David Hardy Glynn v. Commissioner of Inland Revenue
Read the full judgment text of on BabelCite..
1. This appeal raises a question with regard to salary tax, which shall, by reason of Section 8(1) of the Inland Revenue Ordinance Cap. 112-
|
CACV000051A/1988
Headnote By a majority the Court of Appeal held that the value of free education provided by an employer for the child of an employee is liable to be assessed for the purposes of Salaries Tax payable by the employee.
BETWEEN
_______________ Coram : Hon. Cons, V.-P., Clough & Hunter JJ.A. Dates of hearing: 8th-11th November and 9th December 1988. Date of handing down judgment: 23rd December 1988. ______________ J U D G M E N T _______________ Cons, V.-P.: 1. This appeal raises a question with regard to salary tax, which shall, by reason of Section 8(1) of the Inland Revenue Ordinance Cap. 112-
2. The taxpayer Is a well-known solicitor. In 1980 he sent his daughter to Roedean School in England, paying the fees himself. On the 1st April two years Later he entered into an agreement with Intergroup Associates Limited ("the Company) which we understand provides administrative services to the firm of which the taxpayer is a partner. By that agreement he became employed as a director of the Company and in return received a salary and various benefits, In particular that -
3. There is a wealth of English authority with regard to what is taxable as income in circumstances of this kind. We have been referred to many cases in the course of the hearing, but their essence is, I think, to be found sufficiently and succinctly set out in the judgment of Scott J. In Richardson v. Worrall [1985] S.T.C. 693. The authorities establish, if I may borrow his words, two principles by the operation of which extra benefits conferred on an employee may become liable to tax-
4. The taxpayer appreciated that as matters stood immediately after his employment by the Company, they fell within the second of the two principles and that he would be properly assessable to tax on payments made by the Company. In order to circumvent that principle he wrote to the school, by agreement with the Company, and persuaded the school eventually to agree that the Company should thereafter he primarily liable for the school fees and expenses of his daughter, while he remained personally liable only upon a separate and guarantee should the Company default. Payments thus made thereafter by the school would therefore not be in discharge of his debt, but in discharge of the debt of the Company. In that way he would attract no personal tax. The agreements were not completed until the 9th June 1982, by which time the fees for the summer term of that year had already been paid by the Company. Mr. Payne, for the taxpayer, concedes that tax has been properly assessed in their respect, but contends that the Commissioner was wrong to include as well the fees for the remaining two terms within that financial year. 5. Mr. Whaley, for the Commissioner, seeks to persuade us that the correspondence failed to create the contractual relationship for which the taxpayer contends and did no more than set up a purely administrative arrangement for the school to look to the Company in the first instance for settlement of the fee accounts. 6. For my part I am unable to accent that submission. To do so would involve an unacceptable distortion of the language used in the correspondence and would be in direct contradiction of what seems to me to be the clear intention the parties. 7. Mr. Whaley's second line of attack is to extend the second of Scott J's principles from "the discharge of an employee's debt" to "the discharge of a debt for which he would otherwise have been liable". It is, he suggests, an inevitable inference that the taxpayer, having been willing to meet the fees for the first two years himself and having shown no intention of removing his daughter from the school would have continued her education there even if the Company had not taken over the financial responsibility. In that sense the taxpayer would otherwise have been liable to pay the fees. 8. Again I find myself unable to accent the submission. It would create what seems to me a highly artificial and unlikely criterion for tax liability, in that it would in each and every case require an investigation into what a taxpayer's intention would have been in a situation which ex hypothesi could not exist, namely that the taxpayer would have to finance for himself whatever benefit the employer was in fact conferring upon him. I do not think the legislature could have intended a system of assessment which contemplated examinations of that kind. 9. The final suggestion of Mr. Whaley is that the taxpayer is liable because he in fact obtained the benefit of the payments i.e. money's worth. This contention rests on the authority of Nicoll v. Austin (1935) 19 T.C. 531, a decision at first instance where the employer was by contract obliged to pay all the out goings of the taxpayer's residence, and "at his own expense to keep the grounds and gardens thereof in a neat and tidy condition and well stocked". The taxpayer was held liable to tax on all the hills met by the Company under that agreement, including those in relation to the grounds and gardens. Lord Evershed relied on this decision in Wilkins v. Rogerson [1961] 1 Ch. 133 at 145 saying "there is no doubt that Mr. Austin got the benefit" of the garden, but in no other instance has the decision gained approval and with the greatest respect it appears to me to be out of line with the other authorities. 10. I give my decision in the light of the English authorities in deference to the arguments of counsel. Within their context I would agree with the judge below that the taxpayer was incorrectly assessed with regard to the two further payments in the financial year 1982/83. 11. However in the course of considering this matter my attention was drawn by my Lord Clough J. A. to Armstrong v. The Estate Duty Commissioner [1937] A.C. 885 and in particular to p.896-
