Employment Income

Statement of principles

Chargeable, an amount is ordinary income, and therefore included in income under sec 4(1) if there is a sufficient nexus between the amount and an earning activity. Where the earning activity is employment or the rendering of services, the nexus test is satisfied if the amount is characterised as a “product or incident of employment or a reward for services rendered”. This is referred to as the “income from personal exertion” principle. An amount may satisfy the nexus test even though it is consideration for past or future services, is paid by a third party, or is the product of an isolated act or service. An amount that is a benefit that cannot be turned to pecuniary account is not ordinary income: Tennant v. Smith [1892] AC 150. If the benefit is convertible, then it is ordinary income in the amount for which the benefit can be converted.

Generally, the characterisation of an amount as a product or incident of employment or a reward for services rendered is quite obvious – for example, salary, wages, fees and commissions are clearly consideration for employment or services rendered. See section 19(1)(a) ITA.

Similarly, a lump sum payment to the taxpayer made at the commencement of employment in order to compensate for benefits forgone under a former employer’s employee share scheme was held to be assessable because the money was “an integral part … [and] of the main attractions” of the salary package accepted by the employee, representing a “straightforward inducement” for entering into the new employment, and being in the nature of a payment for future service: Pickford v. FC of T 98 ATC 2268. In Allman v. FC of T 98 ATC 2142, a payment for income lost because of wrongful dismissal was held to be in substitution for income which the taxpayer would have earned, and therefore assessable.

In other cases, the satisfaction of the nexus test is less clear. An amount may be a reimbursement of expenses, purely gratuitous or consideration for something other than employment or services rendered. In each case, it is a question of the proper characterisation of the amount as to whether it is ordinary income.

An attempted diversion of personal exertion income to a family company will only be successful if there are factors that indicate that the family company is truly in the business of providing personal services. In Case 3/99 99 ATC 134 an employed investment adviser entered into an agreement with his employer under which he ceased to receive a salary and instead commission payments for his investment advice were paid to a family company. The AAT held that the commission payments were income of the adviser, not of the company. There was nothing to indicate that the company was carrying on a business. On the contrary, the adviser continued to operate from the employer’s premises, carried a business card in the name of the employer and, from the clients’ perspective, there was nothing to indicate they were dealing with the company rather than with the investment adviser.

Characterising an amount

OLD COLONY TRUST CO v. COMMISSIONER

Supreme Court of the United States, 1929 279 U.S. 716, 49 S.Ct. 499.

Mr. Chief Justice TAFT delivered the opinion of the Court. * * *William M. Wood was president of the American Woolen Company during the years 1918, 1919 and 1920. In 1918 he received as salary and commissions from the company $978,725, which he included in his federal income tax return for 1918. In 1919 he received as salary and commissions from the company $978,725, which he included in his federal income tax return for 1918. In 1919 he received as salary and commissions from the company $548,132,27, which he included in his return for 1919.

August 3, 1916, the American Woolen Company had adopted the following resolution, which was in effect in 1919 and 1920:

"Voted: That this company pay any and all income taxes, State and Federal, that may hereafter become due and payable upon the salaries of all the officers of the company, including the president, William M. Wood; the comptroller, Parry C. Wiggin; the auditor, George R. Lawton; and the following members of the staff, to wit: Frank H. Carpenter, Edwin L. Heath, Samuel R. Haines, and William M. Lasbury, to the end that said persons and officers shall receive their salaries or

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other compensation in full without deduction on account of income taxes, State or Federal, which taxes are to be paid out of the treasury of this corporation."

This resolution was amended on March 25, 1918, as follows:

"Voted: That, in referring to the vote passed by this board on August 3, 1916, in reference to income taxes, State and Federal, payable upon the salaries or compensation of the officers and certain employees of this company, the method of computing said taxes shall be as follows, viz.:

" `The difference between what the total amount of his tax would be, including his income from all sources, and the amount of his tax when computed upon his income excluding such compensation or salaries paid by this company.' "

Pursuant to these resolutions, the American Woolen Company paid to the collector of internal revenue Mr. Wood's federal income and surtaxes due to salary and commissions paid him by the company, as follows:

Taxes for 1918 paid in 1919 $681,169.88Taxes for 1919 paid in 1920 $351,179.27

The decision of the Board of Tax Appeals here sought to be reviewed was that the income taxes of $681,169.88 and $351,179.27 paid by the American Woolen Company for Mr. Wood were additional income to him for the years 1919 and 1920.The question certified by the Circuit Court of Appeals for answer by this Court is:

"Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?"

Coming now to the merits of this case, we think the question presented is whether a taxpayer, having induced a third person to pay his income tax or having acquiesced in such payment as made in discharge of an obligation to him, may avoid the making of a return thereof and the payment of a corresponding tax. We think he may not do so. The payment of the tax by the employers was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor. The form of the payment is expressly declared to make no difference. Section 213, Revenue Act of 1918, c. 18, 40 Stat. 1065. * It is therefore immaterial that the taxes were directly paid over to the Government. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed. The certificate shows that the taxes were imposed upon the employee, that the taxes were actually paid by the employer and that the employee entered upon his duties in the years in question under the express agreement that his income taxes would be paid by his employer. This is evidenced by the terms of the resolution passed August 3, 1916, more than one year prior to the year in which the taxes were imposed. The taxes were paid upon a valuable consideration, namely, the services rendered by the employee and as part of the compensation therefor. We think therefore that the payment constituted income to the employee.

This result is sustained by many decisions. * * *

Nor can it be argued that the payment of the tax * * * was a gift. The payment for services, even though entirely voluntary, was nevertheless compensation within the statute. This is shown by the case of Noel v. Parrott, 15 F.2d 669. There it was resolved that a gratuitous appropriation equal in amount to $3 per share on the outstanding stock of the company be set aside out of the assets for distribution to certain officers and employees of the company and that the executive committee be authorized to make such distribution as they deemed wise and proper. The executive committee gave $35,000 to be paid to the plaintiff taxpayer. The court said, p. 672:

"In no view of the evidence, therefore, can the $35,000 be regarded as a gift. It was either “compensation for services rendered, or a gain or profit derived from the sale of the stock of the corporation, or both; and, in any view, it was taxable as income."

It is next argued against the payment of this tax that if these payments by the employer constitute income to the employee, the employer will be called upon to pay the tax imposed upon this additional income, and that the payment of the additional tax will create further income which will in turn be subject to tax, with the result that there would be a tax upon a tax. This it is urged is the result of the Government's theory when carried to its logical conclusion and results in an absurdity which Congress could not have contemplated.

In the first place, no attempt has been made by the Treasury to collect further taxes, upon the theory that the payment of the additional taxes creates further income, and the question of a tax upon a tax was not before the Circuit Court of Appeals and has not been certified to this Court.

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We can settle questions of that sort when an attempt to impose a tax upon a tax is undertaken, but not now. It is not, therefore, necessary to answer the argument based upon an algebraic formula to reach the amount of taxes due. The question in this case is, "Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?" The answer must be "Yes."

