Advanced Prosthetic Centre P/L v Appliance and Limb Centre (Int) P/L

[2002] NSWSC 515

CITATION:	Advanced Prosthetic Centre P/L v. Appliance & Limb Centre (Int) P/L [2002] NSWSC 515
CURRENT JURISDICTION:	EQUITY
FILE NUMBER(S):	SC 5019/2001
HEARING DATE(S):	07/05/2002
JUDGMENT DATE:	13 June 2002
PARTIES :	Advanced Prosthetic Centre Pty Ltd, David Thomas Howells and Erwin Muenger - Plaintiffs Appliance & Limb Centre (International) P/L - First Defendant Richard Anthony Watson - Second Defendant
JUDGMENT OF:	Bryson J at 1

COUNSEL :	D.E. Grieve QC - Plaintiffs R. Hamilton - Defendants
SOLICITORS:	Haywards Solicitors - Plaintiffs Watson & Watson - Defendants
CATCHWORDS:	CONTRACT - construction of contractual provision - Deed of Release of litigation provided for payments by former employer ALC to APC parties, which meant APC Company and two principals who were former employees of ALC - cl.3 authorised deduction of amount of liability "in the event that ALC is liable to make any payment under the Income Tax Assessment Act in respect of any money payable under this clause" - ALC claimed to make deductions on basis that settlement moneys were Eligible Termination Payments as defined in s.27A(1) of ITA Act 1936 - on the facts, the payments were not ETP as defined. - INCOME TAX - Eligible Termination Payment - application of definition to the facts.
LEGISLATION CITED:	Industrial Relations Act 1996 Income Tax Assessment Act 1936 Taxation Administration Act 1953 Income Tax Assessment Act 1997
CASES CITED:	McLaurin v. Federal Commissioner of Taxation (1961) 104 CLR 381 Allsop v. Federal Commissioner of Taxation (1965) 113 CLR 341 Allied Mills Industries Pty Ltd v. Federal Commissioner of Taxation (1989) 20 FCR 288 Whitaker v. Commissioner of Taxation (1996) 63 FCR 1 Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45 McIntosh v. Federal Commissioner of Taxation (1979) 79 ATC 4325 Freeman & Ors v. Federal Commissioner of Taxation (1983) 83 ATC 4456 Haggarty & Ors v. Federal Commissioner of Taxation (1989) 89 ATC 4485
DECISION:	Withholding was unauthorised - judgment for amount withheld - see [66]

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON J.

THURSDAY 13 JUNE 2002

5019/01 ADVANCED PROSTHETIC CENTRE P/L & 2 ORS v. APPLIANCE & LIMB CENTRE (INTERNATIONAL) PTY LTD & 2 ORS

JUDGMENT

1 HIS HONOUR: The plaintiffs sue to recover $79,977 now held in his firm’s Trust Account by the second defendant Mr R.A. Watson, and for a declaration that under a Deed dated 14 December 2000 the first defendant Appliance & Limb Centre (International) Pty Ltd (referred to as ALC) is liable to pay to the plaintiffs $79,977. Mr Watson is ALC’s solicitor. The plaintiffs claim to enforce an obligation to make payments in a Deed which settled earlier litigation.

2 ALC sued Advanced Prosthetic Centre Pty Ltd (APC), Mr Howells and Mr Muenger in proceedings in the Equity Division 3782 of 1998. ALC’s claims arose out of Mr Howells’ being a director and an employee of ALC from 1985 until 1998, and Mr Muenger being an employee from 1980 to 1998, and working in ALC’s business of supplying and fitting prosthetic devices and advising in relation to use of prosthetic devices. It was claimed that Mr Howells and Mr Muenger had served as Visiting Prosthetists to a number of hospitals in their capacity as director and employees of ALC, but that after leaving that employment in May 1998 they had diverted to themselves and to APC the opportunity to serve as Visiting Prosthetists at several hospitals, and they had exploited commercial opportunities derived from their parts in ALC’s business for the benefit of themselves and APC, so depriving ALC of a number of commercial advantages. This was alleged to be in breach of duties of honesty, fidelity and like duties owed to ALC. It was also said to be engagement in misleading or deceptive conduct. Commercial benefits derived from the association were said to be trust property for which they were accountable. It was also alleged that Mr Howells and Mr Meunger held “A” ordinary shares in ALC and that they were bound by Article 7A of its Articles of Association to transfer the shares in accordance with that Article. ALC claimed declarations which would establish the positions it alleged, and orders for payment of compensation and damages, delivery up of books and records and transfer of the shares.