12. As Mr. Payne had confined his submission to the effect of the English authorities, we thought it appropriate to invite him, in the light of the passage above, to address us further. 13. In his resumed submission Mr. Payne initially suggested that, as from the beginning it appears to have been generally accepted within the jurisdiction that the authorities mentioned earlier are applicable here, shown for example by case No. 6 of 1970 reported in the Hong Kong Inland Revenue Order of Review decisions page 15, we should not disturb the position now. He referred us to Bourne v. Keane 1919 A.C. 815 at 872 and 874, and R. v. Casement 1917 1 K.B. 98 at 138. Later however, upon consideration of Campbell College, Belfast v. The Commissioner of Valuation for Northern Ireland 1964 1W.L.R. 912 he conceded that he could no longer pursue that particular line of argument. He asks us instead to adopt the English approach by way of parity of reasoning. For myself I am unable to do so. In my view, as my Lord Hunter J.A. will later fully illustrate, the local legislation does not lend itself to the same arguments. Its true construction must therefore be found in the words used alone, giving them their ordinary and natural meaning. 14. The marginal note to Section 9 of the Ordinance reads "Definition of income from employment" and provides -
(iii) any allowance Paid by an employer to an employee for the transportation of the personal effects of the employee in connexion with any journey on which a holiday warrant or passage referred to in sub- paragraph (i) or (ii) is used in so far as the allowance is expended for the transportation of the personal effects of the employee; (amended, 3 of 1949; s. 4; 9 of 1950, Schedule; 2 of 1971, s. 6 and 40 of 1972, s. 2)
15. Mr Whaley observes that the definition is not exclusive and refers us to the comments of Blair-Kerr, J. in C.I.R. v. Humphrey (1970) 1 H.K.T.C. 451 at 465 -
16. For my part I am unable to accept that the present kind of payments might appropriately be described as income, at least in the natural sense of that word which imports, as Lord McNaughton observed in Tennant v. Smith [1892] A.C. 150 at 164, the concept of something coming in or being actually received. Later he put it more graphically -
17. Nor do I think the payments fall to be an allowance, which in this context I take to be a payment made to an employee on the understanding that it will be, or that the equivalent already has been, spent in a particular way. 18. Do the payments then fall within "perquisite"? Mr. Whaley draws our attention to the Shorter Oxford Dictionary which defines perquisite -
The examples given of its use, all taken from previous centuries, do not assist, although it would seem that even then perquisites were not necessarily limited to cash. 19. In Heaton v. Bell [1970] A.C. 728 Lord UpJohn at 760H had resort to the "official bystander," and Lord Diplock at 764A to the "man in the street". Both, in their Lordships' views, would have looked upon the virtually free use of a motor car as a "perk" and so, in my view, would similar persons in Hony Kong look upon the provision of free or subsidized accommodation. Indeed it is common place to find the word being used in the media and elsewhere to describe the subsidized accommodation provided to expatriate and senior civil servants. 20. In that case such accommodation would fall naturally to be taxable under section 9(1)(a). Why then is it expressly included in Section 9(1)(b)? 21. Mr. Payne suggests it is because the original draftsman clearly had in mind the concept of "convertibility" introduced by Tennant v. Smith. But even if the draftsman had overlooked the then recent decision of Armstrong, why did he think it necessary expressly to exclude the "holiday warrant" and "passage" in Section 9(1)(a), or the "other form of free conveyance" included in the original ordinance in 1940. These can be no more converted to cash in the pocket of the taxpayer than can the accommodation. We are asked to say that it was done ex abundanti cautela, "to make assurance doubly sure so as to allay the fears of those who might think their interests would be affected": 44 Halsbury's Laws of England 4th Edition paragraph 882. 22. The word "perquisite" must of course be construed in the context in which it is found and with regard to the rest of the legislation. Mr. Payne points out in particular its juxtaposition with other expressions all of which sound directly in money. There is force in that observation. "Perquisite" is the only word there that may, although not necessarily must, require external valuation. This could indicate that the legislature intended to place a monetary restriction upon its application. Nevertheless that would not inevitably lead to the concept of convertibility. It would leave open the possibility of cash payments, not to, but for-the benefit of the employee. At the same time however, it would introduce an anomaly in that where the was directly provided, rather than purchased, by the employer, as for example, where a school provided free education for the children of its staff, the employee would escape liability for tax. Anomalies are not unknown in taxing systems, but it is difficult to accept that the legislature would create one so obvious.' 23. Mr. Payne emphasizes as well the absence of any provision for assessment or valuation. For myself I do not attach great weight to that omission. If the perquisite is in fact in cash there is no need. In others I would take market value to be the test. Very often, as in the present instance, this would he established, by what the employer actually paid. If not, it would have to be assessed, It is only where some other value is specifically intended is there a need for specific provision. We find it here in Sections 9(1)(b) and (c) and (1A) which seem to me to have been introduced, together with Section 9(2), to ensure that the benefit of accommodation, always at a premium in Hong Kong, is not charged to an employee by way of salary tax at its full market value, but only at a small percentage thereof. There may be individual instances where the assessment will leave room for argument, but I cannot at the moment envisage any perquisite common in Hong Kong which could not ultimately be accorded a value reasonably consonant. 24. I must confess that this question has caused me some anxiety, but at the end of the day I find myself unable to deduce any legislative purpose behind the Ordinance, comparable to that discerned in I.R.C. v. Plummer [1980] A.C. 896, sufficient to displace the popular and ordinary meaning of "perquisite", which I take to embrace that which identifiably saves the pocket as well as that which goes into it. 25. I would there fore allow the appeal and, albeit for different reasons, would restore the Decision of the Board of Review.
