Andrew Macoun and Commissioner of Taxation
[2014] AATA 155
[2014] AATA 155
Division GENERAL ADMINISTRATIVE DIVISION File Numbers
2013/4274-4275
Re
Andrew Macoun
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal The Hon. Brian Tamberlin QC, Deputy President
Date 20 March 2014 Place Sydney 1. The decision under review is set aside and substituted with the decision that the pension the Applicant received from the World Bank in the 2009 and 2010 income years does not form a part of his assessable income and is exempt from Australian income tax.
........................[SGD]................................................
The Hon. Brian Tamberlin QC, Deputy President
CATCHWORDS
TAXATION – Income Tax – officer of international organisation – privileges and immunities of officer - tax emptions - contributory benefit plan – mandatory participation and contributions - whether pension payments paid under plan are assessable income – characterisation of pension payment – meaning of “emolument” - whether pension payments form part of emolument – whether pension payments arise out of an office or employment – decision under review set aside and substituted
STATUTORY INTERPRETATION – meaning of terms used in domestic legislation as a result of International Convention – what regard can be paid to decisions of other national courts in interpreting terms of International Agreement
LEGISLATION
Income Tax Assessment Act 1936 (Cth); s 23(y)
International Organisation (Privileges and Immunities) Act 1963; Fourth Schedule
Specialised Agencies (Privileges and Immunities) Regulations of 1986; reg 8CASES
Case M90 (1980) 80 ATC 648
AAT Case 10,901 (1996) 32 ATR 1279
Brumby v Minister [1976] 1 W.L.R
Minister for Immigration and Multicultural Affairs v Savvin [2000] 98 FCR 168
Nette v Howarth (1935) 53 CLR 55
Rocklea Spinning Mills Pty Ltd v The Anti-Dumping Authority [1956] 56 FCR 406SECONDARY MATERIALS
Pearce and Geddes, Statutory Interpretation in Australia (7th ed, Lexis Nexis Australia, 2011)
REASONS FOR DECISION
The Hon. Brian Tamberlin QC, Deputy President
The Applicant, Mr Macoun, is a civil engineer who holds a Bachelor of Engineering and Masters of Engineering Science from the University of Sydney. He is approximately 66 years old.
After graduation he worked for 12 years for the Commonwealth Department of Works and later became an employee of the World Bank. The World Bank Group comprises several corporate organisations including the International Bank for Reconstruction and Development (IBRD).
In 1992 the Applicant applied for a fixed term appointment for a period of two years with the World Bank based in Washington DC. In May 1992 he was appointed for a period of two years to the staff of IBRD as a sanitary engineer. This appointment was effective from 1 July 1992.
Under this appointment he became entitled at his option to participate in the World Bank Group’s staff retirement plan (SRP). He exercised the option to participate and make contributions voluntarily out of his salary while this appointment endured.
In September 1993 the Applicant received from the Bank a letter confirming his “regular” appointment as sanitary engineer. This agreement was made on 21 September 1993. He received a confirmation of the regular appointment on 23 September 1993 and the appointment was effective as of 27 September 1993. This “regular” appointment had the effect of terminating the earlier fixed term appointment under the arrangement of May 1992.
The terms of his engagement are summarised in a copy of the handbook issued by the World Bank Group which is in evidence.
One of the conditions of employment under this agreement was that participation in the SRP was mandatory. Mr Macoun was obliged to become a member of and make contributions to the SRP and these payments were deducted from his salary on a regular basis.
The references to “option” and “mandatory” in the two agreements outlined above are significant; in the case of mandatory participation the relationship of the pension to the appointment and office is closer since the office will not be available unless pension participation is agreed.
The SRP is a contributory defined benefit plan under which participants in “regular” employment are required to make contributions of seven per cent of what is referred to and defined as their “pensionable gross salaries”. The benefits are not directly linked to the accumulated value of contributions made to the plan and benefits can be payable under it as a monthly retirement pension for life. It was a condition that the plan was mandatory for any staff member prior to attaining the age of 62. The Applicant was engaged from 27 September 1993 until retirement at age 60 on 26 October 2007. The normal retirement age under the plan was fixed at age 62, when the employee became entitled to receive a pension calculated in accordance with the provisions of the plan. The Applicant retired earlier at age 60, and received an early retirement pension which was less than the normal pension and was reduced in accordance with the plan.
