CDPJ and Commissioner of Taxation
[2014] AATA 535
[2014] AATA 535
Division TAXATION APPEALS DIVISION File Number(s)
2013/5029
Re
CDPJ
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms J Redfern, Senior Member Date 5 August 2014 Place Sydney The decision under review is affirmed.
...............[sgd].........................................................
Ms J Redfern, Senior Member
CATCHWORDS
TAXATION AND REVENUE – income tax – employment termination payment – life benefit termination payment – whether the payment was a transitional termination payment – lump sum payment under a deed – decision affirmed
LEGISLATION
Income Tax Assessment Act 1936 s 175A
Income Tax Assessment Act 1997 s 82-130
Income Tax (Transitional Provisions) Act 1997 ss 82-10, 82-10C, 82-10DTaxation Administration Act 1953 s 14ZZK
CASES
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41
Dibb v Commissioner of Taxation (2004) 136 FCR 388; 207 ALR 151
Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938
Le Grand v Commissioner of Taxation (2002) 124 FCR 53; 195 ALR 194
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381
Re Perfrement and Commissioner of Taxation [2011] AATA 264Reynolds v Southcorp Wines Pty Ltd (2002) 122 FCR 301
SECONDARY MATERIALS
Tax Laws Amendment (Simplified Superannuation) Bill 2006 (Cth) Explanatory Memorandum
REASONS FOR DECISION
Ms J Redfern, Senior Member
5 August 2014
INTRODUCTION
This was an application for review of an objection decision made by a delegate of the Commissioner of Taxation in respect of a lump sum payment received by the applicant in the 2011 income year following the settlement of an employment dispute. The applicant requested that the hearing be in private under s 14ZZE of the Taxation Administration Act 1953. Accordingly, he has been given a pseudonym and is referred to as CDPJ in these reasons.
CDPJ worked as a senior manager at St George Bank (St George) from 1988, and later with the Westpac Banking Corporation (Westpac), until the termination of his employment on 7 August 2009. He, and a number of other senior managers, were made redundant following the merger of St George with Westpac in late 2008.
CDPJ commenced proceedings against Westpac in the Federal Court of Australia in October 2009 in respect of his termination. Westpac filed a cross claim and CDPJ cross claimed against Westpac and others in those cross claim proceedings. Part of CDPJ’s claim, being his claim for the payment of a bonus for the 2008/2009 year, was resolved in November 2010. The balance of the proceedings, including Westpac’s cross claim, was settled by deed of release dated 3 May 2011.
Under the terms of the deed Westpac agreed to pay CDPJ $1,937,000; CDPJ agreed to the dismissal of his claim and cross claims against Westpac; Westpac agreed to the dismissal of its cross claims and the parties provided mutual releases to each other.
At the time of the termination of his employment, CDPJ received a termination payment of $700,492.48, of which $88,939 was treated as a tax-free redundancy payment and the balance of $611,553.48 was treated as an ordinary employment termination payment and was included in CDPJ’s assessable income for the 2010 income year.
CDPJ objected to the assessment and in October 2012 a delegate of the Commissioner allowed his objection in full. The payment of $611,553.48 was treated as a “transitional termination payment”, which provided CDPJ with more favourable concessional tax treatment.
In his tax return for the 2011 income year, CDPJ declared three amounts as payments having been received by him from Westpac, being $597,547 (representing the 2008/2009 bonus with interest which was paid in November 2010) and $969,230 and $967,770, which was the total of the settlement proceeds paid by Westpac in May 2011. How these latter amounts were calculated and how the lump sum settlement proceeds paid in May 2011 should be characterised is the key issue in dispute. The facts are not in contest. They are evidenced by documents that were tendered, without objection, during the hearing. The dispute focuses on the construction and application of transitional arrangements for the taxation of termination payments made to employees in respect of employment entitlements in place before 10 May 2006.
The provisions which are the subject of dispute were part of the Simplified Superannuation reforms legislated with effect from 1 July 2007. As a result of these reforms, changes were made to the taxation of superannuation benefits and payments made on termination of employment. To ensure taxpayers were not disadvantaged by the changes, transitional arrangements were legislated for payments made as a result of employment entitlements in place before 10 May 2006 (transitional termination payments). According to the Explanatory Memorandum for the Bills that comprised the Simplified Superannuation reforms[1] payments made under the transitional arrangements “attract tax concessions designed to broadly mirror existing arrangements”. To access the transitional arrangements, payments must be made to the taxpayer prior to 1 July 2012.
[1] Tax Laws Amendment (Simplified Superannuation) Bill 2006 (Cth) Explanatory Memorandum
While this legislation has been in place for some time and the treatment of these payments for periods up to and including the 2012 income year has been the subject of dispute between the Commissioner and taxpayers from time to time, there is no direct authority on how the transitional provisions should apply to payments made following disputed employment claims.
CDPJ contended that part of the settlement proceeds paid in May 2011, which were said to be referrable to his redundancy entitlements in place as at 9 May 2006, should properly be characterised as a transitional termination payment. The Commissioner contended that payment received by CDPJ in the 2011 income year was a lump sum settlement made pursuant to a deed of release. The payment could not be directly linked to CDPJ’s redundancy entitlement and therefore the concessional tax rates for transitional termination payments did not apply.