Clough J.A. : 26. I gratefully adopt all that has been said by my Lord Cons V.-P. regarding the relevant facts and the reasons for which he would have upheld the judgment of Rhind J. below in the light of the English authorities if they had been applicable. 27. I would only add that in my judgment the secondary obligation of the taxpayer to pay his daughter's school fees undertaken by a new contract in his letter to the Head Master of Roedean dated the 2nd June 1982 did not constitute a guarantee in its wider sense but a conditional undertaking which could not give rise to an enforceable obligation unless and until the company defaulted: see the recognition of such a conditional obligation by Lord Ref in Lep Air Services v. Rolloswin Investments Ltd. [1973] A.C. 331 (H.L.) where he observed at. p. 344C-H:
28. However, after anxious consideration of what I have found to be a difficult question of construction, I regret that I feel unable to concur with the view of the other members of this court that, upon the proper construction of the relevant provisions of the Inland Revenue Ordinance (Cap. 112), without reliance on the decisions of the English courts on the true interpretation of the English Income Tax Acts, the respondent taxpayer was rightly assessed to salaries tax as regards the two relevant payments made by the company in the financial year 1982/83 in respect of the respondent's daughter's fees at Roedean. I would therefore have dismissed this appeal for the reasons given below, citing English authorities only by way of illustration or as the basis for principles of statutory interpretation. 29. Part III of the Ordinance in its present form is a substantially amended version of Chapter III of the Inland Revenue Ordinance 1947 which was substantially a revival of Chapter III of the shortlived War Revenue Ordinance 1940 introduced on the 26th April 1940 (and amended and consolidated as the War Revenue Ordinance 1941 (No. 13 of 1941)) to impose a salaries tax as one of a number of war taxes. Prior to the introduction of the War Revenue Ordinance the inhabitants of Hong Kong had been fortunate enough to be unburdened by taxation of their earnings. 30. Rates of salaries tax have always been modest compared to English rates and the Ordinance has always been intended to be simple and easy to administer. One of the requirements of the administration's tax policy mentioned in the Financial Secretary's Budget Speech in 1978 and referred to by Professor Willoughby in Volume 2, paragraph 1.01/4 of his recently published work on Hong Kong Revenue Law is the fourth requirement "that each and every levy - be it direct or indirect - is simple and easy (and, therefore, inexpensive) to administer and does not encourage evasion, for a low and narrowly based tax system cannot afford to finance costly overheads". Observations to like effect concerning the policies of successive Government administrations in Hong Kong regarding taxation are made at page l in the 1987-88 edition of Mr. David Flux's work on the Law and Practice of Hong Kong Taxation. 31. I approach the interpretation of the relevant provisions of the current Ordinance in the light of this background, as did Rhind J.. However, he seems to have considered that when construing the word "perquisite" where it occurs in Part III of the Ordinance he was bound to accept the restricted meaning of that word imposed by English judicial authority beginning with Tennant v. Smith [1892] A.C. 50 (H. L.) and explained in Abbott v. Philbin [1961] A.C. 352 (H.L.) and Heaton v. Bell (1970) A.C. 728 (H.L.) because he regarded the definition of "income" in Part III of the Ordinance as a slightly simplified form of the United Kingdom's legislation with no material differences. That approach is, with respect, mistaken because as my Lord Hunter J.A. will demonstrate in his judgment, the English authorities relate to a statutory context which is materially different from the context of the Hong Kong Ordinance. 32. Nevertheless I arrive at the same conclusion as Rhind J. by a different route, although I hasten to emphasise in a dissenting judgment that I do so with due diffidence and am unable to concur with the judge's view that a different conclusion would border on the perverse. 33. Part III of the Ordinance begins, in section 8(1), by imposing salaries tax "for each year of assessment on every person in respect of his income arising in or derived from Hong Kong" from any office or employment of profit and any pension. Section 8(1A) and (1B) define, for the purposes of Part III, "income arising in or derived from Hong Kong from any employment" by reference to provisions of inclusion and exclusion which are not material to the meaning of "income" in Part III. Section 8(2) provides for the exclusion of thirteen items of income (in terms not material to the meaning of "income") in computing the income of any person for the purposes of section 8(1). 34. Section 9(1) defines income from any office or employment. In its original form it was section 10(1) of the Ordinance and the whole of section 10 was brief and sketchy compared to its present form as section 9 which reflects numerous amendments which have been made over the years. However the basic framework and scheme of the provision remains the same. As originally enacted section 10(1) was in the following terms:
35. Section 10(2) contained provisions for ascertaining the rental value of a place of residence by reference to rateable value and provided that rental value for the purposes of section 10(1)(ii) and (iii) was to be deemed not to exceed one sixth of the income in section 10(1)(i) or $4,000, whichever was the lower amount. Section 10(3) related to pensions and annuities. 36. In its amended form section 10(1) now appears as section 9(1) in the following terms:-
37. Section 9(1A) contains further provisions regarding rent and places of residence and section 9(2) provides a new formula for ascertaining the deemed rental value of various types of places of residence for the purposes of section 9(1) (b) and (c). Section 9(3) relates to pensions. Section 9(4) provides the basis for calculating the gain referred to in section 9(l)(d). The latter provision is supplemented by section 9(5) in the following terms:
38. Section 9(6) contains definitions for the purposes of section 9. The only relevant definition is that of "place of residence" which supplements section 9(1)(b) and (c) by providing that :
