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9. Chapter 9 Income Tax: Issues Related to Employment and Investment Income

I. Employment Income

9.1. Chapter 7 contains a discussion of a number of matters which, though not confined to persons deriving employment income, are clearly of interest to them. These include the deductibility of expenses of travel to and from work, child-minding expenses, subscriptions to trade and professional associations, and self-education expenses. The present section of this chapter is concerned with further issues related exclusively to employment income. Most notable among these is fringe benefits. Some attention is also given to salary and wage adjustments, travel and removal expenses, payments to obtain release from employment contracts, and a standard deduction for miscellaneous employment expenses.

Fringe Benefits

9.2. The phrase ‘fringe benefits’ is intended to refer to any benefit, other than salary and wages, derived from an employment. The benefit usually takes the form of non-money income, such as the use of a company car or a home provided by the employer. Sometimes, however, it involves cash, as when a portion of an expense allowance remains unspent, or a cash prize or gift is received from an employer.

9.3. Reference was made in paragraphs 7.13–7.15 to the problems of bringing fringe benefits to tax when they take the form of non-money income. Some further elaboration of these problems is necessary, and also of the related problems of fringe benefits by way of cash. The provision of the Income Tax Assessment Act most relevant to the present discussion is section 26 (e), which requires the inclusion in the taxpayer's income of ‘the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise …’.

9.4. A number of matters call for examination. The first concerns the adequacy of the present law to cover all those benefits that it is thought should be included in income. Thus it is doubtful whether the law is adequate to cover the case where the benefit is given, not to the employee, but to a member of his family. There is also a question of how far it is proper to treat as benefits the amenities enjoyed by an employee which are inherent in the performance of his services. In addition, the method of valuing a benefit prescribed by the present law may not be appropriate.

9.5. Secondly, it is proposed to consider the kinds of benefits that would, at least in theory, be within the operation of the amended law and to make observations on how far rules might be laid down that could be applied in the general run of cases to identify benefits and fix their values.

9.6. Thirdly, whether the benefit is one presently subject to tax, or will come within the ambit of reformed provisions, it is necessary to consider the possibility of integrating the taxation of benefits with the system of tax instalment deductions from salary and wages.

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Adequacy of Present Law

9.7. Section 26 (e) is concerned with benefits ‘allowed, given or granted’ to the taxpayer, in the present context the employee. It is not uncommon for the employee to be rewarded in some respects by benefits given to members of his family: for example, air travel provided for them by his airline employer, or education expenses in respect of his children paid directly by his employer. It might be possible to argue that the employee receives a benefit in the saving of expense he would otherwise have incurred. And, in some cases, it will be possible to construe the facts so that section 19 applies: that section would include in the income of the employee an amount that has been ‘dealt with’ by the employer ‘on behalf’ of the employee or as the employee ‘directs’. In the Committee's view it is nonetheless necessary, in order that all situations be clearly covered, to provide generally in section 26 (e) that a benefit arising from the employment relationship enjoyed by a member of the employee's family be deemed to be a benefit derived by the employee.

9.8. Another question is whether the section extends in any respect to benefits that are inherent in the performance of the employee's services. In some cases a benefit is a necessary consequence of performing employment duties: for example, attractive office accommodation or the entertainment enjoyed when attending official functions. It may be argued that where the working conditions of employees of one firm are so much more attractive than those of employees of another firm, the benefit of the more favourable conditions should be brought to tax; or, alternatively, that any remuneration reflecting the less attractive environment in which the second group of employees works should be exempt from tax. While the Committee recognises the force of this argument, it believes that law framed in either of the alternative ways would not be feasible to administer.

9.9. Where the benefit relates only in part to the carrying out of the employment duties, in the sense that it is only in part a necessary consequence, the Committee considers that an appropriate part of the benefit should continue to be brought to tax. Identifying the benefit which is a necessary consequence will always be a matter of judgment. Take, for instance, employer-subsidised housing, which may be a flat in an office building provided for a caretaker who lives in it with his family, or a prestige house provided for a business executive who is expected to entertain clients at home, or a house made available to the local manager of a country branch of a business. In each case the question must be one of how far the employee's use of the house serves his employer's purpose.

9.10. The Committee recommends that section 26 (e) be amended so as to ensure that, even though a benefit is inherent in the carrying out of employment duties, it should be brought to tax except so far as its derivation is a necessary consequence of the performing of those duties.