Considerations in characterising an amountIn characterising an amount, the Court will not confine itself to the form of the supporting documentation, but rather will look at the whole of the circumstances surrounding the receipt. In Reuter v. FC of T 93 ATC 5030, the taxpayer was an accountant engaged by Rothwells Ltd. to advise in the takeover of John Fairfax Ltd. by Tryart Pty Ltd. Rothwells agreed to pay the taxpayer half of the success fee payable to it by Tryart. Under a loan arrangement between Rothwells and Bond Media which included the assignment of the right to the success fee to Bond Media by Rothwells, Bond Media agreed to pay $8m to the taxpayer as consideration for the taxpayer covenanting that he would not, without the prior approval of Bond Media, make any claim or take any action against Bond Media or any other party in relation to the success fee. The Court ignored the form of the transaction to hold that the receipt was so closely associated with the services rendered by the taxpayer to Rothwells that it was a product of those services. Of particular importance was the fact that, given Rothwells’ financial position, all parties to the arrangement knew that this was the only way that Rothwells could effectively reward the taxpayer for his services and that the $8m was paid out of loan funds available to Rothwells.

An amount that is not characterised as a product or incident of employment or a reward or services rendered may still be ordinary income under one of the other principles which comprise the notion of ordinary income, such as the income from business, compensation or periodicity principles. This is illustrated by FC of T v Cooling (1990) 22 FCR 42. In this case, the taxpayer was a partner in a firm of Brisbane solicitors. The partnership received a payment of $162,000 from AMP which was expressed to be in consideration for the partnership’s procuring its service company’s agreement to move premises and for signing certain ancillary guarantees. The Commissioner argued that the payment was made to the taxpayer as facilitators of a transaction between two other persons. This argument was rejected on the ground that, in substance, the payment was characterised as a lease incentive payment rather than as a reward for services rendered. Nevertheless, it was held that the lease incentive payment was an ordinary incident of the taxpayer’s business as a solicitor, and therefore ordinary income.

Allowance. In Taxation ruling TR 92/15, the Commissioner ruled that an “allowance” is a predetermined amount to cover an estimated expense which is paid regardless of whether the recipient incurs the expense or the anticipated amount of the expense. In Case 153 , it was held that a reimbursement of expenses is not an allowance. In that case, a reimbursement was said to transfer the burden of an expense actually incurred from the employee to the employer. In Taxation Ruling TR 92/15, the Commissioner stated that a requirement that expenses be vouched or substantiated supports the characterization of a payment as a reimbursement, as does an obligation to refund unexpended amounts. If a payment in the employment context is properly characterized as a reimbursement of expenses (rather than an allowance), then it may be an expense payment fringe benefit.

Section 19(1)(a) includes in employment income the amount of any travelling, entertainment, utilities, cost of living, housing, medical or other allowance in the employment income of an employee. This ensures that all the income accruing to the employee, irrespective of how the employee spends that income, provided that the expenditure was not incurred in deriving gross income (i.e. an expense made directly in the course of performing one’s duties of employment) is taxable.

Reimbursement of expenses. While an amount derived by an employee as a reimbursement of expenses incurred by the employee in the course of employment or as a condition of employment may be characterised as a product or incident of employment, it is argued that the reimbursement is not ordinary income derived by the employee. See section 19(2)(d) ITA.

The reimbursement would be seen as serving the proper business purposes of the employer and, therefore, as giving rise to no gain to the employee. The authority for this proposition is the judgment of Lord Denning in Hochstrasser v Mayes.If the amount of the reimbursement is characterised as ordinary income, then the employee may be in a neutral position through the allowance of a deduction for the amount of the expenditure incurred. However, the expenditure incurred by an employee will not always satisfy the tests of deductibility. Indeed, the reimbursement in Hochstrasser v Mayes is an example of this.

Consequently, it is argued that, under ordinary principles, the proper approach to a reimbursement of employment-related expenses is to treat them as giving rise to no gain to the employee deriving them.

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Gratuitous payments. The fact that an amount is gratuitous will not necessarily preclude it from being ordinary income. If the amount is properly characterised as a product or incident of employment or a reward for services rendered, it is ordinary income. For example, an employer may pay a Christmas bonus to some or all employees in recognition of the level of sales achieved during the year. While the employer may be under no obligation to pay the bonus, it is still properly characterised as a product of employment. See section 19(1)(a) ITA. On the other hand, a gratuitous payment which is made purely on personal grounds is properly characterised as a ‘mere gift’, and therefore is not within the income from personal exertion principle. See section 21(1)(j) ITA. For example, an employer may give an employee a wedding present which may be characterised as a mere gift.

An amount must be characterised objectively in the hands of the donee, and therefore, while the motives of the donor may be relevant, they will seldom be decisive.

A gratuitous payment may be made by a party or former party to the services relationship, i.e. an employer or it may be made by a third party.

Gratuitous payments made by a party to the services relationship. It will only be in exceptional cases that a gratuitous payment made in the course of an on-gong employment or services relationship will be characterised as a mere gift.

An example of such a case is Scott v FC of T (1966) 117 CLR 514. In this case, the taxpayer was a solicitor who had, over a period of years, performed various legal services for a widow. The solicitor had previously acted for her former husband and there developed a personal friendship between the taxpayer and his client. The client made an unsolicited gift of £10,000 to taxpayer which was expressed to be in appreciation of his friendship rather than for any legal services performed. The Commissioner argued that the nexus test was satisfied because the gift was a ‘consequence’, however indirect, of services rendered. This formulation of the nexus test was rejected by Windeyer J.

His Honour held that;

‘an unsolicited gift does not become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered.’

It was held that the receipt was a mere gift. Factors supporting such a characterisation included the size of the gift, the unusual circumstances in which the gift was made, the fact that the taxpayer had been fully remunerated for services rendered, the fact that gifts had been made to other persons at the same time, and the fact that it was unexpected and unsolicited.

Payment after employment relationship ended. Section 19(1) and 19(6)(c) ITA.There have been a number of cases where the gratuitous payment has been made after the employment relationship has ended. If the receipt is characterised as additional remuneration for past services rendered, then it is ordinary income. This is the case even if there was no obligation to make the additional payment.

In Hayes v FC of T (1956) 96 CLR 47, the taxpayer had been employed by Richardson as his financial adviser. Subsequently, the business was incorporated and the taxpayer was employed by the company. The taxpayer was also issued with shares in the company. On incorporation, Richardson relinquished management of the company. However, the company did not trade successfully and Richardson agreed to take active control of the company on the condition that all issued shares in the company were transferred to him. The taxpayer reluctantly transferred his shares, feeling under a moral obligation to do so. Under Richardson’s control the company traded successfully and was eventually floated. As a gesture of goodwill, Richardson made several large gifts of shares in the public company, including 12,000 shares to the taxpayer. It was held that the taxpayer had been fully remunerated for the work done while in Richardson’s direct employ and while employed by the companies controlled by him. In fact, the only services” to which the gift could be related was the giving of what may be called clubhouse advice”, i.e. advice given in the course of casual conversation, but this was not an income producing activity of the taxpayer. The receipt of the shares was characterized as a mere gift.

A similar conclusion was reached in the case of Moore v Griffiths [1972] 3 All ER 399. In this case, the taxpayer had been a member of the successful England World Cup soccer squad of 1966. A payment of £1,000 was made by the English Football Association to each player in the squad. The payment was made after the players’ service agreements with the Association were terminated.

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It was held that the payment was a mere gift, being in the nature of a personal tribute as applause for the victory and as a mark of the Association’s esteem rather than as a reward for services rendered. Also important was the fact that it was a one-off payment which was not provided for in the player’s services agreements and was unexpected.