Each year since retirement the Applicant has received a document from the World Bank setting out the payment of the pension in respect of the previous year. In accordance with the provisions of the plan relating to the cost of living expenses, the pension has increased since 2007. In respect of the year ended 31 December 2012 the total amount of pension was $150,730.00. Over the whole period of his employment by IBRD, the Applicant contributed a total of US$200,842 to the SRP.
During the period of his employment with the World Bank through IBRD, the Applicant’s salary was exempted from Australian tax pursuant to Part I of the Fourth Schedule to the International Organisation (Privileges and Immunities) Act 1963 (the Privileges Act).
Under the Privileges Act, item 2 of Part 1 of the Fourth Schedule concerns “Privileges and Immunities of an Officer (other than High Officer) of International Organisation” and provides for:
2. Exemption from taxation on salaries and emoluments received from the organisation.
Part II of the Fourth Schedule concerns “Immunities of Former Officer (other than High Officer) of International Organisation” and provides for:
Immunity from suit and from other legal process in respect of acts and things done in his capacity as such an officer.
Section 6(1)(d) of the Privileges Act provides that:
6(1) Subject to this section, the regulations may, either without restriction or to the extent or subject to the conditions prescribed by the regulations:
….
(d) confer
(i) upon a person who holds an office in an international organization to which this Act applies (not being an office prescribed by the regulations to be a high office) all or any of the privileges and immunities specified in Part I of the Fourth Schedule; and
(ii) upon a person who has ceased to hold such an office the immunities specified in Part II of the Fourth Schedule…
Section 23(y) of the Income Tax Assessment Act 1936 (the Income Tax Act) exempts from income tax:
The official salary and emoluments of an official of a prescribed organisation of which Australia and one or more other countries are members to the prescribed extent and subject to the prescribed conditions.
The IBRD is a “prescribed organisation” for the purposes of this provision.
On 26 May 2011 the Applicant lodged returns for the income years ended 2009 and 2010, in which he returned the amounts of $131,302 and $134,970 respectively as assessable foreign source income, being early pension payments from the World Bank. The Respondent issued returns for the income years ended 2009 and 2010 on 3 June 2011. In December 2012 the Applicant lodged a request to amend his assessments for these two income years to exclude the early pension payments received from the World Bank from his assessable income. The Respondent disallowed these requests and issued amended assessments which included the early pension payments in the Applicant’s assessable income for the years ended 2009 and 2010.
On 20 February 2013 the Applicant lodged an objection against the amended assessments and the imposition of tax on the pension he had received from the World Bank. On 4 July 2013 the Respondent disallowed this objection. The Applicant now appeals to this Tribunal for review of this decision. The Issue
The issue for determination is whether it is the correct and preferable decision to include the early pension payments from the World Bank in the Applicant’s assessable income. This involves a consideration of whether the pension was paid to the Applicant as part of emoluments as an officer of the World Bank, and therefore as such is exempt from income tax under the Fourth Schedule of the Privileges Act.
REASONING
Determination of the above question turns on the correctness of the submissions advanced on behalf of the Respondent concerning the proper characterisation of the pension payments, having regard to the fact that they are paid and received after the employment has ceased.
CHARACTERISATION OF PENSION PAYMENT AS AN EMOLUMENT
The Respondent submits that the early retirement pension payments received by the Applicant from the SRP are not directly linked to the value of his contributions to the SRP and are not payments in the nature of deferred or delayed “salary” or “emoluments” arising by reason of his employment with the World Bank. Rather it is submitted that they are to be properly characterised as falling within the post-employment defined benefit pension and are therefore taxable.
The Applicant on the other hand contends that the pension payments are in the nature of payments arising from an “office” or “employment”. They can therefore be properly characterised as an emolument being a reward or remuneration, as an “emolument” is defined in the Oxford English Dictionary and the Macquarie Dictionary being a profit arising from office or employment or compensation for services.
The Respondent contends that the meaning of an “emolument” is confined to a monetary benefit payable to one who is presently serving in employment and therefore, as the pension payments were made to the Applicant after his contributory service had been brought to an end, they do not fall within the meaning of this term. This is the approach taken by the Taxation Board of Review in Case M90 (1980) 80 ATC 648 [15]-[18].