9.11. Another legal issue relates to the interpretation of the words ‘value to the taxpayer’ in section 26 (e). The intention in the use of these words is clearly to displace the general principle of the income tax law that a benefit must be valued by reference to the amount of money that could be obtained for it. On this principle of valuation, the use of a motor vehicle or a residence available only to the employee has no value; the relief from the payment of interest enjoyed by a person who has an interest-free loan also has no value. But the precise method of valuation required by the words ‘value to the taxpayer’ is unsettled. In the Committee's view the meaning to be given to the words should be what it would cost the employee to provide the taxable benefit for himself.

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9.12. It may be contended that the interpretation thus proposed would be too harsh: that it would, for example, require the full rental value of the caretaker's house, in the illustration given in paragraph 9.9, to be brought to tax. It would be made clear in the amended section, however, that the benefit being valued does not include that element which is a necessary consequence of carrying out the employee's duties.

9.13. The employee will in some circumstances be able to argue that the benefit he might have provided for himself would have been something more modest than the benefit he has derived. The argument would be relevant to determining the element of benefit that ought to be brought to tax but not to valuation. An executive should be able to say that he occupies a home which is too large and too expensive for his needs and tastes because his company requires him to live there in the company's interests. But he should not be able to say that a benefit he is free to refuse, for example an expensive car provided exclusively for his private use, is beyond his needs and tastes.

Kinds of Benefits

9.14. Assuming that the law has been amended in the ways proposed by the Committee, issues both of identification and of valuation will arise in relation to various kinds of benefits. These are explored in the following paragraphs. While the legal obligation always rests on the employee to include a benefit in his return of income, there is a question of what the Commissioner should do as a matter of administration to establish rules of identification and valuation. Possible rules of these kinds are also considered in the following paragraphs.

9.15. Housing. Many of the problems of identifying and valuing the benefit from employer-provided housing have already been raised in the illustrations of the caretaker's flat and the business executive's house. Where housing is not in a remote area, the Commissioner should be able to frame rules of identification and valuation, and these ought to be made public. (Such rules would not preclude the taxpayer from establishing that he is entitled to different treatment.) In particular classes of situations, for example a vice-chancellor's house on university grounds, the rules of identification could prescribe certain fractions as taxable benefits. The rules of valuation might provide for the adoption of either a percentage of the capital value as determined by a valuation authority or a rental value of comparable accommodation. Any rent paid by the employee would of course be subtracted.

9.16. Problems of identification of a more especially intractable kind arise when the housing has been provided by the employer at a remote location, such as a mine site: some recognition should be given to the fact that while he remains in the employer's service the employee has no real choice of housing. Problems of valuation may also be acute. It would, presumably, be inappropriate to determine value on the basis of what the house cost the employer, which may be a very high figure because of the location; on the other hand, sale price in a remote area might give too low a figure. There is unlikely to be any market in the area by which to determine a rental value. It may not be possible to frame rules: identification and valuation would have to be settled by negotiations between the employer, or an employee organisation, and the Commissioner.

9.17. Board and lodging. Where the benefit is board and lodging, the same questions arise as for housing and the same recommendations are appropriate. But one further point is worth noting. Section 51A, considered later in paragraphs 9.60–9.62, allows a deduction against a living-away-from-home allowance in circumstances where an employee may be said to be required by his employment duties to establish a temporary home away from his normal place of residence. Arguably, there should

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not be held to be a benefit from board and lodging to the extent that the employee, had he received an allowance, would have been entitled to a deduction under section 51A.

9.18. Use of motor vehicles. The use of a motor vehicle provided by the employer is a common fringe benefit. In principle the value of any private use of such a vehicle should be brought to tax. Private use would include travel to and from work except in those circumstances, explored in paragraph 7.58, where such costs, if incurred by the employee, would be deductible outgoings.

9.19. The Commissioner should establish rules for valuation based either on the annual depreciation of the vehicle and running costs referable to the amount of private use or on some assumed rate per kilometer applied to the distance travelled in private use.