Periodic paymentsIn the above case, the gratuitous payment was a one-off event. Where there have been periodic payments, the analysis is more complex, involving a consideration of other aspects of the notion of ordinary income. In FC of T v Dixon, (1952) 86 CLR 540, the taxpayer’s employer had sent a circular to staff during World War II advising that it would endeavour to pay to staff who enlisted amounts to “make up the difference between their present rate of wages and the amounts they will receive from the naval or military authorities”. The employer was under no legal obligation to make the offer or the payments. The taxpayer subsequently enlisted and received a series of such payments from his former employer. The payments were held by three judges (Dixon CJ, Williams and Fullagar JJ) to be ordinary income, although their reasons differed. Two judges (McTiernan and Webb JJ) dissented on this point.

All judges agreed that the payments were not additional remuneration for past services rendered to the donor. Dixon CJ and Williams J regarded the payments as an “incident” of the taxpayer’s military service in the sense that he was able to enlist with the expectation that he would not suffer a decrease in pay. Their Honours also relied on the fact that the payments were periodical and were relied upon by the taxpayer to support his family. Fullagar J did not consider that the payments satisfied the nexus test in relation to the taxpayer’s military service. Nevertheless, he held that the payments took the character of that which they replaced, namely salary; and wages, and therefore were ordinary income.

Gratuitous payments made by a third party to the services relationship. Section 19(1) An amount may be characterized as a product of employment or services rendered even though it is paid by a third party. This will be the case where the amount is a “clear recognized incident” of the recipient’s employment: The classic example of this is a tip paid (theoretically, at least) in appreciation of the quality of the services rendered: Calvert v Wainwright (1947) 27 TC 475, Penn v Spiers & Ponx Ltd [1908]1,K.B 766, Great Western Railway Co v Helps[1918] AC141. Another example is a “best and fairest” award won by a professional athlete: Kelly v FC of T 85 ATC 4283.

In Moorhouse v Doland (1955) 36 T.C 12, the taxpayer was a professional cricketer entitled under the terms of his contract of employment to collections from spectators whenever he performed outstanding cricketing feats (which occurred with a degree of regularity). The moneys collected from spectators on these occasions were held to be income from personal exertion. On the other hand, in Seymour v Reed, (1927) 11 T.C 12 the proceeds of a benefit match for a professional cricketer were characterized as a tribute to the taxpayer’s personal tributes rather than as a reward for his cricketing services. In this case, the benefit match was a discretionary, one-off event. It should be noted that this case was decided some time ago, and that it is likely that today a benefit match would be regarded as a normal incident of the employment of a professional sportsperson.

Ex gratia payment to former employeeIn FC of T v Rowe, (1997) 187 CCR 266 an ex gratia payment was made by the Queensland Government to a former local government employee. The amount of the payment equalled the legal fees incurred by the employee in successfully defending himself at a statutory inquiry. It was held by a majority of the High Court that the payment was not a reward for any services previously provided by the taxpayer to the local authority.

They payment was made in recognition of a wrong done to the taxpayer and with regard to the fact that the taxpayer was forced to participate in an inquiry undertaken for public purposes. Consequently, the payment was not characterized as remuneration but as reparation and as such was not ordinary income.

Provision of services or disposal of a capital asset. An amount will not be ordinary income where it is characterized as being a gain arising on the disposal of a capital asset: Trustees of Earl Haig v IR Commrs, (1939) 22 TC 725.

On the other hand, an amount will be ordinary income where the disposal of a capital asset is only ancillary to the provision of services: Hobbs v Husssey [1942] IKB 491.

Section 19(1) provides that employment income means any income derived by an employee from any employment and includes the following amounts, whether of a revenue or capital nature…. Emphasis mine. This implies that the distinction between a revenue or capital receipt for the amount listed in section 19(1)(a) to (h) was quashed and as long as a payment is derived from employment, it is employment income. The following are the amounts:

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(a) any wages, salary, leave pay, payment in lieu of leave, overtime pay, fees, commission, gratuity, bonus, or the amount of any travelling, entertainment, utilities, cost of living, housing, medical, or other allowance;

(b) the value of any benefit granted;

(c) the amount of any discharge or reimbursement by an employer of expenditure incurred by an employee, other than expenditure incurred by an employee on behalf of the employer which serves the proper business purposes of the employer;

(d) any amount derived as compensation for the termination of any contract of employment, whether or not provision is made in the contract for the payment of such compensation, or any amount derived which is in commutation of amounts due under any contract of employment;

(e) any amount paid by a tax-exempt employer as a premium for insurance on the life of the employee and which insurance is for the benefit of the employee or any of his or her dependants;

(f) any amount derived as consideration for the employee’s agreement to any conditions of employment or to any changes in his or her conditions of employment;

(g) the amount by which the value of shares issued to an employee under an employee share acquisition scheme at the date of issue exceeds the consideration, if any, given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares;

(h) the amount of any gain derived by an employee on disposal of a right or option to acquire shares under an employee share acquisition scheme.

Section 19 identifies two taxable events. First, it applies where a share is acquired under an employee share acquisition scheme either directly or as a result of the exercise of a right acquires the share. Secondly, it applies where a right to acquire a share under an employee share acquisition scheme is disposed of to a non-associate.

An employee who is issued with a share under an employee share acquisition scheme is required to include in his or her chargeable income the market value of the share less the sum of any amounts paid for the share. The amounts paid include any amount given as consideration for the grant of a right or option to acquire the share. If the employee disposes of a right or option to acquire a share to a person, then the difference between the amount received and the amount paid for the option is included in the employee’s chargeable income.

A share or right to acquire a share is acquired under an employee share acquisition scheme if it was acquired “in respect of, or for or in relation directly or indirectly to, any employment of the taxpayer.

It follows that if the shares or rights are issued directly to a “relative” (as defined in sec 2 of the ITA) of the employee, then that person is treated as the taxpayer for the purposes of 19(6)(b).

There are cases from the common law jurisdiction which made a distinction between revenue and capital receipts. The ITA attempted to remove any controversy that may arise in characterising an amount as income or capital by removing the distinction.

In Brent v FC of T, (1971) 125 CLR 418, the taxpayer entered into an agreement with a newspaper under which she, as vendor, “sold” the exclusive rights to the publication of her life story. It was argued that the amount received was in return for the sale of copyright in her story (i.e. the sale of a capital asset). This argument was rejected by Gibbs J, who characterized the payment as being in return for services rendered, namely the making of herself available for interview by the newspaper’s journalists, the communication of her story to the journalists and the signing of a manuscript prepared by the journalists.

A similar issue arose in FC of T v McArdle, 89 ATC 4051. In this case, the taxpayer was granted a number of options under an employee share acquisition scheme. He received a payment of $1m in consideration for the surrender of his rights and options. This payment was characterized as being received as consideration for the disposal of the options and rights rather than as a reward for services rendered.

How would the case of McArdle be reconciled with section 19(1)(h)? Clearly when an employee disposes of her right or option to acquire shares under an employee share acquisition scheme, it cannot be said that the employee was receiving

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a reward for services rendered. However, it seems that section 19(1) is broad enough to include any gain in the employment income of the employee.

Payments received as consideration for giving up valuable rights. As has been stated above, to be income from personal exertion an amount must be a “product or incident” of employment or a reward for services rendered. An amount that is given in return for some other consideration moving from the employee or provider of services will not be income from personal exertion, and therefore may not be ordinary income. Such payments are usually made in return for the recipient giving up valuable rights and may be made either before, during or after the period of service.