STATUTORY FRAMEWORK AND QUESTION FOR DETERMINATION
The legislation relevant to this review is the Income Tax Assessment Act 1936 (ITAA 1936), Income Tax Assessment Act 1997 (ITAA 1997), the Income Tax (Transitional Provisions) Act 1997 (ITTPA) and the Taxation Administration Act 1953 (TAA).
A taxpayer who is dissatisfied with an assessment of income tax payable may object to that assessment (s 175A of the ITAA 1936). Part IVC of the TAA deals with taxation objections, reviews and appeals. Where an objection is lodged with the Commissioner within the required time, the Commissioner must make an “objection decision”. If a person is dissatisfied with the Commissioner’s objection decision, the person may apply to the tribunal for review. Division 4 of Pt IVC contains provisions which modify various provisions of the Administrative Appeals Act 1975 (the AAT Act) in relation to the review of objection decisions. Of particular importance is s 14ZZK(b), which provides that the taxpayer has the burden of proving that the assessment is excessive.
Division 82 of the ITAA 1997 sets out how employment termination payments are to be treated for the purposes of income tax. In summary, if a taxpayer receives an “employment termination payment” which is a “life benefit termination payment”, part of the payment may be tax-free and the balance will be assessable as income but the taxpayer will be entitled to a tax offset, subject to a number of limitations. Relevantly, a life benefit termination payment will be taxed at the rate of 30% insofar as the taxable component of the payment does not exceed the employment termination payment cap. An “employment termination payment” is a payment received by the taxpayer “in consequence” of the termination of the taxpayer’s employment no later than 12 months after that termination (s 82-130(1)(a)(i)). There is an exemption to the 12 month rule which both parties agree applies in the case of CDPJ. Section 82-130(2) provides that a “life benefit termination payment” is an employment termination payment to which subparagraph (1)(a)(i) applies. This is to be distinguished from a “death termination payment” which is an employment termination payment received after another person’s death, in consequence of the termination of the other person’s employment (s 82-10(1)(a)(ii)).
There is no dispute that the lump sum settlement paid by Westpac to CDPJ in May 2011 was an employment termination payment and therefore a life benefit termination payment.
Division 82 of the ITTPA sets out the rules affecting taxpayers receiving a life benefit termination payment pursuant to pre-10 May 2006 entitlements which are paid on or after 1 July 2007 but before 1 July 2012. Such payments are “transitional termination payments”. Under ss 82-10C and 82-10D of the ITTPA, there is an initial upper cap amount of $1 million in respect of transitional termination payments made to a person under preservation age. This cap is more favourable than the cap that would otherwise apply for non-transitional termination payments.
Section 82-10 of the ITTPA provides as follows (excluding the example and notes, which are not relevant for the purposes of this review):
Pre-10 May 2006 entitlements--transitional termination payments
(1) This Division applies in relation to a life benefit termination payment received by you on or after 1 July 2007 if:
(a) the payment is received by you because you are entitled to it under a written contract, a law of the Commonwealth, a State, a Territory or another country, an instrument under such a law, a collective agreement within the meaning of the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 or an AWA within the meaning of that Act; and
(b) the entitlement is provided for under that contract, law, instrument or agreement as in force just before 10 May 2006.
(2) However, this Division does not apply in relation to a life benefit termination payment received by you on or after 1 July 2012 (except to the extent provided by Subdivision 82-E).
(3) This Division applies in relation to a life benefit termination payment only to the extent that the contract, law or agreement as in force just before 10 May 2006 specifies the amount of the payment, or a way to work out a specific amount of the payment.
(4) For the purpose of subsection (3), a specific amount can be worked out in ways including either or both of the following:
(a) by a method or formula for working out the amount;
(b) by provision for you or another person (or entity) to make a choice between forms of payment allowing amounts to be worked out as provided by subsection (3) and paragraph (a) of this subsection.
(5) To the extent that this Division applies to a life benefit termination payment, Subdivision 82-A of the Income Tax Assessment Act 1997 does not apply to the payment (subject to Subdivision 82-E of this Act).
(6) In this Division:
transitional termination payment means:
(a) a life benefit termination payment to which this Division applies; or
(b) if this Division applies to only part of a life benefit termination payment--that part of the payment.
The issue in dispute was whether the amount of $969,230 (subsequently reduced to $929,066.23 for the reasons later outlined) is a “transitional termination payment” for the purposes of Division 82 of the ITTPA. CDPJ contended that while this amount comprised part of the total settlement proceeds paid in May 2011, it was referrable to a redundancy entitlement that was in place prior as at 9 May 2006. He was therefore entitled to concessional tax treatment for so much of this amount that did not exceed the upper cap amount. The Commissioner contended that this amount was not an identifiable payment within the lump sum settlement, but even if it could be so characterised, no part of the lump sum payment was a transitional termination payment because it did not satisfy the stringent criteria set out in s 82-10 of the ITTPA.
The initial upper cap amount is $1 million and it is common ground that the transitional termination payment received by CDPJ for the 2010 income year of $611,553.48 should be deducted from the cap, leaving a balance of $388,446.52 as being the subject of the disputed concessional tax treatment. As such, the tax in dispute is $58,226.98, being the difference between the tax calculated on $388,446.52 at the concessional rate of 30% and the top marginal rate of 45%.
