Held: IPENZ failed to discharge its onus of satisfying the Court, on the balance of probabilities, that IPENZ was established exclusively for charitable purposes. "Exclusively" added nothing to the concept of charitable purpose beyond the common law connotation. The establishment of the purpose for which a body has been established is a matter of fact to be determined by first looking at the founding documents. In so far as there is any uncertainty on an examination of the relevant document or documents it is permissible to look and see what the body actually does or has been doing. The natural construction of the rules of the IPENZ, not necessarily fatal to the contention that IPENZ was established exclusively for charitable purposes, was that the object of the Institute was the advancement both of the science and of the profession of engineering. At best, the rules were unclear as to what the exact object or objects of the Institute were and in these circumstances it was permissible to look beyond the founding document ie the rules, to see what the Institute had been doing and thus how it had itself construed its stated object.
There was no doubt that the evidence established that IPENZ did perform "learned society" functions and that the advancement of the science of engineering had to be regarded as beneficial to the general public. The learned society functions included the role which IPENZ performed in facilitating and disseminating learned publications, in making awards, in facilitating the activities of technical groups and in arranging for conferences at which learned papers were delivered and discussed. IPENZ also performed the role of establishing qualifications and it had a continuing education function. Membership of IPENZ was not a precondition to the practice by an engineer of his/her profession, nor was registration under the Engineers Registration Act 1924. Because IPENZ had members who were both employers and employees it had only a limited role in industrial or trade union matters. The evidence, however, established that as well as being a learned society IPENZ was definitely and distinctly a professional body. IPENZ had been performing a significant professional role which produced private benefits to its members which were far from incidental to or subsidiary to the learned society function.
Held: Neither fund was held for charitable purposes. In order to be charitable a trust must be of a public character; that is, it must be for the benefit of the community or an appreciably important section of the community. This requirement may involve two closely related questions; whether the purposes of the trust confer a benefit on the public or a section of the public and whether the class of persons eligible to benefit constitutes the public or a section of it. While it is difficult and perhaps impossible to formulate a satisfactory test by which to determine whether in any particular case a particular class of persons constitutes a sufficiently important section of the public to establish the validity of a trust alleged to be charitable, a trust for a particular class of private individuals will not be charitable no matter how large the class may be. Bearing on the significance of the second consideration, the question is not whether a particular object in the abstract is a good charitable object, but whether the purposes of the fund are a good charitable object from the point of view not of the type of misfortune at which it is aimed, but of the beneficiaries.
The peace of mind some members of the community may gain from the knowledge of the existence of the fidelity fund was far too nebulous and remote to be regarded as a public benefit. There was no suggestion that the existence of the fund tended to promote honesty and integrity on the part of those engaged in the public practice of law or accountancy, or that the purpose of the trust was the moral improvement of the community. The only persons who actually benefited from the fund were those whose moneys were misapplied by the solicitor or chartered accountant and who, having exhausted their remedies against that solicitor or accountant, claimed reimbursement from the fund.
The taxpayer claimed that its activities were charitable as they were concerned with the advancement of education. The income earned was therefore exempt from taxation under the provisions of s 61(25) of the Income Tax Act 1976. The Commissioner considered that the taxpayer was not a charitable organisation as its activities did not come within the definition of a "charity" as that term has been defined by the Courts. Upon the Commissioner disallowing the taxpayer's claim a case was stated to the High Court.
Held: The trust in this case fell fairly and squarely within the criteria which have long been accepted as constituting a trust for the advancement of education. The charitable nature of a purpose which was involved with the advancement of education does not depend upon indigence. In determining whether or not a trust for the advancement of education is charitable the question of public benefit, ie the benefit of the community or an appreciably important section of the community will be of significance. However, the nature of the charitable purpose in question, as determined from the aims and objects of the trust under consideration, may itself be a factor in determining whether or not the requirement of public benefit has been met.
The direct beneficiaries of the action of the taxpayer were any pupils of any school which entered into an agreement with the taxpayer and who had the misfortune to lose a parent. The schools themselves were open to any member of the public prepared to meet the fees and expenses and any number of schools could enter into an agreement with the taxpayer. The fact that only three schools had done so did not derogate from the fact that it was theoretically possible for a very large number of schools to take out agreements with the taxpayer. The contributions which particular parents made benefited pupils who attended a school with which they had no connection except the rather tenuous one of participation in the trust. In those circumstances the element of public benefit was present. There was not the link of relationship sufficient to prevent a trust being classified as charitable, nor was there the link of common employment, nor even a link with a particular school.
There were, however, difficulties in reconciling the question of public benefit in this case with some earlier authorities. On the current trend of authority the issue of public benefit was best dealt with by asking "is the trust substantially altruistic in character?" In the evidence the aspect of concern for individual children was of great significance. The primary object was to ensure that the education of the children attending the schools was not disrupted by the personal tragedy of the loss of a parent. If the primary object is charitable it is not defeated by a secondary object which might not come into that category. The fact that the parents and the school may also gain an advantage from the trust was secondary and even although that may smack of a business relationship, it would not be sufficient to deprive the primary purpose of its charitable nature. The scheme was therefore charitable and the income in question was derived for charitable purposes.
Held: The ejusdem generis rule is not to be applied in construing s 33(3) of the Income Tax Assessment Act 1957. Under s 33 when an employer makes a tax deduction from the wages of an employee he shall have the amount so deducted in his possession and under his control until it is paid to the Commissioner of Inland Revenue. The fact that the employer is unable to obtain payment of debts due to him is not a "cause beyond his control" within the meaning of the proviso to s 33(3).
Ever since the PAYE system had been introduced the Commissioner had accepted that the salespersons' commissions were not subject to PAYE. However a change in policy resulted in the Commissioner deciding that PAYE deductions should be made from the commissions. In the High Court the taxpayers argued that the salespersons were not employees but independent contractors. As such their commissions were not subject to PAYE deductions. It was argued that the provisions of the Income Tax Act 1976 and the Withholding Payments Regulations 1979 were circular in effect as "salary and wages" were defined in the Act to include commissions but did not include "withholding payments". The Regulations included commission as a "withholding payment" but did not include "salary and wages" as a "withholding payment". The taxpayers argued that this was meaningless and the ambiguity ought to be interpreted in their favour.
The taxpayers also argued that the Commissioner was estopped from changing his policy to require PAYE deductions to be made from the salespersons' commissions; that the Regulations were ultra vires; and that because there had been amendments to the legislation over the time when the Commissioner's policy of not deducting PAYE from salespersons' commissions had been in force, the legislature could be taken to have intended that PAYE should not be deducted from salespersons' commissions. The Commissioner argued that the case must be decided on the basis of whether the salespersons were employees or independent contractors and that the salespersons were employees.
Held:
Per Holland J in the High Court:
A commission may be paid to both employees and independent contractors. Only commission payments not made to an employee were to be considered as withholding payments. Factors pointing to the existence of an employee relationship were that a salesperson could work for only one licensed agent and that the contracts belonged to the licensed agent. If a contract between the licensed agent and the salesperson was terminated the salesperson would have no business at all. Any deposit received by a salesperson was immediately passed on to the licensed agent. There were systems for the allocation of properties for sale to the salespersons and general briefing of the salespersons and the general provisions of the Real Estate Agents Act 1976.
Factors indicating an independent contractual relationship were: the salespersons working their own hours; the lack of provision for holiday pay, sick leave, superannuation and the like; the lack of control of the manner in which the salespersons worked; that salespersons had to provide their own cars and telephones and to some extent their own places of work; the absence of a trade union; that one salesperson employed their spouse; and that the expressed intention of the parties was that the salespersons were independent contractors.
The former factors outweighed the latter. In each case the salesperson was an employee and the commission paid was salary and wages in respect of or in relation to the employment of the salesperson.
There was nothing in the law of estoppel or related to it which could be relied on to assist the case of the taxpayers. Equity and administrative law could not be relied on to support the continuation of an illegality. It was for this reason that estoppel has been held not to be applicable to an assessment by the Commissioner where the Act confers no discretion.
On appeal to the Court of Appeal:
Whether the relationship between the parties to a contract is that of master and servant or otherwise is a conclusion of law dependent on the rights conferred and the duties imposed by the contract. If the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it. Here, the fact that Harcourts had a written agreement with each salesperson which recorded that the salesperson was in all respects an independent contractor, and the fact that Challenge and Simes held similar views as to the nature of their relationship with their salespersons were not conclusive, as the relationship was largely dictated by statute. The most important, and in most cases decisive, criterion for determining whether a person is an employee or independent contractor is the extent to which that person is under the direction and control of the other party to the contract with regard to the manner in which he/she performs the work under it.
Under s 54(1) of the Real Estate Agents Act 1976 the licensee must be in effective control of the principal place of business of the real estate agency, and under s 54(2) every branch office of a real estate agent must be under the effective control of a person who holds a certificate of approval as a branch manager. It is in the public interest that persons licensed or approved as fit and proper persons so to act, be able to exercise effective control by personal supervision and by working actively in the principal place of business, or branch office as the case may be. As the real estate business is conducted largely by salespersons it follows that the licensee or branch manager must have effective control over their activities, that control extending to the manner in which the salespersons perform their services. What remuneration the salespersons receive for their services and what expenses they bear in the performance of their services goes to the financial terms of their employment rather than the nature of that employment. In this case the salespersons were employed under contracts of service to work for a particular licensed real estate agent, being in a subordinate position under the control of that agent. Each salesperson was an integral part of a business and was not an independent contractor in business on their own account.
The definition of "salary and wages" in s 2 of the Income Tax Act includes "remuneration of any kind". Those words are intended to embrace all other forms of remuneration for services rendered by an employee, and so include commission paid as the sole method of an employee's remuneration. Real estate salespersons, because they receive commission as remuneration under a contract of service, are subject to PAYE tax deductions under the Act and not to withholding payments under the Income Tax (Withholding Payments) Regulations.
The case before the Court was not one for judicial review. There was a distinction between challenging the correctness of an assessment and impugning the legitimacy or validity of the process adopted in making a purported assessment. As these appeals were by way of case stated the question of law to be answered in each was simply whether the Commissioner had acted incorrectly in issuing the notice of deficient tax deductions in this particular case. The Commissioner cannot be estopped by past conduct from performing his statutory obligation to make assessments as and when he thinks proper. It is the Commissioner's present judgment as to the statutorily imposed liability for tax that counts. The correctness of that judgment and the Commissioner's view of the law and the facts which lead to the making of the assessment cannot be challenged outside the objection procedures. Here, the statutory objection procedure had been followed, and the Commissioner had not been found to have acted incorrectly.
Held: Section 9 of the Income Tax Act, in requiring a complete return of all assessable income derived by every taxpayer, extends to every person carrying on a business no matter whether or not an overall loss is claimed. Thus, a person carrying on a business, either in partnership or otherwise, must put in a s 3 return even if the business makes a loss. If the end result is a loss there is no income for that year upon which tax can be assessed and levied but a return of gross assessable income, as defined in s 2, and claimed deductions is nevertheless required to be furnished to the Commissioner so that a calculation of net assessable income under s 101 and succeeding sections can be made and finally the taxable income, if any, of the partnership determined.
Held: The offence of failing to furnish a tax return created by s 416(1)(a) is an absolute liability offence. This conclusion results from the combination of the provisions, analogous cases and the clear wording of the statute. The language used in the relevant sections of the Act confirms the imposition of absolute liability for this particular offence and only absolute liability will properly give effect to the purposes of the legislation.
The taxpayers challenged the assessments upon the grounds that inter alia they were statute barred by reason of the provisions of s 24 of the 1954 Act. Tompkins J upheld the taxpayers' objection to the assessments but the Court of Appeal quashed the orders made in the High Court and declared the Commissioner was not statute barred by reason of s 25 of the 1976 Act (the re-enactment of s 24 of the 1954 Act) from making the assessments.
The issue was whether the determinations by the Commissioner for the 1976 and 1977 years that no tax was payable by the taxpayers constituted assessments for the purposes of s 25(1). If they did the Commissioner accepted that the later assessments were out of time and therefore ineffective. If they did not the later assessments were not time barred. Counsel for the Commissioner adopted the reasoning of the Court of Appeal in arguing that an assessment only took place when the process of determining the income of a taxpayer threw up taxable income. If no figure of taxable income was produced by the process no assessment had taken place. Reliance was placed on ss 188(1), 38(2) and (3), and 21 of the Income Tax Act 1976 to support this contention.
Held: If the process of assessment had not taken place until some taxable income had been ascertained it meant that the Commissioner would not know until he had completed the whole exercise of examining the returns and relevant documents whether he had been making an assessment or not, even though he had in that process calculated the assessable income. If he had not been making an assessment it was difficult to see what he had been doing and what was the statutory warrant therefor. This contention would produce the curious result that a determination by the Commissioner that $5 tax was payable was an assessment which could not be increased after the period specified in s 25(1) of the Act had run, whereas a determination that there was no taxable income or that there was a loss could be revised at any time.
The arguments based on the terms of ss 188, 38 and 21 were unsound and were to be rejected. The terms of s 188(2) did not infer that a loss could not be the subject of assessment. In any event the terms of s 188 could not assist in the proper construction of ss 19 and 25. Section 38 of the Act did not contemplate that there could only be a year of assessment in relation to a taxpayer when he had a taxable income. There could still be a year of assessment although the relevant income year produced no income upon which tax was payable. Further, the final words of s 21 did not show that if a person had a nil tax liability no assessment ought to be made upon it. The expression "make assessments" in the context of s 19 meant the process by which the Commissioner carried out his statutory obligation to ascertain the amount on which tax was payable and the amount of tax. This process might show up a positive figure, a nil figure or a negative figure, but in each case an assessment had been made. There was nothing in the section or in the statutory scheme to justify a conclusion that the Commissioner only made an assessment where he determined that there was tax payable. Any other construction of the section would produce anomalies and illogicalities. Whichever of the three results the Commissioner arrived at he had made an assessment for the purpose of s 19 and hence s 25. It was noteworthy that s 25 used the words "assessed for income tax" rather than "to income tax".
The purpose of s 25(1) was to achieve finality and to enable the taxpayer and the Commissioner to close the books and dispose of their papers after the stipulated period. To accept the argument of counsel for the Commissioner and the reasoning of the Court of Appeal would mean that only where the taxpayer had been determined by the Commissioner as having assessable income would finality be achieved, whereas if the taxpayer was determined as having no assessable income or a loss able to be carried forward the Commissioner could reopen his determination at any time in the future. This result would be contrary to the spirit of s 25. Further, if the determinations by the Commissioner resulting in a nil payment of tax or in a loss did not amount to "assessments" the determination could only be challenged by a taxpayer in the ordinary Courts by judicial review or some other legal process. This would appear to defeat substantially the purpose of Part III of the Act headed "Objections to Assessments" which envisaged that such objections be dealt with by the Taxation Review Authority, a body particularly experienced in taxation matters. It was entirely logical that the legislature should have intended that all matters involving determinations by the Commissioner consequent upon receipt of a taxpayer's return as to tax payable or not payable should be dealt with by that body.
Held: The burden of proof was on the taxpayer not only to show that the Commissioner's assessment was wrong but also to show by how much it was wrong.
Held: The Commissioner is obliged to carry out his duty of assessing tax, and he cannot be estopped from exercising this statutory assessing power by any previous decision. When the Commissioner is issuing assessments he is exercising an administrative function. The doctrine of res judicata applies to a judicial decision and so is not applicable to the actions of the Commissioner. Section 35 is framed in such a way that the Commissioner's power of amendment is only lost in relation to income which has been determined by the Courts, and not to income which has already been determined by the Commissioner.
Held: Where an amended assessment is made in reliance on one section and is then objected to on that basis, the Commissioner is precluded by the scheme of the objection provisions from supporting his assessment under another provision. In this area there is no room for judicial discretion under s 32(11)(b) of the Act.
Held: Subsections (1) and (2) of s 22 of the Land and Income Tax Act 1954 must be read together to ascertain the intention of the legislature. Although the Commissioner has very wide powers under subs (1) to alter assessments, subs (2) ensures that any alteration under subs (1) has the effect either of imposing a fresh liability or of increasing an existing one. The words "fresh" and "existing" liability in ss 22 and 29 refer only to amounts which a taxpayer is called upon to pay as tax on sums assessed as his income. They cannot be extended to include liability under a section of the Act different from that under which the original assessment was made and to which objection was taken followed by a request for a case to be stated. Where the CIR has issued an assessment grounded on particular sections of the Act, accepted an objection relating to the assessment under those sections and received a request for a case to be stated on the disallowance of that objection, he cannot lawfully issue an amended assessment under s 22 of the Land and Income Tax Act 1954 grounded on additional sections of the Act disclosing the same amount of income and a demand for the same amount of tax. The case should proceed for hearing having regard only to the sections on which the original assessment was based.
