Income Tax Assessment Act 1936 ss 23L, 25, 190, 221P

Fringe Benefits Tax Assessment Act 1986 s136

Administrative Appeals Tribunal Act 1975 s44

Taxation Administration Act 1953 ss14ZU, 14ZZ, 14ZZF, 14ZZK

Scott v Federal Commissioner of Taxation (N.S.W.) [1935] NSWStRp 9; (1935) 35 SR (NSW) 215

Commissioner of Taxation v Co-operative Motors Pty Ltd (unreported, 23 June

Federal Commissioner of Taxation v Dixon [1952] HCA 65; (1952) 86 CLR 540

Reseck v Federal Commissioner of Taxation [1975] HCA 38; (1975) 133 CLR 45

Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation (1991) 103

Gilder v Federal Commissioner of Taxation 91 ATC 5062; (1991) 22 ATR 872

Commissioner of Taxation v Citibank Limited and Ors 93 ATC 4691

Counsel for the Applicants: F.G.A. Beaumont QC with

with E.J. Power

and N. Rosenbaum

Solicitors for the Applicants: Harvey Bruce and Co.

Counsel for the Respondent: P.G. Sest

Solicitors for the Respondent: Australian Government Solicitors

1. The appeal from the decision of the Taxation Appeals Division of the Administrative Appeals Tribunal (the "Tribunal") disallowing an objection lodged against an assessment of income tax by the respondent for the income year ended 30 June 1991 be allowed and the decision set aside.

2. The matter be remitted to the Tribunal to determine according to law, and after hearing such further evidence as the Tribunal considers appropriate, the following issues:

(a) whether the taxpayer should have leave to amend the grounds stated in his taxation objection to enable him to raise the issue of whether the retention payment constitutes exempt income under sections 25(1)(a) and 23L of the Income Tax Assessment Act 1936 and, if so, to determine whether the retention payment constitutes exempt income; and

2. (b) to determine the objection review in conformity with the decision of the Tribunal on (a).

3. The respondent pay the applicant's costs of the appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

1. The appeal from the decision of the Taxation Appeals Division of the Administrative Appeals Tribunal (the "Tribunal") disallowing an objection lodged against an assessment of income tax by the respondent for the income year ended 30 June 1992 be allowed and the decision set aside.

2. The matter be remitted to the Tribunal to determine according to law, and after hearing such further evidence as the Tribunal considers appropriate, the following issues:

(a) whether the taxpayer should have leave to amend the grounds stated in his taxation objection to enable him to raise the issue of whether the retention payment constitutes exempt income under sections 25(1)(a) and 23L of the Income Tax Assessment Act 1936 and, if so, to determine whether the retention payment constitutes exempt income; and

2. (b) to determine the objection review in conformity with the decision of the Tribunal on (a).

3. The respondent pay the applicant's costs of the appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

NORTHROP J These two appeals from decisions of the Administrative Appeals Tribunal were heard together. In each appeal the primary question of law is whether a lump sum, described as a retention payment, received by Mr. McLean and Mr. Dean respectively, was assessable income under section 25 of the Income Tax Assessment Act 1936 the ("Assessment Act"). In each case, a secondary question of law is whether the grounds stated in the taxation objection to which each decision relates enabled each taxpayer to claim that the retention payment was exempt income under section 25 of the Assessment Act and if not, whether the Tribunal was in error in refusing each taxpayer leave to amend his grounds of objection to enable this issue to be raised.

2. The relevant facts of each appeal are sufficiently similar to enable the appeals to be considered as if the facts were the same but reference will need to be made to some material differences. The most important difference is that the appeal by Mr. Dean relates to the financial year ending 30 June 1991 while the appeal by Mr. McLean relates to the financial year ending 30 June 1992.

3. There is no real dispute concerning the facts of each appeal. At all material times each taxpayer was employed by Simsmetal Services Pty. Ltd. ("Simsmetal"). Simsmetal was one of a group of companies controlled by Elders Resources NZFP Limited ("Elders Resources"). Elders Resources was intending to dispose of a number of its subsidiary companies, including Simsmetal. In order to obtain the best possible financial return from the disposition of its subsidiary companies, Elders Resources offered to make a lump sum payment described as a retention payment, to certain key employees of those subsidiary companies on the condition that the employees would continue their existing employment for a period of 12 months following the disposition. The offer was contained in a letter in common form addressed to each of the employees concerned. The letters to Mr. Dean and Mr. McLean were each dated 26 October 1990 and, with the exception of the amount of the retention payment, were in identical form. The letter, to Mr. McLean, omitting formal parts, is set out:-

"As you know, Elders Resources NZFP Ltd. ('the Company') intends

to divest itself of all its non-forestry assets. Simsmetal

Holdings Pty. Ltd., its subsidiaries and/or their respective

assets will, in due course, be sold to a new owner.

Your continued employment, involvement and support are seen by us

as vital to the maintenance of the profit levels and health of the

business.