Payments made before entering into the services relationship.An amount that is an advance payment for services to be rendered will be ordinary income. Where the receipt is properly characterized as consideration for giving up valuable rights rather than for the performance of services, it will not be income from personal exertion.

An example of this may be an “inducement payment”, i.e. a payment made to “encourage” a person to enter into a services agreement with the payer.

In Jarrold v Boustend, (1964) 41 TC 701 the taxpayer was a Rugby Union who received a “signing-on fee” to play for a Rugby League club. The fee was characterized as being compensation for the giving up of the taxpayer’s amateur status, and therefore not as remuneration for services to be rendered. Consequently, it was a capital receipt. Where the taxpayer is already a professional athlete, a signing-on fee or similar payment may be characterized as a normal incident of employment as a professional athlete. Similarly, if such fees are commonly paid in relation to a particular sport, then it may be argued that the fee is a normal incident of employment as a professional athlete.

In Pritchard v Arundale, [1972] Ch. 229 the taxpayer was a senior partner in a firm of chartered accountants. One of his clients offered him a senior management position, which he was reluctant to accept because it would mean giving up his established position in private practice. Eventually the client arranged for the taxpayer to be issued shares in a related company as an inducement to accept the offer. The inducement was characterized as compensation for the loss of status involved in giving up his position in private practice, and therefore it was not an advance payment for services to be rendered.

However, in Glantre Engineering Ltd v Goodland (1983) 1 ALL ER 542, where the taxpayer was an employed accountant rather than a partner, it was harder to argue the taxpayer was giving up valuable rights.

An inducement payment that was refundable if the taxpayer did not satisfy a minimum period of service was characterized as an advance payment for services to be rendered and, therefore, ordinary income in Riley v Coglan, [1968] 1 ALL ER 314.

These cases have to be read in light of the requirements of section 19(1)(f). Any amount received as consideration for the employee’s agreement to any conditions of employment is employment income. Note that in the cases the employee is giving up some rights rather than agreeing to conditions of employment and the section may therefore not be operative.

Payments made during the period of serviceAn amount that is characterized as consideration for the giving up of valuable rights of a capital nature under a service agreement will not constitute ordinary income.

In Bunnett v FC of T, (1947) 75 CLR 480 the taxpayer was employed as the managing director of a radio station under a seven-year services agreement entitling him to a salary of £1,040 pa plus a percentage of profits. As part of the negotiations for the sale of the station, the taxpayer agreed to cancel the services agreement and enter into a new one. The new agreement reappointed him as managing director but for a shorter term and with reduced power, although there was an option to extend the period of service to the date when the original agreement would have expired. As consideration for the cancellation, the taxpayer was paid a sum of £12,255 in three instalments.This amount was repayable if the taxpayer exercised the option to extend. The payment was characterized as being in consideration for the giving up of valuable rights of a capital nature under the former services agreement and for the entering into the new agreement with different rights.

In Case Z9, 92 ATC 144 the applicant’s employer unilaterally varied the terms of the applicant’s employment contract by terminating his right to a rostered day off (“RDO”) each fortnight and increasing his formal working hours from 35 to 38 per week. The applicant received a lump sum amount equal to three months’ salary as compensation for the loss of the RDO.

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The is amount was payable in three instalments. The compensation received was characterized as consideration for the surrender of valuable rights of a capital nature, and therefore was not ordinary income.

However section 19(1)(f) is relevant here. It provides that any amount received as consideration for the employee’s agreement to any changes in her conditions of employment is employment income. Surely the amounts in Bunnett’s case and Case Z9 would be part of any employee’s employment income by virtue of section 19(1)(f).

Termination payments. Section 19(1)(d)A receipt which is an additional payment for past services rendered is ordinary income: Carter v Wadman (1946) 28 TC 41. However, a payment which is characterized as damages for wrongful dismissal or as consideration for the giving up of valuable rights of a capital nature under a services agreement will not be ordinary income.

Where the consideration for the surrender of rights takes the form of periodic payments in substitution of the payments which would have been received under the services agreement, those payments may be ordinary income under the compensation principle. For example, in C of T (Vic) v Phillips, (1936) 55 CLR 144 the taxpayer received payments in consideration for agreeing to early termination of his services agreement. The total amount of the payments was an estimate of what the taxpayer would have earned if the agreement had not been cancelled. Further, the amounts were paid in monthly instalments over the unexpired period of the agreement. It was held that the taxpayer had been fully remunerated for services rendered prior to rendered. However, the receipts were still held to be ordinary income on the basis that they took the character of that which they replaced, i.e. salary and wages.

A lump sum payment made in return for an employee’s agreement not to compete with the employer on termination of the employment is generally characterized as capital in character.

In Beak v Robson [1943] AC 352, the taxpayer received a lump sum payment of £14,000 in consideration for agreeing not to be involved for five years after termination of his employment in any competing business within 50 miles of the current employer’s premises.

The House of Lords held that the payment was not a product of the taxpayer’s employment, because even though the covenant was entered into while Robson was still serving his current employer, the obligations under Robson’s employment contract were “entirely separate” from those he undertook under the restrictive covenant, and the agreement not to compete would only become operative after Robson had ceased to render services, not during the course of his current employment. The payment was thus characterized as not being a reward for services rendered or to be rendered, but for agreeing to restrict his (capital) right to perform services for others in the future.

A similar result was reached in Higgs v Olivier, [1951] Ch. 899 where in an endeavour to ensure that the profitability of the recently completed film Henry V was not prejudiced, the film company paid the star of Henry V (Sir Laurence Olivier) a lump sum of £15,000 in return for his agreement not to act for 18 months in any other film.

The sum was held to be non-assessable, having been paid to Olivier for giving up the right to earn income as an actor during the specified period, and not for the performance of any acting or other services or employment. The right to earn income was characterized as capital in nature.

There are some circumstances where a payment for a restrictive covenant may satisfy the nexus test and be taxed as ordinary income, namely where:

(i). The restriction is to operate during the currency of the existing employment, or is really only payment in advance for services to be rendered. See Riley v Coglan [1968] 1 ALL ER 314.

(ii). The covenant is a normal incident of a particular employment (for example, restrictive covenants entered into by professional footballers on joining a particular club), or

(ii). In really, there is not significant restriction on the recipients freedom of activity.

BenefitsWe have looked at the standard broad definition of gross income under Section 17. Section 17 specifically includes in gross income employment income and business income of people providing independent personal services. Both of these may be referred to as ‘’compensation for services’’. Such compensation may take the form of property as well as cash (S. 19(1)(b) and it can be indirectly as well as directly paid (S. 58). The provision is apparently broad enough to

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include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever form or mode by which it is effected.

Legally then, the form of payment does not matter. Payment in shillings, property or right to use property is gross income. Would this be true for all benefits? For example, employer has an electric kettle and employees are allowed to quench their thirst and cool their hunger by taking a cup of coffee or tea as they want. Technically, each cup consumed is gross income. In real life, it is impossible to report or enforce each cup of tea or coffee as gross income. The same is applicable to a copy typist using a company computer to type a personal letter or type a student’s final dissertation. These benefits are small or de minimis and are no big deal anyway. But what about travel passes to airline stewards or courtesy discounts to shop attendants?

