Applicant and Commissioner of Taxation
[2005] AATA 583
•20 June 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 583
ADMINISTRATIVE APPEALS TRIBUNAL )
)NT/2003/267-
2003/269
TAXATION APPEALS DIVISION Re APPLICANT
Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Ms G Ettinger – Senior Member Date 20 June 2005
Place Sydney
Decision The three decisions under review are affirmed. ..............................................
Ms G Ettinger
Senior Member
CATCHWORDS
TAXATION – “Eligible Termination Payment” – claim that payment was compensation for hurt and humiliation - section 27A(1) of the Income Tax Assessment Act 1936 – whether payment excluded from being taxed under section 27A(1) as consideration of a capital nature or in respect of personal injury to the taxpayer – payment to the Applicant is an Eligible Termination Payment – decision affirmed - decisions of the Commissioner regarding reasonable benefit limit and termination payments surcharge also affirmed.
LEGISLATION
Income Tax Assessment Act 1936 ss 27A(1), 160ZB
Income Tax Assessment Act 1997 s 118-37(1)
CASE LAW
Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593
McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557
Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45
Le Grand v Commissioner of Taxation (2002) 124 FCR 53
Dibb v Commissioner of Taxation [2004] FCAFC 126
King v State Bank of New South Wales (No 3) [2003] NSWIRComm 308
McMahon v Federal Commissioner of Taxation (1999) 41 ATR 1056
AAT Case 11,722 (1997) 35 ATR 1114
Graham v Robinson (1992) 1 VR 279
REASONS FOR DECISION
20 June 2005 Ms G Ettinger – Senior Member 1. The Applicant Taxpayer applied for review of three decisions of the Commissioner for Taxation (“the Commissioner”), in respect of assessments under the Income Tax Assessment Act 1936 ("the Act") for the year ended 30 June 2002. The matters concerned:
· the Taxpayer’s objection against a notice of assessment, issued on 28 January 2003 in relation to the year ended 30 June 2002, which included in his assessable income, the sum of $3,176,322. as an Eligible Termination Payment (“ETP”) (Matter NT03/267).
· the Taxpayer’s objection to the Termination Payments Surcharge assessed on the excessive component of the Eligible Termination Payment of $3,384,153 being reduced to nil (Matter NT03/269); (partially allowed, but the taxpayer maintained his objection).
· the Taxpayer’s objection to a Reasonable Benefit Limit (“RBL”) determination which included in the calculation, the termination payment of $3,176,322. (Matter NT03/268).
2. At the Hearing Mr R Hamilton, of counsel, appeared for the Applicant, instructed by WHK Greenwoods Pty Ltd. Mr S Gibb SC, of counsel, appeared for the Commissioner, the Respondent in these proceedings, instructed by the Australian Government Solicitor.
BACKGROUND
3. The background facts were not in dispute. They were in brief, as stated in items (a) to (h) of paragraph 9 of the Respondent’s Outline of Submissions.
9.
(a)On 24 February 1992 the Applicant commenced employment with his Employer in a senior position;
(b)On 7 March 2002 he commenced proceedings against the Employer in the Industrial Relations Commission of New South Wales (“the Commission”), claiming orders relating to his then contract of employment and his shareholding in the Employer, and for compensation for hurt, humiliation and distress during his employment;
(c)On 8 March 2002 the Employer suspended him from his duties;
(d)On 14 March 2002 there was a settlement conference between the parties and their representatives during which a settlement proposal was made;
(e)On 15 March 2002 the Applicant commenced further proceedings against his Employer in the Commission for an injunction restraining the Employer from victimizing him by preventing or hindering him from reporting for, commencing and/or fulfilling his duties, and for compensation for his suspension;
(f)On 19 March 2002 there was a conciliation conference before a judge of the Commission;
(g)On 21 March 2002 the conference continued during which a settlement was reached between the parties and their representatives; and
(h)On or about 4 April 2002 a Deed of Release between the Employer and the Applicant was executed, and the payment was made the next day.
THE EVIDENCE BEFORE THE TRIBUNAL
4. The Applicant’s documents consisted of his witness statement and annexures, (Exhibit A1), a Summons for Relief under section 106 of the Industrial Relations Act 1996 filed in the Industrial Relations Commission of New South Wales in Court Session dated 7 March 2002 as Exhibit A2, and a Verifying Affidavit before the Industrial Relations Commission of New South Wales in Court Session dated 7 March 2002, as Exhibit A3.
5. The Applicant relied on his witness statement, and gave brief oral evidence, essentially to confirm his wish and intention that he had always wanted to return to his position. He confirmed that he understood if the mediation (conciliation), did not deliver a successful outcome, he would either resign or be terminated.
6. The Respondent lodged documents pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, (“the T-documents”), as Exhibit R1, and a folder of documents marked Tender Bundle as Exhibit R2.
ISSUE BEFORE THE TRIBUNAL
7. The central issue before me was whether the payment of $3,176,322. characterised as the “Termination Payment” in Schedule 1 of the Deed of Release of 4 April 2002, was an “Eligible Termination Payment” within the meaning of that term in section 27A(1) of the Act. Schedule 1 reads as follows:
Schedule 1 – Settlement Payment
| Settlement Payment Components | Amount (gross) | Amount (net) |
| (a) Payment in lieu of 12 month’s notice | $1,132,000.00 | $775,420.00 |
| (b)Payment for accrued & untaken annual leave | $13,822.00 | $7,119.00 |
| (c)Payment for accrued and pro rata long service leave | $20,855.00 | $11,262.00 |
| (d)Termination Payment | $3,176,322.00 | $2,175,781.00 |
| (e) Allowance for Employee’s legal costs relating to the Proceedings | $40,000.00 | $40,000.00 |
TOTAL: | $4,383,000.00 | $3,009,581.00 |
| Salary up to and including the Termination Date: | $17,860.00 | $9,198.00 |
8. It was agreed by the parties that the two other matters before the Tribunal (NT03/268 and NT03/269), appealed by the Applicant, would either be affirmed, varied or set aside consequent upon the decision in the central issue as noted above.
