Federal Commissioner of Taxation v Dixon [1952] HCA 65; (1952) 86 CLR 540 (11 December 1952)
HIGH COURT OF AUSTRALIA
FEDERAL COMMISSIONER OF TAXATION v. DIXON [1952] HCA 65; (1952) 86 CLR 540
Taxation
High Court of Australia
Dixon C.J.(1), McTiernan(2), Williams(1), Webb(3) and Fullagar(4) JJ.

FACTS
The taxpayer was employed as a clerk by Macdonald, Hamilton & Co [MH], a firm of shipping agents. His annual salary was around 250 pounds. On 22nd December 1939 Macdonald, Hamilton & Co. had sent a circular notification to the members of their staff concerning the policy with respect to their staff which they proposed to follow during the war. It included the following paragraph:

-In regard to those members of our staff who may enlist for home defence or service outside Australia, for the duration of the War, we shall also endeavour to make up the difference between their present rate of wages and the amounts they will receive from the Naval or Military Authorities, but of course circumstances may compel us to review this decision at some later stage-.

Shortly before his discharge on 13th December 1945 he ascertained that MH wished him to resume work with them and on 2nd January 1946 he commenced his duties with that firm. He had not, however, at any time given them an undertaking that he would return to their employ upon completion of his war service, nor had they given him an undertaking that they would re-employ him upon completion of his war service.

The Commissioner included the amount of 104 pounds in the taxpayer's assessable income for the year ended 30th June 1943 as either ordinary income in terms of ITAA36 s25(1) [ITAA97 s6-5] or as a benefit, bonus or allowance (etc) in terms of ITAA36 s26(e) [ITAA97 s15-2]

DECISION
Dixon CJ; Williams & Fullagar JJ;( McTiernan & Webb JJ dissenting) held the amount was assessable under s25(1) [ITAA97 s6-5]. (The Court held unanimously that amount was not assessable under s26(e).)

