Case V76

Members:
RA Layton DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 13 May 1988.

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R.A. Layton (Deputy President)

The question for determination in this reference is whether a sum of $4,864 paid to the applicant by General Motors Holden Ltd. (``GMH''), being a ``suggestion award for an adopted idea'' constitutes assessable income within the meaning of subsec. 26(e) or 25(1) of the Income Tax Assessment Act 1936 (``the Act'').

2. At the hearing, the applicant was represented by his tax agent and gave evidence under oath. The Commissioner was represented by one of his officers and called Mr Heaft, the Secretary of the GMH Suggestion Plan.

3. The facts are that since 1942, GMH has had a Suggestion Plan in operation. At the relevant time, being the period 1982 to 1985, the company's policy and objectives of the Suggestion Plan were expressed in the following terms (see supplementary documents at p. 8):

``2. Objectives

2.1 The Suggestion Plan has been designed to achieve the following objectives:

• 2.1.1 To make use of the constructive ideas of employees to obtain such direct benefits as savings, improved product quality, greater safety and better working environment.
• 2.1.2 To improve employee attitudes by directing their attention to the positive and progressive aspects of their jobs.
• 2.1.3 To promote good two-way communication between employees and management and as a tool which supervision can use to improve relations with employees.

2.2 The objectives that the Plan has been designed to achieve for GMH employees are as follows:

• 2.2.1 To give eligible employees a tangible share of the benefits which result from the adoption of their ideas.
• 2.2.2 To ensure all employees, including those who are ineligible for a cash award, receive personal recognition for their constructive thought and the satisfaction of seeing their ideas in use.
• 2.2.3. To help all employees to develop and demonstrate their initiative and ingenuity by providing the opportunity to offer their constructive ideas for consideration by management.''

4. The rules of the Suggestion Plan were annexed to the application form (being p. 13 in the supplementary documents).

5. In summary, the Suggestion Plan was open to all full-time employees of GMH (with the exception of salaried employees of the Suggestion Plan Section and ``unclassified people'', being senior management personnel). Forms were made available to employees and suggestions could be submitted by placing completed forms in boxes distributed throughout the GMH plant and offices. These suggestion boxes were regularly emptied and processed including a costing analysis, through

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Central Office. Thereafter the suggestions were sent to a Suggestion Committee which decided the adoption or rejection of a suggestion and, if adopted, the amount of award to be paid. The adoption criteria included consideration of factors such as safety, cost reduction and improvements in productivity.

6. In the event that a suggestion was rejected, the submittee was notified of that decision. However, there was provision in the rules for the submittee to request in writing that the suggestion be re-submitted within a named period, thereby allowing the suggestion to be reconsidered.

7. Conversely, if the suggestion was to be adopted by GMH, a notice was sent to the submittee advising of that decision. Following adoption, in a case where the benefits resulting from a suggestion were measurable, an award equal to one-third of the total net savings made during the 12-month period following implementation of the suggestion up to a maximum of then $12,000, was paid to the submittee.

8. The suggestion application itself included an agreement that GMH ``its subsidiaries, successors and assigns shall have the right to make full use of [the] suggestion'' (p. 10 of supplementary documents).

9. The rules also made provision for two or more employees to collaborate on a suggestion, in which case the award moneys were to be divided equally between the signatories.

10. In 1982, the applicant worked full-time for GMH as a process worker. Part of his employment included working on trim fabrication and repairs. Whilst deployed in those duties, the applicant used a mouth-operated spray gun to touch up scuffed or scratched door trims. In his experience, the spray gun process was unhygienic and resulted in inhalation of paint fumes.

11. On 17 February 1982, the applicant and a fellow employee filled out a suggestion form, suggesting that instead of operating the spray gun by mouth, it could be operated by using an air hose connected to a controlled flow of air.