The reasoning in that case is not on point in the present case because in that case there needed to be a prior medical examination and, more importantly, participation in the fund under consideration was not conferred automatically or mandated by the regular employment arrangement with the United Nations. I note that, at paragraph [17] of its reasons, the Board conceded that the word “emolument” in some contexts may comprehend a pension payable after employment has ceased. However, without disclosing its reasoning process in any detail the Board stated that a consideration of legislation as a whole and the rules of the pension fund led it to the conclusion that generally an emolument is a monetary benefit payable to a presently serving employee.
In its reasons the Board does not mention or refer to the decision of the High Court in Nette v Howarth (1935) 53 CLR 55, where the Court considered the meaning of the terms “paid pension”, “salary”, “emolument”, “profits”, “wages”, “earnings” and “income”.
The reasoning in Nette is not directly on point because it turned on the question whether the payments were of a capital or income nature but it provides some guidance. In his reasons for judgment, Rich J considered that the expression “emolument” includes the advantages in money or monies worth which flows from occupation of an office or the like. Starke J in his reasons referred to the term “emoluments” as meaning earnings of the bankrupt as a result of his labour. He decided that the moneys in that case being a refund were not in any sense personal earnings of the bankrupt and therefore they did not fall within the section.
Dixon J referred to the term “emolument” as a term which relates to revenue whether casual or constant arising from an office, station or situation.
Evatt and McTiernan JJ characterised the payment as a reimbursement or refund of the bankrupt’s contributions. Therefore, in their view it could not come within the category of a pension, salary or emolument, or profit, or wage or earnings. Instead they considered it was income. They also emphasised the consideration that entitlement to the payment only accrues upon resignation from office.
In Brumby v Limmer [1976] 1 WLR 1096, the House of Lords considered whether an “emolument” could be said to be “from employment or an office”. The expression under consideration was “emoluments from any office or employment”. The question concerned the proper characterisation of dividends on shares which were distributed in part to employees. The House of Lords considered that the only question in that case, and in many similar cases which came before the courts relating to payments such as cricketers’ or footballers’ benefits or for Easter offerings or housing subsidies, was whether the emoluments can be said to “arise” from the employment or office. They considered that the payments did arise and therefore constituted an emolument that came within the description of emoluments arising from employment. It is significant that they gave a broad interpretation of the expressions “emoluments” and “arising from”.
The Respondent also referred to the decision of Senior Member Mullen of this Tribunal in AAT Case 10,901 (1996) 32 ATR 1279. The reasoning in this decision is extremely sparse but in any event the case is different on the basis that participation in the fund was voluntary and the decision rests on an assertion without reasoning that because the applicant was a former officer of the World Bank and not a “presently serving officer” at the time he received the funds then the payments were not exempt from taxation. There is nothing in the Act which expressly requires that an emolument or even salary must be “received” during the period of employment.
I do not consider this decision of any assistance in resolving the question before me as to whether the claimed pension in this case is taxable.
In the present application I have concluded that the pension payments are in the nature of an “emolument” because they can be described as a profit or gain arising from an office or employment or as “compensation for services” by way of remuneration. Support for this conclusion can be found in the reasoning of the High Court in Nette v Howarth referred to above. The reasoning in Brumby’s case also emphasises the breadth of the meaning of the expression “emoluments” and the broad approach to be taken to the words “arising from”. The submissions and authorities relied on by the Respondent do not persuade me to the contrary view.
After the Applicant received the letter of 23 September 1993 from the World Bank he accepted that participation in the World Bank’s staff retirement fund was mandatory, and that his employment and remuneration were subject to the SRP. I consider that the benefits and payments under the plan comfortably came within the description of “remuneration”. The relevant entitlement to the remuneration arose during his term of employment and it does not matter that some of his remuneration was to be paid after termination. It is common ground that for example, salary earned before but paid or received after termination would continue to be exempt as retaining that characterisation after termination. Accordingly, I conclude that the pension benefits have the character of “emoluments”, according to the proper and appropriate interpretation of that term as used in the Fourth Schedule to the Privileges Act.
ARISING FROM EMPLOYMENT
The Applicant’s entitlement to the pension payments, and therefore the payments themselves, were impressed with the character of payments arising from employment. They were a part of the remuneration entitlement which crystallised during the course of the Applicant’s employment. This entitlement did not cease on termination of his employment. It continued and indeed has been paid and is being received by the Applicant.
The Respondent submits however that the right and entitlement to a pension payment only arises after the employment was ended because only at that time could the precise amount be calculated and payable.