I shall now state the reasons which have led me to this conclusion. The section is a penal section; and, moreover, one whose application could react most harshly and unfairly if it were applied without care. It is worded so as to give to the Commissioner the widest discretion in its application. ... It does not seem to me that the omission to return the income must be fraudulent or deliberate, or even that the source of income omitted must be one presently in the mind of the taxpayer; if he inadvertently omits mention of it, however small, it seems that on the form of the statute he is liable to the penalty. Where a revenue statute contains a provision which may have so harsh an effect, the Courts, in cases where no fraud or wilful evasion is demonstrated will, I think, not be astute to enforce the provision if the application de minimis appears fairly applicable. It has been held that the maxim is applicable for such a purpose in revenue cases. In The Reward (1818) 2 Dods 265; 165 ER 1482 Sir William Scott said (of a provision in a revenue statute): `The Court is not bound to a strictness at once harsh and pedantic in the application of statutes. The law permits the qualification implied in the ancient maxim de minimis non curat lex. Where there are irregularities of very slight consequence it does not intend that the infliction of penalties should be inflexibly severe'".
Held: The Court had no power to make an order for review because the respondent did not exercise a statutory power within the meaning of s 4 of the Judicature Amendment Act 1972. In the determination of residence s 241 of the Income Tax Act 1976 is exhaustive in its definition whether applied to a person or a company. The essence of the "home" criterion as used in s 241(1) is the centre of gravity for the time being of the life of the person concerned. It will usually be where a person's spouse and children reside. If a person has no such family, or is separated, divorced or single, then the place where the normal course of a person's life occurs will apply, ie, the centre of interests and affairs. Though "home" needs some degree of permanency, it does not connote "permanent home" in the sense of making it similar to the concept of "domicile". The distinction should also be drawn between the place that has become the centre of gravity and that which is merely used for some ephemeral or transient purpose. "Home" under s 241 should not be regarded as synonymous with the ownership of any interest in a house or property. It should be construed qualitatively.
The Revenue is not by the Act expressly confined to the ground of assessment as the objector is to his grounds of objection. But I think the reason is that the scheme of the Act necessarily involves that limitation. And if it be suggested that the Commissioner has a statutory duty to collect revenue properly payable under whatever section liability exists then it may be said that the Act in Part VII is dealing only with objections and the Revenue have, subject to time limits, powers to amend assessments."
The effect of these transactions was that instead of owning the farm the taxpayer was now paying a rent for it, part of which in effect provided income for the family trust in the manner of mortgage interest. The trust was entitled after less than five years to the $40,318 capital; and the taxpayer was owed free of interest the money that had on paper been used to buy the farm from him.
The taxpayer was assessed to tax on the mortgage interest paid by the company to the trustees as being the settlor of a short-term settlement. The Commissioner submitted the transfer by the taxpayer of a fund of $40,318 to the trust constituted a settlement of that property within the meaning of s 105; that by the terms of that settlement the income of the settled property (the fund) was to be applied for the beneficiaries under the trust for a period less than the prescribed period (because repayment of the taxpayer's loan might be required within seven years); and either that the settlement provides that the corpus shall revert to the settlor (because of the trust's obligation to repay) or by virtue of the whole scheme on which the taxpayer had embarked he had reserved the right to dispose or direct or control the disposition of the corpus.
Held: The sole issue for determination was whether there was a settlement within the meaning of the section. Transfer by means of a cheque of the right to a sum of money can constitute a disposition or transfer of assets and therefore a settlement. However, in this case it was not by the terms of the transfer or disposition that income was to be applied for the benefit of persons other than the taxpayer. It was unnecessary to decide whether a settlement resulted from the transfer as the same difficulties did not attend the word "arrangement".
"Arrangement" describes something less than a binding contract; it comprehends both an understanding or plan between two or more persons and also the transactions by which the plan was carried into effect: Newton v Commissioner of Taxation [1958] 2 All ER 759 at 763.
This appeal was on fact and law. As a fact the whole series of transactions took place in pursuance of an integrated plan adopted by the taxpayer on professional advice. The unsecured, interest-free loan to the trust, repayable on demand, was made on the understanding that the trustees would lend an equivalent amount to the company for a fixed term at interest and on the security of a mortgage. This was a term of the arrangement and it was enough that the disposition was intended by the taxpayer to be carried out as part of his scheme and that it was in fact carried out. It was a question of mixed fact and law whether the mortgage interest was income of the settled sum. Realism demanded that this was so where in accordance with the taxpayer's scheme the trustees lent the precise amount received from him and had no other substantial resources.
The taxpayer had, therefore, made an arrangement constituting a statutory settlement of a fund of $40,318 by the terms of which income derived from investing that fund was to be applied for the benefit of the trust beneficiaries. It being agreed that such settlement was for less than the prescribed period, the taxpayer was liable to tax on the amounts of the mortgage interest resulting from the settlement.
Held: The expenditure on fertiliser and weed control could have been deducted under s 111 and therefore s 119E did not assist the Commissioner. The transaction between the taxpayer and the subsidiary was not a sale and consequently was not caught by s 119E. Section 33(10) of the Income Tax Act 1976 imports into the conduct of the proceedings s 36 of the Inland Revenue Department Act 1974, which provides that on the hearing and determination of any objection, "the objector shall be limited to the grounds stated in his objection". If the Commissioner were allowed to change his ground at the hearing and adopt one on which the objection had not been based, an objector would be unfairly treated because he would be limited in his argument to the original ground. The Commissioner was not entitled at the hearing to rely on the provisions of s 91(1D).
Held: The taxpayer suffered a loss of capital and, even if it could be said that he was carrying on a business or carrying on or carrying out a profit-making scheme, his losses would not be deductible under s 111 of the Land and Income Tax Act 1954 because, the losses being of a capital nature, s 112(1)(a) prevented their deduction. The lack of any genuine transactions prevented the operation of s 88(1)(c) and (g). The grounds stated in the objection permitted the taxpayer to rely upon s 129CF. Although the objection did not raise s 129CF as one of the grounds it did refer to "capital losses or outgoings the deduction of which is (not) permitted" and also it referred to a previous letter by the taxpayer which in turn referred to s 164(2) of the Income Tax Act 1976, which section contains the same provision as s 129CF of the 1954 Act. Nevertheless, no deduction was allowable under s 129CF as the payments by the taxpayer to his agent did not get as far as commencing a business. There was not a sufficient number, continuity, pattern or coherence to the transactions for them to be considered an undertaking and hence a business.
Held: The categorisation of the payments under consideration depended upon a pragmatic assessment of the nature of the payment, as well as the purpose and intention of the recipient. The payments made to Messrs Capel concerning the Frankton and Huntly businesses were motivated by a concern to ensure that the person taking over the business had a direct financial interest in it, which suggested the disposition of a capital asset rather than an endeavour to obtain income. The payments could be seen as a one-off transaction, not related to the later intention to set up a series of businesses. The provision for payment of future sums in respect of goodwill was insufficient in itself to establish that the payments were contemplated as returns from a business. The payments were thus not caught by s 88(1)(a).
The payment made in respect of the Hamilton premises by the wives was very much a special transaction on the facts. It fell outside any possible pattern which may have been established and could not be brought within s 88(1)(a).
Payments made to Messrs Capel concerning the Frankton and Huntly businesses were not caught by s 88(1)(d) because the goodwill related to the business itself rather than the premises. While the businesses could not be operated without premises it was apparent from the evidence that the success of the business was dependent not upon the premises or their situation but upon the nature of the business itself and it was this to which the real goodwill related. The site was irrelevant as people patronised the business because of the type of product and the service associated with it.
Payments made to Messrs Capel concerning the Hamilton business and lease were caught by s 88(1)(d) because the real value of the goodwill was inseparable from the premises.
The goodwill was paid because such goodwill related directly to the situation of the business in Victoria Street.
Payments made to Melco were caught by s 88(1)(a). Melco's stated concern was to ensure security of outlet. That could have been secured without the reservation of a proportion of the goodwill being made payable on any transfer subject to Melco's approval.
The establishment of a pattern of activity may have a bearing on the categorisation of payment which might otherwise not be assessable. By the time of the Melco transactions a pattern of activity had emerged and Melco was in fact achieving the payment of an income in relation to the disposition of businesses in the operation of which it had some interest. Melco was using its position and involvement to secure payments arising out of the various transactions contemplated. The legal arrangements involved as well as the number of payments established a pattern which categorised the payments as income for the purpose of s 88(1)(a). The Commissioner was not able to rely on s 88(1)(e) as he had not raised it prior to the hearing and it was too late to raise it during the hearing.
The application for a specified departure was refused. The objectors took advice on and considered an appeal. Alternative proposals for conversion of the property were also considered. After the local council adopted a revised district scheme, which confirmed the residential zoning of the property, the partners decided to abandon their proposals and the property was sold.
During the period of their ownership the units had been leased to tenants. The property had been mortgaged and the partnership suffered losses on the leasing of the property. The objector sought to deduct his share of the losses against his other income. The Commissioner disallowed the claim contending that the losses were not incurred in carrying on a business for the purposes of gaining or producing assessable income. Furthermore, if the losses were deductible the expenditure in question was incurred for the dual purpose of gaining or producing assessable income and holding the property for capital purposes. An apportionment would therefore be required.
The objection led to this case stated. At the hearing the objector also sought to argue that the Commissioner was required to satisfy a threshold onus of proof that the Commissioner's actions had not been arbitrary.
Held: The purchase of the property was a business venture. The property was purchased by a partnership. The very essence of a partnership was the relationship which existed between persons carrying on a business in common with the intention to profit. Even if the partnership and the company were regarded as one there was still an intention to profit from the letting of the surplus premises - that was also a business venture. There was no justification for arguing that the venture was not a business simply because it failed. The expenditure was accordingly deductible in full.
The limitation to the grounds of objection in s 36 of the Income Tax Act 1976 was imperative and could not be waived by the Commissioner or the Court. It could not be said that a "threshold argument" was not truly an objection, but was instead an issue which arose before the objections were said to be considered. Although the term threshold onus had been used in Lowe v CIR (1981) 4 TRNZ 233 it seemed clear that the issue was seen as one coming within the general onus imposed in objection cases. It was therefore not open to the objector to assert that the Commissioner had failed to satisfy the threshold onus.
Subsequently $3,242.78 was paid into the joint bank account of Mr and Mrs Simpson from whence it was used to pay general household expenses and specific items referable to each child. The Commissioner initially assessed the income of the trust as trustees' income under s 228(1) of the Income Tax Act 1976. He later cancelled that assessment and assessed Mr and Mrs Simpson as beneficiaries under the trust who received the benefit of the income. The Simpsons objected to the assessment on the grounds that the moneys were not paid to them as beneficiaries of the trust but as parents of the actual beneficiaries (their children) and that the appropriation of income had been affected by a valid resolution of the trustees. On a case stated to the High Court the Judge held that the income was income of the infant beneficiaries, as "beneficiaries entitled in possession" within s 227(1) of the Income Tax Act 1976. The Commissioner appealed. He argued first that Mr Simpson received the income, applied it for his own benefit and so derived assessable income; and second that as Mr Simpson was himself an object of the discretionary trust's income he must be taken to have received the payments beneficially.
Held: It was not open to the Commissioner to advance in the Court an entirely new basis of assessment namely that the moneys were income of Mr and Mrs Simpson according to ordinary concepts, when that ground was not relied upon in making the assessment or in disallowing the objection. The income was assessable as beneficiaries income of Mr Simpson if and only if Mr Simpson was entitled, or deemed to have been entitled, in possession to receipt thereof under the trust during that income year. It was however conceded by the Commissioner that as a result of the trustees' resolution the infant beneficiaries acquired an absolute and indefeasibly vested interest in the income for the year.
The only possible conclusion was that, when the trustees paid those moneys to the parents, the parents received those sums in a fiduciary capacity and not in their own right as beneficiaries under the trust. To adopt the Commissioner's approach would involve disregarding what the trustees actually did and attributing to them discretionary decisions which they never took. The Commissioner was therefore incorrect in assessing the taxpayer on the basis that he derived income as a beneficiary of the trust during the income year in question.
Different considerations would have been applied if the issue had been whether the payment should be assessed as trustee's income under s 228 or beneficiary's income under s 227. To come within s 227(1) a beneficiary must be entitled in possession to the receipt of income under the trust during the same income year in which the income is derived by the trustee. That entitlement may arise either by virtue of the provisions of the Trust Deed itself, or by virtue of the exercise of a discretion by the trustee. The income must be absolutely vested in the beneficiary, who must be entitled to have the income paid to him or her.
An appropriation of income by a trustee in favour of an infant beneficiary is therefore only the first step. At that point the trustee holds the moneys appropriated in trust for the infant. Under the law of trusts the trustee may also have a discretion under the particular provisions of the trust exercisable in appropriate circumstances to pay to an infant and accept a discharge from an infant (Re Baron Vestey's Settlement [1951] 1 Ch 209; Re Somech [1957] 1 Ch 165).
But tax law does not always march in step with the law of trusts. The statutory history of the relationship between s 227(1) and (4) points to the conclusion that but for the proviso and subs (4) of s 227, and except for the trusts to which subs (4) applies, infant beneficiaries are incapable of becoming entitled in possession to receipt of income from the trust.
The provisions of a trust deed cannot confer on an infant beneficiary an entitlement to sue and so to become entitled in possession to receipt of income for tax purposes. Further, because s 227(1) proceeds on the premise that the entitlement is that of the beneficiary it is no answer that the provisions of the trust may entitle a third party to demand payment from the trustees and give a discharge on behalf of the infant beneficiary.
With respect to the alternative argument, that the income in question came within the provisions of s 227(3), the trustees would have been in some difficulty in discharging the onus on them. Section 227(3) applies where the trustee is empowered to pay or apply income to or for the benefit of specified beneficiaries and the subsection goes on to require the trustee to pay or apply the income "in ... favour" of the specified beneficiaries "by a bona fide transaction ...". As it is a fiduciary power it can be exercised only if it is for the benefit of the children to do so. The expression "bona fide" has the same meaning accorded it in an estate duty context by Lord Macnaghten in Attorney General v Richmond [1909] AC 466, 472 of "not contentious or colourable, but real and genuine to all intents and purposes". On the material in the present case it would be a matter for careful consideration whether those tests were satisfied.
Because of the deeming provisions in s 27 of the Act, when the Commissioner made the assessment now complained of, as there was no formal objection in terms of the Act those assessments were conclusive. In the absence of a formal objection there nevertheless remains the general power of the Commissioner to review assessments on his own initiative under s 23(1). There is also a specific recognition of late objections under s 30(2) of the Act. Although the Commissioner undoubtedly had the power to amend the assessments made either under the general power in s 23(1) or by treating amended returns as late objections within his power under s 30(2) he declined to do so.
It was contended that the department's policy was not to amend assessments in the circumstance where a ruling which has previously been applied is different from that of the Taxation Board of Review or the High Court in order to ensure "Olympian" impartiality and to avoid injustice to other taxpayers. This policy applied unless there was a "live" objection. The applicants argued that the Commissioner had abused his powers and thereby acted ultra vires by inducing the applicants to become out of time in claiming incentives to which the law entitled them; also, that there was a legitimate expectation flowing from the special facts of this case that the discretion to re-assess would be exercised in their favour; that the applicants were subject to inconsistent treatment by the Commissioner with respect to the prior exercise of his discretion; and finally, by refusing in all cases to give retrospective effect to judicial decisions which show that prior assessments were based on an erroneous view of the law, the Commisioner had unlawfully fettered his discretion.
Held (referring the matter back to the Commissioner for reconsideration): Despite the words of s 27 of the Act, it was clear that the discretions vested in the Commissioner under ss 23(1) and 30(2) were reviewable by the Court. The discretions under s 23(1) and 30(2) required the Commissioner to weigh the particular circumstances which existed, including, inter alia, that the plaintiffs had consistently asserted that they were entitled to the export incentive in question and had only failed to claim the same or acquiesced in its deletion because of the Commissioner's insistence that it was not available to them; the plaintiffs had been objectors in fact if not in law in the Te Awamutu case; there were no practical or administrative difficulties inherent in considering this situation; and to grant relief in this case would not violate the integrity of the Commissioner's responsibility to be even-handed in the operation of his function. The circumstances of the applicants had, in reality, not been addressed and the Commissioner had abused his powers by refusing to consider the specific circumstances of this case.
The Commissioner's case was that assessments would not be reopened out of time following a change in the perception of the law unless there was a live objection or there were exceptional circumstances. However, what was described by the department as the "live issue" exception was in fact no exception at all. The very framework of the Act required the Commissioner to reconsider a live objection and it could not be said he is making an exception to a standard when he does what the law requires him to do. The evidence did not disclose any occasion where exceptional circumstances had been found and this appeared to be only a theoretical possibility without practical application. In reality the Commissioner had adopted an inflexible policy in which there was no reasoning but merely a "knee jerk" application of an absolute rule. In failing to discharge a statutory responsibility an abuse had arisen and the matter should be referred back to the Commissioner for reconsideration.
While there was a growing head of review involving substantive unfairness there was no unfairness equivalent to a breach of contract or a breach of representation on the evidence in this case. In endeavouring to assist and advise taxpayers the Commissioner is fulfilling a mission and public function and does not take on some duty which leads to actionable responsibility when, notwithstanding the advice, the taxpayer could always have exercised the option of taking objection proceedings. Similarly, on the evidence nothing in the Commissioner's behaviour could reasonably give rise to a legitimate expectation on the part of the applicants that the discretions vested in the Commissioner would be exercised in their favour. There was no evidence of inconsistent treatment by the Commissioner of cases identical to their own giving rise to unfairness amounting to an abuse of power.
