Dolphin and Commissioner of Taxation

[2006] AATA 169

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 169

ADMINISTRATIVE APPEALS TRIBUNAL        Nº VT2005/351

TAXATION       APPEALS       DIVISION

Re:         Trevor llewellyn Dolphin

Applicant

And:         COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       Mr E. Fice, Member

Date:             27 February 2006

Place:            Melbourne

Decision:The Decision under review is set aside.

(sgd) Egon Fice

Member

TAXATION – amended assessment – retrospective change of character of income – legal entitlement to disability pension – nature of legal entitlement – subject to set-off of prior payment – time limitations for amended assessments

Taxation Administration Act 1953

State Superannuation Act 1988

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Purdon v Federal Commissioner of Taxation 2001 ATC 2064,

Case X21 (1990) 90 ATC 239

Cooper v Federal Commissioner of Taxation 2003 ATC 2123

REASONS FOR DECISION

27 February 2006  Mr E. Fice, Member

1. Mr Dolphin lodged his income tax return for the year ended 30 June 2004 on 26 November 2004. In that return he included as income $142,971.00 which was said to be a gross lump sum in arrears received from the Government Superannuation Office. The Commissioner of Taxation (the Commissioner) issued a notice of assessment on 3 December 2004 which resulted in a tax liability to Mr Dolphin of $54,533.80. Mr Dolphin objected to that assessment by letter dated 6 December 2004. The Commissioner issued a notice of amendment on 9 March 2005 which reduced Mr Dolphin’s tax liability to $18,539.00. Mr Dolphin objected to the amended assessment on 14 April 2005. The Commissioner, by a notice of decision on objection dated 14 June 2005, disallowed Mr Dolphin’s objection. Mr Dolphin, pursuant to s 14ZZ of the Taxation Administration Act 1953, now seeks a review of Commissioner’s objection decision.

2.      The circumstances giving rise to this review are unusual.  Between October 1982 and April 1998, Mr Dolphin was employed by the Western Melbourne Institute of TAFE (the TAFE).  However, because of ill‑health, he did not work between late 1994 and late 1995.  Upon returning to his employment in late 1995, Mr Dolphin worked on a part-time basis until April 1998.

3.      Mr Dolphin was a member of the State Superannuation Fund and he had applied for a disability benefit from that fund.  On 20 April 1998, Mr Dolphin received a letter from the Victorian Superannuation Board which determined that he did not suffer a “disability” as defined by the State Superannuation Act 1988.  Therefore, the Board was of the opinion that he was capable of performing duties for which he was suited by his education, training or experience.  The Board rejected Mr Dolphin’s claim for disability benefits.  Shortly prior to receiving that letter, on 14 April 1998, Mr Dolphin expressed interest in taking a voluntary departure package (VDP) which had been offered to him by the TAFE.  Having had his application for a disability benefit rejected by the Victorian Superannuation Board, Mr Dolphin, on 22 April 1998, accepted the VDP.

4.      Mr Dolphin’s VDP comprised the following:

(a)a redundancy payment of $37,868.10, being Mr Dolphin’s unused long‑service leave entitlements, unused holiday pay and unused leave loading, which amounts constituted a tax‑free part of bona fide redundancy payments; and

(b)a resignation benefit from the Victorian Superannuation Board of $94,163.47 of which $24,000.00 was paid in cash and $70,163.47 was rolled over into various superannuation funds.

5.      Mr Dolphin properly declared his income for the 1998 tax year and there is no issue about him having paid the correct amount of tax for that year.

6.      Apparently Mr Dolphin continued to have discussions with the Government Superannuation Office regarding his entitlement to a disability benefit.  On 25 November 2002, a senior claims assessor wrote to Mr Dolphin, after having reviewed his case history.  He told Mr Dolphin that it was possible for him to make a retrospective application for disability benefits, backdated to the date of his resignation from the TAFE.  In that letter the senior claims assessor noted that if Mr Dolphin were granted a disability benefit effective from the date of his acceptance of the VDP, the resignation benefits of $94,163.47 previously paid to him as well as the redundancy payment amount of $37,868.10 would “need to be offset against the backdated disability benefit approved”.