Per DIXON CJ & WILLIAMS J:
Section 25 of the Income Tax Assessment Act 1936-1943 provides that the assessable income of the taxpayer shall include the gross income derived directly or indirectly, according to his residence from all sources or from all sources in Australia. Section 6 defines -assessable income- to mean all the amounts which, under the provisions of the Act, are included in the assessable income. As a result of s. 25 what is gross income derived directly or indirectly from all sources or all sources in Australia, as the case may be, depends upon what is income. The Commonwealth Act, unlike the Income Tax Act 1952 (15 & 16 Geo. VI. & 1 Eliz. II. c. 10) (Imp.), does not make the question of what is assessable or taxable income depend upon a series of express provisions dealing with the various kinds of income, such as those in schedules A, B, C, D and E of the British Act. It begins with the general conception of gross income and specifies in s. 23 what is exempt and in s. 26 and other sections particular classes of income that are to be included. Sometimes these classes of income appear to be specified simply for greater certainty, sometimes because they do not fall within the natural understanding of gross income, as, for example, in the cases mentioned in s. 36. The definition in s. 6 of -income from personal exertion- or -income derived from personal exertion- has always been used as a possible guide or test in cases where the question is whether a particular receipt is income or not. It is true that the definition is concerned only or chiefly with the difference, for the purposes of the rates of tax, between income from property and income from personal exertion, but, where any of the expressions contained in the definition are relevant, it is logical enough to use them as an indication that a given receipt is income….
In the present case we think the total situation of the taxpayer must be looked at to see whether the receipts of the taxpayer from Macdonald, Hamilton & Co. are of an income character. He was employed at a salary. The war placed him, in common with many others, in a position in which he felt it was incumbent upon him to enlist. At the same time to do so meant that the earnings upon which he and possibly his dependants subsisted would be much reduced. His employers recognized this fact and intimated that they would do their best to see that if he decided to join the fighting forces his military pay and allowances would be supplemented so that it would not mean a financial loss. The motives of his employers for doing this were, no doubt, predominantly patriotic, but their patriotic motives were doubtless reinforced by considerations of what was right and proper in relation to the staff and by a desire of providing some inducement to the members of the staff to return to the firm at the conclusion of the war. From the taxpayer's point of view, it is not unlikely that when he decided to enlist in the armed services, he relied to some extent upon the intimation he received from his employers. The result was to keep his income up to the standard that would have been maintained had he not enlisted. We have advisedly used the word -income- because, from his point of view, the contribution made by his employers meant that the periodical receipts upon which he depended for the maintenance of himself and his dependants remained at the same level as his civilian employment would have given. From his point of view therefore the word -income- would be clearly applicable to the total receipts from his military pay and allowances and from his civilian employers. It does not seem to matter whether these employers are regarded as his former employers, as his future employers or as the other party to a suspended employment. 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 completely 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. This may be seen from such cases as Cooper v. Blakiston [1908] UKHL 1; (1907) 2 KB 688; (1909) AC 104 , Herbert v. McQuade (1902) 2 KB 631; 4 Tax Cas 489 , Chibbett v. Joseph Robinson & Sons (1924) 9 Tax Cas 48 , Slayney v. Starkey (1931) 16 Tax Cas 45 , Hunter v. Dewhurst (1932) 16 Tax Cas 605 and Calvert v. Wainwright (1947) 1 All ER 282 . (at p557)
In the present case the employment or service, as we would emphasize, is as a soldier. The circumstances in which the taxpayer entered into that service were such as to enable him to rely with more or less confidence on the periodical payments from Macdonald, Hamilton & Co., as well as from his military pay, making up an -income- of the level appropriate to civilian service. Such an understanding is not confined to this particular employment. A widespread policy amongst employers both in Australia and in England led to this sort of thing being done….
Because the 104 pounds was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer and because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependants and was paid to him for that purpose, it appears to us to have the character of income, and therefore to form part of the gross income within the meaning of s. 25 of the Income Tax Assessment Act 1936-1943.
Per FULLAGAR J:
It seems to me that the appellant's receipts from Macdonald, Hamilton & Co. must be regarded as having the character of income. They were regular periodical payments - a matter which has been regarded in the cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient, see e.g. Seymour v. Reed (1927) AC 554, at p 570 and Atkinson v. Federal Commissioner of Taxation [1951] HCA 64; (1951) 84 CLR 298 . This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent. What the employing firm decided to do, and what it really did, in relation to the respondent and others in the same position, was -to make up the difference between their present rate of wages and the amount they will receive-. What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added…
Per McTIERNAN J (dissenting):