3 APC, Mr Howells and Mr Muenger filed defences which denied all but formal allegations, and Mr Howells and Mr Muenger filed a cross-claim, to which ALC and five others of its 10 shareholders were cross-defendants, alleging several agreements relating to employment of Mr Howells and Mr Muenger, to distribution of profits by way of bonuses and dividends, and to continuance of the employment of any employees of ALC who were also shareholders. It was then alleged that Mr Howells and Mr Muenger had been dismissed, that the dismissals were in breach of contract and that steps taken to compel transfer of the shares were oppressive, unfairly prejudical and unfairly discriminatory, in the respect that there was an intent to transfer the shares at nominal consideration far less than their value. The cross-claim claimed orders for purchase by some cross-defendants of the shares at more than the nominal value offered, alternatively that ALC purchase the shares and reduce its capital and further alternatively that ALC be wound-up.

4 While Equity proceedings 3782 of 1998 were pending Mr Muenger commenced proceedings IRC 6802 of 1999 in the Industrial Relations Commission of New South Wales on 13 December 1999 and Mr Howells commenced proceedings IRC 1262 of 2000 on 24 March 2000. The respondents were ALC and the five shareholders of ALC who were cross-defendants to the cross-claim, and also four other persons who had been parties to agreements which Mr Howells and Mr Muenger claimed to avoid or modify. Each claimed relief under s.106 of the Industrial Relations Act 1996, which relates to unfair contracts. They sought orders avoiding their employment contracts or some terms of them, orders avoiding collateral arrangements, declarations that the employment contracts and the collateral arrangements were unfair contracts and orders varying them to provide for continuing employment, and for payment of compensation. Each claim and cross-claim in both courts included a claim for costs.

5 Preparations were made for hearing those proceedings, and appointments were made for hearing the Supreme Court proceedings for three weeks commencing on 12 February 2001 and the Industrial Relations Commission proceedings for two weeks commencing on 5 March 2001. On 14 December 2000 the parties submitted their disputes to mediation and reached a compromise embodied in a Deed of 14 December 2001. The Deed was entitled “Deed of Settlement” and the parties included all persons who had been parties to either of the proceedings.

6 The recitals to the Deed collected the parties into groups; APC, Howells and Muenger were called the APC parties, ALC and the other nine respondents (some of whom were cross-defendants) were called the ALC parties, and some agreements in the Deed were made by ALC for itself only. The recitals referred to the earlier proceedings and the agreement to settle and resolve all outstanding disagreements and disputes. These were clauses providing for discontinuance of all proceedings and the cross-claim, in cl.7 for mutual releases by all parties, and clauses dealing with confidentiality and more formal matters. The most significant provisions were in cll.3, 4 and 5 in these terms:

3. ALC will pay to the APC parties or as they may direct the total sum of
$315,000 by the following instalments:
. $130,000 within 28 days of the date of this deed;
. $100,000 within 6 months of the date of this deed; and
. $85,000 within 12 months of the date of this deed.
In the event that ALC is liable to make any
payment under the Income Tax Assessment Act in respect
of any of the money payable under this clause
it may deduct the amount of its liability from
any of the instalments in respect of which the
liability arises.
4. Each party will pay his and its own costs otherwise than as set out herein.
5. Howells and Muenger will transfer their shares in ALC to such transferees as ALC will nominate at $4 per share such consideration to form part of the amount of $13,200-00 referred to in paragraph (3) above.

7 In my opinion the reference in cl.3 to the Income Tax Assessment Act is a reference to legislation relating to income tax generally, and there is no room for avoiding ALC’s right of deduction by pointing out that the deduction is required by some legislation in the complex skein of legislation dealing with income tax other than the Income Tax Assessment Act 1936. Counsel for the APC parties did not contend otherwise.

8 There was some error in cl.5 as para.(3) does not refer to $13,200, but its meaning can be readily understood because Mr Howells and Mr Muenger had 3,300 ALC shares between them. Clause 5 means that $13,200 part of the $315,000 was attributed to the transfer of the shares.

9 In cl.3 the agreement to pay money is an agreement to make a payment to the APC parties (meaning APC, Mr Howells and Mr Muenger) or as they direct. There is no agreement to pay any particular part of the $315,000 to any one of them. It is a promise to pay to them jointly and if it were to be enforced it would have to be enforced by them jointly; and in these proceedings they all join as plaintiffs. Within the terms of the Agreement no particular one of the APC parties has any entitlement to all or part of the $315,000 which is to be paid, and within the terms of the Agreement there is no way of discerning any relation between the $315,000 and the claims made by any one of the APC parties, or the various bases on which they made claims. Their acceptance of $315,000 was given in consideration of their participation in releases of a number of claims and of their accepting releases from the claims made by ALC against them, and in the cases of Mr Howells and Mr Muenger their giving releases from the claims in their cross-claim for orders for purchase of their shares at a value higher than $4, for purchase of their shares by ALC, for reduction of capital, and for winding-up. It was also given in consideration of release of their claims under s.106 of the Industrial Relations Act, which included claims for loss of dividend, loss of salary and benefits, loss of bonus and loss of superannuation; these related to losses in respect of periods which fell after the date of termination and would continue until retirement at age 65 years. Their claims were not claims for salary, benefits, bonuses or superannuation for the periods during which they had been employed. The claims in the Commission included alternatively claims for payment of the true value of their shares rather than the notional price of $4 per share.

