― 118 ―

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.

  ― 119 ―

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.