All the above items are usually referred to as benefits. These benefits are an added favour or service given with the job, besides wages, salary or similar compensation. Conceptually they are gross income. But because of administrative handicaps, taxpayers are not usually obliged to report them.

A ‘’benefit’’ is any monetary or nonmonetary benefit derived from employment that does not constitute cash salary or wages. The possible range of benefits is enormous but they include the provision of a free or subsidised use of a motor vehicle, domestic and household help, employer-provided housing, meals, refreshment or entertainment, paying employee’s bills such as telephone, water and electricity accounts and offering low interest personal and housing loans.

The theoretical case for full inclusion of benefits in the tax base is noncontroversial. Full taxation is a prerequisite to horizontal equity between taxpayers who are wholly remunerated in cash and taxpayers remunerated partly through fringe benefits. It is also a prerequisite to vertical equity because the incidence of fringe benefits tends to rise with taxpayers’ economic incomes and employment status. Full taxation of benefits is also a precondition to achieving an economically efficient tax system. It ensures that the tax system will be neutral between those employers able to provide fringe benefits and those not able to do so and removes the distortion in favour of providing goods and services that are not taxed. Finally, taxation of benefits is important to protect the revenue base.

The overwhelming theoretical case in favour of benefits taxation is countered by a number of conceptual and political problems. A fundamental problem is that many taxpayers, and for that matter some tax administrators do not perceive benefits in kind to be income with the same economic capacity as cash wages or salaries. Subsidiary problems arise from the definition of benefits, the difficulty in allocating general benefits among employees, and the difficulty in distinguishing genuine benefits from benefits that are consumed in the course of employment or that are a necessary condition of employment. The conceptual difficulties that arise with the income taxation of benefits have often resulted in low levels of taxpayer compliance with, and administrative enforcement of, the tax law applying to these benefits. This in turn has led to a ‘’tax culture’’ that regards benefits as tax free remuneration so that attempts to expressly bring the value of benefits within the tax base are subject to political resistance.

Benefits are included in the value of fringe benefits in Uganda in employees’ chargeable income. In civil code jurisdictions, the definition for salaries in the labour codes will usually include benefits and this definition will in principle be applied for income tax purposes. Similarly, benefits will automatically be incorporated into income from employment in common law jurisdictions where the judicial concept of ‘’income’’ is broad enough to encompass all net gains. In common law jurisdictions that rely on UK precedents, the judicial concept of income excludes benefits in kind that connot be converted to cash. In these jurisdictions, specific statutory inclusion provisions and valuation rules are needed to include the full market value into the gross income of the employees. These may be defined as rewards for service, in a form other than contemporaneous payments in cash. In other words, they are benefits provided to employees which form an integral part of the employee’s total package.

Benefits in kind (which may or may not be convertible into money) are non-monetary receipts that increase the employee’s purchasing power or relieve him or her of an obligation.

It is necessary to tax benefits in order to preserve the underlying idea that any gain should be treated as income and also to maintain the ideas of horizontal equity (preventing taxpayers receiving income in one form from being treated more favourably than taxpayers receiving the same in another). Benefits are more common for high income earners thus creating implicit vertical inequity if benefits are untaxed.

Section 19(1)(b) was introduced into the legislation primarily to bring to tax benefits which might otherwise escape taxation by reason of the decision in Tennant v. Smith. The section is not, however, confined to such benefits. Section

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19(1)(b) and 19(3) overcame the decision in Tennant v. Smith by requiring benefits to be valued by reference to the criteria in the Fifth Schedule.

Section 19(1)(b) includes in the chargeable income of a taxpayer an amount that satisfies the following:(1)  there must be a benefit;(2) the benefit must be granted to the taxpayer; and(3) the benefit must be in respect of, or for or in relation directly of indirectly to, any employment rendered by the taxpayer.

Where an amount satisfies these conditions, it is included in the taxpayer’s chargeable income for the year of income in which it is granted to the taxpayer provided it is within Uganda ’s jurisdiction and is not exempt income. The amount included in chargeable income is the value of the benefit to the taxpayer.

There are two important differences between sec 19 and the income from personal exertion principle as part of the notion of ordinary income. First, the nexus test under sec 19 is potentially broader than under general principles. Secondly, sec 19 provides for an objective valuation rule. Non-cash benefits are brought into account at their market value

There must be a benefitThe first requirement in sec 19(b) is that there must be a benefit. These words must be construed in their context, but are clearly intended to cover a broad area.

BenefitIt was held in Case L54 that “benefit” refers to “an advantage, profit, good” in the ordinary sense of that word, and connotes “to do good to, be of advantage or profit to; to improve, help forward …” In this case, the payment of school fees by the taxpayer’s employer was held to be a benefit as it relieved the taxpayer of the obligation which he would otherwise have incurred. In Constable v FC of T (1952) 86 CLR 402, the taxpayer was a member of an employee-sponsored superannuation fund. He contributed 10% of his salary to the fund, and this contribution was matched by his employer. The taxpayer only became entitled to his employer’s contributions after a minimum period of service and only then on the happening of certain events. One of those events occurred and the taxpayer received a payment out of the fund while still in the same employ

The majority of the High Court held obiter that the employer contributions were not ‘allowed, given or granted’ to the taxpayer at the time of payment into the fund. The contributions were not credited to the accounts of particular employees until some time after payment into the fund and even then the employee was not present entitled to the amount so credited. Present entitlement only arose on the occurrence of particular events. Consequently, there was no derivation for the purposes of sec 26(e) at the time of contribution. Further, the payment out of the fund occurred as a result of a contingent right of the taxpayer becoming absolute. It was held that the happening of the event which made the right absolute did not amount to an allowing, giving or granting to the taxpayer of any allowance, gratuity, compensation, benefit, bonus or premium. It may be that the payment out of the fund was a derivation of ordinary income, but at that time there was not a sufficient nexus to employment.

In Payne v FC of T (1996) 66 FCR 299 the taxpayer was an employee of a firm of chartered accountants. The taxpayer was required to undertake considerable travel as part of her employment. During a business trip, the airline gave the taxpayer part of her membership forms for its frequent flyer program. Under that program, a member accrues points based on, inter alia, travel with the airline. The points can be used by the member to claim free flights with the airline. The taxpayer used her points to obtain airline tickets for her parents. The Commissioner assessed the value of the tickets to the taxpayer under sec 26(e) or sec 25(1) ITAA36 (see, sec 19(1)(b) ITA Uganda).

The taxpayer argued, on the basis of Constable’s case, that the provision of the free tickets occurred as a result of the crystallizing of a contractual entitlement of the taxpayer, and therefore was not a benefit allowed, given or granted to the taxpayer. The Federal Court agreed with the taxpayer’s argument.

Granted ‘to the taxpayer’The requirement that the benefit be granted to the taxpayer could raise problems with the application of sec 19 ((b) to benefits provided to an associate of the employee or of the person rendering the services. Under general principles, this problem was resolved through the application of the doctrine of constructive receipt (as encapsulated in paragraph (2) of the Fifth Schedule)

One approach to this problem is to say that the benefit was not so much the benefit provided to the third party, but rather the resulting saving in expenditure to the taxpayer. For example, in Case 79 ATC 399 the employer had established an

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educational scholarship scheme (the taxpayer being at that time managing director of the company and chairman of the meeting of directors which instituted the scheme). The scheme had been instituted primarily in order to retain key employees, and a scholarship could only be won by a child of an employee. The Board held that the scholarship was a benefit granted to the taxpayer, as he was thereby ‘relieved of his previous burden, and of his obligation which he had undertaken to pay the college fees, and thus in essence received a financial benefit’.

