Income-tax---

----Employment---Salaries tax---School fees of tax-payer's daughter paid directly by employer pursuant to tax-payer's contract of service---Whether "perquisite" of employment---Whether payments income of tax-payer assessable to salaries tax.

Section 8(1) of the Hong Kong Inland Revenue Ordinance provided for salaries tax to be charged 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. Under section 9(1) income from any office or employment included "(a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance (with certain exceptions)." By section 11B the assessable income of a person chargeable to salaries tax was the aggregate amount of income accruing to him from all sources in that year of assessment. Section 11D (b) provided that income accrued to a person when he became entitled to claim payment thereof. The tax-payer was appointed an executive director of a company and his contract of service provided, inter alia, that he would be entitled to monthly remuneration and that the company would pay the education costs of his children. It was agreed between the tax-payer, the company and the English boarding school attended by the tax-payer's daughter that the company would be primarily liable for the payment of her school fees. During the year of assessment 1982-83 the company made two payments of fees to the school. Those amounts were included in the taxpayer's assessable income in the assessment to salaries tax for that year. The commissioner rejected the tax-payer's objection to the assessment and the Board of Review dismissed his appeal. His appeal to the High Court was allowed by the Judge, but that decision was reversed by the Court of Appeal by a majority, who held that the question of tax liability had to be determined by reference to the terms of the Ordinance and not to United Kingdom cases, and that each payment to the school by the company was a perquisite within section 9(1)(a) giving rise to a liability to salaries tax.

On the tax-payer's appeal to the Judicial Committee:---

Held, dismissing the appeal, that in the absence of provisions in Hong Kong legislation giving a different meaning to the expressions "salary" and "perquisite" the United Kingdom statutes, on which the Inland Revenue Ordinance was based, and the United Kingdom authorities as to the meaning of the expressions in relation to the same subject matter were of assistance in construing those words in the Ordinance; that they meant the same in section 9(1)(a) of the Ordinance as in the United Kingdom income tax law, and so ascertainable sums of money spent by an employer for the benefit of a particular employee as required by his contract of employment were taxable as being his salary or a monetary perquisite, and the accordingly; since the tax payer was contractually entitled to claim payment of the school fees by the company, the payments by the company to the school pursuant to the tax payer's contract of 'service constituted income of the tax-payer from his employment and salaries tax was chargeable thereon under the Ordinance in respect of the amounts actually paid.

Appeal (No.23 of 1989) with leave of the Court of Appeal of Hong Kong by the appellant tax-payer, David Hardy Glynn, from the judgment of the Court of Appeal of Hong Kong (Cons V.P. and Hunter J.A. Clough J.A. dissenting) given on 23 December 1988 allowing an appeal by the Commissioner of Inland Revenue from the judgment of Rhind, J. delivered on 8 March, 1988 in the High Court allowing an appeal by the tax-payer from a decision of the Board of Review on 21 January 1987 upholding the commissioner's salaries tax assessment on the tax-payer for the year 1982-83.

The facts are stated in the judgment of their Lordships.

Barry Pinson Q.C. for the Tax-payer.

Andrew Park Q.C. and Bernard Whaley, Senior Crown Counsel, Hong Kong for the Commissioner.

JUDGMENT

LORD TEMPLEMAN---By an agreement in writing dated 1 April, 1982 the appellant tax-payer, Mr. Glynn, agreed to work for Inter group Associates Ltd. ("the company") as an executive director at a monthly remuneration of H.K. $5,000 and on the terms inter alia that: "(e) The company will pay education costs of your children and all family medical and dental expenses."

By an exchange of correspondence between the tax-payer, Roedean School and the company culminating in a letter, dated 9 June, 1982 from the school to the company, it was agreed that primary liability for the payment of the school fees of Miss S.V. Glynn, a daughter of the tax-payer, at Roedean School should be borne by the company. The tax-payer became liable to pay if and only if the company defaulted. Thereafter the company paid the school fees. The Board of Review held that the school fees paid by the company, the tax-payer's employer, substituted income of the tax-payer from his employment assessable to Hong Kong salaries tax. The decision of the Board of Review was reversed in the High Court by Rhind, J. but restored by the Court of Appeal (Cons. V.P. and Hunter JA., Clough JA. dissenting). The tax-payer now appeals.