If CDPJ is correct the assessment for the 2011 income year would be excessive and the objection decision should be set aside and substituted with the decision that the objection be allowed. Conversely, if the Commission is correct the objection decision should be affirmed. It is common ground that the question for determination is whether the part of the lump sum settlement paid to CDPJ in May 2011, which CDPJ identifies as $929,066.23, is a transitional termination payment within the meaning of s 82-10 of the ITTPA.
CONTENTIONS OF THE PARTIES
In his written submissions, the Commissioner contended that no part of the lump sum settlement satisfied s 82-10 of the ITTPA because it was received under a deed of release in settlement of proceedings instituted by CDPJ in the Federal Court. Having regard to the context of the amendments made by the Simplified Superannuation reforms and the commentary in the Explanatory Memorandum, s 82-10 should be construed narrowly. It was intended to apply to payments made under binding arrangements in force just prior to 10 May 2006 that were capable of determination. When read as a whole, s 82-10 requires the payment made to the taxpayer to have a direct nexus to, and be capable of being objectively determined by, a contractual entitlement in force as at 9 May 2006. While the Commissioner accepted that the proceedings and deed arose out of CDPJ’s termination of employment and included claims for entitlements asserted to be in force as at 9 May 2006, it was contended that there was no direct causal link between the settlement payment and CDPJ’s entitlements under his contract. The payment was made because of entitlements under the deed and not CDPJ’s entitlements as at 9 May 2006 under his contract of employment.
CDPJ contended that this construction was too narrow. Taken to its logical extension, this would mean where there was a dispute about contractual entitlements in force as at 9 May 2006 and proceedings were commenced and/or a deed or agreement of settlement was entered into resolving this dispute, any payment received could never be a transitional termination payment. This would produce an arbitrary and unfair outcome. Section 82-10 of the ITTPA should be interpreted having regard to substance, rather than form, and the proper characterisation of the payment.
In response to this submission, and in the alternative to his primary submission, the Commissioner contended that if a court determined there was a contractual entitlement in force as at 9 May 2006 which was not discretionary and was capable of determination, there may be sufficient nexus between any payment made pursuant to the court judgment and the contract to satisfy s 82-10 of the ITTPA. Similarly, if a deed or agreement of settlement was entered into which identified the settlement amount by reference to a contractual entitlement in force as at 9 May 2006 and the entitlement was not discretionary and was capable of being determined as at 9 May 2006, this may also be a transitional termination payment.
According to the Commissioner, s 82-10 was drafted in such a way as to encompass arrangements where the payment was able to be determined as at 9 May 2006 to “ensure that the transitional provisions are not open to abuse” (cl 4.68 of the Explanatory Memorandum). This is consistent with the language of s 82-10, which provides for three threshold limitations. The text of the section should be closely scrutinised to ascertain its meaning and scope. As noted by Hayne, Heydon, Crennan and Kiefel JJ in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41 at [47] (footnotes omitted):
This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy.
First, for the payment to be a transitional termination payment it must be received because of the entitlement under a written contract. The word “because” should be given its ordinary English meaning, which is defined in the Macquarie Dictionary as meaning “for the reason that”. This is in contrast to employment termination payments, which are more broadly defined as payments made “in consequence of” the termination of employment. The use of the word “because” requires a direct nexus between the payment and the contract of employment. Secondly, the entitlement must be provided for under the contract in force just before 10 May 2006, namely there must be a close temporal connection between the payment and the entitlement under the contract in force at the transition date. Thirdly, a payment will only be a transitional termination payment to the extent that the pre-10 May 2006 contractual entitlement specifies the amount of the payment or a way to work out the specific amount of the payment. This can be subsequently worked out by a method or formula but, according to the Commissioner, the payment must be capable of being determined as at 9 May 2006 by reference to objective matters. In summary, the Commissioner contended that the language employed in s 82-10 is direct because it is “concerned with identifying, with precision, the receipt and the source of the entitlement to the receipt and then determining whether or not such entitlement rose before the relevant transition date”.
In this case, the lump sum of $1,937,000 was an undissected settlement sum which related to a large number of claims made by CDPJ in legal proceedings that arose out of the termination of his employment by Westpac. Those claims related to damages for breach of contract, claims under the Trade Practices Act 1974 and claims for estoppel and equitable relief. Relevantly, there was a claim for damages for breach of good faith and loss of reputation. These claims were not made pursuant to any contractual entitlement in force as at 9 May 2006. The deed of release resolved all disputes between CDPJ and Westpac, including cross claims made by Westpac against CDPJ. The nexus between the payment and CDPJ’s entitlement under his contract as at 9 May 2006 was therefore broken. One of the claims made by CDPJ related to his assertion he had been underpaid his redundancy because Westpac had not included his entitlement to bonuses in calculating the payment. Westpac conceded that CDPJ was entitled to the bonus in November 2010 but disputed CDPJ’s claim that this amount should be included in his “retrenchment payment” under the redundancy policy in force at the time of CDPJ’s termination. This issue remained unresolved even though the dispute was ultimately settled by the parties, without admission.
