Federal Commissioner of Taxation v Scully

The High Court of Australia heard an appeal from the Full Court of the Federal Court concerning the tax treatment of a lump sum payment received by Ms Lynette Scully from her superannuation fund due to total and permanent disablement. The dispute centred on whether this payment constituted an "eligible termination payment" under the *Income Tax Assessment Act 1936* (Cth), specifically whether it was excluded from this definition as "consideration of a capital nature for, or in respect of, personal injury to the taxpayer."

The legal issues before the High Court were whether the payment received by Ms Scully was "consideration of a capital nature for, or in respect of, personal injury to the taxpayer" within the meaning of paragraph (n) of the definition of an eligible termination payment. This required the Court to interpret the terms "consideration" and "for, or in respect of," in the context of the Act, and to consider the relationship between paragraph (n) and section 27G of the Act, which defines an "invalidity payment."

The High Court allowed the appeal, finding that the Full Court had erred in its conclusion. The Court reasoned that while there was a connection between the payment and Ms Scully's personal injury, the payment was not "consideration of a capital nature for, or in respect of, personal injury." The Court distinguished paragraphs (m) and (n) of the definition, which commence with "consideration of a capital nature," from other paragraphs that begin with "any payment" or "a payment," indicating an intention by Parliament to encompass more than mere payments. The Court held that "consideration" in paragraph (n) implied recompense for the injury, and that the wording of the paragraph, particularly the requirement for the payment to be reasonable having regard to the injury's effect on income-earning capacity, supported this interpretation. The Court concluded that the payment was not made as recompense for personal injury but rather as a superannuation benefit for total and permanent disablement, irrespective of its cause.

Consequently, the High Court ordered that the appeal be allowed, the orders of the Full Court of the Federal Court be set aside, and the appeal to that Court be dismissed. The appellant, the Commissioner of Taxation, was to pay the respondent's costs in the High Court according to an undertaking given.