12. On 2 June 1982, the applicant and his fellow employee were advised by GMH that their suggestion had not been adopted. However, on 17 June 1982, utilising the re-submission procedure, the applicant and his fellow employee applied for a re-opening of their suggestion. The basis of the re-submission was the specific use to which an air-controlled spray gun could be put, namely to retouch scratched ``J-car'' door trims which were being rendered unusable. It was this suggestion as to use which led to its adoption and eventually to an award. Firstly, an award of $50 was made on 14 October 1983, being payment for an adopted safety suggestion. (This money is not the subject of this dispute.) The second award for the suggestion was made by cheque payable to the applicant on 31 July 1984. The amount paid to both the applicant and his fellow employee was $4,864, from which GMH deducted $1,508 tax resulting in a net payment to each of $3,356. This amount was later reflected in a group certificate which was provided by GMH to the applicant in the income year ended 30 June 1985 (p. 5 of the supplementary documents).

13. When the applicant received the payment from GMH for his suggestion on 31 July 1984, he was no longer employed by that company, but was working as a roof tiler, which remains his present occupation.

14. The deduction made by GMH for tax was in accordance with the rules of the Suggestion Plan which stated that:

``Applicable Federal and State taxes are withheld in accordance with Federal and State laws.''

GMH treated the award payment to the applicant as though it were wages, and deducted an amount of tax based on projections of the applicant's employment income.

15. The applicant, in his taxation return for the financial year ended 30 June 1985, disclosed in item 1 under the heading ``Income'' the sum of $4,864 and indicated that $1,508 had been deducted for tax. In an annexure, an explanation was proffered that the amount of $4,864 was not assessable income and that the sum of $1,508 should be either refunded or credited to the applicant (p. 7 of the supplementary documents).

16. At the review hearing, the Commissioner's representative submitted that the moneys were paid to and received by the applicant in connection with his employment with GMH or, alternatively, in connection with services rendered by the applicant to GMH. It

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was therefore submitted that the said sum of $4,864 fell for assessment pursuant to sec. 25(1) and also sec. 26(e) of the Act. The Commissioner's representative also submitted the proposition that if the said amount did not fall for assessment pursuant to sec. 26(e) of the Act, it would similarly be excluded from being brought to account pursuant to sec. 25(1) of the Act.

17. For the applicant, it was submitted that the said sum was not assessable income, that it was the sale of an idea and should be characterised as a capital item. The applicant's representative emphasised that the capital character of the payment in the hands of the applicant was indicated by the lump sum nature of payment and the circumstances of payment which were not connected with his employment in the manner required by either sec. 26(e) or 25(1) of the Act.

18. I will firstly consider the more specific section, namely sec. 26(e) of the Act. That section provides:

``(e) [Allowances in relation to employment] 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...''

(thereafter follow a number of exceptions which are not relevant in this case).