The sum of 104 pounds was assessed as income from personal exertion. This class of income is defined by s. 6(1) of the Act. The definition is exhaustive. It includes -allowances and gratuities received in the capacity of employee-. The commissioner contended that the sum was in this category of income from personal exertion. The sum of 104 pounds was the total of a number of voluntary payments. All were made at the mere will of Macdonald, Hamilton & Co.: none was made upon any legal basis. They were at liberty to decline to make any of them. Indeed they made it clear that they might at any time cease to continue the payments. These were accidental additions to the respondent's financial means, so long as he was on active service and his military pay was less than his civilian pay. Were these payments received by the respondent in the capacity of employee? Lord Alverstone cited in Cooper v. Blakiston (1907) 2 KB 688, at p 697 some observations made by Stirling L.J. in Herbert v. McQuade (1902) 2 KB 631, at p 650 which are in point. -I think that a profit accrues by reason of an office when it comes to the holder of an office as such - in that capacity - and without the fulfilment of any further or other condition on his part-. It was necessary for the respondent to fulfil two other conditions besides being an employee. These were, to join the Army and to be in receipt of military pay less than his pay as a clerk. The measure of the sum of 104 pounds was this difference. It did not relate back to his employment as a clerk: it was not a payment in respect of services rendered as such nor in respect of military services. The sum was paid under a scheme designed to give financial relief to those employees of the firm who suffered financially because they enlisted. The payment of this sum of 104 pounds to the respondent was determined by this personal equation. The fact that the payment was voluntary is not per se a reason why the sum should not be taxable. It is an element in the scheme. The sum was a special contribution made to the respondent by reason of the circumstance that he sacrificed some of his income by enlisting. This was the dominant and determining factor. The sum was in a sense paid to him honoris causa. (at p560)…
The commissioner relied strongly upon the following statement made by Buckley L.J. in Cooper v. Blakiston (1907) 2 KB, at p 703 . -The question is not what was the motive of the payment, but what was the character in which the recipient received it? Was it received by him by reason of his office?- If this test is applicable here, it seems to me that it is not to the commissioner's advantage to apply it. What was the character in which the respondent received the sum of 104 pounds? I should say, that upon the facts found by the stated case, the respondent did not receive the sum in the character of an employee. He would not have received it unless he ceased to be an employee and it was not in any sense an augmentation of the remuneration paid to him as a civilian. As regards his military capacity, it was extraneous to that employment and a mere fortuitous addition to his military pay. It came to him merely in consequence of the bounty of his former employers. They made the payment in respect of his enlistment from their service. It was an acknowledgement of that fact not of his services for them. The bounty would diminish if he was promoted or his military pay was increased. The sum was not paid to impose any obligation upon the respondent to resume his former employment. If it is a material matter the respondent did not request that the payment be made. Neither the firm nor he contemplated that if he enlisted it would be a term of his employment that he would receive such a payment. The scheme contemplated that no payment would be made until further service with the donors was impossible owing to the respondent's enlistment. The respondent had no right to receive anything under the scheme. (at p561)
All the facts clearly point to this not being a payment in respect of the respondent's employment or in respect of services rendered by him or a payment to the respondent in his capacity as an employee. (at p561)
WEBB J (dissenting). As I view the evidence the moneys sought to be taxed were paid to the taxpayer because of, and as a reward for, his enlistment and for no other purpose. This fact remains, although the taxpayer when he enlisted was in the employ of the company that paid him the reward, and he qualified for the reward because he was its employee; and although the reward was conditional upon the military pay of the employee being less than his pay as the company's employee, and was limited to the amount of the difference. The commissioner in claiming that the reward is taxable overlooks the essential nature of the reward as one solely for enlistment and concentrates on the limitation of the reward to particular recipients, being employees of the company, and its quantification with regard to the difference in their military and civil pay. But the essential nature of the reward as one solely for enlistment remains, notwithstanding this limitation and quantification. It is true that the quantification made the reward the equivalent of the loss of pay as a result of enlistment; but on the other hand the amount of the reward bore no relation to length of service with the company: a soldier who had long been employed by the company but with short military service might receive a mere fraction of the reward paid to a soldier employed by the company for a brief period but with long military service. (at p563)
The quality of the reward is not determined by the yardstick used to quantify it. (at p563)
The purpose of the payment by the company, as I see it, was to encourage enlistments among its employees, but its motive may have been to induce them to return to their employment with the company after discharge from the forces; many would, no doubt, have enlisted in any event. However, the purpose of, and not the motive for, the payment is the test of its nature. (at p563)
In my opinion the reward was not given or received -in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by- the taxpayer, and so does not come within s. 26(e) of the Income Tax Assessment Act 1936-1943. (at p563)


