Held: Financial loss caused by the failure of the machinery to produce an expected quantity of goods for sale is a loss of assessable income and damages recovered from the supplier of the machinery as compensation is also assessable income. The costs of an unsuccessful claim for damages in respect of such a loss are therefore deductible pursuant to s 111(1) of the Land and Income Tax Act 1954. Because, however the unsuccessful claim for damages included both items of damage which would be assessable income if recovered, and items which would not be assessable income if recovered, the costs of proving allegations common to both claims were not "exclusively incurred in the production of assessable income" and consequently had to be excluded altogether. With regard to apportionment of expenditure between assessable and non-assessable items and the onus on the taxpayer to show not only that the Commissioner's assessment was wrong but also by how much it was wrong (Commissioner of Taxes v McCoard [1952] NZLR 263) it was not correct that the appellant needed to show precisely how much of the costs related exclusively to the income claim and that there was no evidence upon which the Court could arrive at that figure. Courts are frequently called upon to arrive at a figure for the living expenses of a taxpayer on very imprecise information and do not hesitate to do so. The final pleadings in the appellant's action were put in at this hearing by consent, along with a copy of the judgment. Consequently the principle in McCoard's case was satisfied. The Court was able from the materials before it to arrive at a reasonable estimate in a case where in the nature of things, absolute precision could not be expected.
Held: The onus was on the appellant to show by how much the Commissioner's assessment was wrong. Where the exact amount cannot be proven, however, the appellant must show on the balance of probabilities that his estimate was to be preferred to that of the Commissioner. The Court was not prepared to disturb the findings of fact of the Taxation Review Authority. It was a matter of credibility and the appellant had failed to satisfy the Authority on a balance of probabilities that his estimate of living expenses was an acceptable figure.
The reason for this statutory onus is obvious enough. The Commissioner could not sensibly be expected to bear the onus of proof of matters which originate with the taxpayer and which usually are peculiarly within his knowledge and power. Thus, there was sound if not compelling practical reasons why the legislation requires him to provide satisfactory evidence to support his calculation of his assessable income."
Held: As the substantive hearing had been adjourned there had been no determination that could be subject to appeal in terms of s 43 of the Inland Revenue Department Act 1974.
Two issues arose for the Court's determination. First, whether the time limit prescribed by s 43(6) was mandatory, and secondly, whether the Commissioner possessed the power of waiver in such circumstances. The appellant argued that the filing of a case on appeal is a procedural matter in relation to proceedings which have already been set in train; that in the statutory context the requirement of s 43(6) is directory; and that transmission of the case to the Registrar 34 days after its receipt from the Authority is sufficient compliance where the delay is inadvertent. Secondly, non-compliance with the 14-day requirement could be and was waived by the Commissioner.
Held: The statute was unambiguous as to the time requirement. The issue was whether the legislature intended that language which is obligatory in form should have the effect of invalidating the non-complying act, or whether the act should nevertheless have legal effect. The answer turned on an analysis of the language, scheme and purpose of the statute. An analysis of the scheme of the Inland Revenue Acts in relation to time limits and extensions thereof led to the conclusion that where the legislation intended the Commissioner to be able to grant an extension of time this was specified.
Secondly, prior authority that had held the time limit imposed by the predecessor of s 43(6) to be mandatory was indistinguishable in principle from the facts in this case. Those decisions had stood for over 20 years and related to procedural matters, not substantive tax law. Further, the provisions relating to time limits had been left unchanged when the Act was amended and consolidated in 1974.
In ordinary litigation a party is not bound to take a time point, however in the tax field the weight of authority was in favour of the Crown being bound. There was a public interest element in compliance with the time requirement. By waiving the time limit the Commissioner would be putting the Crown into jeopardy once more, which the Court would not permit. Accordingly, the Commissioner has no power to waive the statutory time limit.
Held: An appeal is deemed to be brought when a notice of motion is served on the various parties concerned and a duplicate has been lodged in the Court appealed from. There is a wide discretion in the Court to extend time or excuse inadvertence where the justice of the case should require it.
In Thompson v Turbott [1963] NZLR 72, Turner J refers to the exercise of the discretion to enlarge time which is given the Court by rule 27 of the Code of Civil Procedure in terms of two different types of cases. The first of them is the situation where there has been an omission due to mistake, inadvertence, sickness, or some reasonable cause of that kind. The second situation is where there has been a definite decision by a party not to appeal but by reason of some unanticipated happening subsequently that decision has been changed. This case fell into a third category, that is to say, the kind of case where really it was not possible to find any justification or excuse for the delays and the failures that occurred.
The motion to have the appeal abandoned must be accepted. First, there was a failure to serve the notice of motion until years after the time had gone by and in the face of constant reminders by the respondent that they were hoping to have the appeal actually heard and dealt with. Secondly, there was an unusually long delay which had elapsed after the sealing of judgment, a period of six and a half years after the judgment itself was actually delivered. And thirdly, no formal application to excuse the delay or have the time extended was made until the day of this hearing and the appellant has been unable to support the application by reference to any mitigating fact.
Held: The objector was detailing complaints against the effect of existing tax law. Such grounds were incapable of any serious bona fide argument. There were no questions of construction or application of tax law raised. The objection was dismissed on the grounds that it was both frivolous and vexatious.
The Commissioner had assessed penal tax for each of the years in question and Mr Gregoriadis objected. The Commissioner stated a case and Mr Gregoriadis filed a motion for an order striking out the case stated on the basis that penal tax was not payable because of his acquittal on the false return charges. Quilliam J dismissed the motion. The argument before Quilliam J was that the assessment of penal tax was the imposition of a penalty and was to be regarded as a criminal matter so that an acquittal on charges brought under s 228 of the Land and Income Tax Act 1954 was available on a plea of autrefois acquit to bar such an assessment. Following a detailed review of the scheme and language of the relevant statutory provisions Quilliam J concluded that penal tax was not a matter of criminal liability and the plea of autrefois acquit accordingly failed. Mr Gregoriadis appealed against that decision in 1980.
The matter was called in the Court of Appeal in 1984 however it became apparent that if the appeal against dismissal of the motion to strike out the case stated succeeded the assessment of penal tax would remain and could not be challenged. Mr Gregoriadis returned to the High Court where the issue between the parties was whether, in view of the acquittal on the prosecutions, Mr Gregoriadis was chargeable with the penal tax assessed against him. In March 1985 Quilliam J held he was so chargeable. Mr Gregoriadis appealed against that decision on the basis that the matter was res judicata and, alternatively, that for the Commissioner to act in that way would be an abuse of the process of the Court.
Held: The essential ingredients of estoppel per rem judicatam were well settled. Where a final judicial decision has been pronounced by a Court of competent jurisdiction any party to the litigation is estopped in any subsequent litigation as against any other party to the earlier proceedings from disputing or questioning the first decision on the merits. In order to found an estoppel per rem judicatam there must be (i) identity of parties; (ii) identity of subject-matter; and (iii) sufficient co-extensiveness of the standard of proof.
To determine whether there is identity of subject-matter requires first a careful examination as to what was decided when the appellant was acquitted on the informations charging him that he did wilfully make a false return in respect of a particular year. Ordinarily an acquittal ascertains no fact (in contradistinction to a conviction) in as much as an acquittal establishes no more than that some ingredient necessary to constitute the offence was not proved. In this case it was otherwise, since following a conviction there was an examination by the Court as to whether the conviction was warranted. It was held not to be warranted because of the absence of proper evidence of basic figures upon which the prosecution was founded. Estoppel extends to any matter, whether an assumption or an admission, which was in substance part of the ratio of and fundamental to the decision. There was therefore a judicial determination not limited to a mere acquittal of the appellant but including a matter which it was necessary to decide as the groundwork of the decision itself. In order to give rise to an estoppel per rem judicatam there is the requirement that this same point should be the basis of the action.
The critical fact which it was necessary to decide, and which was actually decided as the groundwork of the decision on the prosecution, was whether the returns were false. The Commissioner failed on that issue and, subject to consideration of the standard of proof and the scheme of the Land and Income Tax Act, the Commissioner was precluded in these penal tax proceedings from tendering evidence to the contrary. In principle there was no justification for denying the doctrine of estoppel per rem judicatam where the standard of proof in later proceedings closely approximates that in the earlier proceedings. In civil proceedings grounded on fraud, as here, the standard of proof so closely approximates the standard of proof required in criminal cases that there was no sufficient reason for not raising the prior verdict as a bar in the subsequent civil proceedings.
Where a statute imposes a duty or confers powers the doctrine of estoppel cannot prevent the carrying out of a duty or the exercise of statutory powers. See CIR v Lemmington Holdings Ltd (1982) 5 TRNZ 776; Reckitt & Coleman (NZ) Ltd v Taxation Board of Review [1966] NZLR 1032; and Europa Oil (NZ) Ltd v CIR [1970] NZLR 321. But as invoked by the appellant, the doctrine did not impinge in any way on the exercise by the Commissioner of his special powers and duties under the Act. The appellant did not challenge the exercise of the power to make assessments. What he argued was that for the Commissioner to attempt to introduce evidence designed to establish that the returns were false is to challenge the finding against him in the prosecution proceedings. The doctrine of estoppel per rem judicatam applying it was not necessary to decide whether it would be an abuse of the process of the Court for the Commissioner in the face of the acquittal proceedings to tender evidence as to the falsity of the returns.
Per Somers J: Normally in a civil case the fact of an acquittal on an earlier criminal charge would exclude the possibility of estoppel or of any claim to abuse of process for it could not be predicated that one not found guilty beyond reasonable doubt might not be found civilly liable on a balance of probability. The different standard of proof would destroy the identity of issue. Here, however, the onus was on the Crown in the (civil) objection proceedings and the matter to be established by the Crown was precisely the same and, having regard to its criminal character, would have to be established to a standard of proof sufficiently proximate to the criminal persuasion to render the technical differences not material. Also, unusually in a criminal case, the issues decided were able to be isolated. And, as was evident, the criminal and civil cases were between the same parties. It would therefore not be right to permit the Commissioner to seek to establish in High Court proceedings that the appellant wilfully made false returns of income when another Court has already finally determined that issue against him. Whether that conclusion should be described as issue estoppel or the application of public policy in respect of an abuse of process may not be important.
In the High Court the taxpayer's contentions that (1) the rules relating to discovery in Part II of the Code of Civil Procedure were incorporated into the case stated proceedings by s 33(10) of the Income Tax Act 1976, and that (2) the Court had an inherent jurisdiction to order discovery, were rejected and his application was dismissed.
Sinclair J held that Australian decisions recognising jurisdiction were distinguishable because in the rules of the High Court of Australia there is an express provision that the ordinary rules apply to tax appeals. In New Zealand, s 33(10) of the Income Tax Act 1976 provides that, subject to certain provisions of the Inland Revenue Department Act 1974, the procedure at the hearing before the Supreme Court shall be as if in an action. This did therefore not apply to procedure before the hearing, consequently Rule 161 of the Code of Civil Procedure, which relates to discovery, was not incorporated. The right to discovery in civil proceedings against the Crown conferred by s 27 of the Crown Proceedings Act 1950 did not apply, because the Commissioner was not the Crown. Finally, any inherent jurisdiction of the Court to order discovery was excluded by the secrecy requirements of s 13 of the Inland Revenue Department Act 1974.
The taxpayer appealed to the Court of Appeal. The parties asked the Court to decide only the broad question of principle whether, in case stated proceedings, the High Court has jurisdiction to order the Commissioner to make discovery of documents.
Held (allowing the appeal): Neither s 33(10) of the Income Tax Act 1976 nor s 13 of the Inland Revenue Department Act 1974 had a significant bearing on the question of whether the High Court has jurisdiction to order the Commissioner to make the discovery of documents in case stated proceedings. Section 33(10) deals only with the procedure at the hearing, and the preceding subsections, although a code as far as they go, contain nothing inconsistent with jurisdiction to order discovery. As regards s 13, the secrecy provisions are subject to an express exception "except for the purpose of carrying into effect" certain Acts, including the Inland Revenue Acts. The case stated procedure is part of the machinery for carrying those Acts into effect. If that procedure imports jurisdiction to order discovery, s 13 cannot exclude it.
Section 27(1)(b) of the Crown Proceedings Act gives the Court power to require the Crown to make discovery in any civil proceedings to which the Crown is a party, if a person of full age and capacity could be required to do so, and the High Court has inherent jurisdiction, fortified by s 16 of the Judicature Act 1908, to order a person of full age and capacity to make discovery in civil proceedings to which he is a party. The power so to order under s 27 of the Crown Proceedings Act is without prejudice to public interest privilege. It is also "subject to and in accordance with rules of Court". The definition of "civil proceedings" under the Act is wide enough to include a case stated in a tax matter. The Commissioner is an officer of the Crown charged by statute with the function of collecting income tax for and on behalf of the Crown. The statute recognises that income tax is recovered as a debt to the Crown and that the Commissioner is no more than the statutory agent of the Crown appointed to collect it. Disputes about income tax are in truth disputes between the taxpayer and the Crown. That proceedings are commenced by or against the Commissioner is a matter of form and not substance. For these reasons s 27 of the Crown Proceedings Act gives the Court a discretionary jurisdiction to make an order directing the Commissioner to make discovery of documents within his possession which relate to any matter connected with the case stated. But it is a discretionary jurisdiction and successful applications for discovery against the Commissioner will require cogent grounds and are likely to be justified in unusual cases only. In many cases, if further information is legitimately required from the Commissioner, the supply of particulars should be enough.
An order was sought by the applicants under Rules 307 and 312 that certain documents, which had come into existence for the purpose of completing the final investigation and assessment of the taxpayer's tax liability, and which were claimed by the respondent to be privileged, should be produced for inspection. The Master ordered the production of some of the documents requested by the applicants but ruled that other documents should not be produced, production not being necessary to determine the issues. The applicants sought review of the Master's decision.
The respondent argued that if such documents were produced (i) the flow of information within the department may be impeded; (ii) the discharge of the burden of proof on the taxpayer may be made easier; and (iii) confidential investigatory procedures may be revealed.
Held (allowing the application): In considering a claim for public interest immunity the Court had to balance competing aspects of the public interest, namely the preservation against disclosure of documents in the interests of a better administration of a Department of State against a broader public interest of the administration of justice. An affidavit claiming Crown privilege should state with precision the grounds on which it is contended that documents or information should not be disclosed so as to enable the Court to evaluate the competing interests.
Public interest immunity is divided into class immunity, where the documents are automatically privileged because of the class to which they belong, and contents immunity, which requires that the public interest be served by withholding the information contained in a particular document. The documents in question ought not be privileged as a class.
There was little merit in arguing that they could make the discharge of the onus of proof on the taxpayer in objection proceedings easier. The whole thrust of the new High Court Rules adopted in 1986 was to require parties to civil litigation to reveal their positions as much as possible. There was no evidence that discovery and production of internal communications would impede the department's flow of information. Further, in tax objections the department has built-in procedural advantages. It is clear law that documents discovered in a proceeding should not be used for any collateral or ulterior purpose; and if the interests of justice require it the Court may restrict access to specified persons.
There was no detailed attempt in this case to highlight any particular document or its contents to justify a particular claim that they should not be produced. The documents contained no information from informants, no confidential communications from third parties, nor revealed any revolutionary technique of investigation. The public interest of not disclosing the documents was therefore outweighed by the public interest implicit in the due administration of justice which required from both sets of litigants a free flow of information and an absence of surprises and technical knock-outs.
The Court had power to require the Crown to produce documents for inspection under s 27(1) of the Crown Proceedings Act 1950 provided an applicant had satisfied the requirements of relevance of Rule 307 and of necessity under Rule 312. There could be no objection to production of any document in issue based on lack of relevance. The test for relevance is whether the documents may be relevant - not must be relevant. The documents were relevant. They were also necessary for a consideration of the respondent's claim as to whether the exercise of the statutory power of decision under s 17 of the Act was susceptible to the challenges made to it. The documents were to be produced to the applicants within 14 days, availability restricted to the applicants themselves and to their solicitors and counsel.
About the same time, the department was making inquiries in relation to Mr Knight's own taxation position, and on the 11 April formally advised Mr Knight that his and Mrs Knight's records and affairs were to be investigated for income tax purposes. That led to the issue on 21 December 1983 of notices under s 400 of the Income Tax Act 1976 directed to certain companies with which Mr Knight was associated and a trading bank, requiring the recipients to deduct from any amounts payable to Mr or Mrs Knight respectively $72,134 in relation to Mr Knight and $8535 for Mrs Knight. In each case the amount was described in the notices as being terminal taxes. Two days later those notices were withdrawn.
Subsequently the plaintiffs brought proceedings against the Commissioner, the District Commissioner at Auckland and other departmental officials alleging that departmental officers had engaged in a campaign of victimisation and harassment against them. Nine causes of action were pleaded including abuse of power, breach of statutory duties, trespass and interference with the enjoyment of land, nuisance and defamation. In the course of those proceedings the plaintiffs requested discovery of documents held by the IRD relating to the bugging operation, the internal inquiry into the bugging operation, and the police inquiry into the bugging operation. In response the Commissioner claimed privilege on the grounds of public immunity and under s 13(3) of the Inland Revenue Department Act 1974.