RELEVANT LEGISLATION
9. The relevant provision in the Act is section 27A(1) which follows:
“Interpretation
(1) In this Subdivision, unless the contrary intention appears:
…
bona fide redundancy payment, in relation to a taxpayer, means a bona fide redundancy payment in relation to the taxpayer ascertained under section 27F.
…
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 a payment:
(i) made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund;
(ii) of an annuity, or supplement, to which section 27H applies;
(iii) from a fund in relation to which section 121DA, as in force at any time before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1989, has applied in relation to the year of income commencing on 1 July 1984 or any subsequent year of income;
(iiia) from a fund that is or has been a non-complying superannuation fund in relation to any year of income;
(iv) of an amount to which section 26AC or 26AD applies; or
(v) of an amount that, under any provision of this Act, is deemed to be a dividend, or non-share dividend, paid to the taxpayer;
…
but does not include:
(ja) the tax-free amount of a bona fide redundancy payment, or of an approved early retirement scheme payment, made on or after 1 July 1994;
…
(n) consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion; or
…
(ii) wholly applied in paying any superannuation contributions surcharge (as defined in section 38 of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997); or
…
(ii) wholly applied in paying any superannuation contributions surcharge (as defined in section 43 of that Act).
…..”
10. The relevant Taxation Ruling applicable in this matter was TR2003/13, headed: “Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase ‘in consequence of’.”
THE TRIBUNAL’S DELIBERATIONS
11. In order to make the correct and preferable decision, I have had to take into account the evidence before me, the relevant legislation and case law.
12. The background facts in this matter were not in dispute, and are noted in the paragraphs above. In summary it is relevant to note that the Applicant commenced proceedings against his Employer in the Industrial Relations Commission of New South Wales on 7 March 2002 claiming variations be made to his then contract of employment, and for compensation, for, amongst other things, hurt, humiliation and distress during his employment. He was suspended from his duties the following day.
13. On 14 March 2002 there was a settlement conference between the parties and their representatives during which a settlement proposal was made, and on 15 March 2002, the Applicant commenced further proceedings against his Employer in the Commission for an injunction restraining the Employer from victimizing him by preventing or hindering him from reporting for, commencing, and/or fulfilling his duties, and for compensation for his suspension. I have noted that the Applicant acknowledged that he continued to be paid his salary during his suspension.
14. A further conciliation conference took place on 19 March 2002 before a Judge of the Commission which continued on 21 March 2002, and during which a settlement was reached between the parties and their representatives. The Applicant’s resignation was made on 21 March 2002, and the finalisation of the Deed of Release between the Employer and the Applicant took place when the Deed was executed on 4 April 2002.
15. Only the Applicant gave oral evidence. He told me that during the whole time, his wish was to be able to return to work, although his understanding was that if the mediation (conciliation) was not successful, he would resign. His counsel submitted similarly. Mr Hamilton argued that the Summons in the Commission referred to maintenance of the employment, the Applicant seeking to have his contract of employment varied, and seeking compensation for loss of earnings while he was suspended. It was not in connection with termination of the employment he submitted. He submitted that the second application was for relief from victimisation, and did not indicate any reliance on termination or repudiation of the contract of employment.
16. The Respondent had a different view, and I was mindful that the material in the Exhibits before the Tribunal contained a volume of correspondence and exchanges between the Applicant, and various persons from his Employer side, including legal representatives.
17. In a letter of 11 March 2002, the Applicant’s solicitors wrote to the Employer expressing concern at the fact the Applicant had been suspended, raising his feeling humiliated, and querying the level of remuneration to be paid during the suspension. In support of the Applicant’s argument that he intended to remain in the employment, his counsel drew my attention to the content of that letter, in which the Applicant’s solicitors stated, amongst other things, that: “Our client has instructed us that he wishes to return to work immediately.” This letter followed the telephone call and confirmatory letter of the Employer dated 8 March 2002 suspending the Applicant, and informing him his pay would be based on his base salary. I noted further that the Employer wrote to the Applicant on 21 March 2002 acknowledging the Applicant’s stated wish to return to work, and offering to participate in a mediation. The Employer also stated however:
“After giving the matter very careful consideration, I have decided that it would be untenable for you to continue in your employment …
I believe that it would be in our mutual best interests to part ways at this point….”
18. As to the amount of $3,176,322.; the Applicant referred, as part of his argument that the payment of that amount was for compensation for “injury, discrimination and harassment”, to what he deposed at paragraph 16 of his witness statement, (Exhibit A1). He said that this was referable to a meeting held on 14 March 2002 at which it was first proposed that he should resign from the company:
“… That claim and the settlement amount were referred to as the ‘X factor’ by the Company and its representatives. By the conclusion of the meeting, the Company proposed on a ‘without prejudice’ basis to settle my claim regarding the ‘X factor’ for $2m on top of my entitlements on termination of employment. In my later discussions with my solicitors, my claim and the proposed settlement amount were routinely referred to as the ‘X factor’, being what I understood to be the amount of compensation to be paid for the injury, discrimination and harassment. The figure for what I understood to be the ‘X factor’ was ultimately calculated to be what was remaining from the overall payout figure after employment entitlements as finally agreed of $4,383,000., which came to $3,176,322.”
