Douglas Purvis Douglas Kentish Geoffrey Bond and Commissioner of Taxation

[2013] AATA 58

[2013] AATA  58

Division

TAXATION APPEALS DIVISION

File Number(s)

2011/3492

2011/3493

2011/3494

Re

Douglas Purvis

Douglas Kentish

Geoffrey Bond

APPLICANT

And

Commissioner of Taxation

RESPONDENT

DECISION

Tribunal	Senior Member R W Dunne
Date	4 February 2013
Place	Adelaide

Each of the objection decisions under review is affirmed.

.........................[Sgd]...............................................

Senior Member R W Dunne

CATCHWORDS

TAXATION – income tax – loss of licence payments – whether employment termination payments – whether exempt capital payments to, or in respect of, personal injury – whether fringe benefits – whether statutory income – whether CGT Event C2 happens, and if so, whether the payments are compensation received for a wrong, injury or illness – each of the objection decisions under review is affirmed.

LEGISLATION

Income Tax Assessment Act 1997 (Cth) ss 15-2, 82-130(1), 82-135(i), 104-25(1), 118-37(1)(b)

Fringe Benefits Tax Assessment Act 1986 (Cth) s 136(1)

Reseck v Commissioner of Taxation [1975] 133 CLR 45

McIntosh v FCof T (1979) 10 ATR 13

Le Grand and Commissioner of Taxation (2002) 124 FCR 53

Commissioner of Taxation v Scully (2000) 201 CLR 148

REASONS FOR DECISION

Senior Member R W Dunne

4 February 2013 

INTRODUCTION

1. Mr Geoffrey Bond, Mr Douglas Kentish and Mr Douglas Purvis are the applicants in these proceedings.  They were employed by Qantas Airways Limited (“Qantas”) as airline pilots.  The terms of their employment were governed by certain “Collective Agreements”.  As airline pilots, the applicants were each required to hold a licence to fly issued by the Civil Aviation Safety Authority (“CASA”) and a current medical certificate that was appropriate to the licence.  Under the Collective Agreements, Qantas provided “loss of licence insurance” which entitled each of the applicants to a lump sum payment if they lost their licence for medical reasons (“LOL Payment”).  Each of the applicants suffered a medical condition that resulted in the cancellation of their licence by CASA and they received a LOL Payment.

2. In their 2007/2008 income tax return, each of the applicants included their LOL Payment as an employment termination payment.  The respondent issued a 2007/2008 assessment to each of the applicants, who objected against their assessment.  When the respondent decided to disallow the objections in full, the applicants applied to this Tribunal for a review of the objection decisions.

3. At the hearing, the applicants were represented by Mr M Flynn (of counsel) and the respondent was represented by Ms D Harding (of counsel). I received into evidence the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (Exhibit R1, Exhibit R2, Exhibit R3 and Exhibit R4), together with the following exhibits:

   ·witness statement of Douglas Ian Purvis dated 27 February 2012, together with Annexures (Exhibit A3);

   ·witness statement of Douglas McLennan Kentish dated 28 February 2012, together with Annexures (Exhibit A1);

   ·witness statement of Geoffrey Roger Bond dated 28 February 2012, together with Annexures (Exhibit A2); and

   ·witness statement of Captain Wayne Francis Kearns dated 6 August 2012 (Exhibit A4).

   ISSUES FOR THE TRIBUNAL

4. The following are the issues before me:

   (a)Are the loss of licence payments received by the applicants “employment termination payments” under Division 82 of the Income Tax Assessment Act 1997 (“ITAA 1997”)?

   (b)If the loss of licence payments are employment termination payments under Division 82 of the ITAA 1997, are they exempt capital payments for, or in respect of, personal injury under s 82-135 of the ITAA 1997?

   (c)Are each of the loss of licence payments a “fringe benefit” as defined in s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (“FBTAA”)?

   (d)Are the loss of licence payments statutory income under s 15-2 of the ITAA 1997?

   (e)Do the loss of licence payments result in CGT Event C2 happening under s 104‑25(1) of the ITAA 1997?

   (f)If the loss of licence payments result in CGT Event C2 happening, are any capital gains disregarded on the basis that the payments are compensation received for a wrong, injury or illness under s 118-37(1) of the ITAA 1997?

   LEGISLATION

5. The following provisions of the ITAA 1997 are presently relevant:

   ITAA 1997

   “15-2  Allowances and other things provided in respect of employment or services

   (1)   Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).

   …”

   “82-130  What is an employment termination payment?

   (1)  A payment is an employment termination payment if:

   (a)  it is received by you:

   (i)  in consequence of the termination of your employment; or

   (ii)  after another person’s death, in consequence of the termination of the other person’s employment; and

   (b)it is received no later than 12 months after that termination (but see subsection (4)); and

   (c)it is not a payment mentioned in section 82-135.”

   “82-135  Payments that are not employment termination payments

   The following payments you receive are not employment termination payments:

   ….

   (i)  a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936);

   …”

   “104-25  Cancellation, surrender and similar endings: CGT event C2

   (1)    CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

   (a)    being redeemed or cancelled; or

   (b)   being released, discharged or satisfied; or

   (c)    expiring; or

   (d)   being abandoned, surrendered or forfeited; or

   (e)    if the asset is an option – being exercised; or

   (f)     it the asset is a convertible interest – being converted.

   ….”