The matter first came before a Master who upheld the Commissioner's right to privilege on both grounds. The matter then came before Wylie J by way of review. Wylie J ruled that defending a claim for civil damages was not an act that could be classified as "carrying into effect" the Inland Revenue Acts, and upheld the Commissioner's claim that all the documents in issue were immune from disclosure under s 13(3).
The plaintiffs appealed to the Court of Appeal on the basis of the exception to the secrecy provisions of s 13(3); that discovery was necessary for the purpose of, inter alia, carrying into effect the Inland Revenue Acts. As the events had occurred some years ago it was no longer contended by the Commissioner that, apart from the effect of s 13, there were any grounds requiring the documents to be withheld in the public interest. The affairs of no taxpayers other than possibly the plaintiffs themselves were dealt with in the documents in issue.The essence of the argument for the Commissioner was that s 13 should be strictly and inexorably applied and had the effect of preventing an order for the inspection of the documents, no matter whether or not they would reveal confidential information about the taxation affairs of any taxpayers.
Held (allowing the appeal): The test to determine whether disclosure of material falls within the exception to s 13(3) of the IRD Act is to ask whether production of the book or document (as defined in s 2 of the Act), or disclosure of what has come to the officer's attention in the performance of official duties, is necessary for the purpose of carrying any of those Acts into effect. The carrying into effect of the Inland Revenue Acts must include their proper implementation or administration. When the Commissioner is properly a party to litigation, whether as a claimant or as a defendant, in the natural and ordinary use of language, the conduct of that litigation is activity in the carrying into effect or implementation or administration of the Acts. In such a case, and subject to any justified claim of public interest immunity, the Commissioner should comply with the ordinary obligations of a litigant to make discovery of relevant documents.
The plaintiffs were asking the Court to give effect to the Acts by determining that what occurred was outside the statutory powers. Settling the limits of the powers given by the Acts and giving redress for excess of the powers was one way of carrying the Acts into effect. Discovery and inspection of documents is an ordinary and necessary incident of such a proceeding. There was no justification either in the language of s 13(3) or in principle for the interpretation of s 13(3) advanced by the Commissioner that disclosure under the s 13(3) exception was limited to proceedings directed at collecting revenue. The Court was entitled to reject such an interpretation leading to absurd consequences if another interpretation was reasonably open.
Carrying into effect the Inland Revenue Acts therefore meant that the Commissioner was giving effect to the Acts by defending an action brought against him/her concerning their administration, and that the plaintiffs were asking the Court to give effect to the Acts by determining that what happened was not authorised by the Acts and should be the subject of compensation.
To give the statutory exception a workable and realistic interpretation it should be held to cover the communication, to persons legitimately interested, of information obtained as a result of official inquiries into the past administration of the Acts. The New Zealand Bill of Rights Act, which provided that the preferred interpretation in the case of ambiguity was that the Crown as a defendant in litigation should be in the same position as an individual, strengthened this conclusion.
The plaintiffs alleged inter alia that the defendants acted unlawfully and in excess of their powers conferred on them by the Act in carrying out the spot audit. A claim to privilege was also made on the grounds that the public interest required that certain documents be privileged against production.
Held: Compliance by officers of the Inland Revenue Department with orders of the Court concerning the furnishing of an amended verified list of documents does not infringe s 13 of the Inland Revenue Department Act. Applications for judicial review such as this involve the carrying of the Inland Revenue Acts into effect.
There is nothing in s 13 which suggests that it relates only to proceedings initiated by the department or to proceedings in which it is a party or to proceedings in which a litigant's personal, financial or taxation affairs are involved. Section 13 is generally phrased and is clearly intended to be of general application. Section 13(1) is clearly intended to apply whether or not any litigation is in progress. Section 13(3) is clearly intended to apply to all litigation, civil or criminal, and whether or not the Inland Revenue Department is involved as a party and whether or not any person's personal or financial or taxation affairs may be in issue.
Held: The learned District Court Judge was correct in his determination that s 21 is not a code for the production of documents in tax prosecution cases. It merely creates exceptions to the rules relating to documentary hearsay, and the Commissioner did not have to give notice of his intention to produce documents under subs (11). Such a requirement would be, on occasions, a substantial burden upon the Commissioner, one that would not apply to a defendant.
The true meaning of s 108 of the Summary Proceedings Act 1957 is that if evidence has been improperly admitted so that there is insufficient evidence against an accused, there can be an appeal. That appeal is not on the basis of the incorrect admission of the evidence, but on the basis that there is no proper evidence on which an accused can be convicted.
Held: A false return of income is wilfully made if it is completed with knowledge of its inaccuracy as a fact affecting the taxpayer's liability to taxation. There must be an element of active dishonesty on the part of the defendant as opposed to a merely negligent completion of an erroneous return. While ignorance of the law does not excuse an offence, it is an element which cannot be overlooked in determining whether certain types of mens rea have been established.
The Commissioner contended that the taxpayer was carrying on the business of a bookmaker in the income years in question and the profit or loss assessed resulted from the carrying on of that business. The taxpayer argued that after 1951 he had ceased all activity as a bookmaker and the discrepancies shown by the assets method resulted from private betting activities or "punting". No argument was made by the Commissioner that profits from "punting" were assessable or that any losses incurred were deductible.
The magistrate found that the Crown had not established beyond reasonable doubt that the taxpayer was carrying on the business of a bookmaker in the income years in question. However the magistrate found the taxpayer had derived profits or gains from the carrying on or carrying out of an undertaking or scheme entered into or devised for the purpose of making a profit and convicted the taxpayer. The taxpayer appealed eight of the convictions - discrepancies resulted from "punting". The Commissioner cross-appealed.
Held: There were only two grounds that the Crown could have advanced. They were, that the taxpayer came within the provisions of s 88(c), alternately, that the taxpayer was, on his own admission, betting to such an extent that it was proved that the taxpayer derived profit and/or gains from a business. The magistrate did not state and the Crown did not attempt to argue any specific grounds for finding there was either a scheme or an undertaking which would bring the taxpayer within the last limb of s 88(c). There were no grounds for holding that the taxpayer's admitted betting activities came within the section. The evidence showed that no "scheme" of betting had been devised by the taxpayer at all, in any sense of the words. Merely because the taxpayer was a heavy gambler, who claimed to have some superior knowledge of the winning habits of racehorses, and was successful in six out of nine years of betting was not sufficient to hold that his gains in the successful years were the result of carrying out a "scheme devised for the purpose of making a profit".
There was no "scheme" or "undertaking" involved in the taxpayer's betting - he simply used his best judgment and knowledge in the placing of individual bets.
Studying "form" and gleaning information about racehorses before placing bets on them was common to the general body of punters and was not a "scheme" and the making of individual bets from day to day was not an "undertaking" within s 88(c). Therefore, the basis on which the learned magistrate founded his judgment was wrong.
The learned agistrate's finding in favour of the taxpayer on the allegation that he was carrying on the business of a bookmaker was a finding which was open to him, as the tribunal of fact and the learned magistrate did not misdirect himself in law. The appeal therefore proceeds on the basis that the amounts the Commissioner claimed were profits or gains from the business of bookmaking were not proved to be such, and the taxpayer's explanation that personal betting was the chief reason for his variation in assets was disproved.
This left the prosecution in the position that it had to show, beyond reasonable doubt, that the taxpayer's private betting or punting was an activity which produced assessable income. This argument was never fairly put to the taxpayer as being the case he had to meet and the evidence forwarded by the prosecution was not sufficient to discharge the onus of showing that the taxpayer's private betting activities had become a business or were for the purpose of producing an income as distinct from the mere indulgence in betting. Neither large amounts staked nor large amounts won were a safe guide as to whether punting amounted to a business or was merely a hobby or a pastime.
Held: To allow the informations to remain would be an abuse of the Court's process. The principles governing the question of dismissal for abuse of process were now well settled. The District Court had the power to dismiss a prosecution if the Court was satisfied that the institution or commencing of the prosecution was an abuse of the process of the Court. There was a fundamental responsibility on the Court to ensure the distinction between abuse of process and a review of the decision to prosecute was not blurred. The issue of the informations amounted to an abuse of process because the officer of the department with whom the defendant's solicitor had conducted discussions and negotiations advised the solicitor that the department had decided not to prosecute. Secondly, that same officer did not communicate to his superiors either that he had made the indication or that there had been discussions with the solicitor whereby an understanding had been reached that the defendant's case would be viewed favourably in respect of prosecution.
Note: Begg's case has set a remarkable precedent in the grant of an application for an order to strike out a prosecution on the grounds of abuse of process. It is perhaps even more remarkable that the claim of abuse of process has succeeded in the context of tax litigation. For other cases where abuse of process has been argued see Delellis v The Queen 4 CRNZ 601; Moevao v Department of Labour [1980] 1 NZLR 465.
Held: The onus is on the objector to prove affirmatively on the balance of probabilities that the altered assessments are wrong, and that returns made by him were not fraudulent or wilfully misleading. The onus is on the objector to show not only that the Commissioner's assessment is wrong, but by how much. Although the objector was not directly associated with horse racing except as a punter his dominant motive in betting was making an income and his winnings would be taxable and his betting losses deductible.
In the High Court counsel for the appellants submitted that the combined effect of the rule in British Transport Commission v Gourley [1956] AC 185 and of the provisions of the Income Tax Act 1976 governing the taxation of damages for wrongful dismissal was to require a deduction from the gross amount arrived at in respect of the lost remuneration to reflect the true net loss. Gourley's case held that in assessing damages for loss of earnings in personal injury actions, allowances must be made for the incidence of taxation. Moller J concluded that the damages were assessable income under s 65(2)(b) of the Income Tax Act 1976 not affected by the concessional provisions of s 68 and accordingly there was no room for the application of Gourley. The appellants appealed.
Held: The rule in Gouley's case should not be extended to claims for compensation for loss of office. The income tax legislation provides a code for the taxation of compensation for loss of office. Damages for wrongful dismissal are in contract. In the case of breach of contract the loss must be ascertained following consideration of the terms of the contract between the parties. If the employee sues for damages for breach of contract by the employer precluding him from earning the contractually agreed remuneration he is entitled to say that the gross remuneration is the agreed base for calculation of his loss. The disposition of the remuneration by the employee is not a legitimate concern of the employer.
Held: "It was argued by [counsel for the Commissioner] that what was done did not amount to improvements or alterations. He referred to numerous dictionary definitions of the word `improvements' and submitted that it was implicit in the dictionary meaning that there is something in existence to improve.
He went on to say as a legal concept, however, what are regarded as `improvements' are those changes, substitutions, or additions that, having been made for the better, have been made to a building that was being used and occupied at the time those changes, substitutions, or additions to it were made.
I do not agree with that submission. It is not necessary, in my view, that there should be a building in existence before an improvement or addition as contemplated in this section can be made to it. In my view, if there were, as there were in this case, plans prepared and being worked upon for the construction of a new building and a change was made to those plans so as to include a valuable or useful addition, which is one of the definitions referred to by Mr Bridger, or to create a better building then in the result there has been an improvement or alteration to that building as originally designed and as intended to be built. It would indeed create an anomalous situation if an objector could finish the construction of the building and then add to it insulating material and comply with s 125 and obtain a tax advantage, but that if he installed the insulation during construction after having amended his plans to do so he could not. The purpose of this Act must be looked at in construing its provisions.
Section 125 is contained in a part of the Act which is designed to encourage energy conservation by giving taxation benefits where certain capital sums are expended for the purpose of energy conservation. The interpretation of the Act requires a construction which will fairly give effect to such a purpose and I am satisfied that I do no violence to the language of the Act when I interpret `improvements and alterations' in the way that I do".
... The vital words ... are: .. .a profit or surplus arising from transactions of the company or society with its members which would be included in profits or gains for the purpose of that provision or rule [ie, under Case I of Schedule D] `if those transactions were transactions with non-members.'
Counsel for the appellants argued, and there was, I think, some force in his argument, that in the passage I have cited the expression `non-members' means persons who are not contributors to and participators in a mutual insurance scheme and does not mean persons who are in the strict sense not members of a company or society according to its constitution or rules. The badge of membership, he said, for the purpose of this section is contribution and participation in some mutual scheme. I do not think it necessary to decide this question, which may in other connections have far-reaching importance. For, assuming for this purpose that the argument is so far well founded counsel is still faced with a difficulty which appears to me, as it did to the Lord President (Normand) to be insuperable. For the hypothetical profit or surplus with which the section deals is one that is assumed to arise out of `those transactions' with `non-members.' What are `those transactions'? They are ex hypothesis transactions in which the element of mutuality is an integral essential and inseparable part. How then can the two factors coalesce? On the one hand a transaction in which mutuality is essential, on the other hand a party to that transaction who by the postulated definition of non-member is excluded from any transaction which involves just that element of mutuality. It follows that upon an initial assumption in favour of counsel the section becomes meaningless and the hypothetical profit or surplus indeterminable. The appeal must, in my opinion, be dismissed."
Held: The correct interpretation of the statute was treble the total amount of tax payable for the year of assessment not merely treble the amount of tax evaded.
Per Lord Reid at 512: "One is entitled and indeed, bound to assume that Parliament intends to act reasonably and therefore, to prefer a reasonable interpretation of a statutory provision if there is any choice ... But we can only take the intention of Parliament from the words which they have used in the Act and, therefore, the question is whether these words are capable of a more limited construction. If not, then we must apply them as they stand, however unreasonable or unjust the consequences and however strongly we may suspect that this was not the real intention of Parliament."
By these transactions part of what would have been the taxpayer's total income from the farm was hived off and became (via the trustees) the income of the spouse and children, the beneficiaries paying reduced rates of tax. The Commissioner sought to include in the taxpayer's assessable income the amount accruing from the "paddock trusts" on the basis that the transaction was void as against the Commissioner pursuant to s 108 of the Land and Income Tax Act 1954.
In the Privy Council the taxpayer contended that s 108 had no effect in this case for the following reasons; the section has no fiscal effect but operates only as between the parties to the contract, agreement or arrangement; if the section does have fiscal effect, that effect is confined to cases where liability to income tax has already accrued; in any event the section can operate only upon income derived by the taxpayer, in this case the taxpayer did not derive that portion of the income of the farm which went, under the "paddock trust", to the trustees; finally, the fact that the trust in this case was an ordinary family trust for the maintenance and advancement of the taxpayer's spouse and family took it outside the ambit of the section.
Held: Section 108 did have fiscal effect. The words of the section were to be given their ordinary meaning. They were not to be given some other meaning simply because their object was to frustrate legitimate tax avoidance devices. The direction in the section that the impugned contracts, agreements, or arrangements should be "absolutely" void involved the consequence that they were void as against the Commissioner as well as against all others. The reference in s 108 to liability for income tax was not limited to an accrued liability to income tax but included future liabilities also. To construe s 108 as referring only to liabilities which had already accrued would be to deprive it of almost all effect. Such a construction was not to be adopted unless the words of s 108 compelled it, which they did not.
The taxpayer did derive the income from the leased land. He sold the crop and received the proceeds. As the obligation to account for the proceeds to the trustees was to be regarded as void under s 108, and the trusts were to be regarded as non-existent, the taxpayer is left receiving the income and accountable to nobody for it.
With regard to the taxpayer's contention that the nature of the trust took it outside the ambit of s 108, their Lordships were in complete agreement with the observations of Turner J in the Court of Appeal. Successive one-year leases of that particular paddock of the farm which by crop rotation happened to be the wheat paddock was particularly unsuited to be the basis of a family trust providing assured regular income for its beneficiaries and could not be described as an ordinary family dealing, a typical family trust. The rent charged for the paddock was not realistic given that the paddock leased was producing a highly profitable crop.
Lord Denning's passage in Newton v Commissioner of Taxation of the Commonwealth of Australia [1958] 2 All ER 759 at 764 (E-F) when properly interpreted, did not mean that every transaction having as one of its ingredients some tax saving feature thereby becomes caught by a section such as s 108. If a bona fide business transaction can be carried through in two ways, one involving less liability to tax than the other, s 108 cannot properly be invoked to declare the transaction wholly or partly void merely because the way involving less tax is chosen. Indeed in the case of a company, it may be the duty of directors vis-à-vis their shareholders so to act. Again, trustees may in the interest of their beneficiaries, deliberately choose to invest in Government securities issued with some tax-free advantage and to do so for the express purpose of securing it. They do not thereby fall foul of s 108. The clue to Lord Denning's meaning lay in the words "without necessarily being labelled as a means to avoid tax". In this case the whole scheme smacked of such business unreality that the only proper inference to be drawn from the facts was that the scheme was devised for the sole purpose or at least the principal purpose of allowing the taxpayer to escape liability on tax for a substantial part of the farm income.
The bank relied on the particular provisions of ss 25, 26 and 27 of the Trustee Savings Bank Act 1948 in contending that the profits in question were capital profits arising from investments made by the bank within the meaning of s 26(c) of the Act and that such capital profits are required to be credited to the bank's reserve fund. Further, having regard to the provisions of ss 25, 26 and 27 of the Trustee Savings Bank Act the profits were not profits derived from any business and were not assessable income within the meaning of s 88 of the Land and Income Tax Act 1954.