9.20. Provisions have recently been inserted in the Act requiring the inclusion in the employee's income of a minimum amount in respect of the private use of a motor vehicle. These provisions may make unnecessary the calculations contemplated in the preceding paragraphs in the not uncommon case where private use is restricted to travel to and from work and occasional week-end travel. Where the vehicle has an original cost of $6,000, the minimum amount will be $720 in a year of income, assuming that the vehicle is available to the employee for private use for some part of each day of the year of income. It will be proportionally less if the vehicle is available for only a part of the year. The new provisions are complex and it is too early to gauge how well they will work. The Committee is aware of criticisms that the legislation is likely to operate unfairly in some cases but has not sought submissions in this regard.

9.21. Goods or services supplied at a discount. It is not uncommon for an employee to be permitted to purchase goods from his employer at a discounted price. The amounts of the discounts vary widely. It might be thought appropriate to regard an excessive discount as a benefit if what is excessive could be fairly determined. One difficulty is that the retail price by reference to which the excessiveness of the discount would need to be calculated tends, in competitive business conditions, itself to vary noticeably. Another is the problem of relating the treatment of the employee in a retail store receiving discounts against retail prices with the treatment of an employee of a wholesaler who receives discounts against wholesale prices. Ascertaining that an employee has received a discount and, indeed, ensuring that the employee keeps a record of such discounts would present great difficulties.

9.22. In the Committee's view it would not be practical for the Commissioner to frame rules in regard to benefits arising from discounts. In a particular case, say a motor vehicle sold at a very substantial discount, it is open to the Commissioner to tax the employee on the undoubted benefit he receives.

9.23. Discounts may also be provided in respect of services supplied to an employee, or services may be supplied without charge. Similar problems to those already considered in regard to goods apply in bringing to tax benefits of these kinds. In the Committee's view it would not be feasible to devise rules for general application. However, there is a case for applying rules to particular industries where expensive services may be provided to employees at a sizeable discount. An obvious example is the airline industry, where substantial fare discounts are given in respect of travel by an employee or members of his family.

9.24. As already conceded, there will be circumstances where the facts and amounts of discounts are unlikely to be known, even to the employee himself. This is especially

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so when the employer incurs a loss in providing meals in a canteen for his staff. In this case any tax consequence could only be brought about by denying a deduction to the employer, and the Committee would not recommend this. A dining-room restricted to a small group of business executives might be thought to be different from a staff canteen and warrant a more or less arbitrary apportionment of benefits among the business executives concerned.

9.25. Low-interest loans. The practice has existed for many years of granting low-interest loans to employees, primarily for house purchase. This is another conspicuous fringe benefit. In the Committee's view the benefit arising from a loan of this kind should be brought to tax whenever it is derived from the employment relationship. It should not be brought to tax when the making of the loan is solely an act of charity on the employer's part.

9.26. A loan may have been made for a term, at a rate of interest that cannot be varied, at a time when commercial rates were low. Where the rate of interest was not less than the commercial rate, there would not appear to be any benefit to the employee in a later year if, in the meanwhile, commercial rates have risen significantly. Where, however, the rate of interest was less than the commercial rate at the time the loan was made, it could be argued that some benefit is involved. Yet it would not necessarily be appropriate to regard the benefit as the difference between the loan rate and whatever happens to be the commercial rate in the relevant year of income. In the case of a loan at a rate that cannot be varied, the amount of benefit should probably be restricted to the difference between the loan rate and the commercial rate at the time the loan was made. On the other hand, where the loan rate is variable in the power of the lender, it might indeed be appropriate to treat as a taxable benefit the difference between the loan rate in fact charged and the commercial rate in a particular year.

9.27. Implicit in these propositions is a notion of a commercial rate of interest. Commercial rates tend to vary not only by reference to general financial conditions but also with the kind of loan. It would be necessary in framing a rule to fix some single arbitrary rate—one would think a low rate—to apply in all cases where an examination of individual loans is not made.

9.28. The committee recommends that rules be framed, at least as a beginning, in terms of a single ‘commercial rate’ set for each year by reference to the minimum rate charged by savings banks for long-term housing loans.

9.29. Prizes and gifts. Prizes as work incentives are given by some firms. The value of the prize is income of the employee and should be included in his return, though there is a case on administrative grounds for excluding prizes of small value.

9.30. Gifts may be looked at differently where they are in the nature of recognition of the personal esteem in which the employee is held by his employer. There is scope in the legal authorities for the view that gifts of this kind are not income, but this view would be restricted to cases such as the traditional gold watch.

