In 1980, Mr Reid did a teacher training course and he received payments from student teacher allowance as a financial support for his training. He received payments every fortnightly which had been deducted for PAYE tax and superannuation contributions. As a condition of the allowance, he had to sign a bond that he was required to complete the course and work there as a full-time teacher for 3 years, or he had to refund all or part of the bond. During the 1982 tax year, he received the total amount of $5719.17 and $770.04 was his total tax deductions. He recorded nil as his income for the year 1982 and claimed a refund of the PAYE tax.
The issue in this case is whether the allowance paid to Mr Reid is his income or if it is income, whether it is exempt from tax.
The Commissioner based their argument on section 65(2)(b) of the Income Tax Act 1976 as
“65(2) Without in any way limiting the meaning of the term, the assessable income of any person shall for the purposes of this Act be deemed to include, save so far as express provision is made in this Act to the contrary,
(b) All salaries, wages, or allowances (whether in cash or otherwise), including all sums received or receivable by way of bonus, gratuity, extra salary, compensation for loss of office or employment, or emolument of any kind, in respect of or in relation to the employment or service of the taxpayer.”
Thus, the Commissioner claimed that he was under employment, the allowance was his income and he was not entitled to a tax refund.
The taxpayer argued based on three principal features of income:
• Income is something which comes in
• It is periodic, recurrent and regular
• Income depends upon its quality in the hands of the recipient.
• He argued on the third point that allowance was not paid in respect of any services rendered or in relation to employment.
The court agreed with the taxpayer that income can be determined through those three features. They also agreed that the allowance satisfied the first and second principle of income. For the third principle, they had to consider the facts of the case to make informed decision. They agreed that the payment was not paid for as a return for performing services for remuneration. They claimed that:
“The purpose of the studentship is not simply to educate in order to quip the student to take employment anywhere at all. It is expressly connected with the intention that the student will later take employment as a teacher within the New Zealand Education Department. This is the effect of the bond which the objector elected to sign”
Thus, the allowance is there to support the taxpayer and prepare them to take employment for that institute. The bond is there to make it clearer that the taxpayer will stay. The allowance was paid in a regular basic and the taxpayer could expect the payment to continue as long as he continued his contract. Moreover, this allowance is used for supportive purpose, which shares the same idea as a scholarship or bursary. Thus, they claimed that this is income. However, according to section 61 of the Income Tax Act, it is exempt income as scholarship and bursary is considered as exempt income.
This case is a basic case for income. It came up with a framework to define an income. In order to determine income, a transaction must satisfy three principles:
• Income is something which comes in.
• Income has the features of periodicity, recurrence and regularity.
• Income may depend on its quality in the hands of the recipient.
Reid v Commissioner of Inland Revenue (1983) 6 NZTC 61,624