Scott v Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514 (24 August 1966)
HIGH COURT OF AUSTRALIA
SCOTT v. FEDERAL COMMISSIONER OF TAXATION (1966) 117 CLR 514
Income Tax (Cth)
High Court of Australia
Windeyer J.(1)
CATCHWORDS
Income Tax (Cth) - Assessable income - What constitutes income - General principles - -Gratuity . . . in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him- - Gift by client to solicitor - Deduction of gift duty where gift constitutes income - Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth), s. 26 (e).*
HEARING
Sydney, 1966, May 3-6, 10-13; August 24.24:8:1966 APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1961 (Cth).
DECISION
August 24.
The following written judgment was delivered:-
WINDEYER J. Leslie Gordon Scott (whom, following the terminology of the amended assessment of income tax dated 6th September 1963 in respect of his income for the year ended 30th June 1961. The question is whether a sum of 10,000 pounds, which the taxpayer received from one Mrs. Freestone, formed part of his assessable income. (at p515)
2. The taxpayer in other proceedings appealed against the disallowance by the Commissioner of his claims that certain disbursements - 150 pounds in the year ended 30th June 1959, 250 pounds in the year ended 30th June 1960 and 250 pounds in the year ended 30th June 1961 - were allowable deductions as contributions to a superannuation fund. These objections involved a consideration of the affairs of two companies, Associated Provident Funds Pty. Limited and Belvidere Investments Pty. Limited, which had themselves appealed against assessments of income tax payable by them. All these matters, apart from the issue concerning the 10,000 pounds that the taxpayer received from Mrs. Freestone, were much involved with one another. Therefore I, with the assent of the parties, heard at one hearing all the evidence relating to all the appeals covering several income tax years (1966) 40 ALJR 265 . But the matter of the 10,000 pounds received from Mrs. Freestone is not in any way involved with the other question. It was the subject of a separate appeal (No. 47 of 1965) and was dealt with at the hearing as a separate matter. I am therefore giving judgment in it now, although a final determination of the amount of the taxpayer's taxable income for the year ended 30th June 1961 must, as to 250 pounds, await the determination of his appeal No. 46 of 1965. (at p516)
3. The taxpayer is a solicitor who has been practising his profession at Parramatta since 1937, except during war years. He also has an office at Epping. At the time with which I am concerned he practised under the firm name -L. G. Scott & Co.- - but solely on his own account, although soon after the events on which the case turns he took a partner in his Epping practice. In addition to his legal practices he had considerable investments. He had interests in shop and business premises. Through companies and building societies which he had formed and controlled or with which he was associated, he had considerable interests in real estate generally. He is well acquainted with the real property market and with developments and possibilities in the Epping Parramatta and surrounding districts. (at p516)
4. Mrs. Freestone has long been one of his clients. She is a widow, her husband having died on 27th May 1958. He left an estate valued for probate at 190,000 pounds. Of this an amount of 173,975 pounds was attributable to real estate, being partly vacant land, partly houses and business premises. Mrs. Freestone was the executrix of her husband's will and his sole beneficiary. The taxpayer acted for her on the probate application and generally in connexion with the administration of the estate. She had known him for many years. He had acted for her in connexion with her father's and her mother's estates. Her husband, the late Mr. Charles Freestone, had served in the Royal Navy, in submarines, and afterwards in the Royal Australian Navy. He retired from the service in 1926 and started in business at Parramatta as a plaster manufacturer. In 1942 he sold this business. He then had a service station at Parramatta and was an investor in real estate. He and the taxpayer were associated in various business enterprises including a building society of which the taxpayer arranged that he be a director. (at p517)
5. The administration of Mr. Freestone's estate was not a simple matter. Death duties amounted to about 94,000 pounds. The liquid funds were far from enough to meet them. Various properties forming part of the estate were sold as opportunities offered ; and by arrangement the proceeds were paid direct to the Stamp Commissioner in reduction of death duty. The taxpayer acted for Mrs. Freestone in these transactions. A main asset of the estate was a parcel of vacant land on the Pennant Hills Road having an area of eighty-two acres. This land, known as -Greenacres-, was at the time of Mr. Freestone's death in the green-belt and subject to the restrictions upon sale and subdivision that this entailed. Before his death Mr. Freestone had made representations to members of the New South Wales Government in the hope of having the restrictions lifted from this land. In this he was not successful. But after his death the possibility of the restrictions being lifted from lands in this part of the green-belt was being publicly canvassed. The taxpayer, acting professionally for Mrs. Freestone, made representations to the local planning authority with a view to obtaining approval of this. Towards the end of 1959 the restrictions were in fact lifted. At the time of probate -Greenacres-, the total area of eighty-two acres, was valued by the Valuer-General at 15,500 pounds. In 1960, after it had been released from the restrictions, it became attractive to speculators and land developers, as they are called. Many inquiries with offers of purchase were received from estate agents and others. Most of these were made directly to L. G. Scott & Co., that is to the taxpayer at his office. He informed Mrs. Freestone of them : and she on her part told him of offers and inquiries that had come direct to her. I have no doubt that she sought and appreciated his advice at this time. He had become a close and trusted adviser. I have no doubt that his knowledge of real estate values was of much assistance to Mrs. Freestone. This is not to say that she did not make up her own mind in business affairs. I thought she shewed herself to be a woman of an independant mind and with a distinctly individual point of view