The Company therefore offers to make to you a one-off retention

payment of A$108,254 ('the retention payment'). This offer is

subject to the following terms and conditions:

1. That you agree to remain in your current employment with

Simsmetal Services Pty Ltd. or Simsmetal USA Corporation or their

successors or assigns ('Simsmetal') for a period of twelve months

from the effective date of the forthcoming change of ownership of

the part or parts of the Simsmetal business in which you are

engaged and to give your full time attention, commitment and

energy to the business of Simsmetal during that time. This

requirement operates quite independently of your terms of

employment and is not intended to have the effect of converting

that employment into one for a fixed term. This offer, if

accepted, will give rise to obligations between you and the

Company only.

2. In the event that you resign your employment with Simsmetal

before the completion of twelve months' service following the

change of ownership, you agree to refund to the Company the amount

paid to you under this agreement, less an abatement of one-twelfth

of the total retention payment paid to you for each completed

month of service or part thereof. No such refund will be payable

if Simsmetal terminates your employment or you die or become

permanently disabled before the expiry of the 12 month retention

period.

3. That you sign and return to Mr John Cornelius the attached copy

of this letter to signify your acceptance of the terms and

conditions set out in this letter.

4. The retention payment of A$108.254 will be made to you when:

(a) John Cornelius holds the attached copy of this letter duly

signed by you and witnessed; and

(b) the contract of sale of the part or parts of the Simsmetal

business in which you are engaged is for practical purposes

completed and the purchase moneys paid."

4. The amount of retention payment offered to Mr. Dean was A$94,485.

5. Mr. McLean and Mr. Dean each accepted the offer by signing and returning to Mr. John Cornelius the attached letter. In due course Elders Resources disposed of Simsmetal and paid Mr. McLean the sum of $108,254 and Mr. Dean the sum of $94,485. The method of payment is not relevant for present purposes but it is noted that the amount of the retention payments were calculated by reference to the annual remuneration package of Mr. McLean and Mr. Dean respectively.

6. The Commissioner of Taxation calculated the sum of $108,254 as assessable income received by Mr. McLean for the financial year ending 30 June 1992 and the sum of $94,485 as assessable income received by Mr Dean for the financial year ending 30 June 1991. Each taxpayer gave notice of objection in relation to the inclusion of those amounts. The objections were disallowed. Each taxpayer sought a review by the Tribunal of the decisions disallowing the objections. On 11 October 1994, the Tribunal affirmed the decisions under review. The taxpayers have appealed on questions of law from the decisions of the Tribunal.

7. For present purposes, the relevant parts of subsection 25(1) of the Assessment Act are:-

"25.(1) The assessable income of a taxpayer shall include -

(a) where the taxpayer is a resident -

the gross income derived directly or indirectly from all sources

whether in or out of Australia; and

(b) ...

which is not exempt income ..."

8. To understand the reference to "exempt income" in that provision, insofar as the facts of these appeals are concerned, reference is made to paragraph 23L(1)(a) of the Assessment Act which provides:-

"23L.(1) Where the taxpayer derives income by way of the provision

of:

(a) a fringe benefit within the meaning of the Fringe Benefits Tax

Assessment Act 1986; or

(b) ...

the income is exempt income."

9. The Tribunal held that the retention payments received by the taxpayers constituted income under paragraph 25(1)(a) of the Assessment Act but declined to determine whether the retention payments constituted exempt income under paragraph 23L(1)(a).

10. The Court considers first whether the receipt of the retention payments by the taxpayers constitutes income under paragraph 25(1)(a) of the Assessment Act. Logically, this issue should be considered before considering whether receipt of money or property is exempt income under the later part of that paragraph. In some cases it may be practical to consider the question of "exempt income" first, but having regard to the facts of these appeals, such a course is impractical here.

11. The principles of law to be applied in determining whether the receipt of money or property is income derived by a taxpayer are clear. The word "income" is not defined in the Assessment Act. Normally, whether receipt of money or property is income, is to be determined according to ordinary usages and concepts; see Scott v. Commissioner of Taxation (N.S.W.) (1935) 35 SR (N.S.W.) 215 at 219. Recently I considered the principles to be applied in determining whether receipt of money given for no consideration constituted income derived by the recipient; see Commissioner of Taxation v. Co-operative Motors Pty. Ltd. unreported, 23 June 1995 (No. TG 22 of 1994). In that case reference is made to a number of authorities including The Squatting Investment Company Limited v. Federal Commissioner of Taxation [1953] HCA 13; (1953) 86 CLR 570 per Kitto J at 627-628, Scott v. Federal Commissioner of Taxation [1966] HCA 48; (1966) 117 CLR 514 per Windeyer J at 526, Hayes v. Federal Commissioner of Taxation [1956] HCA 21; (1956) 96 CLR 47 per Fullager J 54 and Northumberland Development Co. Pty. Ltd. v. Federal Commissioner of Taxation [1994] FCA 1425; (1994) 126 ALR 97 per Hill J at 103. As I said in Co-Operative Motors Pty. Ltd. whether money is income derived by a taxpayer "depends upon a consideration of all the circumstances surrounding the receipt of the money, or, as is suggested by Windeyer J in Scott, it depends upon its quality in the hands of the recipient".