Held: Enhanced values obtained from realisation or conversion of securities may be assessable for income tax where what is done is not merely a realisation or a change of investment but an act done in the carrying on or carrying out of a business. A trading bank must account for profits and has a right to claim a deduction for losses on realisation. The realisation of securities at short notice is an essential function of the business of a trading bank. The use of the word "capital" in ss 26 and 27 of the Trustee Savings Banks Act 1948 was a misapprehension on the part of the draftsman as to the existing state of the law. The legislature does not alter the law merely by betraying an erroneous opinion of it. The reference in s 26 of the Trustee Savings Banks Act to "capital profits" was not sufficiently explicit to alter the law existing prior to the passing of that Act.
Held: A later statute may not be referred to for the purpose of interpreting clear terms of an earlier Act which the later statute does not amend, even though both Acts are by the express provision of the later statute to be construed as one, unless the later statute expressly places a particular interpretation on the terms of the earlier Act; but if the earlier enactment was ambiguous, a later statute may throw light on the true interpretation of that enactment, as where a particular construction of the earlier enactment will render the later incorporated statute effectual.
Held: The loans received by the taxpayer were derived from the application of the taxpayer's income in South Africa to achieving the necessary transfers which had led to his receiving money from the second company. Counsel for the taxpayer submitted that the emoluments were not received by him in the United Kingdom because they had become, and were, the shares in Artemis and what the taxpayer received in the United Kingdom was something entirely different, namely a loan extended to him by Lodestar. It was argued that it was impossible to come to any other conclusion unless one stripped aside the corporate veil, looked behind Artemis to study the shareholders, and looked at the reality of the situation behind the corporate veil.
However, the case did not depend upon stripping aside the corporate veil but keeping an eye on the emoluments. It was not necessary to get behind the corporate veil to perceive and know that the [[sterling]]25,000 paid to the taxpayer and which goes in as purchase price for shares comes out in the form of the loan to Lodestar. It is not necessary to strip aside the corporate veil if it is found that the emoluments, which mean money, come in at one end of a conduit pipe and pass through certain traceable pipes until they come out at the other end to the taxpayer. Accordingly the loans from Lodestar represented and were the emoluments paid to the taxpayer and, having been received by him in the United Kingdom, were subject to income tax.
In the income year in question the company claimed as a deduction the sum of [[sterling]]10,000 in respect of directors' fees. The directors' fees were fixed each year by resolution of the company in a general meeting towards or after the end of each trading year. The Commissioner disallowed the sum claimed to the extent of [[sterling]]8,000 on the ground that to that extent it was not exclusively incurred in the production of assessable income.
The statute provided that a taxpayer is liable to pay tax as assessed by the Commissioner "save in so far as he established on objection that the assessment is excessive or that he is not chargeable with tax" and that the burden of proof is on the objector. In the income year in question neither of the directors had visited New Zealand. The directors had declined to be examined by the Commissioner with respect to the fixing of the fees and neither of the directors had appeared to give evidence before the magistrate.
In argument the taxpayer maintained that the Commissioner was not entitled to challenge the amount paid by the company as directors fees on the ground of excess or over generosity in its amount, for that was entirely a matter in the discretion of the company; such payments could only be challenged by the Commissioner on the ground that it was not a genuine transaction. The Commissioner substantially accepted the premises of this contention but maintained that the state of the evidence was such that the company had failed to discharge its burden of proof or establish that the assessment was excessive.
Held: The magistrate was entitled to hold that the taxpayer had failed to prove that the [[sterling]]10,000 had been exclusively incurred in the production of the assessable income. If the only evidence had been the company's resolution fixing the directors' fees and the vouchers for payment of the fixed amounts it would be difficult to see how the magistrate could reasonably have refused to hold that the assessment was excessive.
The evidence disclosed that there was complete identity of the persons interested as shareholders in fixing the amount of fees to be paid to the directors and of the persons to whom the fees were to be paid. Except for its impact on the company's tax liability it made no difference to the destination of the money whether the amount of the fees represented fair remuneration for the directors' services or not. The brothers, who alone knew how the fees came to be fixed, not only declined to allow the Commissioner to examine them on this matter, but also did not come forward to give evidence even though the burden of proof was on them.
It was not irrelevant in these circumstances to take into account that in each year the fixing of the directors' fees was made when a fair estimate of the trading results for the year was available and that in each year of the balance available for directors' fees and for distribution among the shareholders about two thirds was apportioned to directors fees.
Payments that were to be made to the taxpayers under the agreements included lump sums and royalties. The royalties were payable on engines and parts of engines manufactured, and the lump sums were described as "consideration for the rights granted" and referred to as capital sums. It appeared that the taxpayers could not hope to sell its engines in those countries and therefore pursued a policy of allowing local manufacture. Otherwise they would have got nothing from those countries.
The question was whether the "lump sums" received under the agreements were income or capital receipts in the hands of the manufacturers.
Held: The lump sums were trading receipts which were income, because the manufacturers were not disposing of a capital asset by means of the agreements. They were exploiting their "knowhow" and turning it to profit in the best or only method open to them, thus extending their trade of manufacturing engines to include that of the granting and implementing of agreements. There was nothing to indicate that a capital asset was in any way diminished by the carrying out of the agreements. The whole of their knowledge and experience remained available to the taxpayers for manufacturing and further research and development, and there was nothing to show that the value of their knowhow was in any way diminished.
The taxpayers had not given up a market that had once been open to them. They could not have sold their engines in these countries whether they had made these agreements or not. If they had not made these agreements they would have got nothing from these countries; by making them they were able to exploit their capital asset by receiving large sums for its use there.
The case of Moriarty v Evans Medical Supplies Ltd [1957] 3 All ER 718 was distinguishable. In that case there was no repetition of licensing which existed in the present case. In Moriarty there was an isolated transaction which resulted in the imparting of certain knowledge, the imparting of which was detrimental to the company's position and prospects in Burma. The transaction in that case was in substance a parting by the company with part of its property for a purchase price. The analogy of secret processes to patents was drawn to reinforce the conclusion that the so-called capital sum was a receipt of a capital nature.
Held: Because the stories were not written by Brent and not in her own words, but were produced by journalists from information supplied by her, the appellant had no copyright to assign. The information which she disclosed could not be described as property in a business sense. As a matter of law the agreement entitled the appellant to payment for personal services rendered to the company in making herself available for interview, in communicating information, and in signing the manuscripts which the journalists produced but which were not her property.
Consideration provided by the agreement was properly treated as income having regard to ordinary business and commercial principles and because the appellant did not carry on a business or profession, had no stock in trade, and her expenditure did not correspond with, or materially contribute to her earnings and because what she received was a reward for personal services, the true income derived by the appellant during the period 1 July 1969 to 3 February 1970 was the amount she actually received, namely $10,000.
Held: Under s 111 of the Land and Income Tax Act 1954 it is not the economic results sought to be obtained by making the expenditure that is determinative of whether the expenditure is deductible or not; it is the legal rights enforceable by the taxpayer that he acquires in return for making it. Statements made in CIR v Europa Oil (NZ) Ltd [1971] NZLR 641, at 648 that "the Crown is not bound by the taxpayer's statement of account, or by the heading under which expenditure is placed. It is entitled to ascertain for what the expenditure was in reality incurred" had given rise to some misunderstanding in this case. All that was meant was that the court was not bound by the description, such as "price of goods", attached to the expenditure in the taxpayer's own accounts or in a particular contract, if upon an analysis of the contractual arrangements, taken as a whole, under which the payment was made it appeared that its true legal character did not accord with that description. The contracts for the sale of goods whereby property in the goods was transferred by the seller to the taxpayer company did not stand alone. What was the legal effect of the provisions of the complex of interrelated contracts? When the taxpayer company ordered goods under the contract of sale and accepted the obligation to pay the sum stipulated in that contract as the purchase price, did the taxpayer company acquire a legally enforceable right, not only to the delivery of the goods, but also to have some other act performed which conferred a benefit in money or in money's worth upon the taxpayer company or some other beneficiary? Since the only legally enforceable right that the taxpayer acquired whenever it entered into a contract for the sale and delivery of one or more cargo lots of feedstocks was the right to delivery of feedstocks by Europa Refining, the whole of the purchase price was an expenditure deductible under s 111 of the Land and Income Tax Act 1954.
The finding that the moneys paid by the taxpayer company to Europa Refining were deductible under s 111 as being the actual price paid by the taxpayer company for its stock-in-trade under contracts for the sale of goods was incompatible with those contracts being liable to avoidance under s 108. Section 108 is not a charging section; all it does is to entitle the Commissioner when assessing the liability of the taxpayer to income tax to treat any contract, agreement or arrangement which falls within the description in the section as if it had never been made. Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made.
Secondly, the description of the contracts, agreements and arrangements which are liable to avoidance presupposes the continued receipt by the taxpayer of income from an existing source in respect of which his liability to pay tax would be altered or relieved if legal effect were given to the contract, agreement or arrangement sought to be avoided as against the Commissioner. The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his/her affairs in relation to income from a new source in such a way as to attract the least possible liability to tax. Nor does it prevent the taxpayer from parting with a source of income.
Thirdly, the references in the section to "the incidence of income tax" and "liability to pay income tax" are references to New Zealand income tax. The section is not concerned with the fiscal consequences of the impugned contracts, agreements or arrangements in any other jurisdiction.
Fourthly, the section in any case does not strike down transactions which do not have as their main purpose or one of their main purposes tax avoidance. It does not strike down ordinary business or commercial transactions which incidentally result in some saving of tax.
In the circumstances the Commissioner was unable to point to some other of the contracts the avoidance of which would have the legal effect of making the profits earned by Pan-Eastern under the new processing contract, or the dividends payable out of these profits to AMP, part of the assessable income of the taxpayer company.
Held: The sum of $37,500 awarded under the agreement was compensation for loss of profits over the then unexpired term of the supply contract and must be regarded as income in Greenslade's hands. The payment of this sum was not the purchase by Lion of the contractual right to supply to itself the goods covered by the supply contract; rather it was Lion paying the sum of $37,500 to gain the cancellation of the supply contract. The legal character of the transaction resulting in the $37,500 payment to Greenslades had to be ascertained by reference to the legal arrangements actually entered into and carried out, rather than the overall economic consequences to the parties.
Lion did not acquire any capital asset in return for the payment and Greenslades lost only the sales to Lion over the remaining eight years or so of the contract, and remained free to sell the merchandise concerned to whomsoever it pleased.
In 1985 there was an oversupply of commercial premises in Brisbane and incentive packages to attract tenants were a feature of the rental market. The law firm's current premises were not completely satisfactory. Real estate agents for the AMP Society, the owner of Comalco House, were eager to attract the taxpayer's firm as tenants in Comalco House. Some negotiations had taken place in 1984 but without success. However in April 1985 a lease proposal which provided for an incentive payment at the commencement of the lease was put to the firm. Following lengthy negotiations including a further package proposal from AMP the firm indicated by letter in October 1985 that it "or an entity nominated" by it wished to lease a floor of the Comalco House premises commencing on 1 February 1986 on certain terms. The proposal accepted by AMP in November resulted in a cash incentive payment of $162,000 agreed to be made payable to the individual partners of the firm. The name of the firm's service company first appeared in the correspondence as the prospective tenant in November 1985. The only effect this had on the transaction was the standard requirement of the AMP Society that the partners guarantee the obligations of the service company under the lease. The lease including the required guarantees were executed on 12 December 1986 and on 16 December 1986 cheques totalling $162,000 in favour of the partners were drawn. A letter preceding the payment stated that the sum of $162,000 was being paid as an incentive to the partners to sign the guarantees and to procure the service company to accept the lease.
The taxpayer received $21,060 as his share of the incentive payment and was assessed to tax on this amount. In an appeal to the Federal Court against the assessment the Court held that the payment was received by the taxpayer on capital account and was not income in ordinary concepts made assessable under s 25(1) or under s 26(e) of the Income Tax Assessment Act 1936-1985. Neither was the amount made assessable pursuant to the provisions of Part 111 A of the Act. In appealing to the Full Federal Court the Commissioner submitted that the form of the transaction entered into by the parties was determinative of the character of the receipt in the hands of the taxpayer. Thus, the amount was paid to the partners for inducing Bengil to enter into the lease and for services in undertaking the obligation of a guarantor. Alternately, if his Honour's finding was correct, the payment arose from a business operation or commercial transaction entered into in the ordinary course of the carrying on of the partnership business and with a profit element in mind. The payment was thus income according to ordinary concepts.
Held: Whether an amount is income in ordinary concepts depends upon its quality in the hands of the recipient. That is not to say that the motive of the donor in making a payment will be necessarily irrelevant, but it will not be determinative. The test to be applied is objective rather than subjective. Where a taxpayer carries on a business the proceeds of that business will be income in his/her hands and thus assessable. It will often be necessary to make a "wide survey" and an "exact scrutiny of" a taxpayer's activities to determine whether a particular profit derives from the business operation or is part of the business operations of the taxpayer. Where the profit arises from the disposal of property the question whether the profit is on revenue account will be answered by applying the tests stated by the Lord Justice Clerk in California Copper Syndicate Limited and Reduced v Harris (1904) 5 TC 159 at pp 165-166 which was referred to in Colonial Mutual Life Assurance Society Ltd v FC of J (1946) 73 CLR p 604 at 614 as follows:
"Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realization is a loss of or accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income... But in the words of the Lord Justice Clerk in California Copper Syndicate v Harris `it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business'."
While the fact that a transaction is a normal incident of the business activity will be conclusive of the income character of the profit derived from that business, the converse is not the case and the profit arising from an unusual or extraordinary transaction may be income at least where, as in FCT v Myer Emporium Pty Ltd (1978) 18 ATR 693 the transaction was entered into by a taxpayer with the intention or purpose of making a profit. The fact that a transaction is a one-off transaction rather than a recurrent one will not preclude the profit generated being characterised as income. Periodicity or the lack of it is but a factor to be taken into account. Where the payment to be characterised is compensation for services rendered, the payment will be income in ordinary concepts, even if the services are rendered once and once only and whether the compensation is received in a lump sum or by way of periodical payments. Thus there was no dispute in the present case that if the payments to the partners of the firm were fees for undertaking the obligations of a guarantor they would constitute income in ordinary concepts. Similarly if the payments were to be characterised as having been made for the service of procuring acceptance of a lease by the service company they would have the character of income.
In arguing that the form of the transaction entered into by the parties was determinative of the character of the receipt in the hands of the taxpayer the Commissioner relied on the well known case of IR Commissioners v Duke of Westminster [1936] AC 1 in which it was held that the legal effect of the covenant as between the parties to it determined for revenue purposes the character of the payments actually made. Every person is entitled to order his/her affairs if possible so that the tax attaching under the appropriate Acts is less than it otherwise would be. No one can be compelled to pay increased tax by applying the so-called doctrine of "the substance" when he or she has so ordered their affairs that the amount of tax sought is not legally claimable. This proposition did not however mean that in determining the legal effect of a contract between parties (and therefore the characterisation of the payment made under it as being income or capital) regard may not be had to the whole factual matrix of which the contracts form part. While it was true that the AMP Society would not have made the payment to the partners unless Bengil entered the lease and the partners guaranteed the obligations of Bengil, it was equally true that the AMP Society was at least uninterested in having Bengil execute a lease and rather, was concerned to have the space let to a prominent firm of solicitors. Looking at the entire context in which the payment was made including the interrelationship between the firm and Bengil, the judge in the Court below was entitled to find that the payment was an incentive to the firm to cause it to move rather than a payment for services to be rendered by the firm. This being the case the character of the payment as income was not to be determined by focusing upon the words of the letter of 29 November to the exclusion of all the circumstances surrounding the payment which provided the real context in which the task of characterisation is to be assayed. His Honour was not in error in considering what he saw as "the reality of the situation" namely that the payment was made so that the firm would move to Comalco House and that it was made independently of the entity which formally took over the lease. The payment was thus not assessable as a payment made for services performed by the firm.
In arguing that the payment was income in ordinary concepts as a payment arising from a business operation or commercial transaction entered into in the ordinary course of the carrying on of the partnership business with a profit element in mind it seemed that the Commissioner sought to argue that Myer had established a new principle that all gains made by a business entity were assessable. Myer did not stand for such an extreme proposition. In Myer what was received related solely to income by way of interest on a loan made by the taxpayer, the amount received being a transfer of the right to receive the interest in the future. The High Court did not base its decision on Myer being in a broader sense, a profit-making company. The purpose of profit-making had to exist in relation to the particular operation. Thus if the transaction can properly be said to have been entered into by the firm in the course of carrying on its business and if it can be said that the arrangement was a profit-making scheme, then it will follow that the amount received by the parties was income notwithstanding that the transaction was extraordinary.
Where a taxpayer operates from leased premises the move from one leased premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business, just as much as the trading activities that give rise more directly to the taxpayer's assessable income. Once this is accepted the evidence established that in Queensland in 1985 it was an ordinary incident of leasing premises in a new city building to receive incentive payments of the kind in question. A scheme may be profit-making notwithstanding that neither the sole nor dominant purpose of entering into it was the making of the profit. While the High Court in Myer referred to the case as involving the intention or purpose of making of the profit, there was no suggestion that the Court dissented from the factual finding of Murphy J that the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify. The obtaining of working capital was possible however only if the profit contemplated by the taxpayer was made. The transaction entered into by the law firm in this case was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment. Accordingly the payment was income in ordinary concepts and the taxpayer partner was assessable to tax on the amount of $21,060 received as his share of the incentive payment.