   “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:

   …

   (b)  compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally;

   …”

   BACKGROUND

6. The material facts in these proceedings are not in dispute.  The applicants commenced employment with Qantas between 1987 and about 1992.  The terms of their employment were governed by either the Qantas Airlines Limited Flight Crew (Long Haul) Certified Agreement 2005-2006 (“LHCA”), the Qantas Airlines Limited Fight Crew (Short Haul) Workplace Agreement 2007 (“SHWA”) or the Qantas Airlines Limited Fight Crew (Short Haul) Certified Agreement 2002 (“SHCA”) (together referred to as the “Collective Agreements”).  Pursuant to the Civil Aviation Act 1988, each of the applicants held an air transport pilot licence and a Class 1 Medical Certificate.  The applicants each suffered illness or injury, their licences were cancelled and their employment with Qantas was terminated in 2007 or 2008.  Pursuant to the Collective Agreements, Qantas maintained loss of licence insurance under a loss of licence insurance policy.  The loss of licence insurance provided for the payment of a lump sum capital benefit reduced by monthly payments made prior to each of the applicants becoming entitled to the lump sum upon cancellation of their licence. 

7. On or about 31 March 2006, the loss of licence insurance policy was replaced by the “Scottish Re Policy”.  The Scottish Re Policy provided that the capital benefit for the applicants was determined by reference to their age and rank, and it set out the procedure to be followed by them in notifying and making a potential claim.  After the applicants each made an application for a LOL Payment, they received a letter of approval which included a Deed of Release that needed “to be signed and returned prior to payment”.  This “sign and return” requirement was a Qantas policy.  The Deed of Release included a clause which read:

   “The payment as at the date of termination, as outlined in 2.2, will be treated as an employment termination payment with the taxation rules governing an employment termination payment.  The total payment represents all moneys owing to the Employee pursuant to his Employment and the Termination (Final Termination Pay).  No payment in lieu of notice will be paid in the final termination pay.”

   EVIDENCE

   Material Evidence of Mr Kentish

8. In giving his evidence in chief, Mr Kentish confirmed that, subject to the correction of a typographical error, his witness statement was true and correct.  Then, in his witness statement he said he was currently employed as a flight simulator instructor with Qantas, and he started in that position on 20 February 2012.  In or about March 2006, he developed symptoms of an illness known as intermittent entrapment of the femoral nerve, which was formally diagnosed as such on or about 9 October 2007.  Earlier, on or about 5 September 2007, he received a letter from CASA which stated that his medical   certificate had been cancelled.  His employment with Qantas was subsequently terminated on or about 28 May 2008.  His LOL Payment was deposited into his bank account on 10 June 2008.  He did not receive any payment for accrued leave entitlements as he had exhausted all his sick leave, long service leave and annual leave entitlements before his employment was terminated.  He said he “understood the LOL Payment was intended to enable a pilot who had lost their licence for medical reasons to navigate the difficult financial time ahead and establish a new career”.

9. In cross examination by Ms Harding, Mr Kentish was referred to various provisions of the LHCA.  He said he had not made a claim for monthly payment of his capital benefit because the monthly payment would have been taxed.  He did this because of what was said in the “loss of licence policy frequently asked questions” document (“FAQ Document”) that had been supplied to him and Mr Bond by Qantas, and which was Appendix C to Mr Bond’s witness statement.  When questioned further, Mr Kentish said he had received the FAQ Document from Qantas in August 2005.  When referred to the loss of licence procedure on page 2 of the FAQ Document, he agreed that he fell under the permanently grounded category which, under the heading “Claim Approval” read:

   “…If the claim is approved, you will receive a letter from Business Support outlining details of the Capital Lump Sum Payment.  Enclosed will be the Deed of Release, Staff Travel Retired Employees information and Qantas Superannuation Disability Information.”

   When asked about the staff travel retired employees’ information on page 2 of the FAQ Document, Mr Kentish replied:

   “From your initial employment with Qantas until your retirement from Qantas you could subsequently, from that time, receive concessional travel in Qantas for the period that you were employed with Qantas.” [Transcript page 36/45]

10. When questioned by Ms Harding about his belief that the capital benefit was not considered income or an employment termination payment, but was instead a payment that was not taxable, Mr Kentish said he formed that belief when he received the FAQ Document in 2005.  He said further that he maintained loss of income insurance as a pilot and, when he was with Australian Airlines Limited, he paid for his own loss of licence insurance.  He stopped maintaining loss of licence insurance after the merger with Qantas because it was then contained in the LHCA.

    Material Evidence of Mr Bond

11. In giving his evidence in chief, Mr Bond confirmed that, subject to the correction of a typographical error, his witness statement was true and correct.  Then, in his witness statement he said that following suspension from flying duties he sought financial assistance from Qantas’ Educational Training and Assistance Scheme to complete studies at RMIT University to obtain a qualification in aviation safety and risk management.  This was declined by Qantas in a letter to him dated 8 August 2006.  He said he believed that the purpose of a LOL Payment was to provide financial stability for a pilot while he or she retrained for another career.