on more than one subject. And she is clearly capable and, as both her memory and records, such as cheque butts, show, methodical in business matters. She had been her husband's confidante in his business activities. She herself had, and has, a gift shop in Parramatta. The taxpayer's services to her were such as a trusted family solicitor having special knowledge might be expected to give to a client of long standing with whose business and personal affairs he was well acquainted. Mrs. Freestone regarded him as a most helpful friend. Ultimately Mrs. Freestone sold forty-eight acres of the eighty-two acres to Consolidated Press Limited for the sum of 170,023 pounds. The contract of sale was dated 25th May 1960. There had been negotiations between that company and Mrs. Freestone a few months earlier. The company had proposed to buy the forty-eight acres for 137,500 pounds; and it had paid a deposit of 100 pounds, on the assumption apparently that its offer had been or would be accepted. But Mrs. Freestone had, it seems, become aware that she could get a better price ; and the taxpayer advised her that she had no legal obligation to sell for 137,500 pounds, there being no contract in writing. She therefore refunded the deposit and refused to go on with that proposal. Negotiations were however resumed, resulting in the sale for 170,023 pounds. In these transactions the taxpayer, acting for Mrs. Freestone, played a large part. He advised her in relation to the terms of a proposed contract, building covenants to be included, provision to be made for ways of access to other land that she owned and so forth. He and she no doubt both regarded the sale at a sum of 170,023 pounds of a little more than half of an area which two years earlier had been valued at 15,000 pounds as a most satisfactory outcome of the negotiations. The sale was completed on 8th August 1960, when the purchase money was paid in full. Mrs. Freestone now had for the first time a large sum of money in the bank from her husband's estate with which she could do whatever she wished. Having heard her evidence and observed her attitude generally, I am firmly of the opinion that she is a benevolent and charitably-minded woman, moved at times by a perhaps impulsive generosity, and desirous of seeing her good wishes carried into effect according to her intent. In 1960, having now money from her husband's estate with which she could give effect to her generous thoughts, her mind turned to members of his family, to persons whom he had known and who had been helpful to her in connexion with the affairs of his estate and to projects in which he had been interested. She said in effect, and I believe her, that she, being mindful of the uncertainties of life and at this time somewhat apprehensive of sudden death, thought she would indulge a wish to be bountiful during her lifetime. Her husband during his lifetime had given a plot of land at Carlingford to be used as a public park and have in it a monument to commemorate his shipmates in a submarine, the K.13, which sank with much loss of life during the First World War. He had died before his plan had been fully accomplished, but regarding the task apparently as her tribute to him Mrs. Freestone carried the project to completion. The monument is well known to anyone travelling on the Pennant Hills Road. (at p519)
6. On 19th August 1960, when one may assume her thoughts were still dwelling upon her recently-acquired moneys, Mrs. Freestone went with the taxpayer in his car on some mission relating to her property outside Parramatta. Neither she nor he can recollect for certain whether their visit had been to the K.13 memorial park or to the residue of -Greenacres-. As they were returning to Parramatta she told the taxpayer that she intended to distribute some of her money as gifts and that she proposed to give him 10,000 pounds. He was, he says, astounded by this. It was entirely unexpected. She confirmed this. He was -speechless-. (at p519)
7. Her evidence may be summed up by quoting some passages from her cross-examination.
-Mrs. Freestone, coming back to this conversation, you say
he was speechless. Did he say anything else ? - Yes. A little
while afterwards he said, 'Mrs. Freestone, no one has ever
given me anything before except my mother'.
-Did he say, did he protest any say 'You have no need to
do that' ? - Yes, he did very much.
-What did you say ? - I said I still wanted to do it.
-Did you tell him, did you say any more about why you
wanted to do it ? - I told him what I have already said, that
I wanted to do things while I am well, while I am alive to do
them, not wait until I am dead and leave them in a will.
-So you explained why you wanted to give him 10,000 pounds? -
It was nothing to do with what he had done.
-That is not what I asked. Did you explain to him, or tell
him why you wanted to give him the 10,000 pounds? - You explain
to a person you regard as your very best friend, and I do regard
Mr. Scott as my very best friend . . . .
-Because he has helped you over the years ? - No, not
because of that. That comes into it I suppose, but you get
to know a person when you work with them very much.
-You are not suggesting the fact he was your solicitor for
this long period had nothing to do with it ? - No, it was not an
honorarium or anything like that. I gave it to him because I
wanted to give it to him not because he did anything for me.
I just gave it to him because I wanted to.
-Would you not agree with this, partly because he had been
your solicitor over the years ? - Not necessarily because he has
been my solicitor. He has been my friend.
-That friendship grew in part out of the attention he gave
you as a solicitor ? - No, because he was my husband's friend.
That is how I got to know him in the first place.
-But he had also been your husband's business associate ?
- Yes.
-And he had helped your husband in business ventures ? -
I suppose I would not have known him if he had not been my
husband's friend. He helped me, I suppose. My husband was a
capable person.
-He had given you capable help in relation to the
administration
of the estate ? - I regard Mr. Scott as an excellent solicitor,
that is why I want him to do everything for me always.
-At that stage in August 1960 one of the factors that was
operating in your mind was that he had been a good solicitor as
well as being a good friend ? - No, I was not thinking about
that at all. I made out these cheques to these people in England
as well at the same time. All these people got the gifts at
the one time.- (at p520)