By section 8(1) of the Inland Revenue Ordinance, as amended, salaries tax shall be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from inter alia any office or employment of profit. The salary paid to the tax-payer by the company is liable to salaries tax. Section 9 of the Ordinance, so far as relevant, provides:

"(1) Income from any office or employment includes---(a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others, except---(i) the value of any holiday warrant or passage granted by an employer to an employee in so far as it is used for travel ....(b) the rental value of any place of residence provided rent-free by the employer..."

The respondent, the Commissioner of Inland Revenue, contends that such sum paid by the company to Roedean School is a perquisite of the tax payer liable to salaries tax. The tax-payer contends that a perquisite must be a sum of money paid to an employee if it is to be taxed. In support of this argument counsel for the tax-payer pointed to the following provisions of the Ordinance: "11B. The assessable income of a person chargeable to salaries tax shall be, the aggregate amount of income accruing to him from all sources " Nothing, it is said, accrued to the tax-payer; moneys were paid to Roedean School for the benefit of the tax-payer's daughter. "11D...(b) income accrues to a person when he becomes entitled to claim payment thereof." The tax-payer, it is said, never became entitled to claim payment of the school fees paid by the company to Roedean School.

Alternatively it is submitted, on behalf of the tax-payer, that the tax payer is not taxable in respect of the-school fees because income only includes the value of a perquisite. Since the right to require payment of school fees cannot be sold by the tax-payer that right is a perquisite which has no value, or at any rate no calculable value, m money terms but therefore cannot be taxed.

The principles of the Inland Revenue Ordinance are based on the provisions of the United Kingdom Income Tax Acts, albeit with modification, to meet the requirements of the Hong Kong economy and establishment. In particular the taxation of a perquisite involves the same problems in Hong Kong as in the United Kingdom. Consequently the legislation of the United Kingdom Parliament and the decisions of the United Kingdom Courts will provide some assistance in construing the Ordinance.

By the United Kingdom Income Tax Act, 1842 (5 & 6 Act. c. 351) income-tax was charged under Schedule E on all "salaries, fees, wages, perquisites or profits whatsoever accruing by reason of inter alia employment of the tax-payer. Perquisites were deemed to be--

"such profits of offices and employments as arise from fees or other emoluments, and payable either by the Crown or the subject, in the course of executing such offices or employments ......

In Tennant v. Smith (1892) A.C. 150 the revenue sought to charge an employee, Mr. Tennant, with income-tax on the value of free accommodation provided for him by his employer, a bank. The House of Lords held that tax was not payable. The effect of this decision was summarised by Lord Diplock in Heaton v. Bell (1970) A.C. 728, 764:

"In Tennant v. Smith (1892) A.C. 150 the House of Lords placed a judicial gloss upon the word `perquisite' appearing in the corresponding sections of the Income Tax Act, 1842, by confining, it to actual money payments and to benefits in kind variously described by Lord Halsbury s L.C., at p. 156 as `capable of being turned into money,' by Lord Watson, at p. 159 as `that which can be turned in pecuniary account,' by Lord Macnaghten, at p. 163, as `payments convertible into money' and by Lord Hannen, at p. 165, as `that which could be converted into money' ....In the Income Tax Act, 1918, the relevant sections were re-drafted and in the process the word `payable' disappeared, but this professed to be a consolidation Act and the presumption is that the change in wording was not intended to give to the new enactment a meaning different from that of the enactment which it replaced. Further changes in drafting and arrangement which were made by subsequent legislation including the Income Tax Act, 1952, and the Finance Act 1956 which are applicable to the present appeal, have not, in my view, affected the meaning which the word `perquisite' bore in the Income Tax Act, 1918. I think that it must be accepted that `perquisite' in each of these subsequent statutes still means what it meant in the Income Tax Act, 1842."