19. There are a number of features of sec. 26(e) which should be commented on:

• (1) The language used in the section is extremely broad as indicated by the phrases ``in respect of'', ``in relation... to'', and ``directly or indirectly'' (see comments of Toohey J. in
  Smith v. F.C. of T. 87 ATC 4883 at pp. 4893-4894; (1987) 74 A.L.R. 411 at pp. 422 and 424, Dixon C.J. and Williams J. in
  F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at pp. 553-554);
• (2) Broad though the language may be, there must be a ``connection'' or ``a real relation'' between the benefits and the employment of the taxpayer or, alternatively, the services rendered by the taxpayer (see Smith's case (supra), in particular Wilson J. at ATC p. 4886; A.L.R. p. 414, Brennan J. at ATC p. 4886; A.L.R. p. 415 and Toohey J. at ATC p. 4894; A.L.R. p. 422);
• (3) As to the words ``directly or indirectly'', it was said by Brennan J. in Smith's case (supra) at ATC p. 4887; A.L.R. p. 415 that ``A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause'';
• (4) It is not necessary that the benefits described be paid as remuneration for the work which an employee is employed to perform; it is sufficient to attract sec. 26(e) that the benefits be paid to an employee as a product, incident or consequence of employment (see Smith's case (supra) in particular Wilson J. at ATC p. 4886; A.L.R. p. 414, Brennan J. at ATC p. 4886; A.L.R. p. 415 and Toohey J. at ATC pp. 4894-4895; A.L.R. p. 425);
• (5) The word ``employment'' is, in the words of Brennan J. in Smith's case (supra) at ATC p. 4888; A.L.R. p. 417, ``more than the activity for which an employee is remunerated: employment comprehends all aspects of the relationship of employer and employee in the particular case save those aspects which are merely personal. If a distinction is to be drawn between the income-producing activity which is an aspect of employment and the entirety which constitutes employment, sec. 26(e) looks to the relationship between the entirety and the payment of the allowance'';
• (6) The phrase ``services rendered'' describes work actually performed by the taxpayer, whether in the capacity as an employee, independent contractor or otherwise. The phrase must ``draw in situations not encompassed by the term `employment''' (see
  F.C. of T. v. Cooke and Sherden 80 ATC 4140 at p. 4150). The phrase ``services rendered'' should, as described by McTiernan J. in
  Revesby Credit Union Co-operative Ltd. v. F.C. of T. (1965) 112 C.L.R. 564 at p. 578 ``consist of the doing of an act for the benefit of another, which is more than the mere

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  making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract'';
• (7) If the benefit is paid to a taxpayer voluntarily, it may still fall within sec. 26(e), but it is necessary to enquire as to why and how the gift came about. If the motive is communicated to the taxpayer employee or is known to the taxpayer, the common understanding of the motive for the payment may be cogent evidence of ``how and why it came about that the gift was made'' (
  Squatting Investment Co. Ltd. v. F.C. of T. (1953) 86 C.L.R. 570 at p. 628 and also see Smith's case (supra), Brennan J. at ATC p. 4888; A.L.R. p. 417).

20. A further matter to note is the conundrum as to whether receipts falling within sec. 26(e) would also be assessable under sec. 25(1). The Commissioner's representative in this review urged that if on the present facts the payment made to the applicant was not caught by sec. 26(e), then neither would it fall for assessment pursuant to sec. 25(1). As to this issue, there have been a number of conflicting observations made by Federal and High Court Judges which include the following.

21. Gibbs J. in
Reseck v. F.C. of T. 75 ATC 4213 at p. 4215; (1975) 133 C.L.R. 45 at p. 47 stated:

``Speaking generally, sec. 26 does not limit sec. 25 but includes as assessable income some receipts that might not ordinarily have been regarded as income.''

22. In the case of
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 54, Fullagar J. said:

``I doubt very much whether s. 26(e) has the effect of bringing into charge any receipt which would not be brought into charge in any case either by virtue of the general conception of what constitutes income or by virtue of the definition of `income from personal exertion' in s. 6.''

23. In Smith's case (supra) at ATC pp. 4891-4892; A.L.R. p. 421, Toohey J., after citing the above comments, went on to remark:

``The matter must remain open though, having regard to the breadth of language used in sec. 26(e), there are strong arguments for the conclusion that receipts that might not ordinarily be regarded as income are included.''

24. In
Donaldson v. F.C. of T. 74 ATC 4192, Bowen C.J. at pp. 4205-4206 said:

``Perhaps the proposition is not so much that sec. 26(e) applies only to income and not to capital items, but rather it is so worded that there is nothing it covers which would not be of an income nature in any event.''

25. In
Scott v. F.C. of T. (1966) 117 C.L.R. 514 at pp. 525-526, Windeyer J. said:

``As I read s. 26(e) its meaning and purpose is to ensure that certain receipts and advantages which are in truth rewards of a taxpayer's employment or calling are recognized as part of his income... The enactment does not bring within the tax-gatherer's net moneys or moneys' worth that are not income according to general concepts. Rather, it prevents receipts of moneys or moneys' worth that are in reality part of a taxpayer's income from escaping the net.''