12. In cross examination by Ms Harding, Mr Bond said he had been trained as an aviation safety investigator in aviation’s air safety and risk management, but that he had been unable to secure employment in that role.  He was referred to Appendix C of his witness statement, which was the FAQ Document that included the loss of licence procedure on page 2.  He said he had received copies of these documents in March 2006.  He then said:

    “Actually, I will correct that:  I probably received them – it could have been slightly before that when I verbally told – rang the company to say it looked like I was going to lose my licence, and they posted out all the documentation and formwork to – in preparation to fill out, and these came with it.  These two documents were included.” [Transcript page 43/40]

13. Ms Harding then referred Mr Bond to paragraph 24 of his witness statement and to the Deed of Release mentioned in that paragraph, which he had signed on or about 13 February 2007 and subsequently returned to Qantas.  When referred to the loss of licence procedure and to the letter mentioned under the heading “Claim Approval”, Mr Bond said it was his understanding that he would be receiving the Deed of Release, staff travel retired employees’ information and Qantas superannuation disability information.  He said further that he understood the staff travel retired employees’ information only related to employees who had retired or where their employment had been terminated.  Mr Bond was referred to Appendix M to his witness statement, which was a letter to him from Mark Wagener, Manager B737 Flight Crew, dated 8 August 2006 and read:

    “I refer to your application for the Education and Training Assistance Scheme (ETAS) and advise that on this occasion, the application has been declined as the course is not considered appropriate to Qantas’ business needs and current budgetary constraints.

    Your application refers to gaining an alternative qualification given that you are unable to perform your normal duties.  The capital benefit of the Loss of Licence Insurance Plan is meant, in part, to recover the cost of a pilot re-training themselves for a career, other than flying, following a permanent loss of licence situation.”

    Material Evidence of Mr Purvis (by telephone)

14. In giving his evidence in chief, Mr Purvis confirmed that his witness statement was true and correct.  In his witness statement he said that he was currently employed on a part-time basis as a reservist with the Royal Australian Navy at HMAS Albatross.  He said that, in about February 2008, he was diagnosed with an illness known as idiopathic parkinsons’ disease.  He referred to the Deed of Release that had been forwarded to him by Qantas with a letter that stated that it needed “to be signed and returned prior to payment”.  He said he felt that he was being coerced into signing the Deed of Release and, unless he did so, he would not receive any entitlements owed to him.  He said he felt that this was an “all or nothing” situation.

15. In cross examination by Ms Harding, Mr Purvis was referred to Annexure M to Mr Bond’s witness statement which was the letter from Mr Mark Wagener.  When asked about the letter, Mr Purvis said he agreed with it in part, and then said:

    “Yes.  There – there is in the – in my interpretation a crossover point where you have insufficient time remaining to retrain yourself, and then from then on it becomes in part a recompense for losing your primary source of income.  So when – in your younger years when you can retrain, yes, I agree you use that money to support yourself and retrain.  But then later on it turns over to more support yourself till retirement.” [Transcript page 55/5]

    Material Evidence of Captain Kearns

16. In giving his evidence in chief, Captain Kearns confirmed that, subject to a minor correction, his witness statement was true and correct.  In his witness statement he said that in 2000 he became Deputy Chief Pilot for Qantas.  He ceased flying with Qantas in September 2007 and formally retired from Qantas in November 2008.  In January 2009, he was approached by both Qantas and the Australian and International Pilots Association to work as a consultant, at which time he decided to work with Qantas.  He said he was aware, almost from the time he first joined Qantas, that Qantas provided loss of licence insurance to pilots.  He said further that pilots needed loss of licence insurance because if they lost their licence they generally had no other training or qualifications to fall back on.  The pilots needed an amount of money to get themselves re-established in a new career.  To his knowledge, since the original Qantas loss of licence scheme was established in 1964, Qantas had paid the cost of the insurance policy to provide coverage for the pilots.  Under those insurance arrangements, Qantas itself paid all loss of licence payments to pilots each year.  At the end of the year, Qantas would claim back from the insurer any loss of licence payments over and above the excess under the policy.  Until Qantas self-insured for loss of licence, the Qantas loss of licence scheme was based on Qantas making the LOL Payment to pilots the amount of the total payments under the policy, over the excess, was reimbursed to Qantas by the insurer.  To the best of his knowledge, the loss of licence payments received by the pilots always came from Qantas.  He said a pilot normally received a payment under the loss of licence insurance policy if he/she had his/her medical certificate cancelled due to not meeting the required medical standard.  This could be because he/she suffered a medical condition or a medical episode or a physical injury that resulted in him/her losing his/her flying licence.  However, payment under the loss of licence insurance policy did not automatically follow because a pilot lost his/her licence as a result of such a medical condition, episode or injury.  Having a medical certificate cancelled and being paid the loss of licence payment (or capital benefit) are two distinctly different things.  They can coincide but in certain circumstances, one does not lead to the other.

17. In cross examination by Ms Harding, Captain Kearns was asked about payment by Qantas of the capital benefit under the loss of licence policy.  He said the last policy that was entered into by Qantas was one with Scottish Re.  This policy set out the terms and conditions upon which a capital benefit was paid and also set out the exclusions.

    SUBMISSIONS FOR THE APPLICANT

18. The following submissions, in brief terms, were made by Mr Flynn:

    (a)The loss of licence payments are not employment termination payments because the applicants received them for the loss of their pilots’ licences, not in consequence of the termination of employment.

    (b)The Collective Agreements prevail over the Deeds of Release.  The applicants became entitled to the loss of licence payments under the Collective Agreements as a result of the approval of their claims under the Scottish Re policy and not pursuant to the Deeds of Release.