19. The Table in the Deed of Settlement which has been reproduced in the paragraphs above, indicates that the total amount of $4,383,000. to be paid to the Applicant, was agreed between the Applicant and his Employer. There was no disagreement that the Applicant’s entitlements, as listed, included payment for accrued leave and pro rata long service leave, legal costs and payment in lieu of 12 months notice.
20. However, in order to decide whether the payment of $3,176,322. received by the Applicant as part of the settlement payment relating to his employment with the Employer was an Eligible Termination Payment (“ETP”), and stood to be taxed pursuant to section 27A(1) of the Act, I had to consider whether it was a payment “in consequence of the termination of any employment of the taxpayer ..” I have dealt with that further on in these Reasons.
21. I turned then to consider the parties’ submissions.
SUMMARY OF THE APPLICANT’S SUBMISSIONS
22. Mr Hamilton submitted that notwithstanding the amount of $3,176,322. was labelled a termination payment, this was not determinative of its character, because it was not paid in consequence of the termination of the Applicant’s employment (Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593). Rather, he submitted, it was a payment of a compensatory nature, the remedy in dollar terms, for the hurt and humiliation caused by the Employer to the Applicant. Mr Hamilton also emphasised in his written submissions, that the Tribunal should not have regard to the quantum of the amount in dispute, nor to the fact it was paid at the time of the termination of employment.
23. Mr Hamilton made written submissions (paragraph 8 of the Applicant’s Outline of Submissions), as to the capital nature of the payment, submitting it was exempt from being characterised as an ETP, and assessed pursuant to section 27A of the Act, because it was compensation for damages for wrong or injury suffered in the workplace, or for personal wrong, illness or injury.
24. Mr Hamilton referred to McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557, where he submitted the Full Federal Court considered whether payments from a provident fund established by a bank employer to make payments to the bank’s employees on retirement were made “in consequence of” the termination. He commented upon the Judges in McIntosh (supra) having considered the views of Gibbs J and Jacobs J in Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45, noting consideration of the concepts of “in consequence of”, or “following on”, and mindful that their Honours held that a temporal sequence alone did not suffice but agreeing that retirement did not need to be the dominant cause.
25. Mr Hamilton also referred me to Le Grand v Commissioner of Taxation (2002) 124 FCR 53, and Dibb v Commissioner of Taxation [2004] FCAFC 126, submitting that the litigation in both those cases had commenced after the employee had terminated the employment, whereas, in the Applicant’s case, he was still employed when the action was commenced, and in circumstances where he was attempting to negotiate a settlement in which he would remain employed. He submitted that in Le Grand (supra), the proceedings were designed to seek damages for loss of benefit of the employment or expected earnings. Hence they were more likely to be income which was awarded to compensate for loss of revenue.
26. Mr Hamilton submitted that in Le Grand, the employee had been induced, to his detriment, not to pursue alternative employment opportunities, and had therefore alleged that his employer had engaged in misleading or deceptive conduct, or conduct like to deceive, contrary to provisions of the Trade Practices Act and the Fair Trading Act (Victoria).
27. Mr Hamilton submitted that a further contrast with the present case was that the payment in Le Grand was a lump sum, not broken up into various components, whereas of course in the Applicant’s case the payment had been divided into various components.
28. Mr Hamilton submitted, that had the Applicant been successful in the Commission, his contract of employment would have been altered, and he would have been awarded damages. However, ultimately he was not successful at negotiating a variation of his employment conditions with the Employer, and remaining in the position. Accordingly, he submitted, the payment of $3,176,322. was compensation for the hurt caused to the Applicant. Mr Hamilton submitted it was payment at the occasion of termination, but was not caused by the termination. He also submitted that the aim of the settlement by the Employer was to settle litigation which had commenced during the Applicant’s employment, and which by its disclosure would be harmful to the Employer.
29. Mr Hamilton also produced a comparison of leave entitlements from records of the Commission of persons who had been through unfair dismissal proceedings, and submitted that the 12 months pay in lieu of notice in the Applicant’s case was generous.
30. In his written submissions, Mr Hamilton also referred to the powers of the Commission, distinguishing its powers to void or vary a contract from those dealing with unfair dismissal.
31. Referring to the action in the Industrial Relations Commission in King v State Bank of New South Wales (No 3) [2003] NSWIRComm 308, Mr Hamilton submitted that the Commission had the power to make awards of compensation, submitting that the Plaintiff in that case had been awarded compensation for medical conditions caused by distress upon termination of his employment.
SUMMARY OF THE RESPONDENT’S SUBMISSIONS
32. Mr Gibb, on behalf of the Respondent, submitted that the decision of the Commissioner in holding that the amount of $3,176,322. characterised in the Applicant’s Settlement Payment as a “Termination Payment” and taxed as an ETP pursuant to section 27A of the Act, should be affirmed.
33. In dealing with the relevant phrase, “in consequence of termination of employment”, he also referred to Reseck (supra), and McIntosh (supra), submitting that a causal connection had to be made between the payment and the termination, and submitting that pursuant to the case law, a mere temporal connection did not suffice. Whilst termination did not have to be the dominant cause for the payment, termination still had to be a cause of the payment, he submitted. (paragraph 4 of the Outline of Respondent’s Submissions).