Held: By itself, the fact that the English company held all the shares in the German company did not render the English company liable to income tax upon the full amount of the profits made by the German company. The English company was only liable to pay income tax upon such profits of the German company as had been received in England.
"It must, of course, be borne in mind that the above general principles may be, and in certain cases have been, modified by express statutory provision."
Held: No part of this sum was assessable income within the meaning of either s 11(j) or (i) of the Income Tax (Management) Act 1928 (as amended) (Stephen J dissenting).
Per Jordan CJ at 219:
"The word `income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income or that special rules are to be applied for arriving at the taxable amount of such receipts... ."
Held: The taxpayer's activities as an evangelist constituted the carrying on of a business for the purposes of s 88(a) of the Land and Income Tax Act 1954, and the donations made to him, apart from purely personal gifts, were assessable income. On the facts the Commissioner was justified in calculating the appellant's assessable income on the "assets accretion" method.
The case was stated to test the taxability of the payments. The Commissioner supported the PAYE deductions under s 65(2)(b) and (l), ITA. Furthermore, the Commissioner contended that the sums in question were not exempt under s 61(37) of the Act.
Held: The allowance was not received in respect of or in relation to the employment or service of the taxpayer. Therefore the payments did not fall within s 65(2)(b). The Court relied on New Zealand Educational Institute v D-G of Education [1981] 1 NZLR 538 in concluding that the relationship between the taxpayer and the Wellington Education Board was not that of an employer and an employee. The allowance was an ordinary incident of higher education and not remuneration for the performance of services.
The allowance was captured by the s 65(2)(l). The Court considered three factors in determining whether the receipt was income. First, the major determinant was whether the payment was periodic. That is, the Court should look to the regularity and recurrence of the payments to see whether "the payments [had] become part of the receipts upon which the recipient [might] depend for his living expenses". Regard was also had to "the relationship between the payer and payee and to the purpose of the payment". The Court concluded that the payments were regular periodic payments to defray the taxpayer's living expenses while he attended teachers' college. "They were contractual payments to which the appellant was entitled so long as he performed his part of the bargain."
The payments were exempt from tax under s 61(37). The question was whether the sums received were paid "in terms of a scholarship or bursary". This phrase was given a wide interpretation. It simply means a sum of money, or equivalent, received for the pursuit of educational studies. The Court had no doubt that the standard tertiary bursary fell within the exemption of s 61(37). Were the allowances chosen by the taxpayer sufficiently different in character to warrant a different conclusion?
The Court looked at the true character of the sums received in the hands of the recipient. Their Honours warned against attempts to seek guidance by considering the character that the payment had in relation to the payer. There is no necessary connection between the two characterizations. The allowance payments were received essentially for educational purposes, just as bursaries were. In return for the payments the taxpayer was to "pursue a course of study and training at the teachers college". The differences between the two payments were not substantial enough to justify saying one was a scholarship or bursary and the other was not.
The Commissioners in each case assessed the taxpayer to income tax on the difference between the two resulting amounts, relying on the second limb of s 88(1)(c) of the Land and Income Tax Act 1954, that the amounts in question constituted a profit or gain derived from the sale of personal property and that the property was acquired for the purpose of sale.
Held: The relevant enquiry was for what purpose was the property acquired and if there was more than one purpose, what was the dominant purpose. In each case it was not relevant to enquire what was the dominant purpose since the only purpose for which the securities were bought was that they should immediately be sold. The fact that the purchase and sale were part of a wider objective could not affect the answer.
At first sight it is difficult to understand how a profit could be derived from the sale of property, made instantaneously after its purchase, when the property neither rises nor falls in value. Particularly in the case of a quoted security the presumption is that the purchaser paid for it precisely its value and no question of profit or loss could seem to arise. Moreover if one considers the substance of the transaction, all that could be said was that the taxpayers were exchanging one currency for another. Admittedly more New Zealand currency was obtained by using the particular method adopted than would have resulted from using the official rate, but merely to use one of the two available exchange rates could not be said to bring the section into play, or bring about a profit. On the other hand the taxpayers, in choosing the method they did, adopted a method that involved the purchase and sale of securities. Because of this it was legitimate, even necessary, to examine the purchase and sale and see if a profit was made on the sale.
A profit on a sale arises if the sale proceeds exceed the purchase price. The only question here was as to the value of the purchase price.
The Solicitor-General contended that the purchase price paid by the taxpayers was expressed in sterling and that there was only one way to ascertain its value in New Zealand currency - by conversion at the official rate. Thus each [[sterling]]100 sterling was worth NZ[[sterling]]10076, not more. Since, on the sale the taxpayers received for each [[sterling]]100 sterling NZ[[sterling]]105-113 the difference represents the profit. This view was accepted by the majority in the Court of Appeal.
However in expressing an opposing view, Turner P considered there were two methods of realisation, that is, two completely legitimate markets for the English currency, open to the taxpayer. Both methods were being used daily by large numbers of persons with the open approval of the authorities. Where there are two markets and the question is what is the value, the question is begged by selecting arbitrarily one of the available markets rather than the other. In such a case the value is the value in the market actually used or if neither is yet used, the value in the higher of them.
The opinion of Turner P was preferred and there was no doubt this corresponded with the realities of the transaction. The taxpayers were making use of an alternative or parallel rate of exchange. This had become so current that the official method of transfer through the banking system was hardly used. The taxpayer knew in advance the "rate" that was going to be obtained under the alternative method and had merely to instruct his broker to arrange remittance in this way and at this rate. The sterling funds therefore had a legitimate premium value to a New Zealand resident, namely the same value as he would have had to pay to obtain them.
In the context of taxation it is insufficient to look too broadly at the "substantial result" of what was done. Analysis must be made of the method actually chosen by the taxpayer. The essential fallacy of the Commissioner's argument lay in valuing the sterling funds at the official rate when funds had to be valued for what they were worth in the better market, in fact in the market which was used, which was a better market in the real sense.
After taking legal advice on the matter he formed a company with a nominal capital of [[sterling]]10,000 divided into 10,000 shares of [[sterling]]1 each. He then entered into a contract of sale, whereby the taxpayer agreed to sell and the company agreed to buy the land in question. The contract provided that the consideration for the sale should be the sum of [[sterling]]8,000 or such lesser sum as the appropriate authority might approve. The consideration was to be satisfied by the issue by the company to the vendor of 8,000 fully paid shares of [[sterling]]1 each in the company or such lesser number of shares as should equal in face value the purchase price approved.
The taxpayer then contracted (subject to the transfer of the land by the company to him) to sell to one Thomas 8,000 [[sterling]]1 shares in the company for a price of [[sterling]]1 10s per share. The consent of the appropriate authority was duly obtained. The land was transferred by the taxpayer to the company and the company allotted 7,998 [[sterling]]1 shares to the taxpayer which with one share already held by him and one share held in trust for him made up 8,000 shares. These shares were then transferred to Thomas and his nominee who paid [[sterling]]12,000 to B for them. The Commissioner assessed the taxpayer's income in the relevant year on the basis that it included the difference between the sum of [[sterling]]12,000 and the sum of [[sterling]]8,000, that is, [[sterling]]4,000.
Held:
Per Fullager J:
Since the taxpayer owned or was to own the whole of the shares in the company, and since the company owned or was to own the whole of the land and nothing more, the value of the land and the value of the shares were as from the date of the contract between the taxpayer and the company, for all practical purposes, identical. Secondly, the figure of [[sterling]]8,000 named in the contract between the taxpayer and the company was an arbitrary figure, selected as one to which the prescribed authority was very unlikely to take objection. It was not indeed necessary that any figure should be mentioned at all. It may be conceded (though not without some doubt) that the shares were "acquired" by the taxpayer with a view to "resale". But they were not acquired with a view to resale at a profit and they were not resold at a profit. The shares were of exactly the same value at the date when they were acquired as at the date when they were resold. No profit arose to the taxpayer from the sale of the shares to Thomas.
It was suggested that the value of the land at the date of the contract with the company was the price at which the prescribed authority would consent to a sale of the land, and that the taxpayer had "carried out" a "scheme" whereby a "profit" had "arisen" to him represented by the difference between that price and the sum of [[sterling]]12,000. A sufficient answer to this was that the value of the land at the date of the contract was not the price at which the prescribed authority would consent to a sale of the land but the price which could be obtained for the land without transgressing the law. This price was [[sterling]]12,000 and the difference between [[sterling]]12,000 and [[sterling]]12,000 is nought.
Regarding the whole transaction as a realisation by the taxpayer of land owned by him the first limb of s 26(a) is excluded, because the land was not acquired by the taxpayer for the purpose of resale at a profit. Did the realisation of the land, then, amount to a profit-making undertaking or scheme? Clearly it did not. The object of the taxpayer was simply to realise a capital asset and to obtain for that asset the best price he could. It was doubtful whether what the taxpayer did amounted to an "undertaking" or "scheme" within the meaning of s 26(a). But in any case, the taxpayer's object was not "profit-making". Nor did any "profit arise" from it within the meaning of the second limb of s 26(a). He may have made a profit in the sense that the sum of money which he finally received was greater than the sum of money which he originally paid for the land. But this profit was not taxable as such, because he did not buy the land for the purpose of resale at a profit. That this was fully recognised by the Commissioner was shown by the fact that there was no evidence before Fullagar J of the price originally paid by the taxpayer for the land. A profit can only be ascertained by comparing one sum of money with another. In this case there was the price of [[sterling]]12,000 ultimately realised for the land. What sum was to be compared with this in order to ascertain the taxpayer's profit? There was no sum with which it could be compared. The whole of the evidence suggested, and suggested only, that the value of the land at all material times was [[sterling]]12,000.
The Commissioner then appealed to the Full Court, arguing that the case was one of a taxpayer acquiring shares for the purpose of sale at a profit. The consideration of [[sterling]]8,000 shown in the contract for the sale of the land must be accepted as the real consideration unless shown to be illusory. The consideration was [[sterling]]8,000, not a parcel of shares. By means of a scheme [[sterling]]12,000 was obtained.
Held: There was in fact no real profit to the taxpayer arising out of the transaction. When the taxpayer transferred the land to the company, which owned nothing else and had no liabilities, and in return got all the shares in the company but one, he cannot be said to have made a profit. He got nothing more valuable than he gave: he received the exact equivalent of what he gave.
When the land was transferred to the company by the taxpayer it was worth what the sale of shares proved it to be worth, that is, [[sterling]]12,000. The figure adopted by the State official in giving his consent to the sale of the land to the company could be disregarded as it was not reliable evidence of the value of the land. Before the official's consent to the figure of [[sterling]]8,000 was given, the taxpayer and Thomas had made a written agreement for the sale of the shares for [[sterling]]12,000.
There is no principle of general application that states, per Kitto J, p 349: "that where there is a sale of property for a money sum to be satisfied by an issue of fully-paid shares, there are two separable and substantive transactions, a sale of the property for a cash price and an issue of fully-paid shares, so that if the shares are subsequently sold any excess over the amount paid up on them constitutes a profit. Section 26(a) ... uses the language of everyday affairs without artificial restriction or enlargement. Whether a given amount is to be characterized as a profit within the meaning of the provision is a question of the application of a business conception of the facts of the case. This does not mean that formal steps that have been taken are to be ignored on the ground that the same result might have been achieved in another way; but it does mean that, however many and complicated the steps employed may have been, a profit is not found to have arisen until there has been deducted from the ultimate sum received the amount or value of all that in fact it has cost the recipient to obtain that ultimate sum.
The question then is, what really was the cost to the taxpayer of the shares which he sold for [[sterling]]12,000? The plain fact of the matter is that the cost was the land which he transferred to the company. It simply is not true to say that the cost was only [[sterling]]8,000. ... The sale agreement provided for only one method of completion: it bound the [taxpayer] to transfer his land to the company and it bound the company to issue fully-paid shares to him. Accordingly a profit cannot be said to have arisen from the sale of the shares, unless the land which the taxpayer gave for the shares was not worth as much as [[sterling]]12,000. The attempt to show that a profit arose from the sale of the shares thus leads to the same question as that upon which the commissioner's alternative submission depends; for his assertion that the land could not have been sold for more than [[sterling]]8,000 does not assist him to maintain that a profit arose from the entire procedure unless it means that the full value of the land which the procedure was designed to turn to account was [[sterling]]8,000, or at any rate an amount less than [[sterling]]12,000.
In point of fact, there is no ground for the assertion that [[sterling]]8,000 was the highest figure for which the taxpayer could lawfully have sold the land. That figure was chosen by the respondent in the belief that it was sufficiently low to ensure the granting of consent; and the fact that in the event it was consented to provides no clue as to the fate which would have attended an application for consent to a sale at a higher price. ....
...The short answer to the whole argument which was submitted on behalf of the commissioner is that the steps the taxpayer took had no other purpose or effect than to get the full amount which a person desiring to own the land would pay for it or for its practical equivalent. In the [[sterling]]12,000 which the purchaser paid for the shares there was therefore no element of profit, except to the extent that that sum exceeded, if it did exceed, what the taxpayer originally paid for the land. If there was such a profit, it was a capital profit and was not included in assessable income by s 26(a).
The decision of Fullagar J. was correct, and the appeal should be dismissed."
"I Hereby declare that my trustees are authorised and empowered at any time after the death of my said wife to sell my said Wellington leasehold property more particularly referred to in para 9 hereof to the said company of A.G. Healing & Co Ltd for the sum of [[sterling]]20,000 the said company to have the option to buy the same at such price when my trustees shall decide to sell the same. The said company shall declare its option in writing within three calendar months after my trustees shall have advised it that the property is for sale and if the said company shall refuse such option or shall not accept the option in writing within three calendar months after my Trustees shall have advised it that the property is for sale, then my trustees shall be free to sell the said property as aforesaid as they shall think fit."
Some three months following the death of the testator's spouse the trustees (who were also directors of the taxpayer company) gave notice to the taxpayer company of their intention to sell the property. Two weeks later the taxpayer company exercised the option given it by the will and a transfer was signed by the trustees several days later. The following day the taxpayer company entered into an agreement for the sale of the property for $47,000.
The Commissioner included in the taxpayer's assessable income the difference between the price of $47,000 for which the property had been sold by the taxpayer company and the sum of [[sterling]]20,000 payable on the exercise of the option, plus certain expenses incurred by the taxpayer giving the net balance of [[sterling]]21,341 3s 5d. The Commissioner based his assessment on the grounds that the property was acquired by the taxpayer "for the purpose of selling or otherwise disposing of it" or alternatively that the gain was "derived from the carrying on or carrying out of an undertaking or scheme entered into or devised for the purpose of making a profit".
Held: "Acquire" connotes some positive step by the taxpayer which would be absent from simply an outright gift. But, the taxpayer company, by exercising the option enforced upon it by the will, did "acquire" the property.
The taxpayer's dominant purpose in acquiring the leasehold property was its resale. Whether or not the taxpayer company realised a profit or gain in terms of s 88(c) of the Land and Income Tax Act 1954, however, depended upon the nature of the benefit conferred upon the taxpayer in the will. Whether the benefit conferred upon the taxpayer was a right of property which vested on the death of the taxpayer or whether it was a mere right to claim the leasehold property if and when offered to the taxpayer by the trustees, depended upon the words of the will. The proper construction to be placed on the relevant provisions of the will was that the trustees had a fiduciary discretion to decide within a reasonable period after the death of the testator's widow the most advantageous time for sale of the property. As soon as they decided that that time had arrived the trustees were obliged to offer the property to the taxpayer in order that it might exercise its option to buy for [[sterling]]20,000. The terms of the gift indicated an intention that the property should be assignable. The testator was aware that it was uncertain whether the taxpayer would have any use for the property itself, while the testator's identification with the taxpayer company as the holder of all except one of the shares and his position as governing director indicated an intention to benefit the company in any event. The grant of the option to the taxpayer company was therefore the grant of a beneficial proprietary interest.
This interest vested on the testator's death although its enjoyment or realisation was postponed to let in the widow's life interest. In exercising the option the taxpayer simply reduced the vested interest into possession and when it sold the property it simply converted the testator's gift into money. The profit made was in reality the realised value of the testator's gift by will to the taxpayer. There was thus no taxable profit or gain because the taxpayer was merely realising the value of the gift.
The gain which the taxpayer company made was derived from the bounty of the testator and not from the acquisition and disposal of the leasehold property or from the carrying out of a scheme entered into for the purpose of making a profit. There was no evidence that in the words of the statutory provision that the legislature intended that a gift otherwise free from income tax should be rendered liable thereto by the mere circumstance that its reduction into possession, its "acquisition", was for the purpose of realisation by resale within the second limb of s 88(c), or that the transaction as a whole was an undertaking or scheme entered into for the purpose of making a profit in terms of the third limb of s 88(c).