9.31. Stock options and share purchase schemes. Until recently, the operation of section 26 (3) 26 (e) that the value of rights which an employee acquired under an employee stock option scheme or share purchase scheme should be brought to tax at the time those rights first arose. The valuing of rights arising under these schemes provided to be inordinately difficult and the employee who paid or was liable to pay tax felt aggrieved on occasions when the rights, in line with the value of the shares on the market, fell substantially in value.

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9.32. Provisions have recently been inserted in the Act displacing the operation of section 26 (e). Under these provisions the time of derivation of income under a share option or share purchase scheme will be the time when the option is exercised or shares are transferred to the employee. The benefit will be the amount by which the value of the shares acquired exceeds the consideration the employee has given for them. In the Committee's view this approach is the correct one. Comment on the detail of these proposals is not attempted in this report.

9.33. Goods and services supplied by others and paid for directly by the employer. A wide range of goods and services may be supplied to employees and paid for directly by their employer. It may be helpful to consider some typical situations.

9.34. Where the expense met by the employer relates to the education of the employee's children, there is a simple case of a benefit that should be brought to tax. However, a difficulty arises in regard to the operation of the tax concession for education expenses: that concession is available to the employee only in respect of an expense he himself incurs. Administratively it may be convenient to treat the direct payment by the employer as involving no benefit to the extent that it is within the amount of the concession.

9.35. Where the employer meets the costs of the employee's education, for example in a trade or professional course, an employer purpose is being served. In this case it is possible to conclude that there is no taxable benefit to the employee, in which event there is a prospect of discrimination between one employee whose employer finances his education and another whose employer does not. In some instances, expenses met by the employee will be deductible as employment expenses, and in regard to such expenses discrimination could not arise. But where the employee who meets his own expenses must rely on section 82JAA—the self-education deduction section—such discrimination seems unavoidable where the expenses exceed the limit imposed by that section. The employer's purpose may in some cases be remote: for example, where the course is not related to the employer's business. In such a situation a taxable benefit should arise, except so far as the employee would have been entitled to a deduction under section 82JAA.

9.36. The employer may meet directly the travel and entertainment expenses of his employee: the availability of credit cards facilitates this. The tax consequences of direct payment by the employer should not be different from the consequences considered in paragraphs 9.40–9.42 where the employee pays from an allowance given him by the employer or is reimbursed by the employer.

9.37. The expenses of attending a conference may relate, at least in part, to a benefit that is not simply the necessary consequence of the carrying out of employment duties. The same is true of some club subscriptions paid by the employer.

9.38. In the case of the club subscription a further issue arises. It is provided in legislation recently enacted that certain kinds of expenditure, not thought to serve clear business needs, will be denied deduction whoever incurs them, and notwithstanding their relevance to the earning of income. The fact that the employer is denied a deduction should not preclude the identifying of a taxable benefit derived by the employee.

9.39. If an employee benefit is to be identified and valued, it will be essential for employers to maintain adequate records showing the purpose and detail of the expenses. In the United States the law requires a substantial degree of detailed recording of the precise nature of travel and entertainment expenditure and the vouching of such expenditure. The Committee recommends that similar provisions be included in the

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Australian law. In the absence of such recording and vouching, deduction for travel and entertainment expenditure should be denied. The recording of entertainment expenditure would, for example, require specification of the date, place and description of the entertainment, the business purpose of the entertainment and details of the persons being entertained. It would be necessary to set some limit on the amount of any individual expenditure below which vouching would not be required.

9.40. Allowances made available to employees for travel and entertainment expenses. Where an employee is given an allowance which relates to travel, entertainment and similar expenses that do not involve any taxable benefit, or is reimbursed such expenses, there are no tax consequences for the employee unless, in the case of an allowance, some part of it fails to be spent in this way. There may, however, be elements of taxable benefit in the travel and entertainment.

9.41. Over recent years there has been an increasing tendency for employers, in both the private and public sector, to pay their senior staff annual expense allowances of a fixed sum to cover entertainment and other expenses incurred in the performance of their duties. Provided the amount is considered reasonable by the Commissioner, it has become normal procedure to view the allowance as having been fully expended without requiring the employee to substantiate his claim. In many instances the amount of the allowance has been negotiated by employers with the Commissioner. It is rare to treat such allowances in this way in overseas countries. It causes administrative problems in negotiating the amount with the Commissioner—inconsistencies are unavoidable—and it is open to abuses which are difficult to police.