    (c)Although there is a connection between the termination of each applicant’s employment and the loss of his licence, and between the LOL Payment and the loss of the licence, there is no relevant connection between each termination and the applicable LOL Payment, because the termination of employment was not a condition for payment under either the Collective Agreements or the Scottish Re policy.

    (d)The applicants became entitled to the loss of licence payments when they satisfied the requirements of the Scottish Re policy, not when they signed the Deeds of Release.  Accordingly, the termination of employment was not a pre-condition to the LOL Payment.

    (e)If it is found that the applicants did receive the loss of licence payments in consequence of termination of employment, the payments were capital payments for, or in respect of, personal injury and therefore fall within s 82-135(i) of the ITAA 1997.

    (f)If the loss of licence payments are found to be employment termination payments, the loss of licence payments are either subject to fringe benefits tax or, if not subject to fringe benefits tax, are exempt from fringe benefits tax because they are for, or in respect of, personal injury.

    (g)If the loss of licence payments are neither employment termination payments nor subject to fringe benefits tax, the payments are non-assessable to income tax under s 15-2(1) of the ITAA 1997.

    (h)The loss of licence payments are not assessable as taxable capital gains.  If CGT Event C2 happens and the loss of licence payments are not subject to fringe benefits tax and are not otherwise assessable, it must be the case that the payments are for, or in respect of, personal injury and the exemption in s 118-37(1)(b) of the ITAA 1997 applies.

    SUBMISSIONS FOR THE RESPONDENT

1. The following submissions, in brief terms were made by Ms Harding:

   (a)The loss of licence payments received by the applicants were received in consequence of the termination of their employment as required by paragraph (a)(i) of the definition of “employment termination payment” in s 82-130(1) of the ITAA 1997.

   (b)The nexus between the payments and the termination of the applicants’ employment is found in the terms of their employment with Qantas.  In each case, the terms of employment anticipate the termination of employment of the applicants who receive a capital benefit.

   (c)The loss of licence payments do not fall within s 82-135(i) of the ITAA 1997.  The nature and effect of the personal injury suffered by the applicants were not   factors that were considered, save that the personal injury had to result in the loss of licence.  The amount of the loss of licence payments depended upon the rank and age of the applicants.  As such, there was no correspondence between the amount of the payments and the personal injury suffered by the applicants.

   (d)If the loss of licence payments are not employment termination payments, the value of the payments should be included in the assessable income of the applicants under s 15-2 of the ITAA 1997.  The loss of licence payment is a compensation, benefit or bonus provided to each of the applicants in respect of, or for or in relation directly or indirectly to, employment within the meaning of s 15-2(1) of the ITAA 1997.  The loss of licence payment was allowed, conferred, given or granted and thus provided to the applicants and would not have been provided but for the loss of the licence and the termination of employment.

   (e)CGT Event C2 under s 104-25(1)(b) of the ITAA 1997 happens if ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied.  Each applicant acquired a right which was an intangible CGT asset as against Qantas.  The right was to receive a payment under the loss of licence provisions of the Collective Agreements and the right was released, discharged or satisfied when Qantas made the payment.

   (f)The capital gain made by the applicants from CGT Event C2 happening is not disregarded under s 118-37(1)(b) of the ITAA 1997.  The CGT Event did not relate directly to compensation or damages which the applicants received for a wrong, injury or illness suffered personally within the meaning of s 118-37(1)(b).  The loss of licence payment was calculated by reference to the applicants’ rank and age and not by reference to the nature of a wrong, injury or illness suffered personally.

   CONSIDERATION

   Are the loss of licence payments received by the applicants “employment termination payments” under Division 82 of the ITAA 1997?

2. The taxation of “employment” termination payments from 1 July 2007 is governed by Part 2-40 of the ITAA 1997. Prior to that, s 26(d) of the ITAA 1936 dealt with the taxation of “eligible” termination payments made in consequence of termination of employment. Under s 82-130(1) of the ITAA 1997, a payment to a person is an employment termination payment if the following conditions are met:

   ·the payment is received in consequence of the termination of the person’s employment;

   ·the payment is received no later than 12 months after the termination; and

   ·the payment is not excluded as an employment termination payment by s 82-135 of the ITAA 1997.

3. The leading cases on the meaning of employment termination payment are Reseck v Commissioner of Taxation [1975] 133 CLR 45, McIntosh v FC of T (1979) 10 ATR 13 and Le Grand v Commissioner of Taxation (2002) 124 FCR 53. These decisions all concern the meaning of eligible termination payment in the ITAA 1936, but they are relevant here because the definitions of employment termination payment and eligible termination payment both share the requirement that the payment must be “in consequence of” the termination of employment.