The plaintiff's father had inherited the farm and wished his son to have it. Arrangements for the son to acquire the farm were made on a commercial basis. Pursuant to a sharemilking agreement dated 10 August 1967, the plaintiff took the farm with a right to purchase at a fixed price at any time within the five year term of the sharemilking agreement.
The defendants, who were the plaintiff's solicitors, omitted to either obtain the consent of the Land Valuation Court or to file a declaration in respect of the option to purchase.
In 1969, the plaintiff having decided that it was not economical for him to keep the farm himself exercised the option to purchase the farm and on the same day resold it at a profit. At that time a declaration referring to the agreement for sale and purchase of 10 December 1969 was made by the plaintiff under the Land Settlement Promotion and Land Acquisition Act 1952 and lodged with the District Land Registrar. The Commissioner treated the plaintiff as having purchased the farm in 1969 when the plaintiff had formed the intention of resale and assessed the plaintiff for tax on the profit made pursuant to the second and third limbs of s 88(l)(c) of the Land and Income Tax Act 1954.
The plaintiff objected to that assessment, but withdrew his objection when he discovered the defendants' alleged negligence.
Held: The offer to purchase in the August 1967 agreement amounted to a valid option to purchase and as such required either the consent of the Land Valuation Court or the filing of a declaration. Because the right to purchase was truly an option it vested immediately and not when it was exercised. The time at which the question of liability to tax had to be determined was the time of acquisition of the right to purchase. It was immaterial for tax purposes whether the option was acquired by gift or by commercial transaction.
The liability of the plaintiff to tax was therefore, to be determined upon the basis that he had acquired his option to purchase in August 1967. No question of resale arose at that time. But for the omission of the defendants the right to purchase could have been exercised by the plaintiff free from any liability to tax. There was thus a direct relationship between the defendants' failure to lodge the declaration and the ultimate assessment of additional tax which would otherwise have been avoided.
In January 1969 the salvage agreement was lawfully cancelled by the borough because it did not suit a new method of refuse collection. The cancellation caused the refuse collectors to strike. The subsequent settlement awarded each collector [[sterling]]450. This payment was described in the settlement as compensation for the cancellation of the salvage agreement. Following acceptance of the settlement the taxpayer returned to work and received [[sterling]]450.
The Crown included the [[sterling]]450 as assessable income because it was substituted remuneration for the taxpayer's former right to share in the proceeds of sale of salvage materials.
Held: The main issue was whether the payments could be emoluments of employment "when the recipient was under no obligation, either express or implied, to remain in his employment for a reasonable time". The taxpayer was entitled to leave his employment after giving only seven days notice.
In cases dealing with payments by employers there seemed no clear answer to whether an obligation to remain at work for a reasonable time was needed or not. Such an obligation was not required by Foster J. He based his assessment on cases that had found payments made by non-employers assessable. In these cases there was clearly no undertaking that the employee would remain at work for a reasonable time.
His Honour considered the motive of the employer. The settlement had described the payment as compensation. This was not an apt description as the borough had already legally terminated the salvage agreement. The main reason for the payment was to return the taxpayer to work while a new agreement was negotiated.
"[T]he money when received by [the taxpayer] was a form of substituted remuneration for his former rights to share in the proceeds of sale of the salvage". Therefore the [[sterling]]450 was an emolument of employment.
Held: Having regard to the origin and purpose of the contributions voluntarily made by a wholesaler towards the cost of improvements to the capital assets of a retailer of motor spirits, payments made were not profits or gains derived from the operations of the retailer's business and were not to be regarded as income in the hands of the retailer.
See also 252 US 189, 207 per Pitney J, citing earlier cases: "`Income may be defined as a gain derived from capital, labour, or both combined; provided it be understood to include profit gained through a sale or conversion of capital assets ...."
Also per Pitney J: "The fundamental relation of `capital' to `income' has been discussed by economists, the former being likened to the tree on the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream to be measured by its flow during a period of time. ... Here we have the essential matter; not a gain accruing to capital; not a growth or increment of value in the investment, but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being `derived' - that is income derived from property. Nothing else answers the description."
But see Commissioner v Glenshaw Glass Company (1955) 348 US 426, 430 per Warren CJ.
In the company's books, fees paid were credited upon receipt to "Unearned Deposits - Untaught Lessons Account". From that account amounts corresponding with lessons taught were periodically transferred to the credit of "Earned Tuition Account". The company made its tax returns on the footing that fees received in advance of tuition formed no part of its assessable income at the moment of receipt, but became such as and when earned by the giving of lessons. The Commissioner, however, issued assessments upon the view that fees received in advance of tuition possessed the character of assessable income in the company's hands from the moment of receipt so that in respect of a given year of income there was no need to distinguish between fees for which lessons had been given during the year and fees for which at the end of the year the lessons still remained to be given.
Held: On the facts appearing in the case stated it was not permissible to uphold the Commissioner's view that a receipt of fees for a specified number of lessons to be given over a period subsequent to the receipt is a derivation of assessable income.
The ultimate inquiry must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income. Whether actual earning has to be added to receipt in order to find income must be determined in light of the necessity for earning which is inherent in the circumstances of the receipt. In the present case although fees received but not yet earned were received beneficially by the company, the possibility that in practical terms the amount might have in effect to be paid back, even if only as damages, should the agreed lessons not be given in due course, was an inherent characteristic of the receipt itself.
Similar language was used in the Privy Council in the case of Dilworth v Commissioner of Stamps [1899] AC 99, at p 105, where Lord Watson, delivering the opinion of the Judicial Committee, said, `The word "include" is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. But the word "include" is susceptible of another construction which may become imperative if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to "mean" and "include," and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions.'
There must therefore be something in the context to show that `includes' means `means'."
Held: Where racehorses have for some years been bred by a farmer as a hobby for racing and for further breeding, a material change of policy and practice must be established to show that the hobby has been converted into a business. Any expenses incurred in the building up of stock for the purposes of commencing the business of selling the progeny were in the nature of capital expenditure, and thus not deductible under the Act.
Mr Harley and Mrs Williams furnished a joint return of income derived by them from their land for the year ending 31 March 1967 and declared a loss of [[sterling]]735 13s 1d by deducting interest rates and rent incurred in respect of the land as expenditure. The Commissioner ruled that the loss was not deductible on the grounds that they were not carrying on the business of farming at all and that in any event the loss was not incurred exclusively in the production of their assessable income in terms of s 111 of the Land and Income Tax Act 1954. Mr and Mrs Jenkins furnished a joint return of income for the year ending 31 March 1967 in which, after deducting interest and rates incurred in respect of their land from their share of the profit, declared a loss of [[sterling]]622 7s 11d. As there was no deed of partnership between Mr and Mrs Jenkins the whole of the loss was deducted from Mr Jenkins' income.
The Commissioner disallowed the deduction and re-assessed Mr Jenkins, adding in the profit derived from the land. The appellants exercised their right to have a case stated for the opinion of the Supreme Court. The matter came before Wilson J who held that the appellants were carrying on the business of farming but that the losses were not exclusively incurred in the production of this assessable income. The appellants appealed to the Court of Appeal.
Held: The Court would not disturb the finding of the Court below that the composite partnership was carrying on "the business" of farming. "Profit" is the difference between the expenses necessary to earn the receipts of the year and the receipts of the year. For an enterprise to be described as a "business" there must be an intention to carry on the enterprise for pecuniary profit.
The expenses deducted by the appellants were not exclusively incurred in the production of their assessable income as required by s 111. The loss of the partnership of two was not incurred in the production of any income derived by the partnership of two; it was incurred for the purpose of enabling the partnership of two to furnish free of charge to the partnership of four land from which the partnership of four might derive income. But the income of the partnership of four was different from that of the partnership of two; and the partners of the latter partnership may not set off disbursements which the partnership of two has incurred against income derived not by them but by the other partnership. That the parties might have ordered matters otherwise by making a charge for rent between the two partnerships was beside the point. They chose to order their affairs in this particular way, and they must be assessed upon the transactions into which they actually entered.
If what had been claimed by the taxpayers had been not the net loss of [[sterling]]735 13s 1d, but the expenditures totalling [[sterling]]865 13s 1d giving rise to that loss, then it could have been contended that the taxpayers were entitled to a proper proportion of these expenditures as attributable to the assessable income of [[sterling]]130 derived as rent from this land. The expenses incurred could have been apportioned but the quantum of the resulting deduction would have been a matter of fact for the Commissioner to decide.
Per North P at p 487: "Reference may also be made to Commissioner of Inland Revenue v Watson [1960] NZLR 259, 262, where Henry J said: `The taxpayer and his accountant have each asserted, and books have been opened and kept on the basis, that as from 1952 the taxpayer was in business as a horse-breeder. This is not sufficient of itself. "Business" includes any undertaking carried on for pecuniary profit. It is not necessary that such a profit should be made, but it is essential, even if not sufficient, that at least an intention to gain pecuniary profit from the activities should be proved before the undertaking can be termed a business.'
I am not unmindful of the fact that the definition clause uses the word `includes' and not the word `means' but, as McCarthy J said in G v Commissioner of Inland Revenue [1961] NZLR 994, 998, while this is so `a study of the definition itself forces the view that it does not add anything to the common meaning of the word; does not catch anything which would not otherwise be caught: and so, for myself, I am not prepared to say that the use of the word "business" in s 88, particularly having in mind the taxing nature of the section and bearing in mind, too, the definition in s 2, is intended to embrace a profession, trade, manufacture or calling, unless there is shown to exist an intention to carry on the particular activity under consideration for pecuniary profit'. Plainly enough the members of the composite partnership had no prospect of making a profit if the various items of expenditure claimed by them were taken into account. But on the special terms of this partnership they did in fact make a small profit in one of the two years with which we are concerned and therefore I am not disposed to disturb the finding of the learned Judge on this point though I do not wish to be thought to be giving my approval to the way he approached the problem, which may require to be re-considered in another case."
Held: The taxpayer must show in relation to his farming activities not only that he carried them on with the "intention" of making a profit but also that there was a "prospect" of making a profit, though not necessarily in the year under review. On the evidence the property was bona fide acquired with the intention of farming for profit, and there was throughout a real prospect of profit. The developmental expenditure was realistic. Though lavish, it was consistent with a programme devised by a farm adviser, and that programme was conscientiously pursued.
Held: The farming venture had ceased, at least in the years 1970 and 1971, to be a business. It was not correct that so far as the prospect of a profit was concerned it was sufficient to show that the reasonable prospect was present at time of purchase. It may be that over the seven years involved the taxpayer retained the intention of making a profit, however upon the basis of known market conditions no reasonable prospect of profit could be retained.
Held: The legislation sensibly allows for deductions and allowances to be claimed even where the overall result is a trading loss. It was not for the Courts or the Commissioner to confine the recognition of businesses to those that are always profitable or to do so only so long as they operate at a profit. There was no warrant in the definition of business in its statutory context for reading in a requirement that there must be a reasonable prospect of profit.
Whether or not a taxpayer is in business involves a two-fold inquiry as to the nature of the activities carried on, and as to the intention of the taxpayer in engaging in those activities. Statements by the taxpayer as to his intentions were relevant but action will often speak louder than words. Amongst the matters which may properly be considered in that inquiry are the nature of the activity, the period over which it is engaged in, the scale of operations and the volume of transactions, the commitment of time, money and effort, the pattern of activity, and the financial results. It may be helpful to consider whether the operations involved are of the same kind and are carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was conducted. However, in the end it is the character and circumstances of the particular venture which are crucial. Businesses do not cease to be businesses because they are carried on idiosyncratically or inefficiently or unprofitably, or because the taxpayer derives personal satisfaction from the venture.
The legislation was silent as to the meaning to be given to "pecuniary profit" in the definition of profit. In the context of a tax statute it simply reflects the underlying notion of income as being money or money's worth. The profit sought must be in money or money's worth and the business must be carried on for pecuniary profit in that sense.
Held: These remittances in the hands of the mother were assessable to income tax under the Act, as being moneys received in this country in respect of foreign possessions.
Held: Where a will appointing a solicitor to be a trustee of an estate expressly empowers the charging of normal professional profit costs, thereby relieving him of the burden of acting gratuitously, those costs are assessable as business income. Although such a provision is a legacy, it is a legacy of the costs themselves when earned rather than the unearned bounty of the testator.
In 1969 the company became a subsidiary of another company, and the directors terminated the scheme by one year's notice. Thereupon the trustees realised the trust assets, paid off the balance of the debt to the company and, in accordance with the terms of the trust deed, distributed the balance in proportions fixed by them to employees and pensioners of the company. In the result, the taxpayer became entitled to an award of [[sterling]]200. He claimed that the effective cause of the payment was not his employment with the company but the decision to terminate the scheme and therefore the payment was not taxable as an emolument "from" his employment, within ss 181(1)a and 183(1)b of the Income and Corporation Taxes Act 1970.
Held: The capital payment made to the taxpayer on the winding-up of the scheme could not be distinguished from payments made in the course of the annual distributions under the scheme. The sole reason for making the payment to the taxpayer was that he was an employee, and the payment arose from his employment. There was no other reason personal to the recipient motivating the payment. Accordingly the payment was taxable as an emolument arising from the taxpayer's employment.
Held: The money was not taxable under Schedule E, because it was not salary, fees, wages, perquisites or profits from an office or employment of profit within r 1 of that schedule, but was a personal gift.
Per Viscount Cave, L C at 297:
"The question, therefore, is whether the sum of [[sterling]]939 16s. fell within the description, contained in r 1 of Sched E, of `salaries, fees, wages, perquisites, or profits whatsoever there from' (ie, from an office or employment of profit) `for the year of assessment' so as to be liable to income tax under that schedule. These words and the corresponding expressions contained in the earlier statutes (which were not materially different) have been the subject of judicial interpretation in cases which have been cited to your Lordships; and it must now, I think, be taken as settled that they include all payments made to the holder of an office or employment as such, that is to say, by way of remuneration for his services, even though such payments may be voluntary, but that they do not include a mere gift or present (such as a testimonial) which is made to him on personal grounds and not by way of payment for his services. The question to be answered is, as Rowlatt J, put it, `Is it in the end a personal gift or is it remuneration?' If the latter, it is subject to the tax; if the former, it is not.
Applying this test, I do not doubt that in the present case the net proceeds of the benefit match should be regarded as a personal gift and not as income from the appellant's employment. The terms of his employment did not entitle him to a benefit, though they provided that if a benefit were granted the committee of the club should have a voice in the application of the proceeds. A benefit is not usually given early in a cricketer's career, but rather towards its close, and in order to provide an endowment for him on retirement; and, except in a very special case, it is not granted more than once. Its purpose is not to encourage the cricketer to further exertions, but to express the gratitude of his employers and of the cricket-loving public for what he has already done and their appreciation of his personal qualities. It is usually associated, as in this case, with a public subscription; and, just as those subscriptions, which are the spontaneous gift of members of the public, are plainly not income or taxable as such, so the gate-moneys taken at the benefit match, which may be regarded as the contribution of the club to the subscription list, are, I think, in the same category. If the benefit had taken place after Mr Seymour's retirement, no one would have sought to tax the proceeds as income; and the circumstance that it was given before but in contemplation of retirement does not alter its quality. The whole sum - gate money and subscriptions alike - is a testimonial and not a perquisite. In the end - that is to say, when all the facts have been considered - it is not remuneration for services, but a personal gift."
The Association Football World Cup championship was held every four years and in 1966 the taxpayer was switched by the association to play for England in the championship and was made the captain of the England team. After England won the World Cup that year the association announced that its finance and general purposes committee had earlier resolved that [[sterling]]22,000 should be divided equally among the 22 players of the World Cup squad, although not all of them had played in the World Cup. The taxpayer received a letter from the association enclosing [[sterling]]1,000 as his share of the [[sterling]]22,000. The letter expressed the association's pride in the taxpayer's part in helping to win the cup for England and stated that the [[sterling]]22,000 had been allocated to the team as "a bonus". After the termination of the World Cup championship the taxpayer also received from the manufacturer of a toilet preparation sums of [[sterling]]500 and [[sterling]]250. The [[sterling]]500 was awarded to him as a "a prize" for being the best player in the World Cup championship and the [[sterling]]250 as a prize for being the best England player. The taxpayer did not know until after the championship that the manufacturing company would be awarding prizes and he had never had any other dealings or connection with the company. He was assessed to income tax under Schedule E of the Income Tax Act 1952 in respect of the three sums of [[sterling]]1,000, [[sterling]]500, and [[sterling]]250 on the grounds that these payments accrued to him by virtue of his employment and were "emoluments" therefrom.
Held: (1) The [[sterling]]1,000 was not taxable under Schedule E; the payment was in the nature of a gift or testimonial to the taxpayer to mark his participation in an exceptional event and was not made as a reward for his services because (i) at the time it was made the taxpayer had ceased to be under the control of the association, it had dispensed with the services of the taxpayer; (ii) the taxpayer had no knowledge that he would receive the [[sterling]]1,000 prior to performing the services which he rendered; (iii) the payment was not linked with quantum of services rendered by the members of the cup winning team; (iv) the terms of the association's letter to the taxpayer indicated that the payment was intended to mark its pride in a great achievement rather than to remunerate the taxpayer for the meritorious execution of his service; (v) it was more consistent with the character and functions of the association to construe the payment as a testimonial or a mark of esteem; and (vi) the payment had no foreseeable element of recurrence.