I do not accept this argument because in my view the character of the payment was a vested entitlement prior to the termination of the employment. The fact of employment and the rendering of services during his term of employment was the factor which gave the Applicant the right to payment. The precise amounts to be paid did not need to be determined in order for his entitlement to vest as part of his remuneration rights.
The above conclusion is consistent with a reasonable commercial expectation on the part of the employee. The generous compulsory pension benefits were clearly part of an overall remuneration package which could be expected to provide a strong incentive to accept the position, especially given the personal inconveniences and disruption consequent on taking up a regular position with an international organisation overseas.
In my view the characterisation of the payments does not alter simply because the payments are made after the rendering of the services. As noted earlier, if “salary” to which an employee became entitled prior to termination of employment is paid after employment ceased, it would nevertheless continue to be impressed with its character as “salary”. The circumstance in which payment is actually made or received after the officer has ceased holding office is in my view immaterial.
REFERENCES TO “OFFICERS” AND “FORMER OFFICERS” IN SECTION 6(1)(D) AND THE FOURTH SCHEDULE TO THE PRIVILEGES ACT
The Respondent submits that the references to privileges and immunities of officers in Part I and immunities of “former officers” in Part II of the Fourth Schedule to the Privileges Act indicates that there is a difference between the entitlements of an officer and those of a former officer in relation to remuneration. This difference is such that the exemption from taxation on “emoluments” received from the organisation after termination of active employment somehow ceases to apply thereafter.
The Respondent also refers to regulation 8 of the Specialised Agencies (Privileges and Immunities) Regulations of 1986 (the Regulations) which refers separately to a pension payable to a person who holds or is performing the duties of an office and a person who has ceased to hold office or provide services in a specialised agency.
In my view no such dichotomy or inference can be inferred from the legislation that exemptions from tax on emoluments ceases after the person entitled ceases to hold office.
I do not accept the submission because the language does not draw any such distinction or impose any requirement, or make any provision, that the person continue to hold office in order to attract the exemption from taxation. Parts I and II of the Fourth Schedule are distinct provisions and in my view should be read according to their own specific provisions and language.
Once it is accepted that the pension payments are “emoluments” then in my view they continue to bear that impressed character after the person ceases to hold office.
Some exemptions in Part I of the Fourth Schedule which are not replicated in Part II are of a different character to of the emoluments exemption in Part I in that on ceasing to hold office those exemptions and rights are no longer appropriate to continue.
The position with respect to exemption of “emoluments” is in a different category to those in other paragraphs of Part I, because that entitlement is impressed prior to ceasing to hold office and it cannot be said to be anomalous for this privilege to continue in the absence of express, clear language to the contrary. By way of contrast for example, an obligation to perform national service or to be exempt from exchange restrictions or immigration law are clearly matters, privileges or exemptions which are appropriate for the period whilst the person remains in the employment of the World Bank or continues to hold office in the Bank or its agencies or associated bodies.
CALCULATION OF BENEFITS
The Respondent also refers to the provisions of the SRP and contends that because it provides for calculation of contributions on the basis of a reasonable gross equivalent of net salaries rather than on the net salaries, the pension scheme must contemplate that income tax will generally be payable on the entitlements. The Plan refers to the provision that:
\the grossing-up formula depends on the level of net salary. The net salary used in the formula is the regular net-of-tax salary excluding allowances for taxes or expenses, …………. benefits etc.
The Plan also refers to:
The resulting pensionable gross salary applicable to the SRP only; is not a substitute for the sum of net salary and tax allowances paid to staff whose bank salaries are subject to income tax.
The Respondent contends that the SRP provisions relating to the calculation of entitlements and contributions indicate that the scheme envisages that in some cases the pensions could be taxable.
In my view these provisions of the pension scheme referred do not control the proper approach to be taken to the interpretation of Parts I and II of the Fourth Schedule. Those provisions are equivocal on the issue before me. The SRP can be said to contemplate that some countries may impose a tax and others may not. This carries the question of interpretation no further in my view.
EXTRINSIC MATERIAL
The authorities referred to by the Respondent which I have considered above do not advance the Respondent’s case. In my view for the most part they support the adoption of the broad view of “emoluments” and the expression “arising from” contended for by the Applicant.
Counsel for the Applicant referred the Tribunal to the second reading speech of the then Minister for External Affairs and Attorney General, Sir Garfield Barwick QC, on 8 May 1963 in introducing the Privileges Act, in which he indicates that there was a perceived need to effectively protect international organisations in their performance of functions on behalf of the international community, by according special privileges and immunities to them.