4. In Reseck, the taxpayer received severance pay in accordance with his employment contract after his employment was terminated. The High Court held, by majority, that the severance pay was an eligible termination payment. Gibbs J said at 51:

   “… Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination.  In the present case the payment did follow as a result of the termination of the taxpayer’s services.  It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. …” [Emphasis added]

   Jacobs J said at 56:

   “I have no doubt that the amounts were allowances to the appellant, that they were paid in lump sums and that they were paid in consequence of the termination of his employment.  It was submitted that the words ‘in consequence of’ import a concept that the termination of the employment was the dominant cause of the payment.  This cannot be so.  A consequence in this context is not the same as a result.  It does not import causation but rather a ‘following on’.” [Emphasis added]

5. In McIntosh, a bank employee became entitled on retirement to a pension for life from a pension fund. He commuted the pension to a lump sum and the Commissioner treated the lump sum payment of $27,006.84 as an eligible termination payment. The taxpayer argued that he received the payment as a result of the commutation, rather than in consequence of the termination of his employment. The Full Federal Court held that there was a sufficient nexus between the termination of his employment and the payment for it to be treated as an eligible termination payment. Brennan, Toohey and Lockhart JJ all agreed that something more was required than merely a temporal connection. Brennan J said at 15:

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

   Though Jacobs J [in Reseck] speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J.  Jacobs J said, at 56; 545: --

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

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

6. Toohey J said at 19:

   “In the present case it may be true to say that the immediate cause of the payment to the taxpayer of the sum of $27,006.84 was the exercise by him of the right to commute a percentage of the pension to which he was entitled.  To say that is not to exclude the notion that the payment was in consequence of the taxpayer’s retirement or that it followed on his retirement.  In my view, the payment followed on the taxpayer’s retirement, the only intervening event being the exercise of the option to commute.  The connection was not simply temporal; retirement was a prerequisite to payment and in that sense there was a ‘following on’ as I understand the language of Jacobs J.”

7. In an extensive judgment, Lockhart J also referred to the decision of Jacobs J in Reseck. He said at 25:

   “In my opinion his Honour did not use the words ‘following on’ as referring merely to a temporal progression of events.  Rather his Honour had in mind a connection between the retirement from or the termination of employment and the payment in question as well as a temporal progression of events.  I do not read the words of his Honour as excluding a connection that is causal in character; rather his Honour enunciated a wider test than one merely of causation and expressed it as a ‘following on’; a concept that may in an appropriate case include a relevant causal connection.  In other words a payment that is caused by the act of retirement from or termination of employment would fall within the test of a ‘following on’, but so would other payments that do not have such causal connection, provided there is a link or connection between the termination of or retirement from employment and the making of the payments.  In my opinion Gibbs J and Jacobs J were not construing the phrase ‘inconsequence of’ differently.

   …

   If the phrase ‘inconsequence of’ were to necessarily import causation, in my opinion the payment made to the taxpayer in the present case would not be a consequence of his retirement.  The cause would be the exercise by him of his right to commute 50% of his pension entitlement to a lump sum which, upon its being exercised, required the administrators to pay the lump sum to him.  That would be not merely a cause, but the cause of the payment.

   …

   In the present case in my opinion there is a relevant connection between the retirement of the taxpayer and the payment of the sum of $27,006.84. …”

8. In Le Grand, Goldberg J has reconciled the different threads in Reseck and McIntosh.  The case concerned an amount received by the taxpayer by way of settlement for wrongful termination of employment as well as for misleading and deceptive conduct.  After analysing the decisions in Reseck  and McIntosh, Goldberg J said at 62-63:

   “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.”

9. In the present case, after referring to Reseck, McIntosh and Le Grand, Mr Flynn’s primary submission was that the LOL Payments were not employment termination payments because the applicants received them for the loss of their pilots’ licences, not in consequence of the termination of employment. In his written submissions, he says (at paragraph 87.2) that:

   “In order to be an ETP the payment must be causally connected to the termination of employment: Reseck, per Gibbs J. Hence, if a taxpayer is legally entitled to the payment, the termination of employment must be both the occasion for, and a condition of, the payment: Brennan J in McIntosh, Goldberg J in Le Grand.”

   It was Ms Harding’s submission, with which I agree, that this “occasion for and condition” approach was rejected by Goldberg J in Le Grand.  As the learned Judge said in paragraph 34 of his reasons, the observation of Brennan J in McIntosh:

   “… that the termination must be ‘occasion’ of the payment before it can be held to be an eligible termination payment fails to pay sufficient regard to the judgments in Reseck and the other judgments in McIntosh.  I do not consider that Brennan J was departing from the reasoning in Reseck.  His observation that the phrase ‘in consequence of retirement’ required that the retirement be the occasion of, and a condition of, entitlement to the payment was made in the context of explaining what Andrews J meant in  McIntosh v Commissioner of Taxation (Cth) [1978] Qd R 354; it was not intended to be an exclusive or definitive explanation of what the phrase required in order to be satisfied.”

   In my view, based on the leading cases I have referred to, the proper test is to assess whether or not the payments were related to, or were an effect or followed on from, the termination of the applicants’ employment with Qantas.

10. Mr Flynn suggested that Qantas paid the LOL Payments under either or both the Collective Agreements and the Deeds of Release.  He said that, on the one hand, certain clauses of the Deeds of Release indicated that each applicant received his LOL Payment as a consequence of the termination of his employment.  On the other hand, he said that the Collective Agreements indicated that Qantas made the LOL Payment in respect of an applicant’s cancellation, for medical reasons, of his licence.  He referred to clause 20 of the LHCA, clause 21 of the SHCA and clause 24 of the SHWA, which provided benefits for LOL insurance as specified in the Scottish Re Policy.  He said the Policy was not part of the Collective Agreements.  However, I note in fact that the Policy is referred to in, or is an Appendix to, each of clause 20, 21 and clause 24 of the Collective Agreements.  He then seeks to make the point that none of the Collective Agreements makes termination of employment a condition of, or the occasion for, payment of the LOL Payment.  In my view, given what is said by Goldberg J in Le Grand, this requirement is not necessary. 