ITA confronts the issue more directly, making it clear in sec 58 & 19(6)(b) and paragraph (2) of the Fifth Schedule that the doctrine of constructive receipt is to apply to employment income.

It is provided that, if an amount would be a benefit and therefore employment income apart from the fact that the person has not received it, then it becomes employment income of the person at the time it is applied or dealt with on the person’s behalf, or as the person directs.

Nexus test. As with ordinary income, it is necessary for the purposes of sec 19(1)(e) to find a sufficient nexus between the provision of the services and the receipt of the benefit. The nexus test defined by sec 19(6)(c) is that the benefit must be granted to the taxpayer ‘in respect of past, present or prospective employment.

The first point is that there must be an employment relationship. In FC of T v Cooke & Sherden 80 ATC 4140, the taxpayers sold soft drinks obtained from a manufacturer. In 1970, the manufacturer introduced an ‘Island Holiday Scheme’, designed to encourage retailers to increase sales. The scheme was a purely gratuitous one, and no legal rights were conferred upon any retailer. Under the terms of the scheme, no cash payments in lieu of the holiday trip could be obtained, and a retailer to whom a trip was awarded (on achieving a certain sales quota) could not transfer the tickets or the benefit of the award to anyone else.

In the relevant year, the taxpayers achieved the required sales quota and were granted an island holiday. The full Federal Court held that the value of the trip was not subject to tax. The relationship between the taxpayers and the manufacturer was one of vendor and purchaser and not that of employer and employee, so that there was no relevant ‘employment’ for the purposes of the law.

Moreover, there had been no ‘rendering of services’ by the retailers to the manufacturer.

‘’the rendering of services’ should consist of the doing of an act for the benefit of another, which is more than the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract.’

Thus, although the successful conduct of the retailers’ businesses increased the manufacturer’s sales and the public awareness of the manufacturer’s products, the conduct of the retailers’ businesses was not a service rendered to the manufacturer:

‘Advantages accrued to the manufacturer because the retailers, independently of any obligation owed to the manufacturers, conducted their businesses in a way which yielded advantages to both…The relationship was essentially one of seller and buyer… The provision of holidays was not part of any contractual relationship and …the provision of holidays could not be said to have been directly or indirectly for services rendered by the taxpayers.’

Section 19(6) of the Act provides constructive payment and receipt rules. These rules avoid any argument that a benefit is not related to an employee’s employment where it is provided by someone other than the employee’s employer or where it is provided to someone other than the employee.

Under section 19(6), a benefit is granted to an employee from employment if it is -(a) provided by an employer or a third party(including an associate of the employer) under an arrangement

with the employer or an associate of the employer; and(b) provided to an employee or an associate of an employee.

Section 19(6) of the Act also ensures that a benefit is treated as from an employment notwithstanding that the employment may not have commenced or may have ceased at the time the benefit was granted.

Where a benefit is granted to an employee from any employment, the amount included in employment income is determined in accordance with the valuation rules in the Fifth Schedule to the Act. The Fifth Schedule provides valuation rules for the following specific benefits: private use of motor vehicles; domestic assistants; meals, refreshment, or

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entertainment; utilities; low- or zero-interest loans; debt waivers; supply of goods or services; and housing. A market value rule applies to any other type of benefit in kind provided to an employee. Section 56(2) of the Act provides that the market value of a benefit in kind is determined without regard to any restriction on transfer or to the fact that the benefit is not otherwise convertible to cash.

C. TREATMENT OF PARTICULAR BENEFITS IN KIND

1. PRIVATE USE OF MOTOR VEHICLES

Where an employee is provided with the use of a motor vehicle for private purposes or a motor vehicle is available to the employee for use for private purposes, the employee derives a taxable benefit.

The value of the benefit is determined in accordance with the formula in paragraph 3 of the Fifth Schedule.

Where an employee is provided with a motor vehicle, the vehicle will not be considered to be used or available for use for private purposes, if:

(i) the vehicle is available to, and is in fact used by, employees of the employer in general for duty purposes;

(ii) the vehicle is not normally kept at the residence of the employee concerned outside of business hours; or

(iii) the nature of the employee’s duties are such that he/she is regularly required to use the vehicle for duty outside his/her normal working hours but otherwise is not allowed to use it for private purposes.

For example, Lucky is employed by CELTEL Uganda and is availed a company vehicle which is at her disposal 24 hours a day. Her normal working day is from 8.00 a.m. to 5.30 p.m. The vehicle was purchased from Motor Care (U) Ltd on July 0, 2000 at a cost of Shs.30,000,000/=. Lucky used it for 320 days (excluding 45 days of annual leave) during the year of income ending June 30, 2001. She was charged a monthly figure of Shs.20,000/= per month for the benefit. We will assume that she did not pay the monthly figure of Shs.20,000/= for the 45 days when she was on leave.

The value of the benefit is (20% x 30,000,000 x 320/365) – (20,000 x 10.5)5,260,274 – 210,000 = Shs.5,050,274/=.

2. LOW INTEREST LOANS

Where an employee is provided with an interest-free loan or a loan at an interest rate below the statutory rate, the employee derives a taxable benefit. Such a loan is referred to as a “loan benefit in kind” in the discussion below. The statutory rate for a year of income is the Bank of Uganda discount rate on the 1st July in that year of income.

The value of a loan benefit in kind is the difference between the interest that would have been paid on the loan if the interest rate was the statutory rate and the interest actually paid on the loan (if any). This is specified in paragraph 7 of the Fifth Schedule.

Paragraph 7 only provides a taxable value for a loan benefit in kind where the amount of the loan, or the total amount of all loans if more than one loan is provided by an employer, exceeds one million shillings.

According to the URA Practice short-term financial accommodation provided by an employer to an employee is not regarded as a benefit for the purposes of section 19, provided the accommodation is fully repaid within three months of being provided, and the accommodation is not rolled-over or replaced by another advance.

While a low- or zero-interest loan was a taxable benefit under the 1974 Decree, the practice under the 1974 Decree was not to include the value of the benefit in employment income. As a transitional measure, that practice continued to apply to a loan benefit provided before 1st July 1997 until the earlier of -

(a) the expiration of the loan term (not counting any period of extension of the loan or of a roll-over of the loan); or

(b) 31st December 1999.

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However, the amount any short-term financial accommodation covered by paragraph 2.4 and the amount of any loan covered by the transitional measure in paragraph 2.5 will be taken into account in determining whether the threshold in paragraph 7 of the Fifth Schedule is satisfied in relation to any other loans provided to an employee.

3. PROVISION OF MEALS, REFRESHMENTS, ETC.

Where an employee is provided with a meal, refreshment, or entertainment, the employee derives a taxable benefit.

The taxable value of the benefit is the cost of providing the meal, refreshment, or entertainment less any contribution made by the employee. This is specified in paragraph 5 of the Fifth Schedule.

However, the employment income of an employee does not include the value of any meal or refreshment provided by the employer to the employee in premises operated by, or on behalf of the employer solely for the benefit of employees and which is available to all full-time employees on equal terms (section 19(2)(e)).

