Constable v Commissioner of Taxation

The money represented the total amount payable to the taxpayer under the regulations of the fund. It became payable under the regulations because of a clause entitling members to withdraw the amounts standing to the credit of their accounts if an alteration were made to the regulations curtailing the rights of members. An alteration of that nature was in fact made taking effect as from 30th September 1947. The fund was established by a deed executed at The Hague and is governed by the regulations already referred to. They are divided into articles, the second of which states that the object of the fund is to accumulate for the benefit of the companies' employees who have joined the fund certain sums as a provision for themselves and their families. The taxpayer has been for many years employed as an ironworker's assistant by one of such companies, namely the Shell Co. of Australia Ltd. He became a member of the fund on entering that company's service.

As the payment in question was not made in consequence of retirement from or termination of his office or employment, it was not possible to treat it as the capital amount of any allowance, gratuity or compensation, paid as a lump sum on such an event within the meaning of s. 26 (d) of the Income Tax Assessment Act, which includes only five per cent of such a capital amount in the assessable income. The Commissioner of Taxation accordingly brought the whole amount into the assessable income of the taxpayer, claiming that it fell within s. 26 (e).

Section 26 (e) provides that the assessable income of a taxpayer shall include the value to him 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. There is a proviso by which the paragraph is not to apply to any allowance, gratuity or compensation which is included in par. (d) of s. 26 or which under any provision of the Act is deemed to be a dividend paid to the recipient. The proviso does not appear to have any importance in the present case. The actual payment cannot, for the reason already given, fall under s. 26 (d), and it certainly is not deemed to be a dividend paid to the recipient. Whatever light the proviso may throw on the meaning of s. 26 (e) in other respects, it does not illuminate any of the questions arising here.

Upon the text of the paragraph it would seem that the liability of the sum, or any part of the sum, received by the present taxpayer during the year of income to inclusion in his assessable income must depend upon the answers to one or other or all of the following questions. Can that sum or any part of it be described as an allowance, gratuity, compensation, benefit, bonus or premium? If so, can it be said of it that it was "allowed, given, or granted to him" during that year? If an affirmative answer is given to these two questions, then is it correct to say of the amount or any part of it that it was so allowed, given or granted to him "in respect of, or for or in relation directly or indirectly, to any employment of him or services rendered by him?" The employment or services must be employment by, or services rendered to, the Shell Co. of Australia Ltd. It is evident that it is enough for the taxpayer if any of the foregoing questions is answered in the negative.

For an understanding of the manner in which the facts of the case bear upon these questions it is necessary to turn to the regulations controlling the rights of members in the fund. The regulations, the original of which is in Dutch, speak of the fund as if it had legal personality. The first article describes it as domiciled at The Hague. Whatever we may suspect, there is nothing before us to show it is a persona ficta. It is governed by a Board of Administrators appointed by three companies which founded it. With their consent other companies may join and no doubt that is how the Shell Co. of Australia Ltd. came to belong to it. The fifth article says that the assets of the fund shall consist of (a) the foundation moneys paid by the founding companies, (b) the contributions of employees of the companies who have joined the fund and of these companies themselves, (c) the interest and other revenues. Other articles provide that employees of each company which has joined the fund may be admitted as members and each such member shall pay into the fund ten per centum of his salary, a requirement subject to variation in certain contingencies which are not material. The company on its side must pay to the fund ten per centum of the employee's salary, or such other amount as is equal to the employee's contribution. It is open to the company to pay "into the credit of its own employees" a greater percentage of the salary or a share of its profits (art. 10 (1)). In the first instance an employer's contributions are credited ("booked") to a special account. Then at the close of the year the administrators of the fund decide, having regard to the assets and liabilities of the fund, what amount shall be transferred from the special account to the credit of the members' accounts (art. 8 (4)). Any balance goes to a suspense account pending transfer to the members' accounts. The moneys of the fund are to be invested and the interest and profits credited to an "interest account", to which losses are to be debited. The balance, after making any special reserves the administrators may think desirable, is to be distributed among the members', (that is the employees') accounts, the suspense account and the reserve account in proportion to their respective amounts (art. 12).

