CASE ANALYSIS EXAMPLE

FCT v. Dixon (1952) 86 CLR 540

The following analysis of the above case (Reading 1 in the Readings book) is
intended as an example of how you might go about the analysis of a case report using
the framework suggested in the Introduction to the Readings. This is a more complex
case report in that it was decided by a 3:2 majority of the High Court in four separate
judgments. The two judgments which comprise the majority – the joint judgment of
Dixon CJ and Williams J and the judgment of Fullagar J – will be considered in this
example.

The facts
The facts in some detail may be found in the ‘Case Stated’ for the Full High Court at
the beginning of the report (at 540-3). The more material of these facts are also
repeated in the judgments themselves, and these will be the source of the facts in
many other case reports. The facts, with an eye to their materiality, may be
summarised thus:

1. The taxpayer respondent was an employed person who enlisted in the armed
forces, thus ceasing his employment with his former employer. (Note that
facts such as the name of the employer and the nature of the taxpayer’s
duties with that employer are not material for the purposes of this analysis.)
2. The former employer had a policy of making up the difference in pay
between their former wages and those paid by the armed forces for those of
its staff who enlisted.
3. For the income year in question, the former employer paid the taxpayer a
total of 104 pounds in accordance with its policy. (While it might be
mentioned in your analysis, the actual income year has no relevance in this
case. The same might be said also for the actual amount which should not
have a bearing on the decision.)
4. At no time did the taxpayer give an undertaking to return to employment
with the former employer on completion of his war service; nor did the
former employer give an undertaking to re-employ him. (In other words, re-
employment was not a condition of the ‘make-up’ payment.)

The issue
The question of law to be decided by the Full High Court was whether the sum (of
104 pounds) was assessable income of the taxpayer respondent for the year in
question. (The relevant assessing provisions argued before the Court were s. 25 and s.
26(e) of the Income Tax Assessment Act 1936.)

The legal reasoning

Dixon CJ and Williams J

Their Honours found that s. 26(e) had no application in this case because they were
‘not prepared to give [that provision] a construction which makes it unnecessary that
the allowance … shall in any sense be a recompense or consequence of the continued
or contemporaneous existence of the relation of employer and employee or a reward
for services rendered given either during the employment or at or in consequence of
its termination’ (at 554). In other words, for s. 26(e) to be applicable they considered
that there needed to be a suitable relationship between the payments and the
employment of the recipient, even if that relationship was not a direct employment
relationship but simply a relationship that contributed to causing the payments to be
made. They found that such a relationship between the taxpayer and the former
employer did not exist.

However, they took a different view of s. 25, applicable to income under ordinary
concepts, in holding that it applied to the sum in question. On this question their
Honours said (at 555-7):

In the present case we think the total situation of the taxpayer must be looked at to see whether
the receipts of the taxpayer from [the former employer] are of an income character. … from his
point of view, the contributions made by [his former employer] meant that the periodical
receipts upon which he depended for the maintenance of himself and his dependants remained at
the same level as his civilian employment would have given. From his point of view therefore
the word ‘income’ would be clearly applicable to the total receipts from his military pay and
allowances and from his civilian employers. It does not seem to matter whether these employers
are regarded as his former employers, as his future employers or as the other party to a
suspended employment. … it is clear that if payments are really incidental to an employment, it
is unimportant whether they come from the employer or from somebody else and are obtained
as of right or merely as a recognised incident of the employment or work. … (Emphasis added.)

In the present case the employment or service … is that of a soldier. … Because the [amount of
104 pounds] was an expected periodical payment arising out of circumstances which attended
the war service undertaken by the taxpayer and because it formed part of the receipts upon
which he depended for the regular expenditure upon himself and his dependants and was paid to
him for that purpose, it appears to us to have the character of income, and therefore to form part
of the gross income within the meaning of s. 25 … .

Thus their Honours decided that the amount was ordinary income because they found
it to be incidental to employment and in such circumstances it is irrelevant whether
the person paying is the employer or someone else. This is the key part of their ratio.
They were also persuaded by the fact that the receipts were regular and that they were
used by the taxpayer to support himself and his dependants. Regularity of receipt and
the use to which the receipts are put are not necessarily determinative of the question,
but may be relevant in looking at ‘the total situation of the taxpayer … to see whether
the receipts of the taxpayer … are of an income character’ (see above).

Fullagar J
His Honour also dismissed the application of s. 26(e) in holding that ‘the receipts in
question are not so related to any employment of the respondent as to fall … within
the terms of s. 26(e) … The payments were made irrespective of any services given
by an employee as employee’ (at 563-4).

However, as with Dixon CJ and Williams J, Fullagar J held that the payments
constituted ordinary income assessable under s. 25, but by taking a different approach
based on what might be styled a ‘substitution’ argument. He said (at 567-8):

It seems to me that the … receipts … must be regarded as having the character of income. They
were regular periodical payments … . This consideration, while not unimportant, is not decisive.
What is, to my mind, decisive is that the expressed object and the actual effect of the payments
made was to make an addition to the earnings, the undoubted income, of the respondent. …
 What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any
employment of the recipient. But it is intended to be, and is in fact, a substitute for … the salary
or wages which would have been earned and paid if the enlistment had not taken place. As
such, it must be income, even though paid voluntarily … . It acquires the character of that for
which it is substituted and that to which it is added. (Emphasis added.)

The decision
By majority, the Full High Court held that the payments received by the taxpayer
constituted ordinary income assessable under s. 25.