39. In substance section 9(1) retains the items which were to be included as income under the former section 10(1), namely the items originally specified in section 10(1)(i) (subject to the exception therein mentioned) and provision of fully or partially rent-free accommodation. "Allowance for high cost of living" in section 10(1)(i) has become "allowance" by amendment in section 9(1)(a) and the latter provision does not contain any reference to "free conveyance" which occurred in section 10 (1)(i). 40. Two additional things have been required by amendment to be included as income. Under section 9(1)(aa) certain payments (other than pensions within section 8(1)(b)) to an employee representing his employer's contributions to certain pension or provident funds schemes or societies are included as income. Under the combined effect of section 9(1)(d), (4) and (5) income is to include, in specified circumstances, gains realised by the exercise or assignment or release by inter alia an employee of a right to acquire shares or stock, and the receipt of the right in question is not to he chargeable under any other provision of the Ordinance. 41. The question that arises, and has to he determined by the construction of the Ordinance, is whether the undoubted benefit or advantage to the taxpayer of free education provided for the taxpayer's daughter by what the Commissioner has accepted to be the employer of the taxpayer, in discharge of the employer's contractual liability to the school, is assessable to salaries tax as income of the taxpayer for the purposes of sections 8 and 9 of the Ordinance. There can be no doubt that whatever was obtained by the taxpayer derived from his employment. 42. The benefit or advantage obtained by the taxpayer cannot be said to be income within the proper sense of the word which Lord Macnaghten regarded in Tennant v. Smith [1892] A.C. 150 (H.L.) at p. 164 as what "comes in or "actual receipts" and as what goes into his pocket rather than what saves his pocket. In A.G. of British Columbia v. Ostrum [1804] A. C. 144( P.C.) where there was for consideration the meaning of the word "income" which was not expressly defined in a British Columbian Assessment Act charging tax on "all land and personal property and income in the province", Lord Macnaghten delivering the advice of the Privy Council attributing the plain and ordinary meaning to the word "income" in its context, indicated that the expression included all gains and profits derived from personal exertions, whether such gains and profits are fixed or fluctuating, certain or precarious, whatever may be the principle or basis or basis of-calculation." 43. As the taxpayer in the present case actually received nothing which could properly be described as a profit or gain but was merely saved expenditure, it follows that if the benefit or advantage in question which he obtained is to be treated as income under Part III of the Ordinance, then this can only be by virtue of the definition of income in section 9(1) of the Ordinance. 44. The definition in section 9(1) defines the things or categories of things which income "includes''. It is clearly an extensive or enlarging definition because, under section 9(1) (b) and (c) it brings in the rental value of rent-free or partially rent-free residential accommodation which does not come within the ordinary meaning of the word income and is a benefit in kind which results in a saving rather than a receipt by the employee. 45. However the benefit or advantage the taxpayer has obtained does not come expressly or implied within section 9(1)(aa), (b), (c) or (d). The question remains whether it is to be deemed to be income within section 9(1)(a). If this be the case, it can in my Judgment only be so by reason that the benefit or advantage in question is a perquisite within the ordinary meaning of that expression as understood by lords Hodson, Upjohn and Diplock in Heaton v. Bell [1970] A.G. 728 (H.L.) at pp. 758C. 760H and respectively wich is intended to apply in section 9(1)(a). 46. If it were not for the exception in section 9(1)(a)(i) I would have had no hesitation in holding that "perquisite" in section 9(1)(a) should be given a restricted meaning in its context. When considering scope to be given to that expression I have endeavoured to apply the test adopted by Lord Wilberforce in I.R.C. v. Plummer [1980] A.C. 896 (H.L.) at page 911 F-G in relation to the definition of "settlement" ("'settlement' includes any disposition, trust, covenant, agreement or arrangement,") in section 454(3) for the purposes of Chapter III of the Income and Corporation Taxes Act 1970 after declining to indulge in judicial legislation by reading in exceptions into the definition Lord Wilberforce observed:
47. Considering section 9(1)(a) in its context and searching for the legislative purpose manifested by its terms, it is apparent that, although the eiusdem generis rule does not apply, the word perquisite, the ordinary meaning of which is very wide, is used in juxtaposition with wages, salary, Leave pay, fee, commission, bones, gratuity and allowance, all of which are expressions with a monetary connotation. "Allowance" was introduced by amendment in place of "allowance for high cost of living" under section 6(a) of the Inland Revenue (Amendment) Ordinance 1971 (No. 2 of 1971) but I can see no reason for giving it anything but a monetary connotation. 48. Section 9(1)(b) and (c) are examples of "deemed income" which are the subject of specific enlargement of the ordinary meaning of income. Such deemed incomes necessarily requires a basis for valuation for taxation purposes and this is expressly provided in section 9(2) together with the definition of "place of residence" which was introduced very belatedly in section 9(6) by section 2 of the Inland Revenue (Amendment) (No. 6) Ordinance 1979 (No. 48 of 1979). 49. Section 9(1)(aa) and (d) (supplemented by section 9(1)(4) and (5)) are both inclusions which were added by amendment by section 6(a)(ii) and (iv) of the Inland Revenue (Amendment) Ordinance 1971 (No. 2 of 1971). Neither of these categories of "income" support a wide construction of section 9(1)(a) to the extent advocated by the Commissioner. Section 9(1)(aa) identifies "so much of any amount ... received" by an employee in specified instances and clearly relates to sums of money. Section (1)(d) was enacted on the recommendation of the Inland Revenue Ordinance Review Committee made on the 14th March 1968 in Part III paragraph 170 of their Report. Section 9(1)(d) and (4) are respectively derived from section 25(1) and (2) of the Finance Act 1966 which were enacted to overrule the decision in Abbott v. Philbin [1961] A C. 352. (H.L.) see the comments to this effect in Willoughby on Hong Kong Revenue Law, Vol. 2, paragraph 2.01/9.32 and Flux on the law and Practice of Hong Kong Taxation (1987-88 Edition at p. 67. 50. Section 9(5) is intended to avoid a double charge to salaries tax consequent upon the new charge resulting from section 9(1)(d). It seems to indicate that the framers of section 9(1)(d) at least regarded "perquisite" in section 9(1)(a) as otherwise possibly extending to a share option when acquired by an employee from his employer. The provisions of section 9(5) are very general and they do not specify in what circumstances such a situation could arise. However the recommendation for the introduction of section 9(1)(d) was made by the 1967/8 Inland Revenue Ordinance Review Committee of which the then Financial Secretary and Commissioner were members and, immediately after making the recommendation in paragraph 170 of their Report, the Committee went on to state in paragraph 171 under the rubric of benefits in kind that "It has been established in decided cases in the U.K. that a perquisite cannot be treated as income unless it is convertible into money." In view of this misapprehension that the English authorities on convertibility were binding in Hong Kong I do not consider that the amendments contained in section 9(1)(d) are of any real assistance in determining the scope of "perquisites" in section 9(1)(a). 51. Looking beyond section a for further indications of legislative intent I can find no indication supporting the unrestricted meaning of perquisite. Section 11D(a) deals with accrued income which has not been "received" by a person and provides for deemed receipt where income has been made available to or dealt with on behalf of a person. Section 11D(b) provides that income accrues to a person when he becomes entitled to claim payment thereof. This is the language of money. 52. Looking beyond part III to the general machinery of returns in Part IX I again find no indication to support an unrestricted meaning for "perquisite" in its context. Section 52 which deals with information to he furnished by officials and employers confers, in sub-section (2), power on an assessor to require an employer to furnish a return of inter alia "the full amount of the remuneration, whether in cash or otherwise" for specified periods of:
53. This again seems to be the language of money and receipt. The reference to "cash or otherwise" could be said to indicate cash or kind but it could equally well indicate cash or a cheque or draft or payment to another on the direction of the employee. 54. I accept that all the expressions indicated above as being the language of money necessarily have to yield to accommodate the undoubted deemed income arising from rent-free or partially rent-free residential accommodation within section 9(1)(b) and (c). However those provisions are supplemented by further detailed provisions in section 9(1A), (2) and (6) which provide a basis for the charge to salaries tax on deemed income arising from that residential accommodation. 55. When it comes to other benefits in kind the entire edifice of taxation of non-monetary benefits rests upon the prima facie construction of "perquisites" in section 9(1)(a) supported by the exception in section 9(i)(a). When supported 9(1) (a ) was first enacted in 1947 as section 10 (1)(i) the exception of the value of a holiday warrant or passage "granted" by an employer to an employee and the exception of any allowance for the purchase in of such facilities from inclusion as the income of an employee chargeable to tax must, in my opinion, have been intended to be an exception out of "perquisite". In 1947 section 10(1)(i) did not refer to "allowance" simpliciter, but to "allowance for high cost of living" 56. When the exception in question was introduced into the original section 1(1 )(i) it clearly was necessary if an allowance for the purchase of a holiday warrant or passage was to be excepted from being a perquisite, but if perquisite was intended to have a restricted monetary meaning I accent that the exception of a holiday warrant or passage "granted" by an employer to an employee was not necessary. 57. I further accept that prima facie if there is an exception made to a provision the implication is that the matter excepted would otherwise have been included in the provision, but I am not satisfied that in the present case such implication is the necessary implication. Moreover I apprehend that in a taxing statute it is not unknown for provisos and exceptions to be found which are not strictly necessary and are inserted ex abundanti cautela to except from enactments matters which would not in any event he covered by the enactments: see Halsbury Laws of England, 4th edition, Vol. 44 at paragraph 882. 58. Doing the best I can to construe section 10 (1)(i) as it was originally framed and as it now appears as section 9(1)(a) in context, I feel constrained to conclude that it cannot reasonably be inferred from the language used by the legislature in those provisions that it was its intention in 1947 or thereafter to extend salaries tax, not only to income expressly deemed to arise from the benefit of an employee's rent-free or partially rent-free residential accommodation but also to benefits in kind generally. It is clear that it was intended to tax rent-free residential accommodation as deemed income in accordance with a statutory formula for ascertaining the valve of that benefit. It is equally clear that it was intended that free passages and holiday warrants were not to be taxed as perquisites or income. I am unable to discern a clear intention to further and tax benefits in kind generally as perquisites. 59. It is common knowledge that free or subsidised housing and leave passages were frequently part of the terms of service for many expatriates prior to 1947 and this continued to be the case thereafter. Prior to 1947 there can have been few if any obvious "fringe benefits" available to employees which the administration would have been minded to tax as income for the purposes of a simple and cost effective salaries tax. Moreover, if the legislature had been so minded I would expect it to have imposed the tax specifically and to have provided the basis for the valuation of the benefits in kind to be taxed (as it did in the case of rent-free accommodation) and not by a side wind through an exception which refers only to the "value" of a holiday warrant or passage granted by an employer to an employee. 60. At the very least the interpretation of section 9(l)(a) seems to me to be shrouded in doubt and difficulty. Furthermore I cannot accept that the absence of valuation provisions is a mere matter of machinery. To suggest that the use of the expression "value" in a specific exception provides the basis for concluding that section 9 (1)(a) has provided for the taxation of all benefits in kind obtained by an employee from his employer on the footing that they are deemed to be income of an amount equivalent to the value of the benefit to the employee seems to me to travel beyond interpretation to judicial legislation. Moreover I am very doubtful whether, as a matter of construction, it is permissible to read so much into an exception: see the dictum of Lord Brougham in Lord Advocats for Scotland v. Hamilton (1852) 1 Macq. 46 (H.L.) at p. 55 that "generally speaking, you cannot raise out of a proviso or an exception in a statute any affirmative enactment' 61. Had the legislature intended such a wide imposition of tax on all benefits in kind I would have expected it to make provision for or to have excepted situations where valuation of a benefit is difficult or impossible. Free meals provided by an employer in a canteen for his employees are an obvious example. In many cases it is difficult to isolate the personal element of benefit from a facility or benefit available to an employee such as a company car or a servant. There must be many other cases of difficulty. The obvious need for specific provision for such problems is illustrated by the elaborate provision for them made in the United Kingdom legislation beginning with Part IV of the Finance Act 1948 and now to be found in a different and complex form in Chapter II of the Income and Corporation Taxes Act 1988. 62. In arriving at the conclusion that the absence of express provisions for valuation of benefits in kind is not to be dismissed lightly in relation to a revenue ordinance as mere machinery and that a mere reference to "value" in respect of a particular benefit in an exception does not suffice as a substitute for such express provisions, I have been fortified by the following dictum of Lord Reid in Heaton v. Bell [1970] A.C. 728 (H.L.) at p. 745B regarding the meaning of "value" generally in relation to the wider meaning of perquisites:
He went on to say that the appellant (the Revenue) had declined to argue that value meant the value of the benefit to the owner because that had been expressly disapproved in Tennant v. Smith [1982] A.C. 150 (H.L.) and he then added that value to the owner "would often be almost impossible to assess." 63. I respectfully adopt this reasoning of Lord Reid. Lord Diplock did not share the same view and at page 764A he indicated that if he were not bound by the judicial gloss put upon the word "perquisite" in Tennant's case he would have had -
However none of the other speeches in Heaton v. Bell appears to contain any similar views on the question of the valuation of a perquisite in its wider sense. 64. The absence of provisions for valuation seems to have been an important factor in Tennant's case where the Revenue sought to tax as a perquisite a bank employer's rent-free residence (as an incident of his employment) in his employer's premises. The absence of such provisions, in contrast to the express provisions providing the basis for taxation under Schedules "A" and "B" in relation to the occupation of land, seems to have been treated as an important factor. Thus Lord Watson made the point in the following dictum at page 158:
65. At page 161 Lord Macnaghten made the same point when he observed:
Difficulties regarding the basis of calculation of the income represented by the perquisite were also stressed by Lord Halsbury at page 156 and Lord Hannen at page 165. 66. The importance of the absence of valuation provisions (in addition to other strong context factors) as a factor when construing a taxing statute is indicated by Lord Reid in Heaton v. Bell [1970/ A.C. 728 (H.L.) at page 744 where, after dealing with the history of the English Income Tax -Acts relating to perquisites and giving his understanding of the reasons why "perquisites" had received a restricted construction, he referred to additional factors which he considered had also been recognised in Tennant case. He observed:
67. Taking the view as I do, that the Hone Kong Ordinance, which was intended to provide a simple cost effective system of salaries tax on income, is to be construed as being intended to tax perquisites in the restricted sense of money received by an employee I have no difficulty in arriving at the conclusion, by parity of reasoning with the approach of the House of Lords in Tennant's case and of Lord in Heaton v. Smith (where at p. 745 A-R he made it clear that he did not doubt the soundness of the reasoning in Tennant's case) that common sense requires that if the employee receives from his employer in respect of his employment a benefit in kind such as a cheque or a share in a company which can be readily converted to money, that benefit should be regarded as a money perquisite. 68. This amounts to the adoption of the convertibility principle, but I consider that it is justified on the construction of the relevant provisions of the Ordinance having regard to English authorities only as providing illustrations and basic principles of construction. Indeed, as Lord Wilberforce observed in I.R.C. v. Plummer [1980] A.C. 96 (H.L.) at p. 913D:
69. Accordingly I would dismiss this appeal on the footing that on the true interpretation of the Ordinance the benefit in question which the taxpayer obtained from the company was not income within the meaning of sections, 8(1) and 9(1) of part III of the Ordinance. 70. Before leaving this matter I mention that in arriving at my conclusion I am comforted by the fact that, although it is not relevant to the question of interpretation and no question of contemporanea exposito or stare decisis arises, the three reports of the Inland Revenue Ordinance Review Committees over the years all indicate that the Commissioner did not reckon to tax benefits in kind which are not convertible to money, albeit because the English authorities on the restricted meaning of perquisites under the English Income Tax Acts were erroneously considered to be applicable: see the 1954 Report at paragraph 15, Part III of the 1968 Report at paragraph 171 and the 1976 Report at paragraph 134. Indeed paragraph 172 in Part III of the 1968 Report, which I set out below, makes strange reading in the light of the Commissioner's contentions in this case:
Hunter, J.A.: 71. Rhind J accepted the respondent's submission here and below, that the decisions of the Courts in the United Kingdom, under Schedule E of UK Income Tax Legislation and its modern equivalent, are directly applicable to the construction of sections 8 and 9 of the Inland Revenue Ordinance (Cap 112) (The Ordinance). He therefore applied the twin concepts of UK law conveniently summarised by Scott J in Richardson (Inspectory of Taxes) v Worrall [1985] STC. 693 at p 713 as follows:-
Since the benefit here is not convertible, the issue on this approach, and much of the argument before us, narrowed to the question whether the Scott J formula (sufficient for the facts of that case) was complete and his "explanation" of Nicoll v Austin [1935] 19. TC, 531, at p 713 was correct; or whether on a different reading of Nicoll v Austin; a reading of Wilkins v Rogerson [1961] 1 Ch 133; and dicta of Viscount Radcliffe in Hochstrasser v Mayes 38 TC 673, 708 and of Cross J in Barclays Bank Ltd v. Naylor [1961] 1 Ch 7, 21,it can be said to be too narrow. If this approach be correct, this court would decide a question of construction of the Ordinance by reference to of and not openly resolved question of HK law, which by reason of legislation specifically directed to the problem, to Income and Corporation Taxes Act 1970, section 196, would not even arise there now. 72. In my judgment this approach is both unattractive and not well founded. One of the few really general principles of the law of taxation is that in every case the question is one of the construction of the particular taxing instrument giving the words there found their natural and ordinary meaning. One of the classic statements of this principle is that of Rowlatt J in Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64, 71 where he said :-
During the initial argument this seemed to me to explain why on several occasions the Privy Council when called upon to construe a particular taxing provision has declined to have regard to parallel but not identical provisions in-other locations eg IRC v Appubamy [1963] 1 All ER 69, 72, and Ward & Co Ltd v Commissioner of Taxes [1923] AC 145, 150. 73. The most recent Hong Kong example of this is Lo Lo v Commissioner of Inland Revenue Vol 2 HK Tax Cases 34. At first instance treated the UK and Australian authorities cited to me as "at most indirectly persuasive" but I considered them. In the Court of Appeal, where IRC v Appuhamy was cited for the first time, Leonard VP and Zimmern JA seem to approve my approach, but referred to no external authority. My Lord Cons JA (as he then was) expressed a preference for the UK approach. The Privy Council recorded the Appellant's concession that under UK law the relevant provision would not have been taxable, but referred to no UK statute or authority. It recorded the appellant's submission that the Hong Kong legislation was closer in form and content to that in Australia, but expressly declined to consider Australian authority. During the initial argument I therefore concluded that my approach was wrong : that gave too much significance to both UK and Australian authority: and that such authority is no more than indicative of the range of problems which can arise in relation to particular taxing provisions. 74. After the conclusion of the argument I was indebted to my Lord Clough JA for drawing my attention to two further Privy Council decisions Attorney General for Ontario v Perry [1934] AC 477 and Armstrong v Estate Duty Commissioner [1937] AC 885. In the latter case, another Hong Kong-appeal, Lord Maugham 'stated the relevant principle as follows, p 896 :-