9.42. The Committee recommends that the law should require detailed recording and vouching of expenses met from travel and entertainment allowances and similar expenses reimbursed by the employer. The recording and vouching should be the same as is proposed in regard to travel and entertainment paid directly by an employer. Any part of the allowance or reimbursement not matched by recording and vouching would be treated as a benefit derived by the employee. Some concession in regard to the recording and vouching required might be allowed in respect of the cost of meals and accommodation where an employee is travelling. The Commissioner might set a per diem figure, and recording and vouching of the costs of meals and accommodation would be dispensed with where the allowance or reimbursement given by the employer does not exceed this figure. The employee would nonetheless have to record other details.

Tax Instalment Deductions

9.43. Except in cases where an employer provides sustenance and use of quarters, the present law does not require that the calculation of tax instalment deductions take account of non-cash fringe benefits derived by an employee. The amounts attributed to sustenance and use of quarters for purposes of tax instalment deductions may, in any event, be less than their real value. The value of these benefits, and also cash allowances, are shown on the group certificate, but other non-cash benefits are not.

9.44. A fully effective system of taxing fringe benefits would require that all such benefits be included in the amount upon which tax instalment deductions are calculated and be shown in the group certificate in respect of an employee. Such a system is clearly out of the question. It would be unreasonable, for example, to expect the employer to calculate the cash value to each employee of discounts allowed to him.

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9.45. However, the Committee favours imposing much wider statutory obligations on employers to disclose fringe benefits in group certificates and to make tax instalment deductions from salary and wages in respect of fringe benefits given to employees. The obligation to disclose should extend to all fringe benefits of which the employee has knowledge. The requirement to make tax instalment deductions should at least apply to regular benefits such as the use of a motor vehicle, housing, board and lodging, low-interest loans and cash allowances. It would always be open to the employee to include in his return an amount different from the value assigned to the benefit by the employer and to substantiate this amount. The Commissioner of course would not be bound by either the employer's or the employee's valuation.

Other Issues

Salary and Wage Adjustments

9.46. It is not uncommon for an employee to receive an amount of wages relating to a period of employment during an earlier year: a wage increase may have been made retrospective to a date in the previous year of income. Less frequently, an employee will receive wages in advance: he may be paid a sum, say in June, for a period of long-service leave he is about to take. The consequence of the cash method of tax accounting applying to employment income is that the wages are taxed in the year of receipt without regard to the period of employment to which they relate. Because of the progressive rate structure, this usually results in greater tax than would have been payable had the wages been received at the time of the employment to which they relate.

9.47. In Chapter 8 it was assumed that in determining the income of a business or profession for tax purposes, efforts should be made to relate receipts to the year of income to which they properly belong. The Committee sees force in the argument that the same should be done for employment income.

9.48. However, the administrative costs in reopening earlier returns, and in deferring the inclusion in other cases to later returns, would be very considerable. They might be mitigated if a lower limit were set on the amount which could be taken into the other return, but this would introduce elements of inequity. Because of the wider marginal tax brackets now obtaining, the number of cases where there will be a significant tax disadvantage is not likely to be very great. In some circumstances, the income equalisation scheme proposed in Chapter 14 will assist the employee to defer the inclusion of an amount to a later return.

9.49. On the balance of considerations, the Committee feels that no change in the existing position is warranted.

Travel and Removal Expenses

9.50. In Chapter 7 the appropriate treatment of fares to and from work was considered, and the Committee recommended against extending the law to allow these fares to be deducted. However, it was also explained that expenses of travel between two places of work within an employment are properly allowable as deductions. Where an employee travels within an employment to a place of work away from his normal base, his own travel expenses are deductible whether the movement is necessary for some temporary purpose or involves an employment in the new place of work for a more permanent purpose. Where the purpose is temporary, his travel expenses will include accommodation and sustenance expenses in the new place of work, but where the purpose is more permanent this will not normally be so. In the case of travel for a more permanent purpose, a question arises whether the travel expenses of his family and the expenses of removal of his home are deductible. When a person

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accepts a new employment involving his moving to another city, there will be a question of the deductibility of his own expenses of travel and also of the expenses of travel of his family and removal of his home. There are, in addition, two marginal situations requiring separate examination, one concerned with living away from home and the other with study leave.