34. Mr Gibb agreed with the Applicant that the fact an amount was labelled a termination payment was relevant, yet not determinative of its character, and submitted that the facts of the particular case had to be analysed to decide whether there was a causal connection between the payment and the termination. Mr Gibb, referred to paragraph 8 of the Outline of Respondent’s Submissions, where I noted the Respondent had submitted:
“So, where a payment is made for reasons entirely unrelated to the termination of the employment, then that payment cannot properly be characterised as an ETP; but it is otherwise where that payment is made for reasons, most or some of which may be unrelated, provided at least one of which is related in the necessary causal sense, that is, as a cause of it having been made. The issue cannot simply be determined by seeking to identify an ‘occasion’ for the payment, (Le Grand (supra)), nor merely by asking why, or for what, the payment was made.”
35. Mr Gibb then referred me to Exhibit R2, where I observed handwritten notes on the various draft documents therein, dated in 2002, at the time the dispute was being negotiated between the Applicant and the Employer. Mr Gibb emphasised in particular at Exhibit R2:
· Letter at Tab 1, dated 8 March 2002, confirming the Applicant would remain on leave until further notified, and stating that: “For the avoidance of doubt, I want to make it clear that we are not dismissing you – your employment continues”. Mr Gibb submitted that this correspondence indicated the flavour of the relationship between the Applicant and his Employer, namely that termination by dismissal or a resignation would be forthcoming. (Mr Hamilton, on the other hand, submitted that in that letter, it was made clear the Applicant’s employment was continuing).
· At Tab 2, there were handwritten notations, (author unidentified), on the back of correspondence dated 13 March 2002, indicating the Employer’s thoughts regarding payout, “550k incl statutory entitlements …. 2.3 mill transfer basis – 170 unpaid incentive – Resignation – No restriction on access to clients …”.
· At Tab 4, a monetary offer of settlement with the Applicant’s resignation anticipated.
· As to the handwritten comments on documents at Tabs 2, 3, and 4, Mr Hamilton submitted the Applicant had not had access to those. Mr Hamilton submitted, (referring to the handwritten notes), that what appeared to have happened, was that in early 2002 the Employer had appreciated the seriousness of the issues, and was asking his solicitors for a solution.
· Tab 7 – Letter of 21 March 2002; settlement requires resignation or dismissal.
· Tab 8 – Letter of 23 March 2002; Applicant’s solicitors negotiating client information and offering resignation.
· Tab 9 – Letter of 26 March 2002 to the Applicant from his lawyers with amendments to the Deed, suggesting that the amount of $3,176,322.33 should be characterised as a redundancy.
· Tab 10 – Deed showing $3,176,322.33 as ‘Termination Payment’ under cover of email dated 26 March 2002.
· Tab 11 – 12, 27 March 2002 - further marked up copies of the Deed with accompanying letter from Applicant’s solicitors: “… In accordance with your agreement to treat the settlement payments in a tax effective manner, we request that our client’s termination be characterised as a redundancy rather than as a resignation…”
· Tab 16 – letter dated 2 April 2002 from the Employer’s solicitors to the Applicant’s solicitors – Re: “Recital D – Our client does not consent to the proposed amendments. Whilst our client is prepared to structure the payment in a tax effective manner (subject to complying with its legal obligations), our client will not consent to the termination being characterised as a redundancy in circumstances where no bona fide redundancy has occurred. … Further, it was agreed with your client during settlement negotiations on 21 March 2002 that his employment with our client would terminate on that day by way of resignation. No redundancy was raised or discussed.”
· Tab 17 – On 2 April 2002, the Deed indicated the amount of $3,176,322. as a “Termination Payment”. At Tab 19 on the following day, the Schedule to the Deed showed the amount of $3,176,322. as a “Termination Payment”.
· Tab 21 – The Deed was signed on 4 April 2002, and on 15 May 2002, the Applicant’s solicitors wrote to the Employer’s solicitors stating that “.. our client has now obtained tax advice. Our client’s tax advisers have requested that we forward to you a letter prepared by them which sets out some significant matters relating to the tax treatments of the payments provided to our client. As you will see, the letter requests amendments to be made to the Deed of Mutual Release signed by our respective clients….”
· Tab 22 – In a letter dated 28 May 2002, the Employer’s solicitors indicated that their client did not agree with the proposition to vary the Deed, adding that: “Our client received taxation advice in relation to the settlement payment in Schedule I of the Deed at the time the Deed was being negotiated and finalised. Our client’s taxation advisers have again confirmed that the taxation treatment and characterisation of the settlement payment outlined in Schedule I is appropriate.”
· Tab 24 - Attached to a letter dated 7 June 2002 from the Applicant’s solicitors, was a letter of advice from the Applicant’s taxation adviser, referring to the Deed, section 27A of the Act, and requesting a change in the Schedule of the Deed to characterise the amount of $3,176,322. as “Compensation for personal wrong and injury”. A further letter from the Applicant’s solicitors at Tab 25 dated 7 June 2002, referred to the Summons for Relief filed on 7 March 2002 seeking orders in respect of compensation for hurt, humiliation and distress, and making a further request that the Deed be amended.
· At Tab 26 is the letter of the Employer’s solicitors in reply, dated 25 June 2002, refusing the request, (noted above), and giving reasons, including the view that the meeting of 14 March 2002 was focused on the Applicant’s exit rather than his continuing employment.
36. In relation to section 27A of the Act and ETPs, Mr Gibb, submitted that whilst termination did not have to be “the” dominant cause for the payment, termination still had to be “a” cause for the payment, and submitted that the Tribunal needed to consider the negotiations between the parties, which, he submitted did not support the Applicant’s assertions that he was focused on getting back to work. Mr Gibb, (referring to Exhibit R2), also submitted that I consider the evidence regarding how the labelling of the payment came to be made.
37. Mr Gibb submitted that but for the termination of employment of the Applicant, the payment of $3,176,322. would not have been made, that is the termination payment was not a coincidence.