10 The Deed of Settlement and the entitlement under it to $315,000 in three instalments were a compromise of many elements. Mr Howells’ claim in the cross-claim was never quantified; but can be seen to include purchase of his shares of their true value, or for winding-up ALC which would have produced a distribution to him. As Mr Howells owned twice as many shares as Mr Muenger it can be conjectured, reasonably but without certainty, that giving up this claim weighed for twice as much in the negotiations as giving up Mr Muenger’s claim did, but there is no basis for conjecturing what influence it had on ascertaining the figure of $315,000. If the cross-claim had been successful and money had been recovered under it, the receipt of that money would on general principles clearly be capital and not income. The influence of giving the release of Mr Howells’ claims in the Industrial Relations Commission on ascertaining the figure of $315,000 is even more difficult to perceive and classify. He claimed $30,000 as a deferred bonus held in trust, an unquantified amount for loss of dividends which would have been payable after termination of his employment, a claim for $70,000 per annum for loss of salary and benefits again for that future period, a claim of $130,000 for loss of bonus for that future period and a claim for loss of superannuation rights which would have accrued to him if his employment had not been terminated; this claim was not quantified. Alternatively he claimed the true value of his shares. Mr Muenger made claims on similar principles, except that he did not claim for deferred bonus held in trust, and he had only half as many shares as Mr Howells to enter into any claim relating to loss of dividends or payment of the true value of shares. His alleged future salary and bonuses were less than those claimed by Mr Howells. On general principles, lump sums of money payable under an order giving effect to these claims would be capital receipts; some elements might be treated as income or liable to tax under statutory extensions of the concept of income, but in the absence of an actual order classification of elements in it cannot begin.

11 Each of the APC parties potentially might have recovered costs orders, and these claims were released by the Deed of Settlement; it cannot reasonably be conjectured what the costs entitlement of each would be, and APC was not a party to the cross-claim or to the litigation in the Industrial Relations Commission. Then too, each of the ALC parties might potentially have recovered costs orders, and this potentially must be taken to have entered in some unknowable way into the reasoning which produced the compromises.

12 It should also be conjectured that in ascertaining the figure of $315,000 some regard was paid to the release of the APC parties from the claims made in the Equity proceedings, which if successful could have imposed large obligations to pay money, orders for delivery-up of property and in the case of Mr Howells and Mr Muenger the transfer of shares, and for costs.

13 All these potential claims and liabilities, of different strengths and of different kinds and amounts for each of the three APC parties, were unsearchably resolved into a joint entitlement of all three to one sum of $315,000 payable in three instalments. It was only possible to enforce the whole obligation in the interest of all three. ALC could not pay any part of the money to any one of them and obtain a discharge, and could not identify any part of it as payable to any one of them.

14 The first instalment of $130,000 was late; in accordance with the Deed it was due on or before 11 January 2001, and it was made by sending a cheque for that amount to solicitors for the APC parties’ who received that payment on 30 January 2001 with their authority. No deduction was made from this payment.

15 There was extensive correspondence about payments under the Deed. On 18 December 2000 ALC’s solicitors Watson & Watson asked Haywards who were solicitors for the APC parties “We also note that you will let us have particulars of the payments to the APC parties … so that the appropriate payment can be made. … [P]lease let us have particulars … so arrangements can be made for calculation of any tax and of drawing of the cheque.”

16 Haywards on 18 January 2001 suggested “There seems to be financial benefits to both your client if part of the instalments may be paid out as dividends … As you know, the settlement was on the basis that our clients would be paid in the most tax effective manner. Dividends were said to be part of that regime.”

17 Watson and Watson on 30 January, in the letter with which they forwarded the cheque for $130,000, rejected the possibility of payment as dividend. They said “This payment is made without any deduction for tax liability which may accrue on such monies which will be addressed in the next instalment due on 14 June 2001. Therefore our clients reserve their rights to deduct the appropriate amount to cover tax liability which may apply to the current and future payments under the Income Tax Assessment Act as stipulated in the Deed signed by all the parties.”