75. In consequence further argument was invited and received. It then became clear :-
76. At the date of the assessment herein, the material UK provisions were sections 181 and 183 of the Income and Corporation Taxes Act 1970. By section 183, the "emoluments" taxable under section 181 were said to "include all salaries, fees, wages, perquisites and profits whatsoever". The corresponding relevant provisions in the Ordinance (I have taken the current ordinance : the contrast could equally be made with the original 1947enactment) are :-
(c) where a place of residence is provided by an employer or an associate corporation at a rent less than the rental value, the excess of the rental value over such rent; (1A) (a) Notwithstanding subsection (1)(a), where an employer or associated corporation refunds all or part of the rent paid by the employee, such refund shall be deemed not to be income;
77. These two enactments are significantly different, notably in the following respects :-
78. Differences (2) and (4) above to my mind show a legislative intent to reject not to adopt the UK conversion principle. From its origins in Tennant v Smith [1892] AC 150, a close connection can be detected between the association of the word "perquisites" with "profits", and from the absence of any reference to or provision for valuation in the context of Schedule E. The first point found expression in the then Rule 4 which, per Lord Watson at p 159, "defines perquisites for all the purposes of the Act to be 'such profits of offices and employments as arise from fees and other emoluments, and payable either by the Crown or by the subject in the course of executing such offices or employments'". This definition, which prevailed from 1842 to 1922 effectively excluded any argument as to "the precise meaning" of the word perquisite : see Weight v Salmon 19 TC per Lord Atkin at p 193. 79. The second point was made by Lord MacNaghten at the outset of his speech at p 162, where he pointed out that the relevant Act "contains no direction for estimating or bringing into account any benefit, or advantage, or enjoyment derived from lands" except under Schedules A & B. The Act's emphasis was seen to be on money "payable" to the servant, not on benefits received in kind. The latter could only sound in money, be put to profitable use and show a profit, if they could be cost into money. If conversion was not possible there was no profit and no taxable emolument. If it was, then you had a perquisite measured not by cost but by its realisable value to the recipient : Wilkins v Rogerson [1961] 1 Ch 133. The matter was most succinctly put by lord Reid in Heaton v Bell [1970] AC 728 where he said at pp 744-5 :-
80. The words emphasised to my mind underlie this connection. 81. By contrast the draftsman of section 9 has abandoned the concept of profit and substitued that of value. Both in its original form in the then section 10, and new, the "holiday warrant or passage" referred to in section 9(1)(a)(i) must have been regarded as a "perquisite". It could now equally be regarded as an "allowance". But in either case the need to except its value is clear indication that such value would otherwise have been taxable as a perquisite: ie that the value of a perquisite was income and taxable. Further it is well known that holiday passages granted by some employers eg Hong Kong Government are not convertible by the recipient into money. So the need to except unconvertible benefits is a clear indication of the rejection of that concept in favour of value. 82. This conclusion is reinforced by the place of residence provisions in the section. They go considerably beyond the reversal of the result in Tennant v Smith. They provide a code for dealing with this benefit, based upon value, but which is intended in all variations of method to produce a single result, ie section 9(2). Such a provision was notably missing in the UK in 1882. The present provision can be said to have filled the gap which contributed so much to the birth of the doctrine of conversion. But this provision to my mind is much more consistent with the rejection of that doctrine as a whole, than with its rejection in respect to property and impliedly its acceptance in other respects. To me it reveals a legislative intent to tax as income the value of residential accommodation expressly upon a fixed and simple basis, which has varied, but which has always been materially less than market value. 83. The second principle identified by Scott J, may be said initially to have been a by-product of conversion, in that it developed out the phrase "money's worth" used by Lord Halsbury in that context in Tennant v Smith at P 156. It is noteworthy that the question posed by viscount Cave LC in Hartland v Diggines [1926] AC 289, 291 was whether the relevant benefit came "within the description of 'profits', 'perquisites', or 'emoluments'" in the statute. His answer was that it was "part of his profits and emoluments". I am far from certain as to the precise limits of this principle in the UK. I have not found any reasoned explanation or justification for it in its narrowest formulation, with its emphasis upon accrued legal liability; of a treating as decisive the distinction which Finlay J failed to draw in Nicol v Austin [1935] 19 TC 531 and seems to have refused to draw in CIR v Lord Forster 19 TC 738, 751. Also it remains a matter of speculation whether in a Wilkins v Rogerson type of situation, if the provision of the suit had been a term of the contract of an employment, it would have been taxable as a profit at cost (as I am minded to think) or still only as a perquisite at its conversion value. 84. The significant principle the respondent seeks to extract from this line of authority and which seeks are invited to apply in Hong Kong is the alleged crucial significance of form. Given education provision made under an express term of a contract of employment, the respondent concedes that sums of money so paid would constitute taxable income of the servant if paid personally to the servant or to the school in settlement of the servant's accrued prior liability for fees : but not if paid to the school direct either before he incurred any liability to the school or after he had successfully downgraded his liability to the school from the primary to a secondary level. In both such cases the taxpayer would have received a benefit, namely free private education for his child, as a direct result of his employment. The distinction drawn may or may not be valid in the UK. If it is valid, it cannot be supported rationally : and can only be explained by reference to the taxing instrument. In my judgment the terms of section 9 especially 9(1)(a)(i), (ii) and (iii) : and 9(1)(b) and 9(1A) reveal a legislative intent to reject any such distinction. 85. I therefore find such significant differences between the UK and the Hong Kong legislation as to be unable to derive any overall assistance from UK authority. I therefore return to the natural and ordinary meaning of the words used, and to Mr Payne invitation to put a narrow meaning upon the words "income" and "perquisite" in section 9(1)(a). 86. In relation to income, Mr Payne invited us to treat Lord MacNaghten as having given an exhaustive definition of income in Tennant v. Smith when at p 164 he spoke of : 87. ".... What 'comes in' - on actual receipts". But shortly after he showed that he was dealing only with Schedules D and E when he said :