THE TRIBUNAL
38. I noted that the dispute between the Applicant and his Employer was settled and that settlement documented in a Deed of Release, Recital E of which stated as follows:
“The parties have agreed to formalise their agreement and to resolve all issues arising out of or relating to the Employee’s employment with the Company or the termination of that employment, without admission, on the terms set out in this deed.”
39. As to the payment of $3,176,322; this was, notwithstanding the efforts of the Applicant’s solicitors negotiating on his behalf, who sought to have it characterised as a redundancy payment, ultimately recorded as a Termination Payment in the final version of the Deed of Release.
40. In that regard, I noted there was no disagreement between the parties that the label given to a payment is not determinative of the character of the payment, and accepted that whilst not determinative, the mode of description, the label given to the payment, is relevant. However, all the circumstances surrounding the transaction have to be taken into account. (Federal Commissioner of Taxation v Broken Hill Pty Ltd (2000 179 ALR 593).
41. Noting that section 27A of the Act refers to “payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer…”, and mindful that the phrase “in consequence of” is not defined in the Act, I turned to consider the leading cases in this area, and was mindful of the submissions of both parties with regard to them.
42. The case of Reseck (supra), a High Court judgment, refers to former section 26(d) of the Act, and was considered by the Full Federal Court in McIntosh (supra). In Reseck the Court considered whether lump sum amounts paid to a taxpayer by his employer pursuant to an agreement between them at the end of two periods of employment, were paid in consequence of retirement from, or termination of any office or employment. I noted that Jacobs J and Gibbs J in Reseck, whilst not in full agreement on all issues, agreed that the termination of employment did not need be the dominant cause of the payment. Their Honours’ different views of the phrase “in consequence of” has since been considered in McIntosh (supra). In McIntosh, the Full Federal Court considered whether a lump sum payment to the taxpayer upon commutation of his retirement pension was “in consequence of” his retirement within the meaning of section 26(d) of the Act. In holding that the payment was assessable pursuant to section 26(d) of the Act, the Court considered whether a payment caused by the retirement of the taxpayer could be said to be “in consequence of” the taxpayer’s retirement.
43. In McIntosh the Court also recognised, relying upon Reseck (supra), that retirement did not need to be the dominant cause of the payment, but that a purely temporal connection was insufficient to establish “in consequence of”. What was required was that the retirement be the occasion of, and a condition of, entitlement to the payment.
44. I noted that Lockhardt J in McIntosh referred to dictionary definitions for the words consequence and antecedent. His Honour also referred to Jacobs J’s construction of the phrase “in consequence of”. His Honour concluded that:
“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 section 26(d) is not ‘caused by’ but ‘in consequence of’. It has a wider connotation than causation and assumes a connection between the circumstances of retirement and the act of payment such that the payment can be said to be a ‘following on of the retirement’.
45. He also stated:
“In my opinion his Honour [Jacobs J] was saying that the phrase includes the case where retirement or termination is a cause of the payment in question; but he was not excluding from the ambit of the phrase, payment which, although not following as a matter of causation from the termination of employment, nevertheless followed on termination of employment and had connection therewith.”
46. The above noted phrases and cases were considered in Le Grand (supra), a case where the taxpayer received an amount as part of a settlement in respect of claims brought by him against his former employer. He had instituted an action for common law damages and a claim for statutory damages pursuant to the Trade Practices Act 1974 and Fair Trading Act 1985 (Victoria), with regard to misleading and deceptive conduct. The Applicant in that case argued that the payment had not been made “in consequence of” the termination of employment. The Court there reaffirmed (following Gibbs J in Reseck), that there must be a causal connection between the termination and the payment, even though the termination need not be the dominant cause.
47. I am mindful that whilst the judgments in Reseck, McIntosh and Le Grand which are binding on this Tribunal, vary somewhat, they are not at odds in holding that termination need not be the dominant cause of the payment for there to be the conclusion drawn that a payment is made “in consequence upon” the termination of employment.
48. I have noted the Applicant’s argument that his case differs from Le Grand in that, in his case, the various components into which the payment was divided were set out in the Schedule to the Deed, whereas in Le Grand, the payment was made as a lump sum. He argued that a lump sum could more easily be found to be consequential upon termination than an amount dissected into components such as in the Applicant’s case.
49. Mr Hamilton’s further argument seeking to distinguish Le Grand was that the Applicant was still employed when he lodged his action in the Commission whereas in both Le Grand and Dibb, the taxpayers had commenced their action after leaving their employment, and that, accordingly, the payments in those cases could more easily be characterised as amounts to compensate for loss of income. He also argued that in this case, given that both sets of proceedings against the Employer were commenced while the Applicant was still employed, the proximity in time of the settlement to the termination date, and the size of the settlement should not be taken into account.
50. In that regard, I was mindful that both in Dibb, and in McMahon’s case, it was held that the termination date, and the date of the Deed of Settlement were similar, “was by no means coincidental. That was of course the situation in this Applicant’s case, and in all the circumstances, I considered it very relevant, particularly as Recital E of the Deed of Release stated as follows:
“The parties have agreed to formalise their agreement and to resolve all issues arising out of or relating to the Employee’s employment with the Company or the termination of that employment, without admission, on the terms set out in this deed.”
51. It is not surprising that the Deed went through many amendments before being signed, and it is clear from Exhibit R2, and the excerpts noted above, that much correspondence passed between the solicitors for the Applicant and his Employer, and the Employer’s legal advisors. The Applicant’s solicitors, as might be expected, appeared to be doing their best to negotiate a suitable deal for the Applicant, and sought to make the settlement tax effective. Details of these negotiations were revealed in Mr Gibb’s closing submissions as he went through the Tender Bundle folder (Exhibit R2) in detail, some of which I have reproduced above. Negotiations between the parties were also demonstrated in the documents tendered by the Applicant.