8. It is necessary to go back a little and relate in some detail what actually occurred. The story is a remarkable one. But I am satisfied that, except in one or two matters as to which their recollection was faulty, the events occurred as Mrs. Freestone and the taxpayer said they did. In its broad outline and essentials their evidence is corroborated by contemporary documents - cheques, cheque butts, and bank statements. (at p520)
9. Mrs. Freestone having told the taxpayer in the car that she wanted to give him 10,000 pounds - having, she said, -thought about it well beforehand-, went on to tell him of other gifts she proposed to make. -I told him what my husband would want to do about his relations in England, because he had not bothered much about them and I said I would like to send his sister 1,000 pounds, his brother 500 pounds and a cousin over there 100 pounds just as a gesture, and he had three other cousins in Sydney and I would give them 100 pounds each, and also there was a man who used to work for my husband.- The man she thus referred to was one Percy Newling. She proposed to give him 2,000 pounds. She said too that she would like to give a cousin of hers, one Eberling, a thousand pounds worth of shares in the Civic Arcade and Theatre in Parramatta, a project in which she was interested. She also told the taxpayer that a Mr. Stoner, who was the branch manager of a bank at Parramatta, should have 500 pounds: -I just said I thought I would like to leave it to him in the same way. I did not want to leave it until I was making a will or something like that. He was a very good friend of my husband's, and it was just sort of gesture of goodwill.- By this time the motor car had been brought to a halt in Macquarie Street, Parramatta. She produced her cheque book ; and on her instructions the taxpayer wrote out four cheques, which in sequence in the cheque book are as follows : -L. G. Scott & Co.-, 10,000 pounds; -John Stoner-, 500 pounds; -P. Newling-, 820 pounds 18s. 5d. and another for -P. Newling-, 2,000 pounds. These she thereupon signed. The taxpayer retained his and the others went to the intended recipients. The taxpayer paid his into his private bank account at Epping. The gifts to the persons in England were effected some days later by means of overseas drafts which Mrs. Freestone procured through her bank. A cheque butt dated 26th September 1960 confirms that she paid for the shares that were a gift to Eberling. At about the same time as these gifts she also made, she said, some smaller gifts to unspecified persons for amounts from 25 pounds upwards. There are cheque butts which accord with this. (at p521)
10. The explanation given of there being two cheques for Newling is that he had continued to work for Mrs. Freestone after her husband's death, mainly in connexion with properties belonging to his estate. He had not been paid for two years for these services, being it seems content to wait until the estate had ready money. The cheque for 820 pounds 18s. 5d. for him represented wages overdue and a refund of some small sum for expenses which he had incurred : details of the computation appear on the cheque butt. How Mrs. Freestone knew these details at the time is uncertain. She said she probably had them on a slip of paper, and that seems not improbable. The cheque for 2,000 pounds for Newling was described on the butt as a gift. It is perhaps not without significance that Mrs. Freestone later gave him a motor car also. (at p521)
11. Counsel for the Commissioner asked me not to accept the evidence of Mrs. Freestone and the taxpayer concerning the occurrences of 19th August. The story was, he said, improbable and there were discrepancies in it. I believe, however, that the four cheques were in fact written in the motor car. I can see no reason for anyone inventing this story, still less for thinking that Mrs. Freestone and the taxpayer were falsely swearing. No inference either for or against the taxpayer can be drawn from the place being an unusual one for writing cheques - whether they were to pay for services or to make gifts. (at p521)
12. The taxpayer said that he accepted the money as a gift and told Mrs. Freestone that he would pay the gift duty. It never crossed his mind, he said, that it might have been prudent, and for his own protection proper, before taking a gift of 10,000 pounds from a client to have advised her to obtain some independent advice. This, it is suggested, should make me suspect that the transaction was not in fact a gift but was the consideration for services rendered. I am certainly surprised that any solicitor should not have been well aware of the presumptions against him that could arise in equity from his acceptance of a gift in this way. However, Mrs. Freestone made it quite clear by her evidence and her demeanour throughout these proceedings that she was under no influence except that of friendship, generosity and gratitude and that her action was in no way prompted by the taxpayer. I am unable to infer from the taxpayer's not counselling her to seek other advice that the transaction was not a gift ; and obviously it would not avail the Commissioner to say that the taxpayer was a trustee of the money for Mrs. Freestone. (at p522)
13. The four cheques dated 19th August do not, when closely examined, bear out all details of the events as Mrs. Freestone described them. The names and amounts in the cheques (and also the butts, on which -A/c Gift- appears) are all undoubtedly in the handwriting of the taxpayer, although there are variations in the script ; in one case it is in block letters in others cursive. The signatures are all undoubtedly by Mrs. Freestone. She said that the cheques were written by the taxpayer with his fountain pen which he handed to her so that she might sign them. In this she was to some degree mistaken, as the two cheques in favour of Newling are obviously signed with a different pen from the others, perhaps with a biro which she got from her handbag. But I see no reason to doubt that all were made out on the same day. Mrs. Freestone insisted that the one in favour of the taxpayer ought not to have been made out for -L. G. Scott & Co.-, as it was meant for the taxpayer personally. It should, she said, have been simply -L. G. Scott-, as indeed the butt is. She was even inclined to dispute the authenticity of the addition -& Co.- on the ground that the ampersand was not of the taxpayer's usual style. If it does differ it is probably only because this cheque was written in block letters. The taxpayer did not dispute that it was his writing. It seems of little significance that he made out the cheque as he did, because L. G. Scott & Co. was himself. A close scrutiny of the cheques leaves unshaken the evidence that they were all written out by the taxpayer on 19th August and signed by Mrs. Freestone, and provides no ground for saying that the one in favour of the taxpayer was not a gift to him personally. (at p522)
14. The taxpayer stated that he applied the whole of the sum of 10,000 pounds given to him to his personal advantage. In answer to questions that I asked he said that there was not any understanding that he should disburse any of the money in any way on Mrs. Freestone's behalf and that he did not do so. He had himself, he said, no legal or equitable interest of any kind in the land or the proceeds of its sale. He said, and I accept his evidence, that the sum of 10,000 pounds went in part in reduction of his overdraft with the bank and in part for various purposes of his own including the construction of a swimming pool. (at p523)
15. A good deal of attention was given to the bills of costs which the taxpayer rendered to Mrs. Freestone. I do not think it necessary to go into all of this. It is enough to say that I am satisfied that Mrs. Freestone expected the taxpayer to charge his ordinary professional costs for all work that he did for her. There was some delay in the taxpayer's office in rendering his accounts. But this was explained. Until the sale of -Greenacres- no bill of costs had been prepared, it being known that the whole proceeds of the realization of other properties earlier had been paid in reduction of death duties. When -Greenacres- was sold Mrs. Freestone was informed by letter that a bill of costs -for the various sales and the probate application generally- would be prepared -as soon as practicable-. In fact an account for a number of items totalling 895 pounds was rendered and paid in November 1960. This was after the gift of 10,000 pounds and some time before the Taxation Department had made any inquiries or raised any question concerning it. This payment and others made pursuant to accounts rendered later dispose, I think, of a suggestion that I ought to infer that the sum of 10,000 pounds was to be taken in substitution for or in satisfaction of professional costs payable by Mrs. Freestone to the taxpayer. Whatever the extent of his services to his client had been, 10,000 pounds must have greatly exceeded any charges that could properly be made for them. (at p523)
16. In short I think that the 10,000 pounds was a gift, in the sense that it was gratuitous, not made in discharge of an obligation and not taken by the recipient as discharging an obligation. But that, of course, does not end the matter. (at p523)
17. The case for the Commissioner is that the 10,000 pounds formed part of the taxpayer's assessable income, either as within the general concept of income upon which the tax is levied, or because it was brought into charge by s. 26 (e) of the Act. It was also argued that, independently of the rest of the Act, it could be regarded as brought into charge by the definition of -income from personal exertion- in s. 6. I am unable to follow the last proposition. It seemed to be based upon a misunderstanding of an observation by Dixon C.J. and Williams J. in Federal Commissioner of Taxation v. Dixon [1952] HCA 65; (1952) 86 CLR 540, at p 555 . Their Honours there said that expressions used in the definition of -income from personal exertion- could, in an appropriate case, be used as an indication that a given receipt is income. The definition enumerates certain forms of income which, for the purpose of the Act, are -income from personal exertion-. As Jordan C.J. pointed out in Scott v. Commissioner of Taxation (1935) 35 SR (NSW) 215, at p 220 , the definition of that expression is not a definition of income - for the simple reason that -the word 'income' appears on both sides of the equation-. The definition does not I think bring anything into charge as income. It refers to what is already by its nature income. The distinction between income from personal exertion and income from property has, since 1954, ceased to be of any relevant importance. By describing what -income from personal exertion- is, the definition is indirectly indicative of what income is. That is all : but otherwise it is irrelevant. I reject the contention that of its own force it makes the receipt of 10,000 pounds income of the recipient. The answer to the question in this case depends therefore on a general conception of the nature of income, bearing in mind s. 26 (e). (at p524)
18. Section 26 (e) is as follows :
-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.- (at p524)