11. Again, in his written submissions, Mr Flynn refers to clause 24.13.1 of the SHCA and clause 27.13.1 of the SHWA.  Both clause 24.13.1 and clause 27.13.1 provide an entitlement to a lump sum payment for accrued sick leave where an applicant’s employment terminates as a result of their licence being cancelled or not renewed and he receives payment of a capital sum under the loss of licence insurance plan.  Mr Flynn submits that neither of these clauses requires a pilot who receives an LOL Payment to terminate their employment.  However, on a close analysis of their wordings and as Ms Harding suggested, it seems to me that these clauses in the SHCA and the SHWA contemplate that a pilot’s employment will terminate as a result of the pilot’s licence being cancelled or not renewed and the pilot receiving a capital sum under the loss of licence insurance plan.       

12. Mr Flynn also refers to clauses 26.6.1 and 26.6.2 of the LHCA.  Clause 26.6.1 concerns the rate of pay for a flight crew member who has not applied for a capital benefit and, because of personal illness, either continues on sick leave or accepts a ground staff position.  Clause 26.6.2 applies to a person who has applied for, and receives, a capital benefit and his or her licence will terminate, but there is no provision for a rate of pay.  Clause 26.6.2 reads:

    “Clause 26.6.1 does not apply where a flight crew member, as a result of the flight crew member’s licence being cancelled or not renewed by the Aviation Regulatory Authority, receives payment of the capital sum under the loss of licence insurance plan (in which case, the flight crew member’s services will terminate when the capital sum under the plan is paid).”

    Again, Mr Flynn submitted that clause 26.6.2 does not impose any requirement that the applicant’s employment is terminated in order to qualify for an LOL Payment.  He says that, under this clause, the payment of the LOL Payment is the “occasion” of the termination of employment.  On the other hand, Ms Harding submitted that the “connection” between the payments and the applicants’ termination of employment is found in the terms of employment, including:

    (a)in the case of Mr Purvis – clause 26.6.2 of the LHCA;

    (b)in the case of Mr Kentish – clause 27.13.1 of the SHWA; and

    (c)in the case of Mr Bond – clause 24.13.1 of the SHCA.

    She submitted, correctly in my view, that in each case the terms of employment anticipate the termination of employment of a pilot who receives a capital benefit.

13. Ms Harding referred to the various clauses of the Collective Agreements which create the obligation on Qantas to provide benefits as specified in the Scottish Re Policy.  The Policy anticipated cover against the temporary and/or permanent loss of licence.  It also provided that claims procedures were to be agreed between Qantas and Scottish Re.  She referred to the loss of licence procedure document which was page 2 of Appendix C to Mr Bond’s witness statement.  Mr Kentish said that he had also received the procedure document from Qantas.  In his evidence, Mr Purvis said that he had not seen the document.  The procedure document reflected two pathways in the claims procedures. For a permanently grounded flight crew member, the medical status form with supporting documentation (medical reports, CASA letter/s), were to be completed and returned.  A claim could not proceed until both CASA letters had been received.  Then, a request to apply the full capital benefit had to be provided in writing.  If the claim was approved, the member would receive a letter from Qantas (Business Support) outlining the details of the capital lump sum payment.  Also enclosed, would be “the Deed of Release, Staff Travel Retired Employees information and Qantas Superannuation Disability Information.”  The covering letters provided to the applicants and referred to in their witness statements (Exhibit A3, Appendix E, Exhibit A1, Appendix E and Exhibit A2, Appendix K) all made it clear that the benefits were directed to medically retired employees.  The procedure also involved the provision of a Deed of Release.  Mr Flynn suggested that the Deeds were forced upon the applicants.  However, it seems clear that the Deeds were part of the procedure set out in the loss of licence procedure document and referred to in the covering letters sent to the applicants. 

14. Appendix M to Mr Bond’s witness statement is a letter from Mr Mark Wagener, Manager B737 Flight Crew, which indicates that the capital benefit from the loss of licence insurance plan was meant, in part, to recover the cost of a pilot retraining himself for a career other than flying, following a permanent loss of licence.  As Ms Harding submitted, each of the applicants agreed with Mr Wagener’s statement.  Mr Purvis agreed in part (Transcript 55/5).  According to Captain Kearns, the purpose of a payment was to provide the pilots with an amount of money “to get themselves re-established in a new career” (Exhibit A4, paragraph 26).  Mr Bond said he believed “that the purpose of a LOL payment is to provide financial stability to a pilot while he or she retrains for another career” (Exhibit A2, paragraph 10).  Mr Kentish said he “understood that the LOL payment was intended to enable a pilot who has lost their licence for medical reasons to navigate the difficult financial time ahead and establish a new career” (Exhibit A1, paragraph 13).  When these comments are analysed, it is clear that the applicants all understood that the lump sum payment was to enable them to prepare themselves for a career after, and in consequence of, the termination of their employment with Qantas. 