18 Watson and Watson’s letter of 7 June 2001 said: “At the time of the settlement it was agreed that you would advise [ALC] about the agreed allocation of the settlement monies as between the APC parties … As no such advice was received payment of the first instalment of $130,000.00 was made in January 2001. It is now necessary to make the second payment of $100,000.00 due on 14 June 2001. As these payments represent eligible termination payments as defined by the Income Tax Assessment Act 1936 it is proposed to withhold on account of tax from the payment due on 14 June 2001 sufficient to cover the payments to date. In the absence of your advice as to what was agreed between your clients it is proposed that each of Howells and Muenger will be treated as receiving one half of the two amounts totalling $230,000.00 ($115,000.00 each) as an eligible termination payment and withholding on account of income tax will be made for each on that figure. … It is proposed to deal with the eligible termination component of the final payment of $85,000.00 on 14 December 2001 in a similar manner. The gross payment will be $85,000.00 of which $71,800.00 will be eligible termination payment component and $13,200.00 will be consideration for the purchase of the shareholding in ALC. These payments will also be treated as divided equally between Howells and Muenger.” They enclosed the draft calculations.

19 Haywards replied on 8 June 2001 and said “The agreement was that our clients would be paid according to their instructions, and would be paid in the most tax-effective manner. We enclose a copy of a letter from our client’s accountant, Bernard Croft, dated 8 May 2001, which details how our clients wish to be paid. We note that part of the payment requires that David [Howells] be provided with a fully-franked dividend.” The enclosed letter from Mr Croft however did not make any clear statement of how the APC parties wished to be paid. It “… set out below summaries of the various tax positions … depending on the nature of the payment received from the abovementioned company.” It can be inferred from the following summaries that $105,000 of the settlement moneys was to be appropriated as legal costs and that $140,000 (which was two-thirds of the remaining $210,000) was to be dealt with in various ways for Mr Howells’ benefit and $70,000 was to be dealt with in various ways for Mr Muenger’s benefit.

20 Haywards’ letter of 8 June and the enclosed letter from Mr Croft (actually dated 8 March 2001) did not give Watson and Watson any clear information about any agreed allocation of the settlement moneys as between the APC parties. It did not constitute authority for ALC to pay the remaining two instalments in any other way than jointly to all three of the APC parties. In particular it did not constitute authorisation to pay the remaining instalments totalling $185,000 as to two-thirds to Mr Howells and as to one-third to Mr Muenger. In my opinion, in the absence of any direction from the APC parties, ALC was entitled to appropriate whatever part of the payments it chose to the $13,200 for Mr Howells’ and Mr Muenger’s shares, but otherwise all the instalments still to be paid were payable to the APC parties jointly.

21 Watson & Watson wrote to Haywards on 20 June 2001 and asserted “… there was no agreement that any dividends would be paid to either Muenger or Howells …” and “We are awaiting your advice as to your split-up as between your clients so the cheques can be paid.”

22 Haywards wrote to Watson & Watson on 25 June 2001 enclosing a copy of Memorandum of Advice from Mr Grieve QC who was of the view that none of the money should be liable to tax. Haywards said “In view of this, we would ask that the next instalment be paid immediately, with no deduction.”

23 Watson & Watson wrote to Haywards on 3 July 2001 and said that they had consulted Mr Hamilton of counsel and “We confirm Mr Hamilton is of the view that pursuant to section 12-190 of the Tax Administration Act, if a payment is to be made to [APC] either withholding tax is to be remitted to the Australian Taxation Office or the usual tax invoice will be required. We believe that it would be appropriate that APC provided a tax invoice for the sum paid previously and for the second instalment. In addition, each of Howells and Muenger and APC should:-

1. Confirm there is no claim in relation to employment.
2. Indemnify our client in relation to any tax that may be payable in relation to the payments.”

24 Haywards wrote to Watson & Watson on 11 July 2001 with several comments including “… there can be no basis why [APC] must remit withholding tax to the Australian Tax Office, or provide any taxation invoice” and “I will seek instructions in relation to taxation indemnity.”

25 On 26 July Watson & Watson wrote to Haywards enclosing a letter of advice from Mr Roger Hamilton of counsel which included the following:

It seems to me that any payment to Messrs Muenger & Howells, or on their behalf, would be likely to be regarded as an eligible termination payment (being ‘any payment made in respect of the tax payer in consequence of the termination of any employment of the taxpayer’, see s.27A(1) ITAA 1936) for tax purposes. As such, [ALC] is liable to withhold an amount from the eligible termination payment (see section 12-85 Taxation Administration Act 1953). So far as any payment is made to [APC], [ALC] may be liable to withhold an amount from the payment unless [APC] provides a tax invoice that relates to the supply which quotes the ABN of [APC] or [ALC] has some other document relating to the supply on which [APC’s] ABN is quoted (see s.12-190 Taxation Administration Act).

Mr Hamilton went on to advise that ALC could obtain a private binding ruling.