Exclusions from Employment Income

Under the ITA, employment income is subject to some specific exclusions. These are -

(1) the cost of passages to or from Uganda in respect of the appointment or termination of employment of certain employees recruited from outside Uganda (section 19(2)(a));(2) the employment income of an employee does not include the reimbursement or discharge of an employee’s medical expenses (section 19(2)(b));

The expression “employee’s medical expenses” is interpreted to include the medical expenses of a dependent of an employee where the employee has the financial responsibility of meeting those expenses. For this purpose, a dependent of an employee means the spouse of the employee, or a child (including an adopted child) of the employee under 18 years of age, subject a maximum of four children, who the Commissioner is satisfied relies on the employee for financial support.

(3) an allowance for, or reimbursement or discharge of, expenditure incurred by an employee on accommodation and travel expenses, and on meals and refreshment while travelling in the course of performing duties of employment (section 19(2)(d));

The rationale for not including these expenses in the employment income of an employee is that, technically, they confer no private benefit to the employee. They are incurred in the course of employment to serve the proper business purpose of the employer. However, they may sometimes confer a private benefit. Consider, for example the case of an employee who is given US$1000 as accommodation and refreshments’ expenses for five days to go to Nairobi, Kenya to attend to her employer’s business. She instead stays with a friend for the entire duration of her stay in Nairobi thus saving the entire amount! The law would still not make this part of her employment income.

(4) the value of any meal or refreshment provided by an employer to an employee in premises operated by, or on behalf of the employer solely for the benefit of employees and which is available to all full-time employees on equal terms (section 19(2)(e));Employee eating facilities are excluded from employment income only if they are provided to all employees on a non-discriminatory basis and on premises operated by or on behalf of the employer. This must be solely for the benefit of the employees. The non-discrimination requirement allows employees no exclusion unless the benefits are provided on substantially the same terms to a broad group of employees.

A critical condition of the exemption is the availability of the premises to all full-time employees on equal terms. An employer may operate both an executive dining room and a staff canteen. Ordinarily, the staff canteen would satisfy the requirements for exemption, notwithstanding that some employees may choose to eat at the other employer-provided facility. This is because employees who are entitled to eat at the executive dining room are not usually expressly excluded from eating in the staff canteen. On the other hand, the exemption would not apply to the executive dining room as that facility would not be available to all full-time employees on equal terms.

(5) any benefit granted by an employer to an employee during a month where the total value of the benefits granted by the employer to the employee for the month is less than ten thousand shillings (section 19(2)(f));

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This includes any property or service is so small as to make accounting for it unreasonable or administratively impracticable. Examples that can be included in this exception are: typing of personal letters by a company secretary; occasional personal use of a photocopier; occasional supper provided because of overtime work; coffee and snacks offered to employees and low value holiday gifts.

(6) a low- or zero-interest loan that is less than one million shillings (Fifth Schedule, paragraph 7).

The employment income of an employee also excludes the amount of certain life insurance premiums and retirement fund contributions made by an employer for the benefit of the employee (section 19(2)(c) and (g).

APPENDIX ‘B’

BENEFIT OF HOUSING ACCOMMODATION

An employee earned the following income for the year 1998.

Salary 6.000.000Travelling allowance 792.000Car benefit 1.456.000Medical Expenses (met by employer) 255.000

He was also given residential accommodation by his employer. The house has an annual market rental value of Shs. 1.800.000 but he was paying a monthly nominal rental of Shs. 30.000 during the period of occupancy.

(a). Solution

Market Rate 1.800.000Less: Rental Paid 360.000

1.440.000

(b). Employment IncomeSalary 6.000.000Travelling Allowance 792.000Car Benefit 1.456.000Market rate of housing etc 1.440.000

9.688.000

Percentage Value 9.688.000 x 15% = 1.453.200

The taxable benefit in respect to housing or accommodation will be shs. 1.440.000 which is the lesser of the two figures.

1. Where our employee is continuing in service of the employer and he/she receive a lump sum payment e.g. of gratuity or bonus, that payment is taxed in the month of receipt using monthly rates.

Monthly pay is 1.000.000He/she receiving a gratuity/bonus of 3.000.000

4.000.000

Apply normal monthly ratesTax thereon will be (45.500 + 30% of 3.590.000) 1.122.500

2. Where an employee is leaving the service of an employer, and he or she is paid a lump sum payment e.g. terminal benefits, retirement benefits, death benefits; Then such lump sum payment would be taxed in the year of receipt.

e.g. X received terminal benefits of 5.000.000 on 31/5/2000. His monthly payment for the year 1999/2000 was 500.000/

Therefore Tax on the lump sum should be calculated as follows:

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Total pay 500.000 x 11 months = 5.500.000To 31/5/2000

Add Lump sum payment = 5.000.000Total = 10.500.000

Tax on total income using annual rates: 2.220.000Tax that already been paid was 72.500 x 11 = 797.500Tax payable on lump sum = 2.220.000 – 797.500 = 1.422.500

3. Where an employee is being compensated for loss of office, for example when a government parastatal is privatised and employees are retrenched.

The lump sum received would be taxed as follows:

(i). If such and employee has served the employer 10 or more years, the amount of lump sum taxable would be 75%.

i.e. assume facts remain as in example 2, then tax on lump sum would be:

Total pay for 11 months 5.500.00075% of lump sum(75% x 5.000.000) 3.750.000

Total 9.250.000

Tax on total income using annual rates 1.845.000Less Tax already paid 797.500

1.047.500(ii). If the employee has served less than (10) ten years, then the calculation is as in example two above.

In Simpson v. Tate [1925] 2 K.B. 214 a medical officer of health joined certain medical and scientific societies in order that by means of their meetings and published transaction he might be aware of all recent advances in sanitary science and keep himself up to date on all medical questions affecting public health. Rowlatt J. said, at p. 219:

"The respondent qualified himself for his office before he was appointed to it, and he has very properly endeavoured to continue qualifying by joining certain professional and scientific societies, so that by attending their meetings and procuring their publications he may keep abreast of the highest developments and knowledge of the day. He seeks to deduct from his assessable income the subscriptions paid by him to these bodies as money expended necessarily in the performance of the duties of the office.  When one looks into the matter closely, however, one sees that these are not moneys expended in the performance of his official duties.  He does not incur these expenses in conducting professional inquiries or get the journals in order to read them to the patients.  If he did, the case would be altogether different. He incurs these expenses in qualifying himself for continuing to hold his office, just as before being appointed to the office he qualified himself for obtaining it ...  In my view the principle is that the holder of a public office is not entitled ... to deduct any expenses which he incurs for the purpose of keeping himself fit for performing the duties of the office, such as subscriptions to professional societies, the cost of professional literature and other outgoings of that sort. If deductions of that kind were allowed in one case every professional office holder would claim to be entitled to deduct the payments made by him to every scientific society to which he happened to belong and the price which he paid for every professional publication, and there would be no end to it."

 

In Ricketts v. Colquhoun [1926] A.C. 1 the Recorder of Portsmouth was not allowed the expense of traveling from his home in London to his court in Portsmouth. Traveling expenses fall into a separate category because each employee chooses where he will live and cannot establish that every employee must incur the same expenses.