The Commissioner furthermore contended that the bonus was discretionary and, given the dispute about the terms of the redundancy policy, CDPJ’s entitlement to a retrenchment payment could not be determined as at 9 May 2006. It was not the role of this tribunal, nor was it desirable, to determine a dispute about entitlements under the redundancy policy that remained unresolved by the Federal Court.
In response to the Commissioner’s submissions, CDPJ agreed there were three threshold criteria to satisfy s 82-10 of the ITTPA but contended that the Commissioner’s approach was unduly narrow. The words used in s 82-10 should be given their “natural and ordinary meaning”. Having regard to the undisputed facts and the terms of s 82-10, all three criteria were satisfied.
First, retrenchment payments do not have to be specifically referred to in the contract of employment to be incorporated into the contract (Reynolds v Southcorp Wines Pty Ltd (2002) 122 FCR 301). The redundancy policy formed part of CDPJ’s contract of employment in force as at 9 May 2006 and it did not matter that the policy was amended from time to time. This did not vary the contractual entitlement in place before 10 May 2006 (refer also Re Perfrement and Commissioner of Taxation [2011] AATA 264). This was recognised by the Commissioner in the objection decision relating to the 2010 income year. Secondly, CDPJ was entitled to the retrenchment payment of $929,066.23 under the redundancy policy. This entitlement was therefore in force as at 9 May 2006. The commencement of legal proceedings and the settlement did not break the causal nexus. Even if the tribunal were to accept the broader interpretation contended by the Commissioner in the alternative, this was still too narrow and was inconsistent with the approach adopted by the Federal Court in other tax cases. Thirdly, the entitlement could be determined by reference to the formula in the redundancy policy as at 9 May 2006 and it did not matter that the entitlement was initially the subject of dispute.
More particularly, CDPJ contended that s 82-10 was broad enough to cover payments made pursuant to a settlement where the settlement was referrable to an entitlement under a contract in force as at 9 May 2006. CDPJ made a claim for underpaid redundancy based on his entitlement to a bonus for 2008/2009. The bonus was capable of being determined and it was based on the Treasury Incentive Plan which was in place from time to time. It was not “discretionary” but was based on basic competency and CDPJ invariably received the bonus as part of his annual remuneration. This was evidenced by the remuneration payments he had received for at least the six years prior to his termination. The causal connection was not broken because the underlying fabric of the proceedings, and therefore the settlement, related to CDPJ’s termination and his redundancy. The redundancy policy was in force prior to 10 May 2006. If it was accepted that CDPJ’s redundancy pay included his pro-rated bonus under the terms of the redundancy policy in place as at 9 May 2006, it should also be accepted that his entitlement under the redundancy policy could be determined prior as at 9 May 2006 by reference to a formula.
According to CDPJ, it was irrelevant that the bonus could not be determined until after 9 May 2006 or indeed that it was not agreed until November 2010. Relevantly, the bonus was in fact agreed and this was evidence that the subsequent redundancy payment, which comprised part of the May 2011 lump sum settlement, was capable of being determined using a formula that was in place as at 9 May 2006. As such, the payment could be calculated by reference to the bonus that was agreed in November 2010, which was $536,794, a weekly amount based on the bonus and the formula set out in the redundancy policy, which provided for a formula based on years of service up to a maximum of 90 weeks. This amount was calculated to be $929,066.96 and was part of the May 2011 settlement. It was paid before 1 July 2012 and, as such, was a transitional termination payment for the purposes of s 82-10 of the ITTPA.
BACKGROUND FACTS
CDPJ commenced employment with St George in its Treasury Division. He was promoted to a senior management role in St George in 2005. His remuneration comprised base salary and annual incentives, namely an award of shares in St George pursuant to the Medium Term Incentive Plan (MTIP) and a bonus paid pursuant to the Treasury Incentive Plan (TIP). In the six years prior to the termination of his employment CDPJ receive bonuses every year which exceeded his base salary. In the two years before the termination of his employment, CDPJ’s bonus was nearly double his base salary. A copy of the Treasury Incentive Plan was not provided to the tribunal and no documents were produced recording how the bonus was calculated. The only documents provided were copies of letters from St George confirming approval of a bonus for each year from 2002/2003 to 2007/2008.
There is no contest that the redundancy policy in force as at 9 May 2006 provided as follows:
Retrenchment payment
Except for staff covered under a Service Agreement, if you’re retrenched you receive a retrenchment payment, which is calculated as follows:
· 6 weeks pay in lieu of notice
· 7 weeks pay for your first completed year of service
· 4 weeks pay for each subsequent year from 2 to 10 completed years of service
· 3 weeks pay for each subsequent year from 11 to 16 completed years of service
· 2 weeks pay for each subsequent year to a maximum of 25 completed years of service including the first year
PLUS
· 1 weeks pay for each year over 45 years of age
PLUS
· Pro-rata pay for each completed month of work
To a maximum of 85 weeks (90 weeks for staff over 45 years old) pay including the 6-week notice period.
On his termination, CDPJ was not paid any bonus for 2008/2009. His redundancy was paid in accordance with the formula referred to in the policy but was based on his base salary.