26 Watson & Watson wrote to Haywards on 13 August 2001 referring to the previous history and asserting among other things:

3. It is apparent from the letter Croft to you that
I. Muenger is to receive one third of the settlement sum.
II. Howells is to receive two thirds of the settlement sum.

They went on to assert that they proposed to account for $130,000 which had already been paid as being:

1. $43,333.00 on account of eligible termination payment to Muenger.
2. $86,667.00 on account of eligible termination payment to Howells.

They also said that it was proposed from the second payment of $100,000, to apply tax and remit it to the Australian Taxation Office in accordance with the calculation which they enclosed. The calculation purported to show tax totalling $34,450 in respect of the payment of $130,000 which had been made on 30 January 2001, and tax totalling $26,500 in respect to the payment of $100,000; and to show that $60,950 was to be deducted from that $100,000 and the balance of $39,050 was to be paid over.

27 Haywards wrote to Watson & Watson on 13 August 2001 contending that any payment to the Australian Taxation Office was inappropriate and offering to give an indemnity if the second payment were made, while threatening recovery proceedings in the District Court otherwise.

28 Correspondence continued inconclusively. Watson & Watson solicitors said that ALC intended to make payments as in their letter of 13 August. The APC parties did not agree to seek a private binding ruling. On 28 August Watson & Watson sent to Haywards a cheque for $39,050; they deposited $60,950 in their trust account, saying it was deducted on account of tax; and they still hold it. On 20 September 2001 Watson & Watson asserted that of the final payment due by 14 December $71,800 would be eligible termination payment component and $13,200 would be consideration for the purchase of the shares, and gave calculations under which $71,800 would be treated as payable as to $23,933 on account of Mr Muenger of which $19,984 would be paid and $3,949 would be on account of tax, and $47,867 would be treated as payable on account of Mr Howells of which $32,789 will be paid and $15,078 would be treated as of account of tax. So another $19,027 would be held on account of tax making $79,977 in total which would be held on account of tax.

29 On 11 October 2001 these proceedings were commenced. On 12 December 2001 Watson & Watson forwarded to Haywards a cheque for $52,773 and another cheque for $13,200. They paid a further $19,027 into their trust account; accordingly the total of $79,977 now in dispute is held in that trust account.

30 Submissions by senior counsel on behalf of the APC parties before me were directed to showing that the payments totalling $315,000 required to be paid under cl.3 would not when paid be income on general principles of Mr Howells and Mr Muenger and hence there is no ground for their former employer to make deductions from the payment. These contentions were, in my understanding, not challenged by counsel for the defendants and in my opinion they were clearly correct. I will state shortly the basis for this opinion.

31 In McLaurin v. Federal Commissioner of Taxation (1961) 104 CLR 381 at 391 the High Court said:

It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly… But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated…or are otherwise ascertainable by calculation… it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole.

32 This passage included references to earlier authorities, which I have omitted.

33 Applying that passage to the present facts, the three payments totalling $315,000 were not made in settlement of distinct claims any of which were liquidated. One part of the amounts payable is ascertainable by calculation as the claim in respect of the shares was reduced to $13,200, but otherwise the payment cannot be apportioned or dissected, and there are no claims for liquidated damages. In my opinion none of the claims are for payments which on general principles would be of an income nature if the payments were made. Counsel referred me to several passages in earlier judgments of the High Court which were referred to in McLaurin. Counsel also referred me to Allsop v. Federal Commissioner of Taxation (1965) 113 CLR 341 at 350-351 (Barwick CJ and Taylor J) and 352 (Windeyer J) which in my respectful view are applications of the same principle to the facts of that case. Counsel also referred me to Allied Mills Industries Pty Ltd v. Federal Commissioner of Taxation (1989) 20 FCR 288 at 313 and Whitaker v. Commissioner of Taxation (1996) 63 FCR 1 at 9-12 where, in my understanding, the same principle was applied to the facts there under consideration.

34 Submissions made by counsel for the defendant opened with the contention that the arguments of the APC parties are arguments with the Commissioner of Taxation, but the defendants are not concerned in those arguments. It was contended that if the defendants take a view in good faith and on reasonable grounds about the character of a payment for the purpose of provisions of taxation legislation and its relation to the meaning of cl.3, that ought to be enough to protect the defendants. It was contended that employers cannot be required to go through a detailed analysis of what each termination payment relates to, and that it is only necessary for the employer to take a reasonable view in the circumstances to discharge the employer’s liability. Counsel pointed out that the legislation relating to taxation imposes civil and criminal penalties for failing to make deductions in compliance. The conclusion of this argument was that the defendant should not be required to investigate in fine details what a payment is about but can act on a reasonable view of its statutory obligation, leaving the defendants as taxpayers to take up the matter with the Commissioner or seek a private ruling. Counsel pointed out that Mr Watson had carefully informed and warned the plaintiffs’ solicitor in advance of what he intended to do, and contended that the defendant had acted reasonably throughout. Underlying these contentions is the assumption, which I understand to be correct, that the liability of the recipient of a payment to tax is not affected by the payer’s having withheld part of the payment and remitted it to the Commissioner.