Although a perquisite must mean the payment of money common sense requires that a perquisite must also include money, which can be obtained from property which is capable of being converted into money. A perquisite also includes not only money which is actually paid to an employee but money which is paid in discharge of a debt of the employee.

In North British Railway Co. v. Scott (1923) A.C. 37 a railway company paid Schedule E tax on the salaries of its officers as required by the Income Tax Act, 1860 but chose not to deduct the amount of the tax when paying the salary. The House of Lords held that the amount of the Schedule E tax not deducted formed part of the income of each official for tax purposes. Lord Wren bury said; at pp. 46-47:

"If the salary which the officer is to receive net is b100, the `salaries, fees, wages, perquisites, or profits whatsoever' which form the reward of his service, are the L100 and the contractual benefit that when the company has paid the tax due for his income-tax (whose payment is imposed upon the company by the statute) they will not deduct it against him as they might. This is a further valuable consideration or profit accruing to the officer by reason of his office and is a factor in arriving at his assessable income for income-tax purposes."

Similarly in Hartland v. Dinginess (1926) A.C: 289 a shipping company voluntarily paid income-tax over a series of years on the salaries of their employees, including their accountant, and it was held that this payment was part of the accountant's profits and emoluments as an officer of the company for which he was assessable to income-tax. Viscount Cave L.C. said, at pp.291-292:

"The company had entered into no agreement, either verbal or in writing, to pay income tax on the appellant's salary, but in fact it had been paid year after year. But is it a profit, a perquisite, or an emolument? That the payment is voluntary makes no difference. But it is said -- and this is the main argument used on behalf of the appellant -- that the sum is not an emolument, because it was not paid to the appellant or at his request, although in fact it was paid regularly over a series of years. I do not agree with that argument ....the effect of the payment was in practice and in fact to relieve the appellant year, after year from his liability for the payment of the tax. It is true that the appellant did not receive cash in his hands, but he received money's worth year after year. This being so, I cannot resist the conclusion that the payment was in. fact a part of his profits and emoluments as an officer of the company for which he has been properly assessed to tax."

The result of the authorities is that a perquisite includes money paid to the tax-payer and money expended in discharge of a debt of the tax-payer. There is no difference between a debt of the tax-payer discharged by an employer pursuant to the contract of service and money paid for the benefit of an employee by his employer pursuant to the contract of service. When a service agreement is under. negotiation the employer decides what the employee is worth to the employer. If the employer decides that the employee is worth L40,000 a year, it matters not to the employer how this sum is expended, so long as it serves the purposes of obtaining and rewarding the services for which the sum is to be paid. It would be absurd if an employee engaged at L40,000 paid tax on that sum whereas an employee engaged at L35,000 plus a covenant to spend 165,000 for his benefit in the manner specified in the service agreement is only liable to tax on L35,000. In both cases it could only be said that the employee obtained a sum of L40,000 as a salary for his services. In the latter case it could also be said that the employee obtained a salary of L35,000 and a perquisite of L5,000. In both cases salaries tax is chargeable on L40,000. The amount which the employer agrees to pay for the benefit of the employee may fluctuate; in the present case if the annual school fees are increased from L12,000 to L15,000 per annum the benefit to the tax payer will increase correspondingly. But in each case the amount of the payment made by the company for the benefit of tax-payer, pursuant to his contract of service, will be ascertainable and taxable. If the burden became too onerous for the company because of the number and expense of the tax-payer's family, then no doubt the company would seek a revision of the contract of service or terminate the contract. If the benefit to the tax-payer ceased because his children completed their education, he might seek a revision of the contract of services or terminate the contract. As Tennant v. Smith (1892) A.C. 150 shows, the employer may provide some advantages for an employee which do not involve the expenditure of money for the benefit of the employee, or which involve an expenditure, which cannot be attributed wholly or proportionately to one employee. For example, if an employer contracts to provide a nursery school for the children of all its employees and to allow each employee to use the facilities of the school, there is no or no identifiable sum expended for the benefit of any particular employee. If the legislature wishes to tax the benefit of a nursery school only statute can provide for this. Money may also be expended indirectly for the benefit of an employee without being taxable; for example, if a contract of service does not provide for medical expenses to be paid and the employer does not normally pay medical expenses, the employer may, for compassionate or other reasons, as a special case, voluntarily pay the medical expenses of transporting and treating a child of the employee. The expense if not contractual and if lacking the elements of expectation and continuity would not be taxable. Again the legislature may provide expressly for such benefits to be taxed and define the quantum which shall be taxed. On the other hand legislation may also provide exemption for benefits which would otherwise be taxable. For example, section 9(1)(a) of the Inland Revenue Ordinance expressly exempts from salaries tax the money expended by an employer, whether pursuant to a contract of service or not, on the purchase of a holiday passage which is enjoyed by the employee. The boundaries of tax principles and tax legislation are sometimes uncertain and frequently surprising. For present purposes it suffices that an identifiable- sum of money required to be expended by an employer, pursuant to a contract of service for the benefit of the employee, is money paid at the request of the employee and is either part of the employee's salary or is a monetary perquisite taxable as such according to the law and authorities of the United Kingdom. It is money paid at the request of the employee equivalent to money paid to the employee as Viscount Cave implied in the passage from his speech in Hartland v. Diggines (1926) A.C. 289, 291-292, already cited.