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In Nolder v. Walter (1930) 15 T.C. 380 an airline pilot was not allowed to deduct the cost of transport between his home and the aerodrome or the cost of the telephone at his home. Rowlatt J. said, at p. 387:

"'In the performance of the duties' means in doing the work of the office, in doing the things which it is his duty to do while doing the work of the office. A man who holds an office or employment has, equally necessarily, to do other things incidentally, and spend money incidentally, because he has the office. He has to get to the place of employment, for one thing ...  Incidentally, he is obliged to do that, but it is not in doing the work of the office, which begins when he arrives, and sets to work to perform his duties."

 

In Blackwell v. Mills (1945) 26 T.C. 468 a student assistant in the research laboratory of a company was required, as a condition of his employment, to attend classes in preparation for the final examination for the degree of Bachelor of Science. He was allowed time off to attend classes for that purpose and claimed to deduct for income tax purposes the expenses he incurred in travelling to and from the classes and in the purchase of text books. Macnaghten J. said, at p. 470:

"It was a condition of Mr. Mills's employment that he should attend the evening classes. Mr. Honeyman contended that, since the subject matter of the evening classes was not unconnected with the duties that Mr. Mills had to perform, he should be regarded as performing the duties of his office when he was attending the Chelsea Polytechnic. In my opinion any such view is inadmissible.  The duties of his employment were as a student assistant in the research laboratories of the General Electric Company. It seems to me impossible to say that, when he was listening to the lecturer at the Chelsea Polytechnic, he was performing the duties of a student assistant at the laboratories of the company."

 

    In Lomax v. Newton [1953] 1 W.L.R. 1123 Vaisey J. said, at p. 1125: "The provisions of rule 9 of Schedule E [now section 189(1) of the Act of 1970] are notoriously rigid, narrow and restricted in their operation. In order to satisfy the terms of the rule it must be shown that the expenditure incurred was not only necessarily, but wholly and exclusively incurred in the performance of the relevant official duties. ... An expenditure may be 'necessary' for the holder of an office without being necessary to him in the performance of the duties of that office; it may be necessary in the performance of those duties without being exclusively referable to those duties; it may perhaps be both necessarily and exclusively, but still not wholly so referable.  The words are indeed stringent and exacting; compliance with each and every one of them is obligatory if the benefit of the rule is to be claimed successfully."

 

In that case a regimental officer was not allowed to deduct his annual mess subscription although he was obliged to be a member of the mess and would no doubt have been transferred or even cashiered if he failed to pay. An officer in the Territorial Army was not allowed his mess subscriptions or his share of mess expenditure on guests. The officer was also not allowed the cost of attending social functions given by warrant officers and other ranks. Vaisey J. said, at p. 1127:

"I agree that participation in the social life of the battalion was part of the social duties of the respondent, but was it any part of his official duties? Was the respondent at the sergeants' dance in the proper sense of the expression 'on duty'? I think not. I am quite unable to see how this item can be brought within the rule.the contentions of the Crown as set out in the case, and say that they are expenses incurred from tradition and custom, accepted voluntarily by the officers of the unit and containing elements of personal choice and benefit, and therefore not within the rule."

 

¶ 29      Similarly in the present case the journalist is not on duty when he is reading at home and his expenditure on newspapers contains elements of personal choice and benefit. Indeed one of the journalists gave evidence that he was a "compulsive" buyer of newspapers. In Humbles v. Brooks (1962) 40 T.C. 500 the headmaster required to teach history was not allowed the expense of attending a series of weekend lectures on history. Ungoed-Thomas J. citing the authorities said, at p. 502:

"'In the performance of the said duties' means in the course of their performance ... It means in doing the work of the office, in doing the things which it is his duty to do while doing the work of the office' ... it does not include qualifying initially to perform the duties of the office, or even keeping qualified to perform them ... it does not mean adding to the taxpayer's usefulness in performing his duties. The requirement of the employer that the expenditure shall be incurred does not, of itself, bring the expense within the rule, nor does the absence of such a requirement excluded it the application of the rule ..." and the judge accepted (p. 503) that the headmaster:

 

  "attended the course to improve his background knowledge of the subject ... he gleaned useful information from the lectures ... he felt the course was essential to keep himself up to date ... to

 

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provide him with material which he reproduced in the history lessons."

In Brown v. Bullock [1961] 1 W.L.R. 1095 a bank manager who was instructed by his employers to foster local contacts and for that purpose to join a club was not allowed as an expense in the performance of his duties as a bank manager the entrance fee and annual subscriptions to the club which were paid by his employers. In approving the decision of Vaisey J. in Lomax v. Newton [1953] 1 W.L.R. 1123 Lord Evershed M.R. said that the language of the statute is of a somewhat rigid character the adverb "necessarily" added to the phrase "in the performance" of his duties clearly narrows very much the scope of any expenditure which can fairly be deductible. Donovan L.J. said, at p. 1102:

"The test is not simply whether the employer imposes the expense, but primarily whether the duties do, in the sense that irrespective of what the employer may prescribe, the duties themselves involve the particular outlay."

 

Elwood v. Utitz (1965) 42 T.C. 482 was a case in which travelling expenses from one place of work to another were held to be deductible in contrast to travel expenses from home to a single place of work.  Pook v. Owen [1970] A.C. 244 is a similar case. Taylor v. Provan [1975] A.C. 194 was another case concerned with travelling expenses.  Lord Salmon, at p. 226, distinguished between expenses which were deductible because they were incurred "in the performance of the duties" and expenses which were not deductible because they were incurred "in order to enable the duties to be performed".   The act giving rise to the expenditure must be done in the actual performance of such duties: an act which is done merely to acquire the necessary qualifications or the background knowledge necessary to do the job or to do it better is not sufficient. This requirement is illustrated by Humbles v. Brooks (1962) 40 T. C. 500 where a teacher was held not entitled to deduct the cost of attending a course for the purpose of improving his background knowledge of the subject he was required to teach. Ungoed Thomas J. said, at pp. 503-504:

"[It was] contended that he was not employed to prepare lectures but to deliver them. This, to my mind, is an unreal distinction for present purposes. I cannot recognise that a person who is employed to deliver lectures or to teach is not, when preparing the lectures or the talks which he gives, doing what he is employed to do - that he is not acting in the course of the performance of his duties. Preparing lectures is, to my mind, a necessary part of his duties. That leaves the question, was the respondent in this case, when listening to the lecture at the adult college, preparing his own lecture ...  First, he attended a course to improve his background knowledge of the subject which he had studied to G.C.E. "O" level only; second, he gleaned useful information from the lectures at the college; third, he felt the course was essential to keep himself up to date; and, fourth, to provide him with material which he reproduced in the history lessons. There is, in my view, a distinction between qualifying to teach and getting background material - and even getting information and material which he reproduced in his own lecture - on the one hand and preparing his own lecture for delivery on the other hand.  The statement, in the passages in the case stated, that the lectures at the college provided the respondent with material which he reproduced gets nearest to the performance of his duties within the section, but even if this element could be treated in isolation, it goes no further than providing material - just as any background information would provide material - and is not, of itself, part of the preparation of his own lecture. It is, to my mind, qualifying for lecturing, or putting himself in a position to prepare a lecture. It is not the preparation of a lecture. In this sense, the distinction is between preparation for lecturing on the one hand and the preparation of a lecture on the other hand. In my judgment, the respondent, when he was attending a course and listening to a lecture, was not preparing his own lecture, and he was therefore not acting in the performance of his duties ..."

 

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