35 In my view the opening submissions should be rejected. There is no test of reasonableness in the terms of cl.3. Clause 3 conferred a contractual authorisation to make a deduction in the event that ALC is liable under legislation to make any payment in respect of the money payable under cl.3; it does not confer any other authorisation, and it does not authorise conduct on a reasonable basis. Unless ALC in objective fact is liable to make a payment under Income Tax legislation, the obligation to make payments created by earlier provisions of cl.3 will operate.

36 Section 16-5 of the Taxation Administration Act 1953 provides: “If Division 12 requires an entity to withhold an amount from a payment, the entity must do so when making the payment.” On its plain terms this does not authorise further withholding to make up for failure to withhold from a previous payment.

37 Quite apart from provisions of cl.3 and the parties’ contractual relationship, it is of course open to ALC to point to and rely on any statutory authority to make a deduction, if in the circumstances there is any. Initially it must be observed that ALC did not withhold any amount from the payment of $130,000 made in January 2001. ALC has not pointed to any statutory provision which authorises it to withhold part of a payment where it should have withheld an amount from an earlier payment but failed to do so. Clause 3 does not authorise deduction from any instalment other than the instalment in respect of which liability to make payment arises.

38 Counsel for ALC also referred to subs.12-190(1) of Sched.1 of the Taxation Administration Act 1953 which provides to this effect:

“Payment for a supply
12-190. Recipient does not quote ABN
(1) An entity (the payer ) must withhold an amount from a payment it makes to another entity if:
(a) the payment is for a * supply that the other entity has made, or proposes to make, to the payer in the course or furtherance of an * enterprise * carried on in Australia by the other entity; and
(b) none of the exceptions in this section applies.

39 This provision is subject to the exception in subs.12-190(2) to the effect that the taxpayer need not withhold an amount if when the payment is made the other entity has given an invoice which quotes its ABN. The exception has no application as the APC parties have not given an ABN or quoted an invoice.

40 This submission was not accompanied by any demonstration of the necessary factual base; that is to say a demonstration to the effect that the APC parties constitute an entity, that entering into the Deed of Settlement constituted a supply or that the supply was in the course or furtherance of an enterprise carried on by the APC parties. Nor was there any demonstration of reasoning or calculations which would show what amount would have had to be withheld if the provisions of s.12-190 in fact applied, or whether the amount to be so deducted would have been greater than, equal to or less than the amount so deducted.

41 It is plain from the correspondence and the basis put forward by the defendants for withholding funds that ALC did not withhold any amount from any of its second or third payments in compliance or purported compliance with s.12-190; the reasons put forward and the supporting calculations have no relation to s.12-190, and if that section was available as a justification for withholding amounts, it was not acted on.

42 The principal position and the main burden of submissions made for the defendants was that ALC was entitled and required to make deductions from eligible termination payments to Mr Howells and Mr Muenger. This was to a similar effect to the contention made in correspondence.

43 A payment made strictly in accordance with cl.3 of the Deed of Settlement to the APC parties jointly could not, on information confined to the terms of the Deed of Settlement, be said to be a payment made in respect of either Mr Howells or Mr Muenger in any ascertainable sum. Identification of the payments or parts of them with either Mr Howells in particular or Mr Muenger in particular depends on the proposition that the APC parties have directed that some part of the payment be made to one of them. That proposition depends in its turn on the terms of Haywards’ letter to Watson & Watson of 8 June 2001 and the enclosed letter from Mr Bernard Croft dated 8 March. ALC has treated these letters as authorisation for appropriating two-thirds of the amounts paid to Mr Howells and one-third to Mr Muenger. Whatever else the communication constituted by those two letters may mean (and its meaning is very difficult to follow) they certainly do not contain any direction that two-thirds of any amount paid is to be appropriated to Mr Howells and one-third to Mr Muenger. Mr Croft’s letter seems to show that $210,000 of $315,000 was treated as “Settlement (net of legals)” for the credit of Mr Muenger and Mr Howells; it certainly does not treat the remaining $105,000 as apportionable between them or payable to either of them. It does not authorise payment of any money to Mr Howells except in the manner set out on page 2 of the letter, that is by payment of a fully franked dividend, payment as a capital gain on disposal of the shares and “golden hand shake”. Similar observations apply to the references to Mr Muenger, which differ in some details. Mr Croft’s letter is not in its terms a direction for payment of any money, but assuming in favour of the defendants that that letter taken with Mr Hayward’s letter forwarding a copy of it is an authorisation by the APC parties to make payments, that authorisation would certainly not be acted on by making payments on some basis in which a greater sum than $140,000 was credited to Mr Howells, or a greater sum than $70,000 was credited to Mr Muenger, or on some basis in which the means of payment by a fully franked dividend, capital gain and golden handshake were not followed.