52. I was satisfied from the correspondence in Exhibit R2, at Tabs 1 & 2, that contrary to the Applicant’s evidence that he contemplated remaining in his position with altered conditions of contract, what was contemplated in the letter at Tab 2 dated 13 March 2002, and subsequent negotiations, was his resignation. I was satisfied that the flavour of these negotiations did not reflect the Applicant returning to work. This was confirmed in further correspondence at Tab 7 (21 March 2002), where the Employer wrote directly to the Applicant in the following terms, referring to his earlier correspondence: “After giving the matter very careful consideration, I have decided that it would be untenable for you to continue in your employment with …” . Further on in the same letter, the Employer offered mediation, continuing with “If you choose to resign now or it becomes necessary to terminate your employment in the way I have indicated, I should indicate that we will be making a termination payment in lieu of twelve months notice, together with outstanding commissions, statutory and other entitlements.”
53. There was no discussion of renegotiating the contract, redundancy or payment for hurt or humiliation, and the flavour of the negotiations did not support the Applicant’s contention that his return to work was contemplated.
54. Further, the letter of 26 March 2002 at Tab 9 of Exhibit R2, on behalf of the Applicant, with proposed amendments to the Deed, and suggesting that the amount of $3,176,322.33 be characterised as a redundancy, met with refusal by the Employer.
55. I noted further at Tab 24, attached to a letter dated 7 June 2002 from the Applicant’s solicitors, a letter of advice from the Applicant’s taxation adviser, referring to the Deed, and to section 27A of the Act, and requesting a change in the Schedule of the Deed to characterise the amount of $3,176,322. as “Compensation for personal wrong and injury”. A further letter from the Applicant’s solicitors at Tab 25, also dated 7 June 2002, referred to the Summons for Relief filed on 7 March 2002 seeking orders in respect of compensation for hurt, humiliation and distress, and making a further request that the Deed be amended.
56. The letter of the Employer’s solicitors in reply, refusing the request, and giving its reasons was at Tab 26, and included the view that the meeting of 14 March 2002 was focused on the Applicant’s exit, rather than his continuing employment.
57. In considering all the circumstances surrounding whether the amount of $3,176,322. was an Eligible Termination Payment, I was satisfied it was not a coincidence that the termination date of the Applicant’s employment of 21 March 2002 was related to the completion of negotiations for the Deed, signed some days later on 4 April 2002. I noted this had been subject of discussion in Dibb (supra) and McMahonv Federal Commissioner of Taxation (1999) 41 ATR 1056.
58. I rejected the Applicant’s argument that the size of the payment and the fact that the claims to the Commission were lodged while the Applicant was still in employment indicated it was made to compensate him for hurt and humiliation rather than to settle all matters between the Applicant and his Employer, including securing the resignation of the Applicant. There was no discussion of compensation for hurt and humiliation in the large volume of documents before the Tribunal.
59. I was satisfied from the evidence before me that but for the termination of the employment, the payments to the Applicant would not have been made, thus establishing the causal nexus. In that regard, I was mindful also that pursuant to the decisions in Reseck (supra) and McIntosh (supra), the termination of employment did not need to be dominant cause of the payment, rather “a” cause of the payment. I was satisfied that in the Applicant’s case, the payment was to secure his resignation as well as to settle all outstanding litigation.
60. I was mindful of the Applicant’s agreement at Clause 3.1(a) of the Deed that he agreed to “release and does unconditionally release the Group from all Claims he has or may have against the Group”. In further support of the proposition that the payment of the $3,176,322. was an ETP and not to compensate for hurt and humiliation, I was mindful that during the drafting and negotiation stages of the Deed, and indeed a month afterwards, the Employer refused to characterise the amount as a redundancy payment, further that hurt and humiliation, although raised in the originating documents to the Commission, did not form part of the negotiations towards the Deed.
61. I was satisfied that the Deed, which had been prepared and finalised with legal advice on both sides, had, as part of the implementation of its terms and conditions, contemplated the Termination Payment being an ETP in that in clause 2.2 in the section dealing with arrangements between the parties, it stated:
“The Company agrees to pay the Employee immediately upon receipt by the Company’s solicitor of this deed executed by the Employee the various components of the Settlement Payment less any amounts required to be deducted for taxation purposes on the condition that the Employee will duly complete and return an ‘ETP Pre-Payment Statement’ to the Company.”
62. I was satisfied from the evidence before me, as noted above, that notwithstanding the Applicant’s oral evidence, and the two documents initiating action lodged in the Commission by the Applicant, which claimed for a variation in contract, and then compensation for hurt, humiliation and distress, that the tone of the discussion between the parties in March 2002 was towards a settlement which included the Applicant’s termination of employment either by resignation or otherwise.
63. I was satisfied that notwithstanding the Applicant was, on 8 March 2002, suspended, and not dismissed, subsequent discussions did not centre around the Applicant remaining in employment. Rather, at Tab 2, there were handwritten notations, (author unidentified, but perhaps Katrina Morris from Freehills, for the Respondent Employer), on the back of correspondence dated 13 March 2002, indicating the Employer’s thoughts regarding payout, “550k incl statutory entitlements …. 2.3 mill transfer basis – 170 unpaid incentive – Resignation – No restriction on access to clients …”.
64. At Tab 4, there was a monetary offer of settlement with the Applicant’s resignation anticipated, and at Tab 7, a letter of 21 March 2002 indicating that settlement required resignation or dismissal.