15. It was Mr Flynn’s argument that there was no requirement in the Collective Agreements that the applicants’ employment be terminated.  In my view, this argument does not take account of the loss of licence procedure document, the covering letter received by each of the applicants from Qantas referred to in their witness statements, the Deeds of Release, the letter from Mr Mark Wagener and the understanding of Captain Kearns, Mr Kentish and Mr Bond that the capital payment was to enable a pilot to get re-established or re-trained.  Read in context, the interpretation of the Collective Agreements is that a consequence of the capital payment is that there is a termination of employment.  Then, in paragraphs 100 and 111 of Mr Flynn’s written submissions he says there is no requirement in the Collective Agreements that a pilot’s employment be terminated upon receipt of an LOL payment, or that there is any requirement that the pilot’s employment is terminated in order to qualify for an LOL payment.  In paragraph 125, he says although there is a connection between the termination of each pilot’s employment and the loss of his licence, and between the LOL payment and the loss of the licence, there is no relevant connection between each termination and the applicable LOL payment because the termination of employment was not a condition for payment under either the Collective Agreements or the Scottish Re Policy.  I disagree.  As Ms Harding submitted, there was a condition which is found in the Collective Agreements, when read in light of the Scottish Re Policy and the loss of licence procedure document.  So read, the Collective Agreements incorporate the loss of licence procedure document that refers to the Deed of Release and the Staff Travel Retired Employees information, which is for medically retired employees, as can be seen from the covering letters from Qantas.  Thus, the relevant connection between the payment and the termination of employment is found in the Collective Agreements, the Scottish Re Policy and the loss of licence procedure document.  The connection between the payment and the termination of employment was not simply temporal.  Termination of employment as a pilot was a pre-requisite to payment and in that sense payment followed on the termination of employment and had the necessary connection with it.

1. When I first considered Mr Flynn’s primary submission that the LOL Payments were not employment termination payments because the applicants received them for the loss of their pilots’ licences, not in consequence of the termination of employment, my feeling was that the submission was best answered by what was said by Toohey J in McIntosh (supra) at page 19. Adopting the same approach, it may be true to say that the immediate cause of the capital payments to the applicants in the present case was the loss of their pilots’ licences. However, to say that is not to exclude the notion that the payments were received in consequence of the termination of their employment or that they followed on their termination of employment.

2. To summarise and conclude, and having now reflected on Ms Harding’s submissions as expressed in these reasons, I am of the opinion that the LOL Payments were received by the applicants in consequence of the termination of their employment with Qantas.  The Collective Agreements and the Scottish Re Policy provided for cover against permanent loss of licence and for agreed claims procedures.  Under these claims procedures is the loss of licence procedure document, which was page 2 of Appendix C to Mr Bond’s witness statement.  The loss of licence procedure document reflected two pathways in the claims procedures and set out what action was required by an applicant.  The required action was also set out in the covering letters sent to the applicants by Qantas, which enclosed a Deed of Release, Staff Travel Retired Employees information, directed to medically retired employees, and Qantas Superannuation Disability Information. 

3. Although I have found that the LOL Payment in the hands of each of the applicants was an employment termination payment received in consequence of the termination of employment, if my finding is found to be incorrect, I must also consider the other issues that have been raised before me.       

   If the Loss of Licence payments are employment termination payments under Division 82 of the ITAA 1997, are the exempt capital payments for, or in respect of, personal injury under section 82-135 of the ITAA 1997?

4. Section 82-135 provides a list of payments that are not employment termination payments.  In paragraph 127 of his written submission, Mr Flynn seeks to rely on s 82‑135(i), when read with s 82-130(1)(c) of the ITAA 1997.  Under s 82-135(i) a capital payment for, or in respect of, personal injury is not an employment termination payment “so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on [the taxpayer’s] capacity to derive income from personal exertion”.  Mr Flynn argues that the LOL Payments are not employment termination payments because they were paid for, or in respect of, personal injury.

5. In her written submissions, Ms Harding suggests that the applicant’s face a number of difficulties, in particular:

   (a)The nature of the personal injury suffered by each of the applicants was not a factor that was considered in relation to the LOL Payment, save that the personal injury had to result in the loss of licence.

   (b)The effect of the personal injury on the applicants’ capacity to derive income from personal exertion was not a factor that was considered in relation to the LOL Payment, again, save that the personal injury had to result in the loss of licence and thus of the privileges of the licence.

   (c)The amount of the LOL Payment depended upon the rank and age of each of the applicants up to age 59: see Schedule A of the Schedule of Benefits (Exhibit R4, page 372).  As such, there is no correspondence between the amount of the Payment and the personal injury suffered by each of the applicants.  On the evidence, it cannot be concluded that the amount was reasonable having regard to the nature of the personal injury suffered.

   Similarly there is no correspondence between the amount of the LOL Payment and the likely effect of the personal injury on the capacity of each of the applicants to derive income from personal exertion.  There is nothing to suggest that the applicants’ capacity to obtain other employment was taken into account in determining the Payment.  As such, on the evidence, there is no basis for concluding that the amount was reasonable having regard to the likely effect of the personal injury on the applicants’ capacity to derive income from personal exertion.  In Commissioner of Taxation v Scully (2000) 201 CLR 148 at paragraph 26, in relation to former s 27A(1)(n) of the ITAA 1936, which is apt, the High Court said:

   “…

   In our opinion, the fact that the payment must be ‘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’ envisages that the payment has been calculated by reference to the injury. …”

   No such calculation occurred in the present case.  For the above reasons, s 82‑135(i) does not exclude the LOL Payments as employment termination payments.

   Are each of the loss of licence payments a “fringe benefit” as defined in section 136(1) of the Fringe Benefits Tax Assessment Act 1986?

