to the taxpayer was an advance of salary partly in respect of the following tax year and had the nature of a loan which the taxpayer would have had to repay if he had failed to return to work for the employer at the end of his leave and to resume his duties for a period equal to the duration of his leave. Nevertheless, No. 1 Board of Review came to the conclusion that the whole of the lump sum paid to him was assessable income in the tax year in which he received it.

10. Mr Berry submitted that three circumstances in the present case made it unfair and inequitable that the applicant should be disadvantaged by having the two amounts included in his taxable income for the 1985 tax year. First, the payment had been made very near to the end of the 1985 tax year. Second, it had been made before 1 July 1985 entirely on his employer's own initiative. Third, the applicant was not aware that it would have any detrimental effect on his tax liability. The Act should, therefore, be construed in a way that did not have that effect. I agree that it is unfortunate that the employer did not wait until 1 July 1985 to pay the two amounts to the applicant and that he should suffer detriment because of that: However, it is, I consider, not possible for the Tribunal to construe the provisions of sec. 17 and 25 of the Act in the manner for which Mr Berry has contended. It is required to apply the principles derived from Carden's case which have been applied by the Boards of Review and the Administrative Appeals Tribunal consistently ever since. Accordingly, while it is impossible not to have sympathy with the applicant, it is necessary to affirm the objection decision under review.