65. Other draft documents and handwritten annotations in Exhibit R2, indicated that cessation of employment was contemplated immediately following the suspension of the Applicant from duties on 8 March 2002, and that no views regarding paying the Applicant compensation were expressed either in the formal documents or handwritten documentation.
66. I noted that the Deed, which had been prepared and finalised with legal advice on both sides, had, as part of the implementation of its terms and conditions, contemplated the Termination Payment being an ETP in that in clause 2.2 in the section dealing with arrangements between the parties, it stated:
“The Company agrees to pay the Employee immediately upon receipt by the Company’s solicitor of this deed executed by the Employee the various components of the Settlement Payment less any amounts required to be deducted for taxation purposes on the condition that the Employee will duly complete and return an ‘ETP Pre-Payment Statement’ to the Company.”
67. I was mindful that the causal connection, the payment in consequence of the taxpayer’s resignation in this case was what was discussed in McIntosh (supra), notwithstanding that in McIntosh it had been a retirement rather than a resignation. I noted further that in Le Grand (supra), it was reaffirmed that the termination did not need to be the dominant cause of the payment for the conclusion to be drawn that the payment was made “in consequence upon” the termination of the employment.
68. In his written submissions, Mr Hamilton also referred to the powers of the Commission, distinguishing its powers to void or vary a contract from those dealing with unfair dismissal. I accepted that the Commission has both powers, neither of which it exercised in this case, because although the Applicant commenced two actions in the Commission, all issues were settled between the parties pursuant to the Deed of Release which has been referred to above.
69. I did not accept the Applicant’s argument that if he had been successful in the Commission, his contract would have been altered and that he would have been paid damages. That did not occur, it was speculative, and the Deed was drafted to settle all proceedings. I did not accept the Applicant’s argument that the payment was made at the occasion of the termination but that it was not caused by the termination.
70. Mindful of the evidence and applying the case law as noted above, I was satisfied that the payment of $3,176,322. was “payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer…”, that there was not just a temporal connection but that the causal nexus had been established between the payment of $3,176,322., and the termination of employment of the Applicant. Accordingly, the payment must be taxed as an ETP pursuant to section 27A of the Act.
71. Mr Hamilton also produced a comparison of leave entitlements from records of the Commission of persons in other industries earning salaries at levels different from that of the Applicant who had been through unfair dismissal proceedings, and submitted that the 12 months pay in lieu of notice in the Applicant’s case was generous. I did not find the comparisons of great relevance or assistance in my deliberations.
72. Because redundancy had been raised by the Applicant, I considered it for the sake of completeness.
REDUNDANCY
73. I have already noted above that the Applicant sought, during negotiations to finalise the Deed of Release, and afterwards, to characterise the payment of the $3,176,322. as a redundancy payment, which would have rendered it exempt pursuant to section 27A(1)(ja) of the Act. As relevant section 27A(1)(ja) follows.
“…
but does not include:
(ja) the tax-free amount of a bona fide redundancy payment, or of an approved early retirement scheme
payment made on or after 1 July 1994;”
74. The Applicant was ultimately unsuccessful in those attempts, which were resisted by the Employer (Exhibit R2 - Tab 9, Tab 11, request of Applicant; Tab 10; Tab16, Tab 22, refusal by Employer).
75. I was satisfied from the documentation and evidence before me that the Applicant could not succeed in having the amount of $3,176,322. characterised as a redundancy payment, and thus benefit from the exemption in section 27A(1)(ja) of the Act.
WHETHER THE PAYMENT WAS OF A CAPITAL NATURE
76. I was mindful that considerations whether the payment of $3,176,322. made to the Applicant was of a capital nature, and therefore exempt pursuant to section 27A(1)(n) of the Act, were raised. Section 27(1)(n) follows:
“(n) consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion; or …”
77. Further, section 160ZB(1) of the Income Tax Assessment Act 1936 or section 118-37(1) of the Income Tax Assessment Act 1997 which follow below, also serve to exempt a taxpayer from capital gain under certain circumstances.
"160ZB(1) A capital gain shall not be taken to have accrued to a taxpayer by reason of the taxpayer having obtained a sum by way of compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation and no such wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such a wrong or injury, shall be taken to have resulted in the taxpayer having incurred a capital loss."
and:
“118-37 Compensation, damages etc
(1)A capital gain or capital loss you make from a CGT event relating directly to any of these is disregarded:
(a)compensation or damages you receive for any wrong or injury you suffer in your occupation;
(b)compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally;”
78. I noted from AAT Case 11, 722 (1997) 35 ATR 1114 that the Applicant there relied on Taxation Ruling TR 95/35, dated 6 December 1995, headed "Income Tax: Capital Gains: Treatment of Compensation Receipts". Paragraphs 210‑215 of that Ruling are relevant to s 160ZB of the Act.
79. I also considered what Deputy President Block had to say in McMahon and Federal Commissioner of Taxation (1999) 41 ATR 1056. He referred to several dictionary definitions for the words “personal injury”.
80. Osborn’s Concise Law Dictionary (8th ed.) defines “personal injuries” as follows:
“personal injuries. Damage to the physical person rather than a person’s property”
81. DP Block also referred to Butterworths’ Words and Phrases Legally Defined (3rd ed.) which defined “Injury to person”:
“Australia ‘In order that a worker may become entitled to receive compensation, it is necessary, inter alia, (1) that he should receive a personal injury, and (2) that the injury should incapacitate him, totally or partially, for work, for a minimum period. Personal injury means, in my opinion, injury to his person, that is, to some part of his body.’ “Storey v McCawley (1948) 48 SR (NSW) 474 at 475, per Jordan CJ.