12. In the present case the question can be answered by reference to paragraph 25(1)(a) of the Assessment Act. It is not necessary to refer to paragraph 26(e). This is consistent with authority; see for example Federal Commissioner of Taxation v. Dixon [1952] HCA 65; (1952) 86 CLR 540 per Dixon CJ and Williams J at 555-6 and Hayes per Fullagar J at 53-54. On the facts of this appeal, the reasoning that led to the division of opinion expressed by the Justices in Reseck v. Federal Commissioner of Taxation [1975] HCA 38; (1975) 133 CLR 45 concerning the relationship between sections 25 and 26 of the Assessment Act, does not arise. In that case, however, all members of the Court expressed the opinion that generally section 26 does not limit section 25 but includes as assessable income some receipts that might not ordinarily have been regarded as income. At this stage also, it should be noted that in the joint judgment of Dixon CJ and Williams J referred to above in Dixon their Honours noted the difference between the provisions of section 25 of the Assessment Act and the provisions of the Income Tax Legislation in the United Kingdom. As a result, many authorities of the Courts in England are not of assistance in determining what is income under section 25. In the present appeals, counsel for the taxpayers relied on a number of English authorities but they are not of any assistance in determining the issue before the Court.

13. In the present case, the Tribunal held that the retention payments received by the taxpayers constituted income derived by them within paragraph 25(1)(a) of the Assessment Act. In my opinion, the Tribunal was not in error in so concluding. In my opinion all the facts of this case point to the conclusion that the receipt of the retention payments by the taxpayers was related to their activities as employees and as continuing to be employees with the result that in substance and reality the amounts received were the product of the income-earning activity on the part of each taxpayer.

14. The nature of the payments is made clear by a reference to the contents of the letters written to them by Elders Resources. The payment was made as an inducement to each taxpayer to continue in his employment for a period of at least one year. If the taxpayer voluntarily left his employment, the amount of the payment was reduced but otherwise the payment was for the specified sum. The fact that this was not to be paid on a periodic basis does not detract from the true nature of the receipt of the payment. The continual employment was at the very heart of the receipt of the payment the amount of which was calculated having regard to the salary of the taxpayer. There is no similarity between the facts of this case and those discussed in Dickenson v. Federal Commissioner of Taxation [1958] HCA 62; (1958) 98 CLR 460.

15. It thus becomes necessary to determine whether the retention payments constitute exempt income, in this case, by reference to paragraph 23L(1)(a) of the Assessment Act. Part IVC of the Taxation Administration Act 1953 ("the Administration Act") makes provision for taxation objections, reviews and appeals. Under the provisions of that Part, each taxpayer made a taxation objection against the assessment made on the basis that the retention payments did not constitute income. Section 14ZU of the Administration Act provides that the person making the taxation objection "must state in it, fully and in detail, the grounds" relied on. In the present appeals, Mr. Dean made a taxation objection by notice of objection dated 7 July 1992 in which he objected to the inclusion of the retention payment of $94,485 in an amended notice of assessment as income derived by him for the year ending 30 June 1991. The only relevant ground relied upon by Mr. Dean as set out in the taxation objection as required by section 14ZU was:-

"The receipt of $94,485 was not a receipt of income because it was

not paid as a result of my duties performed or work undertaken in

relation to my employment."

16. Mr. McLean made a taxation objection by notice of objection dated 12 April 1993 in which he objected to the inclusion of the retention payment of $108,254 in the notice of assessment as income derived by him for the year ending 30 June 1992. The only relevant ground relied upon by Mr. McLean as set out in the taxation objection as required by section 14ZY was:-

"The receipt of $108,254.00 was not a receipt of income in the

ordinary sense and therefore not subject to Tax under Section

25(1) of the Income Tax Assessment Act because it was not paid as

a result of any duties performed or work undertaken in relation to

my employment."

17. Neither objection made specific reference to assessable income under paragraph 25(1)(a) of the Assessment Act as including gross income but excluding exempt income. In order to raise the issue now under consideration, the ground of objection should have drawn attention to the fact that the taxpayer alleged that the receipt of money was either not income (or gross income) derived, or if it was, it was not assessable income because it was exempt income. In other words, to raise the issue, attention should have been directed to the fact that the taxpayer claimed that the income was exempt income under a specified provision of the Assessment Act.

18. The purpose of the statement of grounds is obvious. It is to direct the attention of the Commissioner to the questions raised. In the present case, the grounds stated related to "income" only. It was not stated to be with respect to "assessable income" which may have left open the question of whether exempt income was to be raised. Even this is doubtful since "income" may be "exempt income" by reason of a number of different provisions of the Assessment Act.

19. In conformity with the provisions of the Administration Act, the Commissioner, by a decision, disallowed the taxation objections. The taxpayers applied to the Tribunal for a review of those decisions; see section 14ZZ of the Administration Act. In conformity with section 14ZZF(1), the Commissioner gave a statement of reasons for those decisions. Those reasons, not surprisingly, made no reference to "exempt income" nor to paragraph 23L(1)(a) of the Assessment Act.