For every such member there is to be kept a separate account, and to it are to be credited the total amounts paid by him and by the company employing him as an additional percentage of his salary or as a percentage of profits, and also the amounts transferred from the special account (art. 11). These are the accounts referred to as the members' or participants' accounts. A member is entitled to an annual statement showing the position of his account, but, as long as he remains in the service of his company, he has no claim whatever to a "refund" (which must mean any payment out) of the amounts standing to his credit or of any part thereof (arts. 13 and 14). But the amount standing to his credit shall be paid out to him within six months of his retirement from that service, subject to certain exceptions or qualifications which may be disregarded (art. 15). If he dies while in the company's service, the amount shall be paid to those entitled to his estate (art. 18). The member's rights to the amounts due to him by the fund in accordance with the regulations are to be personal and therefore inalienable ("cannot be ceded or pledged"). A member infringing this provision may at the discretion of the administrators forfeit the benefit of the company's contributions but not of his own (art. 20). Failure of a member to keep up his own contribution to the fund exposes him to exclusion from membership and forfeiture of the benefit of the company's contribution, but again not of his own (art. 21). In all matters the decision of the administrators is final (art. 25).

The payment to the taxpayer part of which the commissioner has included in his assessable income arose, as has already been stated, from an alteration in the regulations. By art. 23 a power is conferred upon the administrators, with the consent of the founding companies, to alter the regulations by notarial act. Notice in writing of such an alteration must be given to every member. If in consequence of the alteration the right of the members be curtailed or their obligations increased, then any member shall be entitled to withdraw the amounts as shown in his account by giving notice within three months after he receives notice of the alteration. An alteration in the regulations was made putting an end to the admission of new members and terminating the obligation of the companies and of the members to continue making contributions. This was regarded as curtailing the rights of existing members and the taxpayer duly notified his exercise of his right to withdraw the amounts shown by his account.

The Commissioner of Taxation included in the assessable income so much of the sum withdrawn as corresponded with the contributions made in respect of the taxpayer by his company and interest thereon and with the interest on the moneys ascribed to the contributions made by the taxpayer. He did not include in the assessable income any amount representing the taxpayer's own contribution as a member. By a misunderstanding part of the amount was included which was paid in the next year of income as the balance to which the taxpayer was entitled from the fund; but it is conceded that this must be excluded from the present assessment, and accordingly we are not concerned with it.

On these facts we are of opinion that, whether or not the payment or any part of it may be described as an allowance, gratuity, compensation, benefit, bonus or premium in respect of or for or in relation to the taxpayer's employment or services rendered by him, it cannot correctly be said that it was such an allowance, &c. "allowed given or granted to him" during the year of income under assessment.

It appears to us that the taxpayer became entitled to a payment out of the fund by reason of a contingency (viz.: an alteration of the regulations curtailing the rights of members) which occurred in that year enabling him to call for the amount shown by his account. It was a contingent right that became absolute. The happening of the event which made it absolute did not, and could not, amount to an allowing giving or granting to him of any allowance, gratuity, compensation, benefit, bonus or premium. The fund existed as one to a share in which he had a contractual, if not a proprietary, title. His title was future, and indeed contingent or, at all events, conditional. All that occurred in the year of income with respect to the sum in question was that the future and contingent or conditional right became a right to present payment and payment was made accordingly. This, in our opinion, cannot bring the amount or any part of it within s. 26 (e). The amount received by the taxpayer from the fund is a capital sum, and, unless it or some part of it falls under s. 26 (e) (there being no other applicable imposition of liability), it is not part of the assessable income.

While we prefer to place our decision of the case upon the simple ground stated, that does not mean that we think that the actual payments by the company to the fund in respect of the taxpayer formed, in the year in which they were so paid, any part of his assessable income.

It is not, of course, a matter that arises for decision in the present case, but, to avoid misunderstanding, it is, we think, desirable to say that on the frame of the regulations we find it by no means easy to see how the sums so contributed can be regarded as allowed granted or given to the employee when they are paid to the administrators of the fund. It is only after the administrators have exercised their discretion that any moneys paid to the special account are reflected in the member's (employee's) account, and even then that does not mean that the member becomes presently entitled to the moneys credited to that account.