Sir Garfield emphasised that certain exemptions from the fiscal laws of member states were justified, and that the philosophy behind the subject of privileges and immunities of international organisations and staff was one of functional necessity if the organisation is to function effectively.
In my view, the remarks of the Sir Garfield lend support to a beneficial and liberal view in relation to the interpretation of the Privileges Act. Sir Garfield referred to the fact that the salaries and emoluments of judges, for example of the International Court of Justice, are free from all taxation. In relation to that body, he said that it should be noted that the privileges and immunities which may be conferred are confined to privileges and immunities in respect of acts and things done in the course of the performance of official duties in connection with the business of the court.
The Applicant has referred me to several decisions by several superior Spanish Tribunals, not as any binding authority but as providing some indication that the reasoning contended for by the applicant in this case is not without significant reasoned support. The principal decision, which refers to several other relevant authorities, is that of the Superior Court of Justice of Catalonia, decision number 326 /2007, dated March 28 2007. In that case three judges held that pensions paid after cessation of office and employment as a United Nations official were exempt from taxation as being “emoluments”.
The judges rejected the contention that it was not necessary in order to constitute an “emolument” that the recipient must remain active in the effective performance of the office, employment or service whilst in receipt of the payments or entitlements. In declaring that the appellant be exempt from income tax of pensions received from the United Nations, the Court in that case refers to similar conclusions having been reached by the Supreme Court of Madrid, and the Superior Court of Justice of Andalucía.
The Spanish decisions provide some reasoned guidance on the issue before me in considering the interpretation to be given to the language which has been applied consistently and over a lengthy period in the International Conventions. It is appropriate to have regard to reasoned decisions in other jurisdictions, and to consider whether a decision is consistent with the reasoning in recent decisions of other superior courts which have considered the questions. I have taken into account that there are some differences in the legislative provisions but the essential reasoning supports the Applicant’s position.
The relevant principle in relation to consideration of decisions in other national courts on legislation implementing international agreements is that it is generally desirable that where the same expressions are used in international agreements they should so far as possible be construed in a uniform and consistent manner by both local courts and international courts to avoid a multitude of different approaches in the territories of the participating countries on the same subject matter: see Rocklea Spinning Mills Pty Ltd v The Anti-Dumping Authority [1956] 56 FCR 406 at 421; Minister for Immigration and Multicultural Affairs v Savvin [2000] 98 FCR 168 at 197; see also Pearce and Geddes, Statutory Interpretation in Australia (7th ed, Lexis Nexis Australia, 2011), at [1.14], [2.20] –[2.22], [3.13] –[ 3.14].
The Vienna Convention on the Law of Treaties 1969 provides in Article 31(1) that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose. In the present case, the ordinary meaning contended for by the Applicant is consistent with the language used, having regard to the context, object and purpose of the Privileges Act in attempting to attract personnel. In my view the conclusion is also supported by what was referred to by Sir Garfield as the necessary privileges and immunities available to enable the organisation or member to perform its functions with the necessary immunities and privilege, so as to attract personnel with exceptional experience and qualifications to best serve the organisation. As he pointed out in his Second Reading speech, the provisions of the Fourth Schedule to the Privileges Act follow very closely the provisions of International Conventions on the subject of privileges and immunities.
CONCLUSION
Having regard to the foregoing considerations, I consider that the pension payments paid to the Applicant by are exempt from tax on the basis that they are “emoluments” within the meaning of the Fourth Schedule to the Privileges Act. I consider that the immunity in respect of “emoluments” in Part I of that Schedule continues in force and effect after the termination of the Applicant’s employment and after performance of the services in respect of which the pension entitlement was granted during the period of his service or office.
ORDER
I therefore set aside the decision under review, and substitute the decision that the pension the Applicant received from the World Bank in the 2009 and 2010 income years does not form a part of his assessable income and is exempt from Australian income tax.
I certify that the preceding 60 (sixty) paragraphs are a true copy of the reasons for the decision herein of The Hon. Brian Tamberlin QC, Deputy President ..................[SGD]......................................................
Associate
Dated 20 March 2014
Date of hearing 29 January 2014 Counsel for the Applicant The Hon. R Ellicott QC Counsel for the Respondent Mr M O'Meara Solicitors for the Respondent ATO Legal Services Branch
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