44 For this reason there is no basis for the step in the defendants’ reasoning in which two-thirds of the total moneys paid were treated as an eligible termination payment (or payments) to Mr Howells, and one-third so treated for Mr Muenger. The payments, when made to the solicitors who acted for the APC parties, had the character of a payment made to the three APC parties jointly under an obligation to make payments to them jointly.

45 The definition in s.27A of the Income Tax Assessment Act 1936 is extremely complex. Its opening provisions are:

27A(1) “Eligible termination payment”, in relation to a taxpayer, means:
(a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than …

There are many exceptions and many other branches of the definition but they do not to my reading have any present importance.

46 Section 12-85 Schd.1 of the Taxation Administration Act 1953 provides:

An entity must withhold an amount from an *eligible termination payment it makes to an individual.

47 A chain of provisions applies the definition in s.27A of the Income Tax Assessment Act 1936 to the provisions of s.12-88 Sched.1; see s.3AA of the Taxation Administration Act 1953 and Income Tax Assessment Act 1997 Sched.1 s.995-1

48 The defendants’ justification for making deductions requires that it be established, in respect of Mr Howells, that two-thirds of each of the payments fell within the definition in s.27A of eligible termination payments; and similarly for one-third and Mr Muenger. The apportionment and the relation between the proportion of the payment and either of those men has difficulties to which I have earlier referred. These difficulties cannot be surmounted. It cannot be concluded that two-thirds of each sum paid was a “… payment in respect of the taxpayer” relating to Mr Howells; similarly for Mr Muenger.

49 Assuming that it could be shown to the contrary, I turn to consider whether it can be said that the payment was made “in consequence of the termination of any employment of [Mr Howells]”. Counsel referred me to case law relating to the meaning of s.26(d) of the Income Tax Assessment Act 1936 which when in force operated in what was, in a general way although not in all details, a similar way to provisions which now operate in respect of eligible termination payment.

50 Section 26(d) provided, in the form in which it stood in 1973,

“(d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law:
Provided that this paragraph shall not apply in respect of any amount which under any provision of this Act is deemed to be a dividend paid to the recipient, or in respect of deferred pay, including interest thereon, paid to a person who is or has been a member of the Defence Force …”.

51 Each definition has many complexities not found in the other but their terminology is similar in their references to payments in consequence of the termination of any employment.

52 Section 26(d) was one of a number of statutory extentions of the assessable income of the taxpayer. In the form in which it stood in 1973 the paragraph was considered in judgments in the High Court in Reseck v. Federal Commissioner of Taxation (1975) 133 CLR 45

At pp 48 and 49 Gibbs J observed that para.26(d) includes some receipts which would otherwise be capital and gave examples, and concluded (at 49) “It is therefore clear that s.26(d) includes some receipts that would not be income according to ordinary concepts.” At pp50 to 51 Gibbs J, after stating that the two amounts in question were each an allowance, proceeded at 51 to decide a question practically identical with one which arises under the present provision. His Honour said:

“The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. Within the ordinary meaning of the words the sum is paid in consequence of the termination of employment when the payment follows as an effect or result of a termination. In the present case the payment did follow as a result of the termination of the taxpayer’s services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment … In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer’s service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer’s employment.”

53 Jacobs J reached a similar conclusion. His Honour said at 56:

“It was submitted that the words ‘in consequence of’ import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a ‘following on.’”

His Honour’s further observations at p56 show his view that s.26(d) extended to payments falling within its terms whether they were capital or income on general principles. Stephen J dissented, on grounds not presently relevant, because he thought that the whole payment and not 5 percent of it was effectively brought to charge by other provisions.

54 Holdings in Reseck were considered in judgments in the Full Court of the Federal Court in McIntosh v. Federal Commissioner of Taxation (1979) 79 ATC 4325. After referring to the judgment of Gibbs J, Brennan J said at 4328:

“To say that a payment ‘follows as an effect or result of the termination’ imports causation as the relevant nexus between the termination and the payment, but it is clear that termination need not be the dominant cause of the payment.”

After referring to a passage from the judgment of Jacobs J, Brennan J said:

“His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold that the required nexus to be (at least) that the payment would not have been made but for the retirement.”

55 Toohey J after referring to causation in judgments in Reseck said at 4330-4331:

“In the present case it may be true to say that the immediate cause of the payment to the taxpayer … was the exercise by him of the right to commute a percentage of the pension to which he was entitled. To say that is not to exclude the notion that the payment was in consequence of the taxpayer’s retirement or that it followed on his retirement. In my view, the payment followed on the taxpayer’s retirement, the only intervening event being the exercise of the option to commute. The connection was not simply temporal; retirement was a pre-requisite to payment and in that sense there was a ‘following on’ as I understand the language of Jacobs J.”