We do not think that s. 19 can be used to eke out s. 26 (e) and extend its operation or application.

There are two questions in the case stated, one dealing with moneys treated as reflecting the principal contributed by the company in respect of the taxpayer, the other dealing with moneys treated as representing or reflecting interest referable to that principal and interest referable to moneys treated as reflecting the contributions to the fund made by the taxpayer.

In our opinion, for the reason we have given, both questions should be answered by saying that no part of the sums to which they refer form part of the assessable income of the taxpayer.

Case stated by Williams J. The appellant Constable is an employee of the Shell Co. of Australia Ltd. On 22nd June 1936 as such employee he became a member of a Provident Fund of Combined Petroleum Companies. The Shell Co. was also a member. The regulations governing this fund must be set out at some length for the purpose of determining the nature of the payments into and out of the fund. These regulations provide inter alia:

(1) By art. 2 that the object of the fund is to accumulate for the benefit of the companies' employees who have joined the fund (which they may do on the recommendation of the company employing them) certain sums as a provision for themselves and their families;

(2) By art. 3 that the entire management and administration of the fund is to be entrusted to a board;

(3) By art. 5 that the fund is to consist of certain foundation moneys, contributions of the employees of companies who have joined the fund and of those companies, and interest and other revenues earned;

(4) By art. 7 that each member shall pay into the fund ten per centum of his salary;

(5) By art. 8 (1) that a company is to pay into the fund an amount equal to that paid in by each of its employees;

(6) By art. 8 (4) that contributions paid into the fund are to be booked to the credit of a special account and at the close of each year the board is to decide, after giving consideration to the assets and liabilities of the fund, what amount is to be transferred to the credit of members;

(7) By art. 8 (6) that a separate account for each member is to be kept in the books of the fund in which is to be entered the amounts paid in by him and by his company; and that moneys in the special account not transferred, and any accrued interest therein, are to be credited to a suspense account in the name of each member, and when the board thinks that the liabilities as compared with the assets of the fund justify a transfer, such transfer is to be made to the credit of members in proportion;

(8) By arts. 10, 11 and 19 that a company may pay into the fund to the credit of its employees an additional percentage of the employees' salaries or a certain percentage of the company's profits or other specified sums; that as soon as a member's account has reached £10,000 he may stop his payments, and the company's payments will then be made to the special account and the fund will pay it to the member, and any such extra percentage of profits is to be settled direct between the employee and the company;

(9) By art. 12 that the moneys of the fund are to be invested as the board determines; interest and profits are to be credited and losses debited to an "interest account", and any balance after providing for special reserves that the board thinks desirable are to be distributed among the "participants'" accounts, the suspense account and the reserve account in proportion to their respective amounts;

(10) By art. 13 that each member shall receive a yearly statement of his account;

(11) By art. 14 that while a member is an employee of the company he is to have no claim to a refund of amounts standing to his credit;

(12) By art. 15 that the amount standing to the credit of a member, after deducting amounts owing to the company, is to be paid out to him within six months after the termination of his service;

(13) By art. 16 if a member has less than a specified period of service - five years in the appellant's case - he is to have no claim for amounts credited to his account, but only for amounts he had himself paid in and interest accrued thereon. But the board on the proposal of his company has power in a special case to decide that he is also to receive part of the amounts paid in by his company and credited to his account;

(14) By art. 17 that if a member under fifty leaves the company's service within twenty years the board may withhold the amount standing to his credit until he reaches fifty, but he is not to participate in additional percentages and profits paid in by the company;

(15) By art. 18 that if a member dies whilst in the service of the company the amount standing to his credit is to be paid to his estate;

(16) By art. 20 that the rights of members to amounts due from the fund are personal and cannot be assigned or pledged; and that if a member infringes this provision he is at the discretion of the board to forego the benefit of the contributions of the company, but is to be entitled to the amount of his own payments into the fund and accrued interest;

(17) By art. 21 that if he fails to make the payments for six months the board may cancel his membership and he is then to be entitled only to amounts paid in by him and accrued interest; but in a special case the board on the proposal of his company may pay him part or the whole of the company's contributions and interest;

(18) By art. 23 that the board may alter the regulations, but if the rights or obligations of members are thereby increased any member is to be entitled to withdraw the amounts shown by his account.