20. At the hearing before the Tribunal, each of the taxpayers was represented by a different counsel. In its reasons for decision, the Tribunal, after stating the broad basis of the submissions made on behalf of the taxpayers, said:-

"Alternatively, it was submitted that the amounts constituted

fringe benefits under the Fringe Benefits Tax Assessment Act 1986

('FBT Act') and are, therefore, exempt from income tax under

Section 23L of the Act and excluded from Section 26(e) of the Act

pursuant to paragraph (iv) of that section. It is appropriate to

deal with this latter argument later and separately as the

question arises as to whether the argument can be considered

pursuant to the provisions of Section 14ZZK of the Taxation

Administration Act 1953 ('Administration Act') which limits an

applicant to the grounds stated in the objection to which the

decision under review relates."

21. Paragraph 14ZZK(a) of the Administration Act provides:-

"14ZZK On an application for review of a reviewable decision:

(a) the applicant is, unless the AAT orders otherwise, limited

to the grounds stated in the taxation objection to which the

decision relates; and

(b) ..."

22. Later in its reasons, the Tribunal turned to consider whether the grounds stated in the taxation objections were wide enough to include grounds that the retention payments constituted exempt income. The Tribunal referred to the opening paragraphs of the taxation objections where Mr. McLean said the amount of the retention payment "received by me which is not considered by me as income due to salary and wages or income in any sense of the word, which would be the subject to (sic) Income Tax under the Act".

23. Mr. Dean said that the retention payment received by him "is not considered by me as income due to salary and wages or income in any sense of the word which would be the subject to (sic) Income Tax under the Act".

24. It is noted that neither of these paragraphs is stated to be a ground of taxation objection but each draws attention to the fact that what is being objected to is the treating of the retention payments as income on which income tax is to be assessed. This would include the possibility that the payments were exempt income but no reference is made to the reason for that conclusion.

25. The Tribunal expressed the opinion that the grounds stated in the taxation objection did not include a ground to the effect that the retention payments constituted exempt income under paragraph 23L(1)(a) of the Assessment Act. In my opinion the Tribunal was not in error in coming to that conclusion.

26. Thereafter, there is some confusion as to what occurred arising in part from some unusual procedures which were adopted by the Tribunal and the absence in the reasons of the Tribunal of a full description of what occurred. It appeared that the question of whether the retention payments constituted "exempt income" arose for the first time in final submissions on behalf of the taxpayers. The Tribunal, in the course of those submissions, suggested that the taxpayers may need to rely upon leave being given to amend their grounds in the taxation objection, see paragraph 14ZZK(a), but "little was put forward ... in support of the request for leave to amend the grounds of objection." The reasons then continue:

"Consequently, and at a subsequent Directions Hearing, the

respondent was directed to file and serve a written submission

on this question with the applicants to file and serve a reply.

A submission was filed by the respondent but no reply was provided

by the applicants."

27. The reasons do not disclose how the directions hearing was convened or the methods by which the directions hearing was conducted. Normally it would be expected that any directions would have been to the effect that the taxpayers, as applicants seeking an indulgence, would be required to file and serve written submissions in support of the application followed by answering submissions opposing the application and finally submissions in reply if any. This was not done. In the event no submissions on behalf of the taxpayers were considered. No reference is made as to the times within which the submissions were to be filed and served nor is there any indication that time factors did apply. In any event, the Tribunal had regard only to the submissions filed on behalf of the Commissioner.

28. The Tribunal refused to give leave to the taxpayers to amend the grounds of their taxation objections to include a ground that the retention payments constituted exempt income on the grounds that they constituted income by way of the provision of fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986 ("the Fringe Benefits Act"). The Tribunal stated that it did not necessarily agree "with the views of the respondent that the "FBT argument is unmeritorious and untenable".

29. In reaching its decision the Tribunal had regard to the following facts namely the late stage at which the application was made, the detailed procedures followed including the statement of facts and contention of law, that the giving of evidence had been completed and further evidence may need to be given, that the taxpayers had legal representation and the limited argument in support of the application. The Tribunal referred to subsection 14ZZK(1) of the Administration Act but did not set out the relevant part of that section. The Tribunal referred to Lighthouse Philatelics Pty. Ltd. v. Federal Commissioner of Taxation 91 ATC 4942 at 4949, Gilder v. Federal Commissioner of Taxation 91 ATC 5062 at 5072 and Federal Commissioner of Taxation v. Citibank Limited and Others 93 ATC 4691 at 4703. The Tribunal refused to allow the amended ground to be relied upon and therefore did not consider the substantive issue. The Tribunal said:-

"Given the lateness of the introduction of the argument (with

the possibility that this new line of reasoning only occurred to

counsel when he came to the word 'benefit' in his submission on

the application of Section 26(e) of the Act) and the limited

ability of the respondent to deal with this new and unexpected

argument, it is not surprising that the Tribunal was not provided

with a full analysis of the merits of the argument."