At the outset of his speech he made it clear that "income from all sources" for the purposes of the Act was not limited to what he called "income properly so described" and included income chargeable under Schedules A & B : see the observations of Lord Buckmaster in Lady Miller v CIR 15 TC at p 80. In Attorney General of British Columbia v Ostrum [1904] AC 144, Lord MacNaghten himself declined to narrow the plain and ordinary meaning of the word income in rejecting a Canadian view which had much emphasised actual receipt. Repeating the terminology of the UK statute, he spoke of "all profits and rains". P 147. Few employees I am minded to think, receiving free education for a child from their employer, would find it easy to dispute that such a benefit was a "gain" from their employment. 88. This money in the pocket approach is to my mind too narrow, has not prevailed in the UK, and it is indeed inconsistent with the "money's worth" principle. I obtain more assistance from the speeches in one of those cases, North British Railway Company v Scott [1922] AC 37. The benefit there found taxable never reached the taxpayer's pocket, but their Lordships found no difficulty in regarding it as part of the servant's income, Lord Wrenbury said :-
On this approach income is simply the total valuable consideration moving from the employer, or, if it is preferred, the total benefit received by the employee, arising from the office or employment. In the context of the Hong Kong Ordinance this approach seems to me fitting and appropriate. 89. If this be correct education benefit can constitute income. Having regard to the word "includes" it is I think unnecessary to seek to bring them in under any of the words used. This would suffice for the determination of this case, unless a distinction is to be drawn between benefits which discharge and those which do not discharge an accrued legal obligation. 90. In the Hong Kong context I have no hesitation in rejecting that distinction. First I detect a legislative intent to the contrary. Secondly, the result would be quite irrational and arbitrary. It is accepted that an employer's contribution which goes only to reduce an employee's liability to the school is part of his income and taxable, howsoever paid. It is I think common experience that this is the form many, if not most educational provisions or allowances take, since they are limited to some fixed sum measured by the term or by the year. It follows that any contribution up to 99 per case of the whole will always be taxable. Those employers who are so generous or malleable as to grant unlimited apprehend in a rising market, and thus provide totally free education, are I apprehend in the minority. I cannot attribute to the legislature an intent to tax the many and exempt the few : or to tax allowances up to 99 per cent and to free the recipient of 100 per cent. 91. I see no ground for distinguishing between parents at different stages in a child's education. I assume the case of a servant whose contract of employment contains a covenant by his employer to pay the education costs of his child. He may or may not choose to take advantage of such covenant, and send his child to a fee-paying school. If he does, then every terms fees discharged directly or indirectly by his employer, would constitute income then "received" by him, for the purposes of section 11 (D) (a) of the Ordinance. The payment would also fall within the phrase "cash or other wise" in section 52(2). It follows in my judgment that despite the complex alterations brought about in the relationship between the respondent and the school, which I accept reduced the respondent's liability from a primary to a secondary one, all fees paid by the company pursuant to the covenant in clause (e) in the contract of employment constituted taxable income in the hands of the respondent. 92. Upon the hypothesis that my construction of income is wrong, and that to constitute income, education benefits have to fall within one of the words used in section 9(1)(a), I would have reached the same conclusion upon the construction of the word "perquisite", and since the limitation was removed "allowance". Having regard to the statutory differences, I can see no possible justification for putting upon the word perquisite what Lord Diplock called "the judicial gloss" of Tennant v Smith, Heaton v Bell p 764. The word "perquisite" in the context of either 1947 or 1988 naturally means a benefit received or receivable by a servant additional to any monies paid by way of "wages, salary, leave pay, fee, commission, bonus, (or) gratuity". The perquisite may be in kind or in cash. A typical example of the former would be free private motoring. This was recognised as an obvious perquisite, if that word is given its natural meaning, in Heaton v Bell by Lord Diplock, p 763, 4, Lord Hodson p 758 and Lord Upjohn p. 760, and by Scott J in Richards v Worrall p 708. Section 9(1)(a)(i) recognises value as the appropriate measure of a perquisite's worth as income to the taxpayer. I respectfully accept as appropriate Lord Diplock's view in Heaton that this means market value. This is quite consistent with the need in section 9 to prescribe a particular or special measure eg in relation to residential accommodation and stock options only where market value is to be departed from. I anticipate no serious problems. If the perquisite consists of a money payment that sum prima facie its value to the taxpayer. Further in my judgment it is immaterial whether the payment is made to the taxpayer or to a third party on his account or for his benefit, cp Scott J in Richards v Worrall p 708. This also follows from my view that section 9 directs attention to substance rather than form. I would be minded to afford a similar meaning and effect to the word "allowance" now it stands alone. 93. I would also allow this appeal and restore the Decision of the Decision of the Board of Review.
Cons, V.-P.. 94. The appeal is therefore allowed and the Decision of the Board of Review is restored; we make an order nisi that the Commissioner of Inland Revenue is to have his costs here and below.
Representation: B. Whaley, Crown Solicitor for the Appellant Ian Payne & Miss C. Van der Eb (M/s Hampton, Winter & Glynn) for the Respondent |