CDPJ commenced proceedings against Westpac in 2009. The proceedings included a claim for a pro-rated bonus for 2008/2009. There was an exchange of correspondence between the solicitors for Westpac, Allens Arthur Robinson (AAR), and CDPJ’s lawyers, Gillis Delaney, which culminated in the settlement of the pro-rated bonus claim. According to a letter from AAR dated 11 June 2010, which was produced by Westpac in response to a summons issued in these proceedings, there was correspondence between Westpac and CDPJ dated 28 November 2008 in relation to CDPJ’s redundancy package. A copy of this letter was not provided to the tribunal but the letter from AAR purported to paraphrase the letter, noting as follows:
· if a comparable role could not be identified for [CDPJ] he would be entitled to a redundancy package, calculated in accordance with his existing St George entitlements;
· in recognition of his contribution during the merger period, and in addition to the redundancy package, he would be eligible for a pro-rata variable reward payment for the period 1 October 2008 to the end of his time in the transition role;
· the amount of the pro-rata payment would be based on the performance of Westpac and the Institutional Bank as well as [his] personal performance over the period; and
· provided the performance of Westpac and the Institutional Bank were at plan and his individual performance was effective he could expect the variable award amount to be consistent with his 2008 award (adjusted for actual time worked during the year).
An offer was made by AAR to settle the pro-rata bonus claim based on CDPJ’s bonus for the 2007/2008 year of $700,000, pro-rated for the relevant period and reduced by 20%, “in recognition of lower bonuses paid generally”. In addition, Westpac offered to pay interest on the agreed unpaid bonus from the date of termination to the date of the offer. By letter dated 8 November 2010 Gillis Delaney recorded an agreement with Westpac in respect of the unpaid bonus for 2008/2009, following discussions between the lawyers, whereby CDPJ would accept the sum of $536,794, which represented a reduction of 10% of the claim, together with interest thereon. The total sum agreed was $597,547. It was further noted that CDPJ would “amend his pleadings accordingly”.
There is evidence that the pleadings were amended because the tribunal was provided with a marked up version of an Amended Statement of Claim but the version provided was undated and did not reflect this settlement. It is unclear whether the Amended Statement of Claim was further amended but this was not material to the issues in dispute as it is clear that all claims between CDPJ and Westpac were settled by May 2011.
CDPJ disclosed the payment for the bonus and interest for 2008/2009 as an employment termination payment in his tax return for the 2011 income year. He also disclosed the lump sum settlement paid in May 2011 but particularised the payment as two amounts. An amount of $969,230 was said to represent CDPJ’s unpaid redundancy payment based on the agreed 2008/2009 bonus. The second payment disclosed of $967,770 was the difference between the amount identified as a redundancy payment and the lump sum settlement of $1,937,000. There were no documents produced by either CDPJ or Westpac identifying how the settlement sum was comprised. The lump sum was not particularised into payments representing the various claims made by CDPJ. The amount identified as referrable to CDPJ’s claim for unpaid redundancy is somewhat artificial because it has been apparently calculated on the agreed 2008/2009 bonus, without compromise, notwithstanding this was a significant issue in dispute in the proceedings. There was no evidence about how the balance was calculated nor was there evidence that these two amounts were even identified by the parties as discrete sums as part of the lump sum settlement.
The artificiality of this characterisation is highlighted by the fact that the sum identified in CDPJ’s tax return for the 2011 income year as having been made pursuant to the redundancy was asserted to have been incorrectly calculated based on $560,000 because CDPJ “inadvertently rounded” up the agreed 2008/2009 bonus.
CONSIDERATION
The parties referred to a number of cases which, while not directly on point, considered the question of how lump sum settlement payments should be treated for the purposes of other cases of income tax law.
The Commissioner referred to the High Court case of McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 which has been applied in a number of tax cases that followed.
In McLaurin the taxpayer commenced proceedings against the Commissioner of Railways to recover £30,000 for damages to his property arising out of a fire. The claim included several different heads of damage. The Commissioner made a lump sum offer to Mr McLaurin of £12,350 based on a valuation of the items which were accepted by the Commissioner of Railways. The basis of the offer was not communicated to Mr McLaurin. He accepted the offer and the Commissioner of Taxation assessed Mr McLaurin for tax on the amount of particularised claims which had been apparently accepted by the Commissioner of Railways but not communicated to or agreed by Mr McLaurin. The High Court (Dixon CJ and Fullagar and Kitto JJ) rejected the assessment made by the Commissioner, observing as follows (at 390):
No doubt it was discussed item by item during the negotiations which resulted in the settlement. But the settlement, nevertheless, was for a lump sum of damages, not composed of agreed constituents, offered and accepted in full satisfaction of the entirety of the appellant’s causes of action against the Commissioner for Railways. It may be the fact, and it makes no difference if it is, that the appellant, because of the course the discussions had followed, was in a position to make a confident guess as to the amount Mr. Cameron had allowed for each item in making his recommendation to the Assistant Solicitor for Railways. But he was not concerned to make the guess. He had simply to weigh £12,350 against the entirety of his claim, and accept it or reject it as a whole. Obviously, to accept the lump sum was not to assent to any figure in respect of any individual item of his claim.