The appellant became entitled under art. 23 to withdraw the amounts shown by his account in the fund, and he did so. In his income tax return for the year ended 30th June, 1948, he returned the amounts so received from the fund in that year as a retiring allowance of £404, but claimed that only five per centum, or £20, was assessable income. Accounts rendered by the fund to the appellant in pursuance of art. 13, and the receipts given by the appellant for the moneys received from the fund, purported to specify how much of these moneys consisted of contributions by the company to the fund and interest thereon, and how much consisted of contributions by the appellant to the fund and interest thereon. However, the commissioner took the view that the whole amount received during the year ended 30th June, 1948, so far as it was represented to comprise the company's contributions to the fund and interest thereon, and interest on the appellant's contributions to the fund, was assessable income of the appellant.

Counsel for the appellant submitted that the moneys received from the fund were not assessable income, and that if they were it was only so in respect of the year of income in which they were credited to the account of the appellant in the fund, and not in the year of income in which the composite amount was paid over to him, which was in the year ended 30th June 1948. He also submitted that the moneys were really a retiring allowance paid before retirement. He compared the benefit in the fund to an insurance policy taken out by the employee and contributed to by the employer. He relied on the provision for investment, and the fact that the balance paid to a member's account might have little relationship to the amount paid in by the company; and submitted that the contributions paid in by the company lose their identity on being paid into the fund.

Counsel for the commissioner submitted that the moneys received by the appellant from the fund were an allowance, gratuity, bonus or benefit under s. 26 (e) of the Act, and that the whole of the company's contributions from the commencement and interest thereon were taxable as in the year ended 30th June 1948. He relied on art. 19 of the fund regulations as indicating that the contributions of the company are part of the emoluments of the employee, because when the employee has paid £10,000 into the fund he need pay no more and the company then pays its contributions direct to the employee, including any additional payments under art. 10. He also relied on the provisions in the regulations for separate accounts which must always show, for the purposes of arts. 16, 17, 18, 20 and 21, "payments out of the fund to employees", the amount of each contribution, whether by the company or its employee, and interest thereon.

I think that the moneys paid into the fund by the company were, as counsel for the commissioner submitted, really part of the remuneration of the appellant, or in any event were a "benefit given or granted to him in respect of, or for or in relation directly or indirectly to" his employment, within s. 26 (e). Moreover, I think they became a benefit to the appellant as from the time when the company paid them into the fund. Upon such payment into the fund they ceased to be the property of the company and the payment then enured for the benefit of the appellant, although contingently on his serving for the necessary period to qualify to receive them (art. 16), which the appellant did in 1941. But I do not think that because the moneys in fact paid out of the fund to the appellant purported to be identified, in the yearly accounts given to him under art. 10 and in the receipts which he gave for these moneys, with moneys paid in by the company and interest thereon, that the moneys when paid out of the fund to the appellant still retained their identity as remuneration of the appellant and interest thereon. By art. 12 moneys of the fund, which included foundation moneys, were to be invested and earnings allocated to the members' accounts among other accounts. Investment in the manner indicated in art. 12 would, I think, cause the moneys paid into the fund to lose their identity as remuneration of the employees. They were invested, but a record was kept showing the exact amount of each contribution and interest earned thereon. The regulations required this to be done, as in certain cases they permitted payments to be made to an employee before his retirement of the amounts paid in by him and interest thereon; and also in some cases of the amounts paid in by his company. If the money received by the appellant from the fund had been paid to him without purporting to show how it was made up it could not, I think, have been held to be taxable as remuneration of the appellant in respect of his employment. But this requirement of the regulations was merely one of keeping a record and did not, I think, have the effect of preserving the identity of the moneys in the fund as employers' and employees' contributions and interest thereon, so that when they were paid out of the fund to the appellant under art. 23 they still retained that character.

In my opinion, then, the moneys paid out of the fund to the appellant were not moneys paid for or in respect of his employment; nor were they in the events that happened a retiring allowance. Moreover, they were of a capital nature. That applies also to the appellant's contributions and interest thereon.

For these reasons I think that none of the amounts in question was assessable income of the appellant.

I would answer both questions in the case in the negative.