19. (There is a proviso which is, however, irrelevant in this case.) Counsel for the Commissioner pointed to the wide words -in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him- and said that they must be given their full meaning and effect. This of course is so. But what is their full meaning and effect? That is the question. It is no doubt an orthological question. But it is not to be answered by reading the words in the abstract with the aid of a dictionary. Their meaning and the limits of their denotation must be sought in the nature of the topic concerning which they are used. They are in an income tax statute. Dixon C.J. and Williams J. said in the judgment that I have mentioned, -We are not prepared to give s. 26 (e) a construction which makes it unnecessary that the allowance, gratuity, compensation, benefit, bonus or premium shall in any sense be a recompense or consequence of the continued or contemporaneous existence of the relation of employer and employee or a reward for services rendered given either during the employment or at or in consequence of its termination- (1952) 86 CLR, at p 554 . This remark was inverted in the argument for the Commissioner to support a proposition that if a payment could be said to be in any sense directly or indirectly a consequence of services rendered its receipt was income. But so put the proposition merely shifted the question into a new semantic area in which emphasis was placed upon the words -indirectly- and -consequence-. It was said that if a testator left by will a legacy to a servant in his employment whose wages had been fully paid, and by his will expressed the legacy as given because of long and faithful service, it would be within the words of s. 26 (e) and thus be income of the legatee. I do not think that the words of s. 26 (e) compel that conclusion. And I do not think that a legacy given by a grateful testator to, say, his physician would ordinarily be income in his hands. And the position would, it seems to me, be no different if the same gifts were made, not by will but by the donor in his lifetime. That is not because the words of s. 26 (e) could not describe such gifts but because it stands in an Act the purpose of which is to impose a tax on income. To take another illustration: suppose members of a society made a gift to a man because he had rendered some special services to the society. In terms such a testimonial gift, whatever form it took, money or plate or a picture, although the product solely of the donors' appreciation of the donee's services would be within the words of s. 26 (e). But would it therefore necessarily be income of the recipient liable to tax? I think not. And would a person who on restoring lost property to its owner was given a reward for his services be taxable on the basis that the reward was part of his income? Again I think not, but again the words of s. 26 (e) would cover the case. (at p525)
20. 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. In other words the enactment makes it clear that the income of a taxpayer who is engaged in any employment or in the rendering of any services for remuneration includes the value to him of everything that he in fact gets, whether in money or in kind and however it be described, which is a product or incident of his employment or a reward for his services. If, instead of being paid fully in money, he is remunerated, in whole or in part, by allowances or advantages having a money value for him they must be taken into account. The enactment does not bring within the taxgatherer'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. (at p526)
21. I may interpolate at this point that gift duty was paid by the taxpayer in respect of the 10,000 pounds. I asked as to the Commissioner's attitude as to this. In reply counsel at first said that, on his instructions, if the taxpayer were held liable for income tax the gift duty paid would be refunded. But there appears to be no reason for saying that there was not a gift of 10,000 pounds. If so, gift duty was payable; and I am not aware of any authority in the Commissioner to refund any duty lawfully exacted. A more correct view it seems would be that, if income tax be exigible in respect of a gift, the amount of income taxable is the amount of the gift less the amount of any gift duty which when the gift was made the donee undertook to pay. (at p526)
22. I return to the general concept of income. Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance. It is apposite to quote here a passage from the judgment of Kitto J. in The Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation (1953) 86 CLR 570, at pp 627, 628 . His Honour said: -. . . it is a commonplace that a gift may or may not possess an income character in the hands of the recipient. The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances; and even in respect of a true gift it is necessary to inquire how and why it came about that the gift was made.- An unsolicited gift does not, in my opinion, become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered. It was said for the Commissioner that if a service was such as the recipient was ordinarily employed to give in the way of his calling, and the gift was a consequence, however indirect, of the donor's gratitude and appreciation of that service, then it must necessarily be part of the donee's income derived from the practice of his calling, and caught by s. 26 (e). But as thus expressed, this proposition is, I think, a mistaken simplification. It was based upon the fact that in Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47, at p 56 Fullagar J. regarded as decisive that it was impossible to relate the receipt of the shares there given to any income-producing activity on the part of the recipient. In the present case the taxpayer was engaged in an income-producing activity, his practice as a solicitor, to which it was said the gift could be related. But because the absence of a particular element was decisive in favour of the taxpayer in one case it does not follow that the presence of that element is decisive in favour of the Commissioner in another case. The relation between the gift and the taxpayer's activities must be such that the receipt is in a relevant sense a product of them. (at p527)
23. I was referred to sentences and phrases in judgements in other cases. I do not think that much is gained by this. There are decisions both here and in England which are helpful because they afford illustrations of considerations to be borne in mind in approaching the problem. Some of the English cases have turned on particular terms in the English legislation, on words and phrases which, although altered and elaborated by later enactments, have an ancestry which can, as Lord Macnaghten observed in London County Council v. Attorney-General (1901) AC 26 , be traced back to the Act of 1799, 39 Geo. III, c. 13, which spoke of -such income as shall arise from any profession, office, stipend, pension, employment, trade or vocation-. The application of similar words in later English enactments - such as - emoluments-, now defined to include - salaries, fees, wages, perquisites and profits whatsoever- - has no doubt contributed to the understanding of the nature of income as a subject of tax. I respectfully think that a passage in the judgment of Kitto J., to which I have already referred, is a wholly accurate and sufficient statement of the general principle which must govern this case and that I need do no more than quote it and adopt it. His Honour, speaking of the English cases, said: -The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income-producing character . . . and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally, . . . (1953) 86 CLR, at p 633 .- Here, as in England, the words of the statute must be read against the background of the same general idea. (at p528)
24. To analyse motives and seek the ultimate causes of conduct can seldom yield any single or simple result. Mrs. Freestone, I assume, would not have made her gift to the taxpayer if she had not appreciated his help to her and his friendship. If he had not acted for her as he did in relation to her husband's estate, if he had not been a friend of her husband, it probably would not have occurred to her to make him a beneficiary in her distribution of part of the moneys that she got from the estate. He no doubt was aware of this. Nevertheless I do not think that her gift to him was in a relevant sense given or received as a remuneration or recompense for services rendered so as to form part of his assessable income. (at p528)
25. I allow the appeal with costs and remit the matter to the Commissioner to amend the assessment accordingly. (at p528)
ORDER
Appeal allowed. Commissioner to pay the taxpayer's costs. Case remitted to the Commissioner to reassess the tax payable in respect of the year ended 30th June, 1961, such assessment to issue upon the determination of appeal No. 46 of 1965.