26. In F.C. of T. v. Cooke and Sherden (supra), the High Court tantalisingly left the entire issue open.

27. Finally, Brennan J. in Smith's case (supra) at ATC p. 4888; A.L.R. p. 416, said:

``... I do not find in the context of sec. 26(e) any ground for holding that the scope and effect of that provision is limited to bringing into the tax net the value of those benefits which are, according to general concepts, of an income nature, being benefits received in kind rather than in money. If an allowance is paid to an employee in consequence of his employment, sec. 26(e) is attracted whether or not the allowance is of an income nature.''

28. In my view, it is not necessary for this Tribunal to endeavour to resolve this issue, being one which the High Court appears reluctant to clarify. For reasons which appear below, the result in this matter would be the same in considering the facts under either section. I will proceed to address both sections with regard to the principles referred to in para. 19 hereof.

29. The Suggestion Plan scheme under which the applicant received the relevant payment was a scheme only available to

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employees of GMH. The Suggestion Plan was devised to improve employment at GMH in a general sense by making the working environment at GMH more cost effective, safe and/or improve the methods used in the manufacture of motor vehicles. The improvement suggestions made by the applicant in this matter relate to a job which he had performed from time to time as a process worker in the trim section. Although the submission of a suggestion under the scheme was not a specific duty or task required to be performed by the applicant in his usual employment as a process worker, none the less the Suggestion Plan was directly related to the work interests and work relationship of all employees (including this applicant) with their employer, GMH. It was not a scheme which related merely to social or personal aspects of the relationship between GMH and its employees. The applicant's receipt of moneys pursuant to the scheme was a receipt which was connected with his employment at GMH in a direct or at the very least in an indirect, proximate way. The receipt of such moneys is clearly encompassed by the description of ``benefits'' as that word has been interpreted, even in its narrowest form as an economic advantage received by the applicant. For these reasons, I consider the applicant's receipt of such moneys falls within the description of benefits given to him directly or indirectly in respect of his employment with GMH and therefore fall to be taxed pursuant to sec. 26(e) of the Act.

30. In the alternative, if I am incorrect in concluding that the payment had the necessary and appropriate connection with employment, the receipt of such moneys would fall for taxation as benefits in relation to ``services rendered by him''. The filling out of the suggestion form including its content and its placement in the box in accordance with the Plan, was an act performed by the applicant and his fellow employee which benefited his employer, and the payment which was made by the employer to the applicant was calculated on the extent of the economic benefit derived by the employer. The fact that the applicant's suggestion was self-serving in that he also benefited from the suggestion, does not detract from the benefit derived by the employer. The receipt would therefore be encompassed by sec. 26(e) on that basis.

31. In reaching these conclusions, I reject the applicant's submission that the moneys should be regarded as a personal gift or windfall because, firstly, determination and assessment of the suggestion and its resultant payment were matters in the hands of GMH alone. Secondly, if the suggestion had fulfilled the criteria of the Suggestion Plan and if the suggestion had been implemented, the applicant would have had a contractual common law right upon which he could sue if payment were not made. The moneys did not therefore constitute a gift.