(2) Neither the [[sterling]]500 or the [[sterling]]250 were taxable under Schedule E; the prizes were plainly offered in order to publicise the manufacturer's products and were not in the nature of a reward for services rendered by the taxpayer to the Football Association or to his club or anyone else.
Held: Franklyn J found there was a nexus between the taxpayer's employment as a footballer and the benefit received. The question was whether this nexus was sufficient for the $20,000 to be categorised as "really incidental to his employment" (FCT v Dixon (1952) 86 CLR 540). His Honour emphasised the fact that it did not matter that the taxpayer gave himself no chance of winning the Sandover Medal. What was important was that the award was secured by the taxpayer playing football to the best of his ability. Consequently the $20,000 could be regarded as a "clearly recognisable and recognised incident of the appellant's employment as a footballer with the club".
The fact that the donor was to some extent motivated to secure benefits to Channel 7 was not considered to be a determinative factor. The character of the receipt was determined by its quality in the hands of the recipient. The overall circumstances indicated that the sum was received by virtue of his employment. The payment was not "referable to the attitude of the donor to the donee personally" as was the case in Scott v FCT (1966) 117 CLR 514. The payment was "directly related to the taxpayer's employment by the club as a footballer".
Franklyn J considered that there was a direct relationship because the cause of the payment was the taxpayer's employment as a footballer. This made him eligible to receive the award and obliged him to play to the best of his ability. In the end the latter point secured for the taxpayer the Sandover Medal and consequently the money. "[T]he payment is directly related to the performance by the recipient of his duty as an employee of the club, which performance itself secures the votes of umpires and results in receipt of the payment."
Held: The collections were taxable because they arose in the ordinary course of the taxpayer's employment. Occasions for the collections arose repeatedly. The taxpayer was entitled by the terms of his contract to invite subscriptions and therefore from the standpoint of the taxpayer the proceeds of the collections were earnings accruing from his employment.
Per Jenkins LJ at p 104 (in relation to voluntary payments made to the holder of offices or employments):
"I deduce the following principles: (i) The test of liability to tax on a voluntary payment made to the holder of an office or employment is whether, from the standpoint of the person who receives it, it accrues to him by virtue of his office or employment, or in other words by way of remuneration for his services. (ii) If the recipient's contract of employment entitles him to receive the voluntary payment, whatever it may amount to, that is a ground, and I should say a strong ground, for holding that, from the standpoint of the recipient, it does accrue to him by virtue of his employment, or in other words by way of remuneration for his services. (iii) The fact that the voluntary payment is of a periodic or recurrent character affords a further, but I should say a less cogent, ground for the same conclusion. (iv) On the other hand, a voluntary payment may be made in circumstances which show that it is given by way of present or testimonial on grounds personal to the recipient, as for example a collection made for the particular individual who is at the time vicar of a given parish because he is in straitened circumstances, or a benefit held for a professional cricketer in recognition of his long and successful career in first-class cricket. In such cases the proper conclusion is likely to be that the voluntary payment is not a profit accruing to the recipient by virtue of his office or employment but a gift to him as an individual paid and received by reason of his personal needs in the former example and by reason of his personal qualities or attainments in the latter example."
Held: The gifts were taxable. The test was whether they were gifts given as a reward or remuneration for services or a mere gesture of goodwill, and that was a question of fact and degree. Having regard particularly to the regularity of the payments year after year, it was open to the Commissioner to find that they were made in return for services.
Held: The reason for the payments was the taxpayer's personal success in passing the examination and not for services performed for the bank. The payments were therefore not assessable as income from the taxpayer's employment.
Held: The Easter offering were profits accruing to the vicar by reason of his office within the meaning of the Act.
Per Lord Ashborne at p 107:
"These offerings had been made for several years to the taxpayer, the vicar of East Grinstead. They were made in response to a systematic appeal, initiated by the bishop and supported by the churchwardens, to induce collections to eke out slender stipends. People were urged, it is true, to subscribe as a personal freewill gift, the contributions were wholly voluntary, and the amount given was regulated entirely by the discretion of the subscribers. But in what character did the appellant receive them? It was suggested that the offerings were made as personal gifts to the vicar, as marks of esteem and respect. Such reasons no doubt played their part in obtaining and increasing the amount of the offerings, but I cannot doubt that they were given to the vicar as vicar, and that they formed part of the profits accruing by reason of his office. The bishop was naturally anxious to increase the scanty stipends of ill-paid vicars. The whole machinery was ecclesiastical: bishop, churchwardens, church collections, and I am unable to see room for doubt that they were made for the vicar because he was the vicar, and became, within the statute, part of the profits which accrued to him by reason of his office."
Held: Tips received by a person as a reward for services rendered, although voluntary gifts made by people other than the employer, are assessable to tax as an emolument forming part of the profits arising out of the person's employment. The tips received by the taxicab driver were assessable income as they arose out of his employment and were given as a reward for services.
Held: The gifts were taxable as profits of the huntsman's employment. They were received by the huntsman in his capacity as huntsman. In the absence of evidence to the contrary, the gifts, being regularly made year by year, must be taken to have been made in pursuance of the custom to make gifts to the huntsman at Christmas time. The consequence was that the object of the gifts was the huntsman (whoever he was) by virtue of his office, though personal regard also entered into the matter particularly as regarded the amount of the gifts.
Hayes was an officer of both companies, for which he received remuneration. He also performed trifling services and continued to give good financial advice to Richardson, as a result of their close personal relationship.
The Commissioner claimed the receipt fell within the general concept of income or was income in relation to employment (s 26(e), Income Tax Assessment Act (Cth)).
Held: If the receipt was not a receipt under ordinary concepts then it could not be caught by the more specific section (s 26(e)). Both sections required there to be a real relationship between the receipt and the employment or service.
The crucial question, therefore, was whether it was possible to relate the receipt of the shares by Hayes to any income-producing activity on his part. Was the gift an incident of personal exertion? The Court found there was no need for a legal obligation for the payment.
The Court considered the motive of the donor, gratitude for the services rendered and the advice given. It held that, though relevant, these factors are seldom decisive. The Court also weighed these motives against the factors of goodwill between the two men, and Richardson's promise to "make it up" to Hayes.
More important was the objective assessment of the character of the receipt in the hands of the recipient. It was held that Hayes had been fully remunerated for his services as an officer of both companies. Furthermore, the advice given and the "trifling" services performed by Hayes were explained as "merely giving advice as one might to a friend". They could not be described as activity engaged in for producing income. There was no act by Hayes to which the gift from Richardson could be related. There was nothing to displace the prima facie presumption that a "voluntary gift from A to B is not income in B's hands".
Held: The [[sterling]]350 was not liable to tax because the Crown failed to show that it was a payment for services (and, consequently, that it was a profit from the employee's office or employment). There was nothing in the housing agreement to suggest that that was the nature of the payment, except the relationship of the parties, which was not sufficient to justify such a conclusion.
Per Lord Radcliffe at p 823:
"[I]t is not easy in any of these cases in which the holder of an office or employment receives a benefit which he would not have received but for his holding of that office or employment to say precisely why one considers that the money paid in one instance is, in another instance is not, a `perquisite or profit ... therefrom'.
The test to be applied is the same for all. It is contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise `from' the office or employment. In the past several explanations have been offered by judges of eminence as to the significance of the word `from' in this context. It has been said that the payment must have been made to him `in his capacity of employee'. It has been said that it is assessable if paid `by way of remuneration for his services' and said further that this is what is meant by payment to him `as such'. These are all glosses and they are all of value as illustrating the idea which is expressed by the words of the statute. But it is, perhaps, worth observing that they do not displace those words. For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee. It is just because I do not think that the [[sterling]]350 which are in question here were paid to the taxpayer for acting as or being an employee that I regard them as not being profits from his employment. ...
The essential point is that what was paid to him was paid to him in respect of his personal situation as a house-owner who had taken advantage of the housing scheme and had obtained a claim to indemnity accordingly. In my opinion, such a payment is no more taxable as a profit from his employment than would be a payment out of a provident or distress fund set up by an employer for the benefit of employees whose personal circumstances might justify assistance."
Held: The signing-on fee was a capital sum paid to the taxpayer as consideration for his relinquishing his amateur status for the rest of his life, viz, paid in compensation for the loss of a permanent asset. The Commissioners directed themselves properly in finding that the true nature of the [[sterling]]3,000 must first be sought in the agreement which the parties actually made, whatever their motives for so doing. Rule 24 of the Rugby League By-laws was imported into the playing agreement by cl 3 thereof and thus the [[sterling]]3,000 was a once-and-for-all payment payable only by the first professional club which an amateur player joined and was connected with the relinquishment of amateur status. The payment of the [[sterling]]3,000 to the taxpayer was quite separate from the engagement of his services and was not a payment of remuneration in advance. It was an inducement to him to put himself into a position in which he could be employed by Hull Football Club and to relinquish his amateur status. Accordingly the [[sterling]]3,000 was not taxable as an emolument of the taxpayer under Schedule E.
Held: The Crown, on whom the onus lay, failed to show that, on the realities of the situation, the transfer of the shares to A constituted an emolument from an office or employment within s 156 of the Income Tax Act 1952. The agreement expressed the consideration for the shares not as being the rendering of services by A under the contract, but his undertaking to serve the company which pointed not to the continuous rendering of services but to the initial entering into the obligation to serve. The taxpayer was giving up a secure livelihood in order to undertake to serve the company full-time and he could not do the latter without also doing the former. The shares were transferred to A on an out and out basis in consideration of A entering into a contract whereunder his employment was to commence not forthwith but within a little over six months. A might have died before he had rendered any services whatever to the company, yet there was no provision for him to return any of the consideration. Moreover, it was not the company which was transferring the shares, but L, albeit that he was in control of the company.
The loan was based on the salary payable to the taxpayer at the commencement of the course. In the event of such salary being increased during the period of training by reason of a national salary award, the loan was to be deemed to be increased by a corresponding amount equated over the unexpired period of the course at the date of operation of the award.
The taxpayer was successful on the course and on 15 July 1966 she returned to the local authority's employment as a fully-fledged health visitor. She remained with the authority until 18 January 1968, which was three days after the period of 18 months had expired and the loan thereupon ceased to be repayable. The inspector of taxes assessed the taxpayer under s 156(a) of the Income Tax Act 1952 as amended (Schedule E), on the basis that the loan was an emolument of the taxpayer's employment for the year 1967-68.
Held: The amount of the loan was assessable to the taxpayer for the year 1967-68 because the consideration for the loan in the first instance was the promise by the taxpayer to follow the course of training and at its completion to serve the local authority for a period of at least 18 months; the actual 18 months' service turned the loan into an absolute payment and made it a reward for past services and as such an emolument arising from the taxpayer's employment; since the loan was taxable as a reward for the services it was immaterial that the right not to repay the loan stemmed from the loan agreement and not from the taxpayer's contract of service.
Held: The sum [[sterling]]7,000 was not remuneration. Though it was true to say that if the taxpayer had not entered into the agreement he would not have received that sum, it was not a profit from the office of director and manager. The sum was the consideration for the benefit of a covenant which only came into operation after completion of the service.
Held: The trust was a genuine discretionary trust and the repayment of the income in question into the son's bank account was in the proper exercise of a genuine discretion. If the trustees under such a trust believe that it is for the child's benefit that the income should be expended in paying a school bill for which the child's parent is liable or if they put the income at the disposal of the parent who uses it to discharge such a bill the income in question does not thereby suddenly lose its character as income of the child and become the income of the parent. No doubt the payment of part of the expense of the education of an employee's child may be "money's worth" to the employee but the way in which the employer contributed to the education expenses in this case was not by paying the school bills or part of the school bills out of its own money but by providing the child with an income out of which the bills or part of them could be met. The company was admittedly not actuated by benevolence in executing the deed. It executed it in order to obtain a commercial advantage but that advantage would result (if at all) simply through the performance by the trustees of their duties under the deed. These duties would have been precisely the same if the covenantor had had no commercial advantage in mind.
Held: Dixon CJ and Williams J saw the case revolving around whether the [[sterling]]104 given to the taxpayer was "in respect of or in relation, directly or indirectly, to any employment of or, services rendered by him". A mere historical connection with some employment was not considered to be sufficient.
"[N]o contractual right to the payment or allowance 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 somebody else and are obtained as of right or merely as a recognised incident of the employment or work". The relevant employment in this case was employment as a soldier, for which the taxpayer knew, with some assurance, he would receive an "`income' of the level appropriate to civilian service". Therefore the payment was an expected periodic payment arising out of circumstances that extended to the war service undertaken. Their Honours also placed some emphasis on the taxpayer's dependence on the payments for regular expenditure upon himself and his dependants. (This point has since been criticised in subsequent cases. See FCT v Harris (1980) 43 FLR 36.) Consequently the payments were income.
Fullagar J gave less weight to the periodicity of the payments, although considering that fact to have some importance. His Honour considered the payments to be substitutes for the wages which would have been earned if the enlistment had not taken place. "[E]ven though it is paid voluntarily and there is not even a moral obligation to continue making the payments" it is income. "It acquires the character of that for which it is substituted and that to which it is added".
In April 1976 Harris received a $450 payment. Apart from the memorandum this was an unexpected and unsolicited receipt. Similar payments were received in subsequent years.
The Commissioner assessed Harris on the payment. Harris successfully appealed to a Board of Review. After an unsuccessful appeal to the Victorian Supreme Court the Commissioner took his case to the Federal Court.
Held: Bowen CJ affirmed that gifts are not ordinarily income in the hands of the recipient. He drew out guidelines from previous cases that may help in the analysis of such transactions. Motives of the donor and regularity or periodicity were found to be relevant but seldom decisive factors. On the other hand "a generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or indeed any revenue producing activity carried on by him".
He went on to consider FCT v Dixon (1952) 86 CLR 540 in more detail because it stood slightly apart from the other cases. He drew from the majority decisions several useful considerations.
1. Can the payments received by the recipient be described as incidental to current employment? In Dixon it was a promise made by the employer to pay for the employee while he was on military duty that weighed heavily with the Court.
2. Does the recipient rely on the payment for regular expenditure? Bowen CJ went on to state that such considerations throw little light on the character of the receipt.
3. Can the payments be described as a substitute for the wages or salary that would have been earned? Such a payment "acquires the character of that for which it is substituted and that to which it is added".
Bowen CJ then went on to apply these guidelines to the facts of the case. Harris' former employment was described as the cause of the payment, but the payment was not the product of that employment. The Chief Justice considered the fact that the payment was not related to the length or quality of service as significant. His Honour paid particular attention to the supplemental nature of the payment. Was it to take on the characteristics of the pension, that is, was it assessable income for this reason? Bowen CJ held that the payment by the bank was "intended, and it in fact was, a supplement to the taxpayer's pension". Despite this, the overall circumstances of the case were insufficient to lead his Honour to the conclusion that the gift should be regarded as income.
Deane J, dissenting, held the payment to be income. In doing so he focused on three considerations.
1. Even though the payment was not the product of Harris' employment with the bank it could still not be considered as a mere gift made on personal grounds. "It was received by the taxpayer because he was one of a class of ex-employees of the bank whose well-being the bank was, for proper commercial reasons, concerned to protect".
2. The payment was, when viewed with the advantage of hindsight, one of a number of regular payments. "Regularity and periodicity are factors of some importance in determining whether particular receipts possess the character of income in the hands of the recipient".
3. "The fact that a payment, which is a periodic payment, is made to supplement income is ... a factor pointing to the receipt of the amount paid being a receipt of income".
A main asset of the estate was a parcel of land of 82 acres on Pennant Hills Road, Sydney, which was valued for probate at [[sterling]]15,000. The land was, for town planning purposes, in the green-belt area and thus was subject to restrictions on use. Prior to his death, Freestone had made a number of applications to the authorities to have the land rezoned, but without success. The taxpayer made representations on Mrs Freestone's behalf to have the restrictions lifted and this was achieved towards the end of 1959. In May 1960, 48 acres of the land were sold for [[sterling]]170,023. The taxpayer had played a large part in the negotiations for this sale and had advised Mrs Freestone on the terms and covenants to be included in the contract. The sale was completed on 8 August 1960.
On 19 August 1960, while travelling with Scott on a mission relating to her property outside Parramatta, Mrs Freestone informed the taxpayer that she intended to distribute some of her money as gifts. She proposed to write out four cheques, including one for [[sterling]]10,000 in favour of L G Scott & Co, the taxpayer's firm. Having discussed the matter, she instructed the taxpayer write out the four cheques and then she signed them. The taxpayer accepted the money and paid gift duty on the [[sterling]]10,000. A bill of costs relating to the sale was later received by Mrs Freestone.
In assessing the taxpayer for the year ended 30 June 1961 the Commissioner included the [[sterling]]10,000 in his assessable income. The taxpayer objected and, on the objection being disallowed, the objection was treated as an appeal and forwarded to the High Court.
Held: The [[sterling]]10,000 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. It was therefore not income according to ordinary concepts.
The [[sterling]]10,000 was not assessable income by virtue of the operation of s 26(e) of the Income Tax and Social Services C