According to the High Court, “in point of law it would plainly be unsound to allow a determination of the character of a receipt in the hands of the recipient to be affected by consideration of the uncommunicated reasoning which led the payer to agree to it” (at 391). The Commissioner’s “dissection” of the lump sum to attribute part of the sum to assessable income could not be justified in the circumstances. The High Court nonetheless provided guidance as to when apportionment may be justified (at 391, footnotes omitted):
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: Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation; Ronpibon Tin N. L. and Tongkah Compound N. L. v. Federal Commissioner of Taxation; The National Mutual Life Association of Australasia Ltd. v. Federal Commissioner of Taxation. 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, cf. Carter v. Wadman, or are otherwise ascertainable by calculation: cf. Tilley v. Wales, 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: Du Cros v. Ryall.
CDPJ relied on the subsequent Federal Court decisions of Le Grand v Commissioner of Taxation (2002) 124 FCR 53; (2002) 195 ALR 194 (Goldberg J) and Dibb v Commissioner of Taxation (2004) 136 FCR 388; 207 ALR 151 (Spender, Dowsett and Allsop JJ), as authority for the proposition that the courts, and therefore this tribunal, should look behind a settlement in order to properly characterise a lump sum payment received for the purposes of determining liability for income tax. In other words, the tribunal should approach the matter by giving consideration to “substance over form”. Both cases considered whether lump sum settlements were “eligible termination payments” within the meaning of the tax legislation prior to the Superannuation Simplification reforms.
In Le Grand, the taxpayer received a lump sum of $547,960 in settlement of proceedings initiated by him against his former employer in respect of the termination of his employment. The taxpayer claimed damages for his lost opportunity to earn remuneration and profit share and compensation for distress, humiliation and loss of reputation. The taxpayer’s claim was in excess of $2 million but he accepted a significant compromise in settlement of the claim. The taxpayer argued that the payment was not an eligible termination payment because it was not made “in consequence” of the termination employment but rather in consequence of the settlement of the litigation. Justice Goldberg rejected this argument at [33] as follows:
I do not consider that the issue can simply be determined by seeking to identify the “occasion” for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that a payment is made “in consequence” of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of that circumstance. The passages in the judgments to which I referred earlier make this clear. They also make it clear that there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made “in consequence” of that circumstance. The passages to which I have referred make it clear that it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows, in the causal sense referred to in those judgments, as an effect or result of the termination.
And further at [36]:
Although the claims in the proceeding for misleading and deceptive conduct related to representations which had occurred prior to the termination of the employment and, indeed, prior to the making of the employment agreement and are conceptually separate causes of action, the claim that the representations were untrue was, in part, based upon the fact that the applicant’s employment was terminated on 23 February 1998 and that by reason of that termination he was unable to receive his remuneration package and had suffered loss and damage. Thus the fact of the termination of the applicant’s employment was interwoven, and intertwined, with the claims for misleading and deceptive conduct. I do not consider that the claims for misleading and deceptive conduct and the settlement of those claims insofar as they were settled by the acceptance of the offer of compromise broke the causal relationship which existed between the termination of the applicant’s employment and the payment of the offer of the compromised amount. The fact that the offer was made by both defendants in the proceeding and not just the employer does not detract from the characterisation of the payment that it was related to, and was an effect or follow on from, the termination of the applicant’s employment.
In Dibb, the taxpayer was paid $788,544 in settlement of a claim for wrongful termination. His claims included damages for loss of reputation and for physical and psychiatric injury. Mr Dibb applied to the Commissioner for a private ruling concerning his tax liability arising out of the lump sum settlement. He objected to the private ruling and appealed, first to a single judge of the Federal Court then to the Full Court. Mr Dibb submitted that the lump sum payment was not an eligible termination payment but even if it was, it was a bona fide redundancy payment and therefore tax-free. He also submitted that the payment was in consideration of a capital nature for personal injury and therefore not assessable as income tax. The provisions which were the subject of dispute in Dibb are different to the provisions presently under consideration but a number of the findings are nonetheless relevant.
First, the Full Court found that the lump sum settlement was paid “as a consequence” of the termination of Mr Dibb’s employment, even though much had happened between his dismissal and the settlement of the Federal Court proceedings. CDPJ relied on this finding to support his contention that the requirements in ss 82-10(1) (a) and (b) of the ITTPA were satisfied. In contrast, the Commissioner contended that Dibb could be distinguished from the present case because the language in s 82-10 required that there be a direct link between the payment and a contractual entitlement in force as at 9 May 2006 to attract concessional tax under the transitional arrangements. Dibb concerned the former provisions relating to an eligible termination payment where the language was broader, encompassing payments made “in consequence of the termination of any employment” of the taxpayer.