6. The term “fringe benefit” is defined in s 136(1) of the FBTAA. The definition does not include the following:

   “….

   (lc) an employment termination payment (within the meaning of the Income Tax Assessment Act 1997);

   ….

   (m) consideration of a capital nature for, or in respect of:

   (i)      ....; or

   (ii)     personal injury to a person.

   …”

7. In relation to paragraph (lc) of the definition of fringe benefit, this paragraph makes it clear that a fringe benefit does not include an employment termination payment under the ITAA 1997.  Moreover, in relation to sub paragraph (m)(ii) of the definition of fringe benefit, the decision of the High Court in Scully (supra) is relevant. That case dealt with the definition of eligible termination payment in s 27A(1) of the ITAA 1936 and the exclusion contained in paragraph (n) of the definition. Paragraph (n) is worded in similar terms as subparagraph (m)(ii) of the definition of fringe benefit in s 136(1) of the FBTAA. Both provisions refer to “consideration” of a capital nature for, or in respect of, personal injury. In Scully the High Court said at paragraph [25]:

   “…the use of the word [consideration] in this context suggests that the payment or benefit is made to recompense the taxpayer for the injury and is referring to a payment or benefit that compensates or reimburses the taxpayer for the injury suffered, recompense being one of the standard meanings of ‘consideration’. …”

   And then at paragraph [29], the High Court said:

   “… Given that ‘consideration’ in this paragraph involves the notion of recompense, it is not enough that there is a ‘consideration’ which can be said to have a connection with personal injury.  The payment must be compensation for or in respect of the particular injury.”

8. In the present case, the language in subparagraph (m)(ii) in the definition is “consideration of a capital nature for, or in respect of, personal injury to a person” and the payment for personal injury depended upon the pilot’s age and rank.  The actual injury suffered was not a factor that was taken into account, save for its effect being the result of a loss of licence.  There was, therefore, no notion of recompense, so a loss of licence payment is not a fringe benefit.

   Are the loss of licence payments statutory income under section 15-2 of the ITAA 1997?

9. Section 15-2 of the ITAA 1997 includes as assessable income of the taxpayer all allowances, gratuities, compensation, benefits, bonuses and premiums provided in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer.  In my view, the capital payment received by each of the applicants is a benefit.  The payment was allowed, conferred, given or granted or performed and thus provided to the applicants within the meaning of s 15-2(1).  In this regard, the term “provide” is defined (in s 995-1(1) of the ITAA 1997) to include “allow, confer, give, grant or perform”.  The payment was made, and thus performed, by Qantas.  The value of the benefit is the amount of the payment and will be included in the assessable income of the applicants under s 15-2(1), unless excluded as an employment termination payment under s 15-2(3)(a), which reads:

   “(3)  However, the value of the following are not included in your assessable income under this section:

   (a)a superannuation lump sum or an employment termination payment;

   …”

10. An employment termination payment is often of a capital nature (per Jacobs J in Reseck (supra) at 56).

    The exclusion in s 15-2(3)(a) of the ITAA 1997 of an employment termination payment indicates that such a payment may fall within s 15-2(1).  As such, the language of s 15-2 does not suggest that the section is limited to amounts of an income nature and arguably can include an amount of a capital nature.

11. As I have found that the LOL Payments are employment termination payments, I find the value of the Payments is not included in the applicants’ assessable income by virtue of s 15‑2(3)(a) of the ITAA 1997.

    Do the loss of licence payments result in CGT Event C2 happening under section 104-25(1) of the ITAA 1997?

12. CGT Event C2 under s 104-25(1)(b) of the ITAA 1997 happens if a taxpayer’s ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied.  Under s 108-5(1) of the ITAA 1997, a CGT asset is any kind of property or a legal or equitable right that is not property.  Arguably, each applicant acquired a right which was an intangible CGT asset as against Qantas.  The right was to receive a payment under the loss of licence provisions of the LHCA, the SHWA or the SHCA (as the case may be).  The right was released, discharged or satisfied when Qantas made the capital payment.  Hence, CGT Event C2 happened under s 104-25(1)(b) and the time of the Event is under s 104-25(2) of the ITAA 1997.

    If CGT Event C2 happens, are any capital gains disregarded on the basis that the payments are compensation received for a wrong, injury or illness under section 118-37(1) of the ITAA 1997?

13. The nature of the capital payment received by each of the applicants is found in the terms of their employment with Qantas, the terms of the Scottish Re Policy and the purpose of the payment.  The amount of the payment depended upon the rank and age of each of the applicants.  The amount was calculated without regard to the nature of the personal injury suffered, save that the personal injury had to result in the loss of licence.  The payment does not relate directly to compensation or damages within s 118-37(1)(b) of the ITAA 1997.  The capital gain is not disregarded under s 118-37(1)(b) of the ITAA 1997.

    DECISION

14. Each of the objection decisions under review is affirmed.

I certify that the preceding 47 (forty -seven) paragraphs are a true copy of the reasons for the decision herein of

.....................[Sgd]...................................................

Administrative Assistant

Dated  4 February 2013

Date(s) of hearing	25 & 26 October 2012
Counsel for the Applicant	Mr M Flynn
Solicitors for the Applicant	Finlaysons
Counsel for the Respondent	Ms D Harding
Advocate for the Respondent	Mr A Goss, ATO Legal Services Branch