9.51. Travel within employment for a temporary purpose. Travel expenses, including in this case accommodation and sustenance, are deductible by the employee as expenses in deriving income. Where the employee can be said to act on his employer's behalf in incurring the expenses, it is appropriate to treat any allowance or reimbursement provided by the employer as not being the employee's income and any amounts paid by the employee as not being deductible by him. The general practice would be to treat expense allowances and reimbursements in this way. If the employer himself meets the expenses directly, there will be no income derived by the employee.

9.52. There is ordinarily no question of deductibility of the expenses the employee may choose to incur in having his wife or other members of his family travel with him. These expenses are private. The expenses of a member of his family are only deductible in the unusual case where the role of that member is essential for the performance of the employment. If the employee receives a sum of money from his employer in respect of the expenses of his family, this is included in his income.

9.53. Travel and removal expenses within an employment for a more permanent purpose. The travel expenses of the employee are deductible: these expenses ordinarily include accommodation and sustenance expenses, though this is not the case if he may be said to have established a home at the new place of work. Where the expenses are the subject of an allowance or reimbursement or are met directly by the employer, there is again ground for the view that the employee is not entitled to any deduction and does not derive any income. The deductibility of the travel expenses of members of his family and of removal expenses raises a somewhat different issue. An employee who is required to move to a new place of work where he will have to stay for any length of time may fairly claim that these expenses are not private but are incurred in deriving income. In this case, however, it would appear that the expenses are not deductible.

9.54. Where the employer meets family travel and removal expenses, either directly or by giving an allowance or reimbursement, there is a question of how the amount involved should be treated. It is at least arguable that the amount is not income of the employee. It appears to be the Commissioner's practice to treat such an amount in this way, provided it does not exceed the actual expenses and those expenses are reasonable.

9.55. In the result there would appear to be an unfair discrimination between an employee whose employer is prepared to meet the expenses and another whose employer is not. To overcome the unfairness it would be necessary to provide that the reasonable expenses incurred by the employee will be deductible where he is required by his employer to move to a new place of work.

9.56. In the Committee's view the law and practice assumed in paragraph 9.54 should be confirmed. Where the employer meets the reasonable removal costs of an employee, no amount should be included in the employee's income. Where the employee who is required to move meets his own reasonable expenses, he should be entitled to a deduction for those expenses.

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9.57. Travel and removal expenses to take up a new employment. The expenses of seeking new employment are currently not deductible: they are akin to the expenses of exploring the possibility of undertaking new business operations. The denial of a deduction, to a person who is unemployed, of expenses in seeking a job may appear unfair. However, the difficulties in defining the expenses to be allowed rule out the possibility of giving a deduction. If the Commonwealth Employment Service provides financial assistance to meet the expenses of seeking a job, this assistance should be excluded from income.

9.58. The expenses of taking up a new employment are, it seems, not deductible. In the view of the Committee, the treatment in paragraph 9.54 should apply in respect to any amount provided by the new employer to cover those expenses.

9.59. Treating a reasonable amount provided by the employer in respect of these expenses as non-taxable could in this case, even more than in the previous one of movement within an employment, be justified as contributing to greater mobility of labour.

9.60. Living away from home. Since 1945 there have been express provisions in section 51A allowing a limited deduction to an employee in receipt of a living-away-from-home allowance, i.e. an allowance paid to him for the additional expenditure he is obliged to incur in meeting living costs in a place of employment away from his home. The deduction is limited to what the Commissioner considers reasonable, but in general it may not be more than the amount by which the allowance exceeds two dollars. Two dollars is supposed to represent the amount by which his permanent household expenses would be increased were he at home; but clearly, with a decline in the value of money, theory and reality have parted company.

9.61. This deduction does not fit comfortably into any of the situations already considered. In its terms it is intended to cover expenses in deriving income not deductible under the general provisions of the Act. Some element of permanence in being away from home seems to be contemplated, so that the expenses would not necessarily be in the nature of travel expenses in the sense of those words in paragraph 9.53. Travel expenses, deductible under the general provisions, include accommodation and sustenance expenses only when the taxpayer has not established a home in the new place of work. Provided there is an establishment elsewhere which the employee may claim to be his home, there is a prospect of his being permitted deductions against a living-away-from-home allowance even though, in a sense, he has a home in the place where he works.