Secondly, the Full Court found that, in the circumstances of this case, the lump sum settlement could not be dissected to apportion any part of the payment to Mr Dibb’s personal injury claim. Mr Dibb had made a claim for personal injury but his employer denied the claim. There was no agreement that Mr Dibb had suffered personal injury. Relevantly, the Full Court found as follows at [46]:
… Here, it is impossible to say whether there was or was not personal injury. AVCO denied it. The section does not provide for “consideration ... of, or in respect of, allegations of personal injury.” As can be seen from the description of the allegations in the Federal Court proceedings and the terms of the deed, there was no agreement between the parties that Mr Dibb had suffered personal injury. It was submitted on his behalf (as it had to be) that the respondent was obliged to sit, in effect, as a tribunal to decide whether he suffered personal injury and if so, the amount of a reasonable payment therefor. We disagree. The respondent was correct, as was his Honour, in concluding that it was impossible to identify any part of the total sum of $788,544 as consideration for, or in respect of personal injury.
The Commissioner relied on this passage in Dibb to support his contention that it is not the role of this tribunal to go behind the deed of release to apportion liability for that part of the lump sum payment that related to the redundancy payment. To do so would necessarily involve the tribunal making findings of fact on issues that were before the Federal Court but were not determined because the proceedings were settled. According to the Commissioner, this is not the role of this tribunal when reviewing an objection decision and would be inconsistent with the weight of the authorities.
The Commissioner also relied on the Full Court decision (Fox, Fisher and Sheppard JJ) in Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938. This case did not relate to termination of employment but rather the appropriate tax treatment for a lump sum payment received by a taxpayer in settlement of the claim made for wrongful termination of an agreement. The Commissioner assessed the taxpayer on the lump sum payment and argued that, on the proper construction of the deed, the settlement was paid for loss of commissions, and therefore was assessable as income, not loss of reputation. The Commissioner submitted that the claim for loss of reputation was not a valid claim and therefore the release was illusory. The Full Court observed (at 941):
...What counsel seeks to do is to circumscribe, or categorise, the nature of the receipt by reference to the legal claims which are discharged. In our view, this approach is misleading.
The discharge document relates to all possible claims arising out of the termination. It is in wide and comprehensive terms, plainly going beyond the necessities of the case. What it does do, assuming its effectiveness, is to bar legal proceedings. It does not follow that because a particular matter of complaint could not, or might not, lead to a legal claim, it has no existence. If it did, or could, its prosecution would be barred. Nor does it follow that the payment is related only to matters with which the discharge deals. The nature of the receipt and the causes of action (if any) to which the termination gave rise are distinct.
In dismissing the appeal, the Full Court found (at 942-3):
In the present case the amount received comprised or included recompense for damage to goodwill, which, it is agreed, is an item of capital. The point of the present case is that what was received was a lump sum, the ingredients of which were not identified (there may in fact have been no dissection made on either side) but which, it was held, included compensation for injury to a capital asset. There is no basis for dissection or apportionment. In these circumstances, in accordance with authority (McLaurin v FCT (1961) 104 CLR 381; Allsop v FCT (1965) 113 CLR 341; 9 AITR 724 and see Parsons, Income Taxation in Australia: Principles of Income Deductibility and Tax Accounting, Sydney Law Book Co 1985 para. 1.78) the whole receipt is to be treated as one of capital. Queries concerning McLaurin’s case are made by Professor Parsons in his work (paras. 2.558 et seq.) but they relate to the matter of apportionment, and it has not been contended here that the amount paid could be divided, or apportioned. The tribunal found that there was not any evidence that the quantum of out-of-pocket expenses incurred by Spedley in securing the loan had been communicated to Santos, although the fact of Spedley having incurred disbursements was a fact well known to Santos. It is not clear what part this amount played in the final settlement, and there is no specific evidence of any relevant claim for an income tax deduction in respect of it: see H.A. Sinclair & Son Pty Ltd v FCT (1966) 114 CLR 537; 10 AITR 3.
Having regard to these authorities, the submissions of the parties and the uncontroverted facts in this case, I am not satisfied that CDPJ received $929,066.96, which was said to comprise part of the lump sum settlement paid to CDPJ in May 2011, as a transitional termination payment within the meaning of s 82-10 of the ITTPA.
My reasons follow but, in summary, CDPJ failed to establish the critical elements of the provision in one very important respect. He was unable to establish that the lump sum could be apportioned to attribute a payment of $929,066.96 to his redundancy entitlement and that this entitlement was in force as at 9 May 2006. Even though the lump sum settlement may have been a payment which was “in consequence of” CDPJ’s termination of employment, the language of s 82-10 requires more than this. To be a transitional termination payment, the taxpayer must be able to establish that an identifiable part of the settlement is attributable to a contractual entitlement in force as at 9 May 2006.
In affirming the objection decision, I nonetheless reject the Commissioner’s original contention that no part of the lump sum payment could be a transitional termination payment because it was made pursuant to an entitlement under the deed of release and not CDPJ’s contract of employment. This is a very narrow construction of the operation of the provision. While s 82-10 requires that there be a close causal connection between a pre-10 May 2006 contractual entitlement and the payment asserted to be a transitional termination payment, I do not accept that this causal connection is necessarily broken by subsequent legal proceedings and/or a court judgment or settlement. In this regard, I am persuaded by the contentions of CDPJ. The word “because” connotes a close causal nexus but does not imply that the nexus must be direct. Such a narrow construction would produce an unfair and arbitrary outcome, depending on whether the taxpayer’s employer disputed liability. I therefore accept CDPJ’s contention that it may be appropriate to “look through” a deed of release to determine whether a payment is a transitional termination payment.