The Business School

BULAW 3731 INCOME TAXATION – Law & Practice
Assignment
Semester 2 - 2013

INSTRUCTIONS
1. See the Instructions and Assessment Criteria in the Course Description and make sure you follow them!

2. Please answer all parts of the question

3. Attached to this document is a Checklist to be filled in by you and attached to your essay/assignment. Read this now before you start your research. If you have followed this checklist, there is a good chance you will do well.

4. All work presented for assessment in this course must comply with the
format outlined in the University's Presentation of Academic Work
publication, available from the bookshop or on-line at
www.ballarat.edu.au/generalguide.

5. All essays must be accompanied by a signed official cover sheet ('Plagiarism Declaration Form'), available at www.ballarat.edu.au/ard/business/student_info_webct.shtml and lodged as appropriate for your campus.

6. You MUST reference in the body of the essay every time you use information from other people. This requires you to keep a track of where you are taking information from and then writing the reference up. You should use the Harvard/APA style; and use the University’s new Presentation of Academic Work. The Library’s website also has a citation style guide site. If you plagiarise (intentionally OR unintentionally) you will be given zero: see Regulation 6.1.1 for more details.

7. DUE DATE: You will be advised by your Lecturer but Week 9 should be taken as a guide. Please check with the Course Description for details of where and when to submit your assignment. If you need an extension you must ask for one BEFORE the due date (unless this is impossible).

8. The assignment should not exceed approximately 2000 words.

9. The assignment is worth 25%.


Assignment

Part A [Approx 50%]

Explain why the payment to the taxpayer in FCT v Dixon (1952) 86 CLR 540 was assessable income but the payment in Scott v FCT (1966) 117 CLR 514 was not.

In your answer you should include (but not necessarily be limited to) the following:

i) A brief statement in your own words of the facts of the cases.
ii) Identify the issues raised and the relevant legislation in the context of ITAA97.
iii) Identify any cases and other sources of information relevant to the issues and legislation.
iv) Apply the law to the facts stating clearly why one taxpayer was assessable and the other was not.


Part B [Approx 50%]

Nigel is a professional percussionist and performs with a number of bands and orchestras. In order to practice, he set aside a special room in his house that is soundproof and contains a variety of electronic sound equipment. The room is used only for practice or performance related purposes. He pays council rates, interest on the house mortgage, repairs and maintenance, electricity and telephone expenses in connection with the house. He believes he should be able to claim tax deductions for all these costs together with depreciation on the room and equipment.

Explain the tax position to Nigel. In you answer you should:

i) Identify the tax issues that are raised and the relevant sections of the legislation.
ii) Identify any cases and other sources of law or information that apply.
iii) Apply the law to the facts.
iv) Express a conclusion in regard to the issues identified and indicate any other information required.

University of Ballarat – The Business School

CHECKLIST TO BE ATTACHED TO ASSIGNMENT IN BULAW 3731

Name: ……………………………………………………………..
Student No. ………………………………..

Please check that you have done the following. Tick the boxes to show you have!

? Submitted an assignment that is your own work. (You may discuss the essay topics with others but you cannot copy another’s work, give your work to someone else to copy, or work closely with another student on how to structure or write the essay.)

? The assignment is no more than 2000 words long (excluding abstract, references, bibliography).

? Read and tried to address the criteria in the Course Description.

? Read and addressed the issues raised in the University’s Presentation of Academic Work

? Read Regulation 6.1.1, Plagiarism and asked questions if you are unsure about what it means.

? Referenced direct quotes (use quotation marks or indent) AND summarising from another person’s work in the body of the essay. (This includes internet sources).

? Indicated what referencing style you have chosen Harvard/APA and USED IT.

? Answered all parts to the question.

? Used headings (even though this is not a report, headings are encouraged to assist structure and flow).

? Proof read the assignment for spelling, punctuation and grammar errors.

? Where required, used relevant sections of legislation, legal rules/principles

? Where required, used cases to support your points or arguments. These cases can be obtained from textbooks, or the CCH online libraries, articles found via AGIS PLUS TEXT database etc.

? Put case citations in the body of the work as well as listing the case in the List of References.

? Discussed the issues as required and put arguments and gave your view.

? Used a range of resources.

? Included a title page with your name, student number, course code and name and lecturer’s name.

? Have a margin so comments can be added; put page numbers and your name and student number on each page.

Signed by student: ___________________________________________