32. In reaching the above conclusions, I also considered the applicant's submission that the payment he received was not assessable income either pursuant to sec. 25(1) or 26(e) of the Act because it was the product of the sale of a capital item, namely an idea, and that the character of its payment in the hands of the applicant as a lump sum again suggested a capital item. In my view, this submission must fail for the following reasons. It has been stated on many occasions that neither knowledge nor information is property in a strictly legal sense (see
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525,
Brent v. F.C. of T. 71 ATC 4195; (1971) 125 C.L.R. 418). Further, that knowledge does not become property merely because it is secret (F.C. of T. v. United Aircraft Corporation (supra), Latham C.J. at p. 535). There have, however, been cases in which an imparting of ``knowhow'' has been held to be a method of trading with the result that the moneys received as consideration for the knowhow were included in the profits and gains of the company (
Jeffrey (H.M. Inspector of Taxes) v. Rolls Royce Ltd. (1962) 40 T.C. 443 and
Musker (H.M. Inspector of Taxes) v. English Electric Co. Ltd. (1964) 41 T.C. 556); there have also been other cases in which the ownership and transfer of copyright, patents and royalties have been regarded as of a proprietorial character and receipt of their sale has been regarded as capital (see
Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd. (1967) 1 Ch. 1038,
Nethersole v. Withers (Inspector of Taxes) (1946) 1 All E.R. 711). These cases which have involved trading and specific proprietorial interests are not applicable to the facts in this case, and I consider the principles enunciated in the cases of United Aircraft Corporation (supra) and Brent (supra) to lead to rejection of the

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applicant's submission. Further, I do not regard the fact that the moneys were paid to the applicant in a lump sum, when taken in combination with all of the other surrounding circumstances of their receipt, suggests the character of a capital item.

33. In reaching my conclusions as to the applicability of sec. 26(e) of the Act, I also considered the applicant's submission that as the payment was made after he had ceased his employment with GMH, this was yet another factor which suggested that the moneys received were not appropriately related to his employment, nor were the moneys received for services rendered within the meaning of sec. 26(e) of the Act. In Dixon's case (supra) at p. 554, their Honours referred to ``the continued or contemporaneous existence of the relationship of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination''. This case was concerned specifically with a make-up payment being the difference between the military pay of an employee who had enlisted and the payment he would have received in his civilian occupation. It was further stated at p. 556 by their Honours that:

``In the definition of `income from personal exertion' the expression `allowances and gratuities received in the capacity of employee or in relation to any services rendered', while it does not appear to us to include, as a matter of meaning, allowances and gratuities received by an employee after he has ceased to render any services and after his employment has terminated, nevertheless does seem to indicate that no contractual right to the allowance or payment need exist. Indeed, it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognized incident of the employment or work.''

34. In Dixon's case (supra) it was held by their Honours that the character of the regular periodical payments made to the taxpayer in the circumstances which attended the war service undertaken by him and formed part of the receipts upon which he depended for regular expenditure, had the character of income and therefore were assessable income pursuant to sec. 25 of the Act. I do not take their Honours' comments to mean that if a payment is made in relation to duties or services in employment, but the payment is made after the termination of that employment or, alternatively, if services are rendered for which no immediate payment is made but is made some time after, that the time differential would exclude it from being a benefit in relation to employment or services rendered. In this case, it is quite clear that the payment made to the applicant by GMH and received by him, was in respect of the suggestion made by the applicant pursuant to the Suggestion Plan and, for reasons which I have expressed above, directly or indirectly related to his employment or services rendered by him. The time interval is of no relevance in this matter and does not alter the nature of the receipt in the hands of the applicant.

35. Turning now to consider sec. 25(1) of the Act. The receipt of moneys by the applicant was ``income'' in the general usage of that term within the section. Bearing in mind the provisions of sec. 6 of the Act, the payment made to the applicant for his suggestion pursuant to the Plan was a payment related to his employment with GMH or, alternatively, for services rendered by him to GMH in giving the suggestion pursuant to the Suggestion Plan, notwithstanding that it was paid in a lump sum, and after he had ceased employment with GMH. The reasoning is as expressed above.

36. The final matter relates to the late lodgment of the applicant's taxation return. As a result of a concession made by the Commissioner, and agreed to by the applicant, the penalty amount required to be paid by the applicant pursuant to subsec. 221(1) of the Act is a sum of $35.50. The concession appears to be appropriate and to that extent, the Commissioner's decision on the objection is varied.

37. For the above reasons, I consider that the Commissioner's assessment should be upheld with the variation as to the penalty for late lodgment.