However, it does not follow that any payment made in settlement of a dispute concerning the termination of the taxpayer’s employment should be so characterised. In my view this would go beyond the terms of s 82-10 and is impermissibly broad. The decisions of Dibb and Le Grand do not support such a broad construction and it is relevant to note that both concerned the question of whether a payment was in consequence of the termination of employment, not whether a payment was because of a contractual entitlement where it is critical to pinpoint the genesis of the entitlement. To be a transitional termination payment, a payment must not only be made in consequence of the termination of employment but it must satisfy the requirements of s 82-10.
The word “because” implies a more direct nexus to an event or action than the phrase “in consequence of”, which includes a result or outcome that follows from an earlier event or action that does not need to be the dominant cause. However, these fine distinctions are not as instructive as interpreting the words by reference to the context in which they are used in the relevant provision. Section 82-10 should be construed as a whole.
I agree, as contended by the Commissioner, that the language of s 82-10 is concerned to identify, with some precision, the source of the entitlement to the receipt to determine whether it was in force before the transition date. Whether a payment is made because of a pre-10 May 2006 contractual entitlement must be determined having regard to the question of whether the entitlement was capable of being specified or calculated, albeit at some time in the future, as at 9 May 2006. While I do not accept the Commissioner’s original narrow construction, there is considerable force in his alternative construction, which recognises that a transitional termination payment may be made following a court order or a negotiated settlement provided there is a sufficiently direct nexus between the payment and a pre-10 May 2006 contractual entitlement which is the subject of the order or settlement.
Thus, the critical issue is whether the payment was received by the taxpayer because he or she was entitled to it under a contract where the entitlement was in force as at 9 May 2006 and was capable of being determined, either because the amount of the entitlement was specified or a specific amount can be calculated by a method or formula.
CDPJ contended the entitlement was capable of being determined as at 9 May 2006. It was based on the formula in the redundancy policy, which in turn was based on his total remuneration, including annual incentives, from time to time. The Commissioner contended CDPJ’s total remuneration was discretionary and, in any event, the entitlement was disputed. As such, the entitlement was not in force as at 9 May 2006 and could not be determined as required by s 82-10(3).
If an entitlement is alleged to be in force as at 9 May 2006 but is disputed this does not, of itself, negate the validity or existence of the entitlement. Whether an entitlement is in force will be a question of fact and law, depending on the terms of the entitlement. If an entitlement is created after the transition date, it is clear that any payment made in respect of the entitlement will not be a transitional termination payment. If the amount of the entitlement is based on a method or formula that was in force as at 9 May 2006 but includes a discretionary aspect, the position is not so clear. There was no evidence about precisely how the incentive scheme worked, other than that CDPJ invariably received significant bonuses each year. Ultimately, these issues were not material because there was a fatal flaw in CDPJ’s contentions.
In this case, there was dispute about whether CDPJ was entitled to a retrenchment payment based on his 2008/2009 bonus as well as his base salary. This dispute was resolved as part of a broader settlement. The claims and counter claims made in the Federal Court proceedings were many and varied. It is impossible to determine the basis for the settlement or the extent to which the lump sum included compensation for causes of action beyond the contractual claims. For instance, there were apparently negotiations in November 2008 about redundancy entitlements that would be received by CDPJ as a result of the Westpac/St George merger and it is unclear whether any claims were made or paid as part of the settlement in respect of these negotiations.
Consistent with the authorities of McLaurin, Le Grand, Dibb and Spedley, there is no basis to apportion the lump sum settlement received by CDPJ in May 2011, or any part thereof, to a pre-10 May 2006 contractual entitlement. There was no agreement about this, Westpac did not concede liability for distinct claims and the settlement was not particularised. CDPJ has sought, after the event, to attribute a value to this claim by reference to the 2008/2009 bonus which was agreed in November 2010. This is not a case, as identified by the High Court in McLaurin, “where the payment or receipt is in settlement of distinct claims of which some at least are liquidated … or are otherwise ascertainable by calculation”.
CDPJ contended that the tribunal should not only “look through” the deed but make its own determination about CDPJ’s pre-10 May 2006 contractual entitlements to answer the question which is at the heart of this review. This approach was expressly rejected in Dibb, and in Spedley the Full Court declined to make findings about the legal claims that were discharged or go behind the settlement. The Commissioner contended, and I agree, that it would not have been appropriate for the delegate, nor is it now appropriate for this tribunal, to make a determination on the matters that were before the Federal Court. The parties agreed a lump sum settlement and the tax implications of the settlement should be adjudged based on the terms of the settlement.
I am therefore not satisfied that the assessment for the 2011 income year is excessive and affirm the decision under review.
I certify that the preceding 62 (sixty-two) paragraphs are a true copy of the reasons for the decision herein of Ms J Redfern, Senior Member ....................[sgd]....................................................
Associate
Dated 5 August 2014
Dates of hearing 15 and 18 July 2014 Counsel for the Applicant Mr M Sealey Solicitors for the Applicant Gillis Delaney Lawyers Counsel for the Respondent Ms M Hirschhorn Solicitors for the Respondent Australian Taxation Office Review and Dispute Resolution Group
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