82. Butterworths’ Legal Terms also defines “personal injury”:
“Personal injury Any disease or injury sustained by an individual to his or her person, including broken limbs, for which another is legally liable.”
83. I was mindful that in Graham v Robinson (1992) 1 VR 279, Smith J considered whether emotional hurt, or injury to reputation, is an injury to the person. His Honour was called on to decide a jurisdictional issue as to whether a claim for damages for defamation was a claim for damages in respect of personal injury. In holding that the expression "personal injury" did not extend beyond physical injury and mental illness to include emotional hurt, Smith J stated at page 281:
“In the absence of express authority, I have come to the conclusion that the expression 'personal injury' does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence: Mount Isa Mines Ltd. v. Pusey (1970) 125 C.L.R. 383, at p.394 and Jaensch v. Coffey (1984) 155 C.L.R. 549, at p.587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages 'in respect of personal injury'."
84. In AAT Case 11,722, Senior Member Dwyer considered whether an amount paid in settlement of the taxpayer’s claim for wrongful dismissal was properly included in the taxpayer’s assessable income as an ETP. The taxpayer in that case argued that the term “personal injury” in section 27A(1)(n) should be given a wider interpretation than that given by Smith J in Graham v Robinson, and relied for that submission on paragraph 8 of IT 2424 which provides:
“By way of general comment the determination of the character of a compensation payment, and in particular whether it is liable to tax in the hands of an employee, depends upon the nature of the payment. A compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee. On the other hand a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc., is not liable to income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in subsec. 160ZB(1) for compensation or damages paid for wrong or injury suffered by a taxpayer to his or her person or in his or her profession or vocation.” (emphasis added)
85. The taxpayer in AAT Case 11,722 also relied on paragraph 214 of Taxation Ruling 95/35 which refers to the exemption contained in s. 160ZB of the Act from capital gains tax in respect of "compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation", and which specifically provides that damages for wrongful dismissal are exempt from capital gains tax. Senior Member Dwyer stated:
“Further, I agree that because of the difference in terminology s 160ZB(1) provides a wider exemption from capital gains tax than the exclusion from taxable income of that part of an eligible termination payment which is "consideration of a capital nature for, or in respect of, personal injury to the taxpayer" (s 27A(1)(n)). For that reason the Ruling dealing with s 160ZB(1) is not relevant to the construction of the term "consideration for or in respect of personal injury" in paragraph 27A(1)(n).”
86. Deputy President Block stated that he agreed with Senior Member Dwyer’s finding that section 160ZB(1) provides a wider exemption from capital gains tax than does the exclusion from taxable income of that part of an ETP which is consideration in respect of personal injury to the taxpayer pursuant to s. 27A(1)(n) of the Act.
87. He remarked that the Explanatory Memorandum accompanying the original ETP legislation did not suggest that the wording of section 27A(1)(n) of the Act be accorded such a wide interpretation. The Explanatory Memorandum in respect of the Income Tax Assessment Amendment Bill (No 3) 1984 stated relevantly page 67:
“Payments being excluded from the definition [of ETP] by paragraphs (k), (m) and (n) are sums paid as loans, or under covenants in restraint of trade, or by way of compensation for loss of income through personal injury.”
88. It is of interest that the word “compensation” which appears in the Explanatory Memorandum does not appear in section 27A(1)(n) of the Act. I agree with Deputy President Block that the inclusion by the legislature of the words “from personal exertion” tend to confirm that the section is intended to exclude from the definition of ETP payments injuries to the person, where such injuries being physical injuries or mental illnesses, have an assessable and identifiable impact on the capacity of the taxpayer to earn income. As Deputy President Block considered, in summary, an injury to person is distinguishable from an injury to a person’s reputation.
89. As I have found in the paragraphs above that the payment to the Applicant was in settlement of “all issues arising out of or relating to the Employee’s employment with the Company or the termination of that employment, without admission, on the terms set out in this deed”, and as I have held that it would not have been made but for the resignation of the Applicant, I cannot find the payment of $3,176,322. to be of a capital nature, and therefore exempt from taxation as an ETP pursuant to any section of the Act.
90. As stated above, in coming to my decision, I have considered the nature of personal injury referred to in the legislation, and the statements of Senior Member Dwyer, in AAT Case 11,722 (supra), Deputy President Block in McMahon (supra), and the case of Graham v Robinson (supra) where it was held that the expression "personal injury" did not extend beyond physical injury and mental illness to include emotional hurt.
CONCLUSIONS
91. I find from the evidence before me, and authority of the case law, that I am bound to hold that the payment received by the Applicant from his ex-Employer as part of the Deed of Settlement made as part of his separation from the Employer, is an Eligible Termination Payment, and taxable pursuant to section 27A(1) of the Act.
92. The parties agreed, and I accepted that the primary decision regarding the Eligible Termination Payment would determine the other two applications. Given that I have decided that the payment to the Applicant of $3,176,322 is an Eligible Termination Payment, and to be taxed pursuant to section 27A(1) of the Act, the other two decisions of the Respondent against which the Applicant claimed before the Tribunal stand to be affirmed.
DECISION
93. The three decisions under review are affirmed.
I certify that this and the preceding 93 paragraphs are a true copy of the decision and reasons for decision herein of Ms G Ettinger, Senior Member
Signed: .....................................................................................
AssociateDate of Hearing 3 March 2005
Date of Decision 20 June 2005
Counsel for the Applicant Mr R Hamilton
Instructed by WHK Greenwoods Pty Ltd
Counsel for the Respondent Mr S W Gibb SC
Solicitor for the Respondent Australian Government Solicitor
5
0