30. A party which seeks to appeal on a question of law from a decision of the Tribunal in the exercise of a discretion has a difficult task. In the present case, the review had been conducted over a lengthy period with breaks between the days of hearing. Much evidence was given which, in the event, was not relevant to the main issue decided. Many legal issues were debated which were irrelevant to the main issue decided. The construction and application of paragraph 26(e) of the Assessment Act took up a major time of the hearing it being overlooked, apparently, that if the receipts constituted income under paragraph 25(1)(a) of the Assessment Act, paragraph 26(e) need not be considered. Much time was spent on the question of the application of subsection 160(M)(7) of the Assessment Act and "any other of the Capital Gains Tax provisions". Having regard to all these factors and the unsatisfactory nature of the hearing before the Tribunal and the subsequent "Directions Hearing" it is easy to understand the views of the Tribunal. Nevertheless, the Court approaches this question by applying the well known principles applicable in determining whether a discretion has been properly exercised as expressed by Dixon, Evatt and McTiernan JJ in House v. The King (1936) 55 CLR 499 at 504-505. The Court has regard also to the fact that here the appeal is limited to a question of law; see subsection 44(1) of the Administrative Appeals Tribunal Act 1975 and division 4 of Part IVC of the Administration Act.

31. In its reasons, the Tribunal referred to subsection 14ZZK(1) of the Administration Act but did not set out the terms of that subsection. The subsection is set out earlier in these reasons. Part IVC of the Administration Act was inserted into that Act by Act No. 216 of 1991 and came into operation on 1 March 1992. It replaced similar provisions that had appeared in the Assessment Act. In particular subsection 14ZZK(1) is in similar form to paragraph 190(a) of the Assessment Act which provided:-

"190. In proceedings under this Part on a review before the

Tribunal ...

(a) the taxpayer shall, unless the Tribunal ... otherwise orders,

be limited to the grounds stated in his objection; and

(b) ... " (Emphasis added)

32. The words "unless the Tribunal ... otherwise orders" were inserted into the Assessment Act in 1986 by Act No. 48 of 1986. As was said of the Court, Lockhart, Burchett and Hill JJ in Lighthouse Philatelics Pty. Ltd. v. Commissioner of Taxation (1991) 32 FCR 148 at 150-151:-

"Prior to that amendment, in proceedings before the Tribunal, or

its predecessors, the Taxation Boards of Review, a taxpayer was

confined to the grounds which he had stated in his objection.

There was no power in the Commissioner, the Tribunal or the court

to enable the taxpayer to argue matters outside the grounds which

he had included in his objection. This gave rise to injustice."

33. In that case, a Full Court of the Federal Court considered the nature of the power conferred by the words "unless the Tribunal ... otherwise orders" in paragraph 190(a) of the Assessment Act. Those observations of the Court have equal application to the nature of the power conferred by subsection 14ZZK(1) of the Administration Act. The whole of the judgment should be read to enable a full understanding of the nature of the power.

34. In Lighthouse Philatelics, the Full Court was exercising the original jurisdiction of the Court on the hearing of an appeal under section 44 of the Administrative Appeals Tribunal Act from a decision of the Tribunal refusing the taxpayer leave to amend the grounds of an objection stated in its objection pursuant to paragraph 190(a) of the Assessment Act. To that extent, the appeal is identical, in this respect, with the appeal being considered at this stage in these appeals. The Tribunal refused to allow the amendment on the basis that the section did not empower the amendment. To that extent, the present appeals are different. Here the Tribunal accepted it had power but, as a matter of discretion, refused the amendments sought.

35. In its reasons, the Full Court referred to the injustices occurring from the fact that prior to the 1986 amendment there was no power to amend, the unsatisfactory results flowing therefrom including the unsatisfactory development of unreal and unhelpful grounds of objection as well as injustices to the taxpayers. The Court referred to the report of the Taxation Review Committee (the Asprey Committee) which recommended the amendment and the fact that the power prescribes no limitation on its exercise. In other words, the power to amend is unfettered. Nevertheless, it must be remembered that the power must be exercised according to law.

36. After considering submissions made on behalf of the Commissioner to the effect that limitations should be based upon the exercise of the power, the Court said at 156:-

"Nothing in the context of the Act requires the clear words of

s190(a) to be so confined. On the contrary, the whole statutory

background leads to the conclusion that the natural meaning of

the words should be given effect to. The amendment to s190(a)

introduced by the Taxation Boards of Review (Transfer of

Jurisdiction) Act 1986 (Cth) was of a remedial kind and thus must

be construed in accordance with well-established principles

relating to ameliorating legislation. It follows that the Tribunal

or the court has power to permit a taxpayer to argue that the

taxable income and tax payable are incorrect and 'excessive' for

reasons not initially advanced, even if those reasons involve, as

in the present case, entirely fresh grounds in substitution for

the original grounds, or even if they require consideration of

matters not considered by the Commissioner in the original

assessment process.

The decision whether to allow an amendment ought to be made on

the same considerations of justice upon which such decisions are

regularly made in litigation. It was in the past a reproach to the

law that the real issues in taxation appeals could be refused a

hearing for a defective objection, and Parliament has legislated

to remove that reproach; an amendment under s190 should not be

considered with reluctance, but on its merits.