56 Lockhart J dealt with this matter at pp4335 to 4337 and considered in detail passages in the judgments of the majority in Roseck. His Honour’s conclusion at 4336 was:

In my opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connection between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment. The phrase used in sec. 26(d) is not “caused by” but “in consequence of”. It has a wider connotation than causation and assumes a connection between the circumstance of retirement and the act of payment such that the payment can be said to be a “following on” of the retirement.

Sometimes the relevant connection may be that the retirement is a condition precedent to the right to payment of the sum in question.

57 In my respectful view this passage is an exegesis but not an exposition, as “following on” is no more than a paraphrase of “in consequence of”.

58 In Freeman & Ors v. Federal Commissioner of Taxation (1983) 83 ATC 4456 the Full Court of the Federal Court again applied s.26(d). Northrop and Fisher JJ after reviewing previous authority said at 4472:

Thus in our view the question is, in circumstances such as the present, whether there was sufficient causal nexus between the payment and the retirement to make the retirement the occasion of the payment. This is essentially a question of fact.

59 The payments were assessable in full under s.26(e) and the taxpayers had not proved that they fell within s.26(d). Frankie J reached the same conclusion.

60 In my respectful view it is not possible to carry exposition of the law to greater detail than that given to it by Northrop and Fisher JJ. A causal nexus between payment and the termination is required, but the sufficiency of the causal nexus cannot be usefully expounded, or stated at all except in the process of applying statutory provision to the facts. That process requires application to facts of ordinary English words which are not terms of art, and an attempt to apply earlier judicial formulations, or to make one’s own, incurs the danger of departing from the terms of the statutory provision. It can I think be understood that in Reseck Gibbs and Jacobs JJ were not attempting to do more than explain the process of reasoning which led to the conclusion on the facts which they made.

61 In Haggarty & Ors v. Federal Commissioner of Taxation (1989) 89 ATC 4475 Wilcox J considered a case in which the relevant provision was s.27A of the Income Tax Assessment Act 1936. At 4493 his Honour said:

In order to constitute an “eligible termination payment”, a payment has to be made ‘in consequence of the termination’ of the employment. There must be a direct causal relationship between the termination and the employment. The mere existence of an employer/employee relationship is not enough.

62 Wilcox J’s treatment of the subject was brief, and appropriately so. I would think that Wilcox J’s view was informed by the case law on the previous provision, and the view he expressed is in accordance with it. The issue should be addressed as one of application of s.27A(1) to the facts.

63 There is a chain of events and circumstances which connects the series of payments to the APC parties to termination of the respective employments of Mr Howells and Mr Muenger. The chain of events includes these matters. Mr Howells and Mr Muenger formed APC, and engaged in conduct which ALC regarded as in breach of their duties to it; or ALC decided to allege that they did. Then ALC brought the equity proceeding and Mr Howells and Mr Muenger in turn brought the cross-claim seeking remedies relating to oppression arising out of their shareholding in ALC which in turn had arisen out of their employment by ALC. Then Mr Howells and Mr Muenger each brought proceedings in the Industrial Relations Commission claiming various remedies on the basis that the terms of their employment and the terms on which they held their shares had been unjust contracts. Then there was a mediation and an overall settlement which reduced the balance of merits of both parties and of their various claims to an inseverable lump sum. The terminations of their employments were elements in this chain of facts and events, and necessary elements for the whole series, but the connection between the termination and the payments is highly attenuated by the causal operation of many intervening events and circumstances. The terminations cannot be completely excluded from the causative facts and circumstances leading to the payments, but their part in the outcome is so distant and attenuated that I do not regard it as a correct conclusion of fact, applying the terms of the definition to the facts, that the payment was made in consequence of the terminations.

64 In my view then ALC was not, within the meaning of cl.3 liable to make any payment under Income Tax legislation in respect of any of the three instalments and has no authorisation either under cl.3 or under Income Tax legislation to make any deduction. For these reasons I will give judgment for the plaintiffs for the amount claimed.

65 The parties were in agreement that there should be no order as to the costs of the litigation, and that there should be no award of interest.

66 ORDERS:

(1) Declare that under Deed of Settlement dated 14 December 2000 the first defendant is liable to pay to the plaintiffs $79,977.00.

(2) Order that the second defendant pay to the plaintiffs the sum of $79,977.00 now held by him in his Trust Account on account of the first defendant and in relation to these proceedings.

(3) Order that each party pay its own costs of the proceedings.

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Last Modified: 07/18/2002