9.62. The distinction between travel expenses deductible under the general provisions and the expenses to which section 51A applies is not readily apparent. Having regard to the nominal character of two dollars at today's prices, very little turns on whether a deduction is classified as the one or the other. If the sum is increased to a more realistic figure, the classification will become of some consequence. In the Committee's view, section 51A should be regarded as a special provision appropriate to the case of an employee who, because of the limited time he spends in any one place of work or the remoteness of the place of work, does not move his principal home to his place of work.

9.63. Study leave expenses. Another situation that does not fit comfortably into any of those dealt with in paragraphs 9.51–9.59 is that of a person, most often on the staff of a university, who goes abroad on study leave in the course of his employment. The leave may be of varying length, quite commonly twelve months. It is not unusual for

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the employee to be given allowances by his university intended to cover his own fares and those of his family and extra costs associated with his going abroad.

9.64. The practice of the Commissioner, it would appear, is to treat the employee as a person travelling within his employment for a temporary purpose. He is allowed to deduct his own fares and his accommodation and sustenance expenses; any allowances he receives from his university are taxed as income.

9.65. This practice seems to the Committee appropriate where the employee goes abroad for only a short period of leave. It does not appear appropriate, however, when an extended period of leave is involved, say four months or more. It would not be thought fair in this case to disregard the necessity for the employee to be accompanied by his wife and dependent children. Yet this appears to be the consequence of the Commissioner's practice. Even though an allowance has been given by the university intended to cover the fares of members of the employee's family, these expenses are not deductible. Moreover, where the employee has taken members of his family with him and has established a temporary home abroad, he may find himself limited in the amount of the deduction for his own accommodation and living expenses he will be allowed: the Commissioner will attribute a substantial proportion of the expenses of the temporary home to the members of his family who have accompanied him.

9.66. In the Committee's view, the amount of a reasonable allowance provided by the employer to cover the fares of the employee, his wife and dependent children, and the extra expenses which fall on the employee in undertaking the study leave and are met by way of a per diem allowance, should not be included in his income when an extended period of leave is involved.

Payments to Obtain Release from Employment Contracts

9.67. It is not uncommon for scholarships and cadetships under which a person undertakes some form of training to provide that he must enter or continue in the employment of the organisation giving him the scholarship or cadetship for a period of years after completing his training. If he does not fulfil this condition, he may be required to pay an amount to the organisation to obtain his release. Under the present law there does not appear to be any basis on which a deduction of an amount so paid might be claimed: it would be regarded as a capital cost of obtaining freedom of action to enter on other employment.

9.68. There is a general principle appropriate at least to business income that moneys received are not income if, under the terms of the receipt, there are outstanding conditions yet to be fulfilled; the moneys will become income only as the conditions are fulfilled. If this principle were applied to moneys received under the scholarship or cadetship, it would bring about a result somewhat different from a deduction of the amount paid to obtain release. Receipts under the scholarship or cadetship would cease to be taxed as received but would become income during the years of service following training, and this would mean a bunching of income which would not be welcomed by the former trainee. The Committee would not, in any event, favour the application of such a principle in the present context.

9.69. If the law is to make any allowance in respect of payment under an employment contract, it will have to be by way of a special provision permitting a deduction of the whole or some part of the payment at the time it is made. However, the Committee does not favour such special provisions.

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Standard Deduction

9.70. A number of employment expenses of relatively minor significance for the vast majority of taxpayers are deductible under the general provisions of the Act. These largely relate to tools of trade, special clothing and its maintenance, and professional, technical and trade journals. The administration of the law in this regard involves considerable compliance and administrative costs which might be thought disproportionate to the revenue involved. Some taxpayers who are unaware of the available deductions or are unwilling to submit to the tedium of record-keeping do not obtain deductions to which they are entitled. Claims for deductions put the Commissioner to considerable trouble in verifying the amount of claims and whether they qualify.

9.71. In some countries, for example Canada and New Zealand, a standard deduction in respect of these items is given. The deduction, usually of modest amount, is allowed without proof of actual expenses and any further deduction is denied. In Canada's case the amount is 3 per cent of employment income up to a maximum of $150. There is considerable merit in this approach, though it must cause injustice to some taxpayers for whom the expenses are of more than minor significance. Both Canada and New Zealand have found it necessary to treat some classes of taxpayers more generously.