7.      By letter dated 25 June 2003, the Government Superannuation Office advised Mr Dolphin that it had reversed his original resignation benefit claim and in its place would show him, from 16 June 1998, in receipt of a disability pension benefit.  The Government Superannuation Office calculated that between 16 June 1998 and 14 August 2003, Mr Dolphin was entitled to receive gross pension arrears amounting to $142,971.63 less tax deducted on that sum of $9,293.16 resulting in a net payment to Mr Dolphin of $133,678.47.  However, given that Mr Dolphin had received $132,031.57 under his VDP, the Government Superannuation Office told Mr Dolphin that, taking into account the fact that there had to be a repayment of the VDP, the first payment made to Mr Dolphin on 14 August 2003 would be $1,646.90 gross.  After that date, his normal pension payment would be $1,156.14 gross per fortnight.

8.      According to the Commissioner, Mr Dolphin became legally entitled to a disability payment in arrears of $142,971.00 immediately following the decision of the Government Superannuation Office to grant him a disability pension.  Under s 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997), income is derived when received or applied or dealt with in any way on behalf of the taxpayer or as the taxpayer directs.  Section 6-5(4) provides:

6-5      Income according to ordinary concepts (ordinary income)

. . .

(4)In working out whether you have derived an amount of ^*ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

9. As far as the resignation benefits and bona fide redundancy payment made to Mr Dolphin in the year ended 30 June 1998 are concerned, the Commissioner contends that these payments constituted an eligible termination payment in accordance with s 27A(1) of the Income Tax Assessment Act1936 (the ITAA 1936).  Therefore, Mr Dolphin was not required to return the amount received in the year ended 30 June 1998 in his tax return for that year. 

10.     Critically, the Commissioner contends that following the Government Superannuation Office’s determination to pay Mr Dolphin the disability pension in April 2003, he became entitled to receive the disability pension from the date of his retirement in 1998 and he was no longer entitled to the VDP, which was to be repaid in order that Mr Dolphin could receive the lump sum payment in arrears.  According to the Commissioner, the payment to Mr Dolphin in August 2003 by the Government Superannuation Office of the difference between the VDP that he had already received and the disability pension to which he was entitled, being $1,646.90, did not alter the fact that Mr Dolphin became entitled, from the Government Superannuation Office’s determination in April 2003, to the full amount of a disability pension being a lump sum in arrears of $142,971.63.  According to the Commissioner, Mr Dolphin had a legal obligation to repay the VDP payment already received from the lump sum disability payment in arrears.  The fact that one payment was set-off against the other was merely to simplify the administrative process of making the payment.  That being the case, the Commissioner maintains that the lump sum to which Mr Dolphin was entitled for the financial year ended 30 June 2004 was assessable in that year (Purdon v Federal Commissioner of Taxation 2001 ATC 2064, Case X21 (1990) 90 ATC 239 and Cooper v Federal Commissioner of Taxation 2003 ATC 2123).

11.     The problem that I see with the Commissioner’s argument is the characterisation of the sum said to have been derived by Mr Dolphin as a consequence of the decision of the Government Superannuation Office to pay him a disability pension backdated to the date of his retirement on 22 April 1998.  The amount to which Mr Dolphin became legally entitled was only the difference between the amount he received as a VDP and the amount of the arrears of disability pension (less a deduction for tax).  That difference was $1,646.90 gross payable from 14 August 2003.  In a letter to Mr Dolphin dated 25 November 2002, following discussions Mr Dolphin had with the Government Superannuation Office, the senior claims assessor made it clear that the resignation benefits paid to Mr Dolphin in 1998 would need to be set-off against the backdated disability benefit approved.  Therefore, in my opinion, when the Government Superannuation Office decided in April 2003 that Mr Dolphin was entitled to a disability pension backdated to the date of his resignation in 1998, that entitlement was subject to an adjustment in respect of payments already received by Mr Dolphin by way of his VDP.  It is wrong to argue, as the Commissioner does, that at the time that the decision was made to pay Mr Dolphin a disability pension in arrears, Mr Dolphin was legally entitled to demand payment of the net sum calculated at $133,678.47.  The payment of arrears of disability pension was, at all times, subject to setting off the amounts Mr Dolphin had already received in 1998.  Mr Dolphin’s legal entitlement was to the difference between his VDP and the disability pension calculated in arrears being the amount of $1,646.90 as at 14 August 2003.