One further comment may be made. To refuse to allow the amendment

of the grounds of objection on the basis that the failure to claim

deductions otherwise properly allowable was a mistake of the

taxpayer's accountant would involve an error of law. Cf Jess v.

Scott (1986) 12 FCR 187 at 194. So too would an error of law be

involved in refusing to permit a taxpayer to rely on new grounds

because he had commercially adopted a structure involving two

companies 'with tax and commercial objectives in mind'. A decision

on that basis would take into account irrelevant considerations.

It would not seem that the learned member did take such matters

into account, having regard to his decision that he had no power

to permit the amendment. However, having regard to the learned

member's expression of opinion on these two points, the matter

should be heard again before a Tribunal differently constituted."

37. This passage sets out clearly and unequivocally the nature of the power to give leave to amend contained in paragraph 14ZZK(1) of the Administration Act. It makes clear also that the Tribunal, and the Court, are required to dispense justice according to law as between the litigants and not according to the abilities of those representing them. The Full Court allowed the appeal.

38. In the present case, the Tribunal, in its reasons, referred to Lighthouse Philatelics and quoted that part of the passage just set out commencing "It follows that" - - to - - "in litigation". The Tribunal did not refer to the wide nature of the unfettered power so conferred. The Tribunal then referred to more of the facts in Lighthouse Philatelics relating to the length of time the Commission had of the taxpayer's claim. The Tribunal then referred to the fact of the late stage at which the question of amendment was raised in the present case. The Tribunal referred to Gilder v. Federal Commissioner of Taxation (1991) 91 ATC 5062 where Davies J refused to grant leave to amend the grounds of objection. The Tribunal quoted from the reasons for judgment of Davies J at 5072 indicating that in exercising the discretion his Honour had taken into account the time constraints imposed of the legislation with respect to reviews and appeals to the Court in first instance and the procedure of the Court in hearing appeals from decisions of the Commissioner. The Tribunal did not refer to other relevant facts set out at 5072 as follows:

"Counsel for Mr Gilder also sought leave to amend the grounds of

objection relied upon to introduce the ground first that the

Deputy Commissioner had no basis to conclude that fraud and

evasion was involved and, secondly, the ground that there was no

proper assessment of the additional penalties imposed.

During the hearing, I indicated that I thought there was power to

consider these grounds but that, in the circumstances of the case,

it was inappropriate to do so. However, I reserved the issue for

further consideration.

Since then, in Lighthouse Philatelics Pty Limited v. F.C. of T.

91 ATC 4942, Lockhart, Burchett and Hill JJ have held that the

discretion to amend is at large. Their Honours disapproved

decisions of the Administrative Appeals Tribunal to the contrary."

39. The passage quoted by the Tribunal in its reasons then appears and the judgment continues:-

I take into account not only the fact that the proposed grounds

raise matters entirely different from those presently before the

Court but also the fact that they do not stand out as matters

which, in the interests of justice, must be considered by the

Court. The material before the Court does not disclose a prima

facie case of invalidity of the assessments. As to the additional

tax, if that issue had been raised in the original objections,

this matter would presumably have been referred to the

Administrative Appeals Tribunal rather than this Court."

"The whole purpose of pre-hearing proceedings including exchange

of statements of facts issues and contentions between parties

required by this Tribunal is to ensure that proceedings in the

Tribunal are efficient and both parties are fully aware of the

case for each side so that proper evidence and argument can be

presented. To permit the applicants to introduce a new issue at

such a late stage in proceedings would prejudice the respondent

and the application is refused."

In this matter, I adopt the view of Hill J in Federal Commissioner

of Taxation v Citibank Limited and others, 93 ATC 4691 (at p.4703)

"Counsel for the respondents sought leave to amend the grounds of

objection to claim a deduction for such a loss. It was not in

issue between the parties that the Full Court could in an

appropriate case grant such leave. The present case, however, was

not an appropriate case because the point was not taken at first

instance in circumstances where, had it been taken, evidence might

well have been admissible on the question."

42. In so doing, the Tribunal misunderstood what Hill J was saying. There the Full Court was exercising appellate jurisdiction in hearing an appeal from a single Judge of the Federal Court. The application to amend was made to the Full Court. The principles to be applied in that case were very different to those to be applied by the Tribunal. This is apparent from the quotation relied upon. In the present case, if the amendment had been allowed, the Tribunal could have adjourned the further hearing of the review to allow further evidence to be called, if necessary, and further submissions to be made.

43. In my opinion, in the present case the decision to refuse to allow the amendments sought of the taxpayers was made in error of law. A reading of the reasons for decision shows that the Tribunal did not apply the proper principles in the exercise of the unfettered discretion conferred by paragraph 14ZZK(1) of the Administration Act, an unfettered discretion remedial in nature to overcome a mischief resulting in injustice. The Tribunal applied a fetter on the exercise of the discretion, a fetter in the nature of a straight-jacket in the form of the practice and procedure of the Tribunal. The practice and procedure should be seen as facilitating the identification of the nature and determination of the issues in dispute. Practice and procedure is not an end in itself. The interests of the litigants are to be determined by applying justice between them, not on whether their representatives have followed the practices and procedures of the Tribunal. The substantial issues must be determined.