9.72. Were the Canadian and New Zealand approach adopted, it is likely that some occupations would seek to be excluded. It might be more realistic, therefore, to provide that the standard deduction be available but not obligatory: a taxpayer would still be allowed to itemise his claims. If a taxpayer chose to itemise, he would not be subject to the money limit on deductibility. At least some saving in compliance and administrative costs would be achieved.

9.73. The Committee recommends that an optional standard deduction against employment income be available. The amount of the deduction might be set, as in Canada, at $150 or 3 per cent of employment income, whichever is less. It will be necessary to specify the kinds of claims the standard deduction is intended to cover in addition to those listed in paragraph 9.70. The Committee does not contemplate that the standard deduction, if taken, would preclude the allowance of separate deductions for such expenses as subscriptions to trade and professional associations.

II. Investment Income

9.74. Ownership of property can give rise to various forms of investment (or property) income, notably rent, interest, dividends and capital gains. Their tax treatment is analysed in a number of places in this report. Imputed rent from owner-occupied dwellings is dealt with in Chapter 7, dividend income in Chapter 16, income from investment in superannuation and life assurance in Chapter 21, and capital gains in Chapter 23. A further aspect, the levying of a special surcharge on property income, is considered in Chapter 14 and there rejected. An issue not taken up in Chapter 14, however, is whether there are grounds not merely for rejecting the surcharge but for actually granting concessional treatment to investment income. This is the issue considered here.

9.75. One possible justification for concessional treatment is to encourage saving, either in general or in particular forms. In Chapter 21 the Committee has commented on the objective as justifying special treatment of superannuation funds and life insurance.

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9.76. A second possible justification for concessional treatment is that consumption may be thought a better indicator than income of ability to pay tax. If this is accepted, it follows that imposing an income tax, including tax on income from savings, is horizontally inequitable because individuals are treated differently according to how they spread consumption over their lifetime, the effective rate of tax on postponed consumption being greater than the rate on current consumption. Given the retention of income tax, however, the consumption approach suggests a need to give relief to income saved as distinct from relief to income from saving, and it is this philosophy that underpins much of the discussion on superannuation and life insurance in Chapter 21.

9.77. As already pointed out in Chapter 3 and 6, conventional procedures for establishing income subject to tax under conditions of inflation can result in ‘illusory’ rather than ‘real’ gains being brought to tax. This leads to inequities of a horizontal kind, and perhaps vertical inequities too. The Committee discusses the problem for recipients of business income in Chapter 8, and its proposals in regard to capital gains are spelled out in Chapter 23.

9.78. In times of inflation, recipients of interest income, too, face the prospect of being taxed on ‘illusory’ gains. This is particularly noticeable when interest rates lag behind the rate of inflation, in which case tax is imposed on what are in reality negative gains. For this reason the Committee considers that some form of concessional treatment should be provided for taxpayers in receipt of interest income.

9.79. One means of providing concessions would be the broad-brush approach of indexing all monetary debts. This is a radical proposal, raising issues beyond the Committee's terms of reference. Were a move to be made in this direction, the initiative would have to come from the government, which might as a first step issue indexed bonds.

9.80. An alternative approach would be to make ad hoc adjustments to the income tax base. Canada has recently introduced legislation to this end. In computing taxable income, an individual in Canada may deduct interest income from securities such as bank and trust company deposits, mortgages and bonds. The deduction is limited to the lesser of (a) $1,000 or (b) the taxpayer's interest income for the year minus the amount, if any, deducted by him in computing his income on account of interest paid on borrowed money for the purpose of earning income from a business or property. New Zealand also has tax concessions for persons receiving interest income, and these have recently been extended. An exemption is given of $100 of interest from any source; in addition, $200 of savings bank interest is exempt. There is also a special exemption of $500 in respect of savings certificates and national development bonds. In the short run at least, ad hoc adjustments such as these appear to be the most appropriate.

9.81. If legislation were to be introduced along these lines, the following general principles should be followed:

  • (a) The deduction should be available for interest income on as wide a range of securities as possible to avoid introducing new distortions into the capital market. Consideration might be given to making the deduction available in respect of dividends on preference shares which carry no rights to capital beyond the amounts subscribed.
  • (b) The deduction should be limited to net interest in the sense of interest received less interest that is deductible, whether as costs of deriving income or by a virtue of a concessional deduction provision.

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    (c) The deduction should be limited in amount and be personal to the individual taxpayer.