12.     The Commissioner also contended that where the characterisation of a payment changes from non‑taxable to taxable, the income is deemed to be derived in the income year in which the character of the payment is altered, irrespective of whether or not the payment was physically received in an earlier income year.  However, the Commissioner’s representative provided no authority for such a contention and I do not necessarily accept that to be correct.  Although it is true to say that income may be derived even though it has not been physically received, it seems to me that alteration of a payment from non‑taxable to taxable probably requires the Commissioner to issue an amended assessment in respect of the first payment received.

13. The problem for the Commissioner is that, given the Government Superannuation Office’s decision to alter the character of the payment made in 1998 from an eligible termination payment to an assessable lump sum payment in arrears, Mr Dolphin’s assessment for the 1998 tax year is incorrect. If it were allowed to stand, Mr Dolphin would have paid less tax than he should have for that tax year. The only remedy available for the Commissioner in those circumstances is that provided under s 170 of the ITAA 1936, which permits the Commissioner to amend assessments not withstanding that tax may have been paid in respect of the original assessments. However, the Commissioner is limited in these circumstances by s 170(2)(c) or (d), in that he may only amend the assessment within either two or four years after the day on which the tax became due and payable under the original assessment. The two year time limitation applies to a taxpayer who is a SPOR (Shorter Period of Reviewed taxpayer) and four years applies to other taxpayers. Although I am not certain whether Mr Dolphin can be classified as a SPOR for the 1998 tax year, it does not matter because more than four years has expired since the day on which tax became due and payable under the 1998 assessment. For that reason, the Commissioner cannot now amend the 1998 assessment. Although I am aware that this will result in Mr Dolphin paying less tax than he should have for the 1998 year, there is no way of correcting that position under the existing tax legislation.

CONCLUSIONS

14.     In my opinion, the essential problem with the Commissioner’s contention is that Mr Dolphin did not in fact receive a lump sum payment of $133,678.47 in August 2003; nor was that income derived by Mr Dolphin in the 2004 tax year in accordance with s 6-5(4) of the ITAA 1997.  Because Mr Dolphin had already been paid the sum of $132,031.57 in 1998, his legal entitlement, after the Government Superannuation Office belatedly agreed to his claim for a disability pension in April 2003, was to a payment of the difference and not the entire sum.  It is, in my opinion, wrong to regard Mr Dolphin as being entitled to the entire sum of $133,678.47 as from August 2003 with an obligation to repay the sum of $132,031.57 for the reason that the Government Superannuation Office made it clear to Mr Dolphin that it was prepared to retrospectively grant him a disability benefit backdated to his resignation date in 1998 only on the condition that the payments that he had already received as a VDP be set off against the payments to which he was now entitled.  That was the basis upon which the disability payments were granted. 

15.     Accordingly, the objection decision made by the Commissioner on 14 June 2005 should be set aside and the matter remitted to the Commissioner for the purpose of issuing a further notice of assessment in accordance with the reasons set out above.

I certify that the fifteen [15] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr E. Fice, Member      

(sgd)     Catherine Lake

Clerk

Date of Hearing:  23 January 2006

Date of Decision:  27 February 2006
Solicitors for the applicant:               B.P. Cooney and Associates

Representative for the respondent:   Ms A. Lemish, Australian Taxation Office