44. Here, each taxpayer had objected against an assessment of tax. The notices of objection each stated that the taxpayer considered that the retention payment was "not considered ... as income due to salary and wages or income in any sense of the word which would be the subject to (sic) Income Tax under the Act". The notice was prepared by an accountant. The Commissioner, by his appropriate officer, should have known the provisions of the Assessment Act and the principles of law to be applied in considering paragraph 25(1)(a) of the Assessment Act, the assessable income of the taxpayers being their gross income but excluding exempt income. The Commissioner knew that the retention payments were not paid by the taxpayers' employer. The Commissioner knew of the provisions of subsection 23L(1) of the Assessment Act. It should have been apparent that receipt of the retention payments could constitute exempt income. The Tribunal, a specialist tribunal dealing with reviews of reviewable decisions under the Assessment Act, heard much evidence relating to the reason and nature of the payment of the retention payments by Elders Resources. It seems strange that neither the Tribunal nor the Commissioner considered the possibility that the retention payments could be fringe benefits under the Fringe Benefits Act. The legal representatives of the taxpayers may have been at fault, but their failure to comply fully with the practice and procedures of the Tribunal should not prevent the taxpayers from having their objections determined according to law.

45. The facts of this case were very different from those considered by Davies J in Gilder. There the proposed amended grounds related to matters completely different from the stated grounds. Here, the proposed amended grounds, in reality, form part of the matters in dispute, namely, did the retention payment form part of the assessable income of each taxpayer and in particular does it constitute exempt income as being a fringe benefit payment.

46. In my opinion, the Tribunal misapplied the law and the decisions to refuse the taxpayers leave to amend the taxation objections should be set aside.

47. After expressing its decision to refuse to allow an amendment to the grounds of objection, the Tribunal considered it inappropriate to consider fully the merits of the argument based on whether receipt of the retention payments constituted exempt income under the Fringe Benefits Act. The Tribunal said that "Whilst not necessarily agreeing with the views of the respondent that the FBT argument is unmeritorious and untenable" it is a complex argument requiring an analysis of the relationship of the Act and the FBT Act." The Tribunal expressed no view on the question of whether the receipt did constitute exempt income and made no findings of fact or law on the issue.

48. Counsel for the Commission contended that if the Tribunal was in error in refusing the taxpayers leave to amend the grounds of their taxation objections, nevertheless the Court should not set aside the decision of the Tribunal and remit the matters to the Tribunal since to do so would be futile. It was contended that this was so since, even if leave to amend were granted, there could be only one conclusion reasonably open to the Tribunal on the exempt income issue namely that neither retention payment could constitute a fringe benefit under the Fringe Benefits Act and therefore neither payment could constitute exempt income.

49. Therefore before considering what orders should be made, it is necessary to turn to the question of whether the receipts of the retention payments constitute exempt income under paragraph 25(1)(a) and paragraph 23L(1) of the Assessment Act.

50. The submission on behalf of the taxpayers was simple. Under section 66 of the Fringe Benefits Act a tax is imposed upon the employer in respect of a fringe benefit. The meaning to be given to the words "fringe benefit" is contained in subsection 136(1). For present purposes, "fringe benefit" is defined in relation to an employee, in relation to the employer of the employee, in relation to a year of tax as meaning a benefit:-

"provided to the employee ... by:

(a) ...

(d) an associate of the employer; or

(e) ...

in respect of the employment of the employee, but does not

include:

(f) a payment of salary or wages or a payment that would be salary

or wages if salary or wages included exempt income for the

purposes of the Income Tax Assessment Act 1936;

(g) ..."

51. In the same subsection, the word "benefit" is given an extensive meaning by including a wide range of benefits whether coming within the normal meaning of the word benefit or not. In the Fringe Benefits Act, the word "benefit" is sufficiently wide so as to include a "bonus" or an "allowance".

52. In the present case it appears to be accepted by the parties that each of the retention payments constitutes a benefit received by the taxpayer as an employee and provided to the employee by an associate of the employer and thus a fringe benefit within paragraph (d) of the definition of "fringe benefit" contained in the Fringe Benefits Act. Counsel for the taxpayers contended that on the assumption that the retention payments constitute gross income within paragraph 25(1)(a) of the Assessment Act, they do not constitute assessable income because each constitutes a fringe benefit under the Fringe Benefits Act; see paragraph 23L(1)(a) of the Assessment Act.

53. Counsel for the Commissioner contended that the retention payments do not constitute fringe benefits because they come within the exclusionary provision of paragraph (f) of the definition of "fringe benefit" contained in the Fringe Benefits Act. In particular, it was contended that each retention payment was either "salary or wages" or "a payment that would be salary or wages if salary or wages included exempt income for the purposes of" the Assessment Act. In the Fringe Benefits Act the words "salary or wages" are defined in subsection 136(1) to mean "assessable income, being salary or wages within the meaning of section 221A of the Income Tax Assessment Act 1936." In the Fringe Benefits Act the words "assessable income" is defined to mean "assessable income for the purposes of" the Assessment Act.