Salaries and perquisites, expressions which have formed part of United Kingdom income-tax law since at least 1842, must have the same meaning in Hong Kong tax law, which is based on United Kingdom law provided that the Hong Kong legislation does not attach different meanings to those expressions. There is nothing in section 9 to suggest that the expressions "salary" and "perquisite" do not include sums contracted to be paid by the employer for the benefit of the employee. Section 11B provides for aggregation of all sources of income. Section 11D provides for the ascertainment of the year of assessment in which the income is received. Mr. Pinson, on behalf of the tax-payer, submitted that section 11D(b) shows that income is only taxable if payment is to be made to the tax-payer. But section 11D provides that income accrues to a person when he becomes entitled to claim payment. There of The tax-payer was at all times entitled to claim payment of the school fees by the company pursuant to his contract of service. If the Hong Kong legislation intended to achieve the result that only sums paid in cash to a tax payer are taxable the Ordinance would require different language to achieve such an absurd result.

The Court of Appeal felt itself inhibited from applying United Kingdom authorities to the Hong Kong definitions of salary and perquisites on account of Attorney-General for Ontario v. Perry (1934) A.C. 477 and Armstrong v. Estate Duty Commissioner (1937) A.C. 885. In Perry's case the somewhat tortuous path of legislation and authority whereby for United Kingdom estate duty purposes a settlement in consideration of marriage was held not to be a gift was held not to apply to Ontario's succession duty charged on a gift. In Armstrong's case English decisions in which a settlement for the purposes of estate duty was defined by reference to the Settled Land Acts were held not to alter the definition of a settlement in a Hong Kong Ordinance. In Armstrong's case Lord Maugham delivering the judgment of the Board said, at p. 896:

"It is well settled that in interpreting a taxing statute a Dominion or a Colony which contains, on its face, no reference to its origin or to previous legislative history, it is not permissible to consider .the evolution of any British statute or provision from which the terms or whole sections of the enactment under consideration may have been taken, or to rely on decisions as to the true interpretation in the Courts of Great Britain of those terms or sections."

That statement does not however prevent the application of the logical and sensible principle that expressions employed in British legislation and authorities on the meaning of such expressions are of assistance in construing identical expressions in Hong Kong legislation concerned with the same subject-matter: The Hong Kong legislation may, of course, provide to the contrary but in the present case their Lordships consider that perquisites not expressly exempted from salaries tax under the Hong Kong Ordinance are no different from perquisites not exempted from tax under the Income Tax Act.

Their Lordships will humbly advise Her Majesty that this appeal should be dismissed with costs.

Solicitors: Charles Russell Williams and James; Macfarlanes.

1606/T