54. In paragraph 25(1)(a) of the Assessment Act, assessable income, for present purposes, is gross income which is not a fringe benefit within the meaning of the Fringe Benefits Act.

55. Counsel for the Commissioner contends that despite those provisions, each retention payment could not be a fringe benefit because each payment was "a payment of salary or wages for the purposes of the Fringe Benefits Act in that each constitutes "salary or wages" as defined to mean" assessable income, being salary or wages, within the meaning of the definition of those words in subsection 221A(1) of the Assessment Act.

56. Section 221A is within Division 2 "Collection by Instalments of Tax on Persons other than Companies" and within Part VI "Collection and Recovery of Tax" under the provisions of the Assessment Act. Those provisions are designed to require an employer to make deductions of tax from the salary or wages of employees and to pay the amounts so deducted to the Commissioner. These provisions are often described as the PAYE system. The legal obligation to deduct tax is imposed upon the employer of an employee. In subsection 221A(1), "employee" is defined to mean "a person who receives, or is entitled to receive, salary or wages". The extended meaning has no application to the facts of these cases. "Employer" is defined to mean "a person who pays or is liable to pay any salary or wages". The extended meaning has no application to the facts of these cases. The relevant parts of the definition of "salary or wages" in operation before 24 December 1991 are set out:-

"salary or wages" means salary, wages, commission, bonuses or

allowances paid ... to an employee as such, and, ... includes ...

(a) ...

But does not include -

(f) payments of exempt income:

(g) ..." (Emphasis added)

57. Act No 216 of 1991, with effect from 24 December 1991, replaced those words emphasised with the following "paid ... to an eligible person as such". The same Act inserted a definition of "eligible person" into subsection 221A(1) of the Assessment Act. The relevant part of that definition is, for present purposes, that "eligible person" means "a person who is an employee within the ordinary meaning of that expression;". This amendment applies with respect to the appeal by Mr McLean, but it is difficult to see any different result arising therefrom.

58. In the present cases, counsel for the Commissioner contended that the cash retention payment was a "bonus" or "an allowance" within the meaning of those words appearing in the definition of "salary or wages" in subsection 221A(1) of the Assessment Act. This might well be so but I express no view on this issue. But here the retention payments were not made by the employer of the taxpayers. They were not paid by the employer "to an employee as such". They were paid by an associated company pursuant to the agreement set out earlier in these reasons. The contentions made no reference to most of the definitions discussed above but relied essentially on the words "salary, wages, commission, bonuses or allowances paid ... to an employee as such" appearing in the definition of "salary or wages" in subsection 221A(1) of the Assessment Act. Counsel referred to a number of authorities dealing with the meaning to be given to the words "bonus" and "allowance", the deliberately wide definition of "salary or wages" in subsection 221A(1) and submitted only one conclusion was reasonably open with regard to the Fringe Benefits Act issue, namely that the retention payments were not, by definition, fringe benefits.

59. It is doubtful that this submission should be accepted. The issue can be determined only after a detailed examination of all the relevant legislative provisions and their application to the facts of these cases. The provisions of paragraph 25(1)(a) of the Assessment Act are clear. They are designed to enable the assessable income to be ascertained. The reference to "exempt" income is clear and on the facts of this case, must involve a consideration of paragraph 23L(1)(a) of the Assessment Act. Further the exclusion of payments of exempt income from salary or wages as set out in paragraph (p) of the definition of "salary or wages" in paragraph 221A(1) of the Assessment Act appears to be consistent with the provisions of paragraph 25(1)(a) and paragraph 23L(1)(a). This becomes clearer when regard is had to the policy, purpose and appeal of Division 2 of Part VI of the Assessment Act when compared with the policy, purpose and effect of sections 25 and 23L. All these matters call for attention. It is not for this Court to express an opinion on them since whether they can be considered or not depends upon whether the Tribunal grants leave to the taxpayers to amend their grounds of appeal. What can be said is that the submissions of the taxpayers are not so unmeritorious that the granting of leave to amend would be futile.

60. In the result in each appeal the Court orders that the appeal be allowed and that the decision of the Tribunal be set aside. The Court also orders that the matter be remitted to the Tribunal to determine according to law, after hearing such further evidence as the Tribunal considers appropriate, first, the issue of whether each taxpayer should have leave to amend the grounds stated in his taxation objection to enable him to raise the issue of whether the retention payment constitutes exempt income under paragraphs 25(1)(a) and 23L(1)(a) of the Assessment Act, secondly, if leave is granted, to determine whether each retention payment constitutes such exempt income and, thirdly, to determine each objection review in conformity with the decisions made by the Tribunal on issues 1 and 2 remitted to the Tribunal. The Court also orders that the respondent pay the applicant's costs of the appeal.

61. It is noted that the issues remitted to the Tribunal could be heard concurrently.