Johnston and Defence Force Retirement and Death Benefits Authority
[2009] AATA 290
•28 April 2009
CATCHWORDS – DEFENCE FORCE BENEFITS – whether pension payable should be calculated on pay at demoted level at discharge or that of higher rank when election to disregard reduction in pay rate had been exercised – decision affirmed
Defence Force Retirement & Death Benefits Act 1973, ss 3, 17, 19, 20, 23, 31, 33, 75, 78, 98J
Defence Force Retirement & Death Benefits Amendment Act 1981, s 8
Duncan v Defence Force Retirement and Death Benefits Authority and Commonwealth of Australia (1980) 47 FLR 256; 3 ALD 113; 30 ALR 165
DECISION AND REASONS FOR DECISION [2009] AATA 290
ADMINISTRATIVE APPEALS TRIBUNAL )
) 2008/5669
GENERAL ADMINISTRATIVE DIVISION )Re:DAVID JOHNSTON
Applicant
And: DEFENCE FORCE RETIREMENT AND DEATH BENEFITS AUTHORITY
Respondent
DECISION
Tribunal: Deputy President S A Forgie
Date: 28 April 2009
Place: Melbourne
Decision:The Tribunal affirms the decision of the respondent dated 7 November 2008.
S A FORGIE
Deputy President
The issue in this case turns on whether the pension payable to the applicant, Mr David Johnston, under the Defence Force Retirement and Death Benefits Act 1973 (DFDRB Act) should be calculated on the basis of the annual rate of pay he received as a Lance Corporal at the time of his discharge or at the higher rate payable to a Corporal. Mr Johnston had previously held the rank of Corporal and had made contributions under the DFDRB Act on the basis of the annual rate of pay for that position. After his demotion to the rank of Lance Corporal, he elected to continue to make contributions at the rate he had when a Corporal. That was a rate higher than the rate he would otherwise be required to pay as a Lance Corporal. Some two years after his demotion, Mr Johnston was discharged from the Australian Defence Force (ADF) on the grounds of invalidity. The issue to be decided in this case is whether the pension payable to Mr Johnston under the DFDRB Act should be assessed on the basis of the annual rate of pay payable to a Corporal or to a Lance Corporal. Mr Johnston has submitted that s 20(1) of the DFDRB Act requires the pension to be assessed on the basis of the annual rate of pay to a Corporal. For the reasons I give below, I do not agree with Mr Johnston and have decided that his pension should be assessed on the basis of the rate of pay payable to a Lance Corporal.
BACKGROUND and LEGISLATIVE FRAMEWORK
The parties agreed that the applicant, Mr David Johnston, was a member of the Australian Defence Force (ADF). For the purposes of the DFDRB Act, he was an eligible member of the Defence Force.[1] As such, he was required to pay the Commonwealth fortnightly contributions in accordance with that legislation.[2] The amount of each fortnightly contribution he paid was “… an amount equal to 5.5% of the fortnightly rate of pay applicable to the member on the day on which the contribution is payable.”[3] The “fortnightly rate of pay”:
[1] DFDRB Act, s 3(1)
[2] DFDRB Act, s 17(1)
[3] DFDRB Act, s 19(1)
“… in relation to a member of the Defence Force on a particular day, means
an amount calculated in accordance with the formula:
14 x A
365
Where A is the annual rate of pay applicable to him on that day.”[4]
The expression “annual rate of pay”:
“… in relation to a member of the Defence Force on a particular day, means the amount, that, under the regulations, is the annual pay applicable to the member on that day”.[5]
[4] DFDRB Act, s 3(1)
[5] DFDRB Act, s 3(1)
During the course of his service, Mr Johnston was promoted to the rank of Corporal but, on 10 July 1989, he was demoted to the rank of Lance Corporal after being summarily convicted of an offence under the Defence Force Discipline Act 1982. The demotion meant a reduction in Mr Johnston’s rate of pay from the $26,593 per annum that he had been paid as a Corporal. Despite the reduction, Mr Johnston made an election under s 20(1) of the DFDRB Act to have the reduction in his rate of pay disregarded.
Section 20(1) provides:
“Where the annual rate of pay applicable to a contributing member changes, otherwise than by reason of the member ceasing to hold an acting or a temporary rank, or of the amendment of the Defence Force Retirement and Death Benefits (Annual Rates of Pay) Regulations made by section 9 of the Defence Force Retirement and Death Benefits Amendment Act 1981 and, as a result of the change, the amount of each fortnightly contribution to be paid by him would, if he did not make an election under this subsection, become less, he may, by notice in writing given to the Authority within a period of 90 days after the change, or within such further period as the Authority, in special circumstances, allows, elect to have that change in his annual rate of pay disregarded, and, if he so elects, the change shall be disregarded for the purposes of this Act.”
The practical effect of Mr Johnston’s making an election in the short term was that he continued to make contributions at the higher rate at which he had been making them when he held the rank of Corporal. Had he not made the election, he would have been entitled to a refund of some of the contributions he had made
under s 17 under s 20(2). The amount of the refund would have been an amount:
“… equal to the difference between the amount of the contributions payable by him under that section before the change referred to in subsection (1) and the amount of the contributions that would have been so payable by him if the amount of each fortnightly contribution so payable by him had not exceeded the amount that is the amount of each fortnightly contribution payable by him after the change …”[6]
The effect of the refund is that “… the amount of any contributions in respect of which he becomes so entitled to a refund shall, for the purposes of this Act, be deemed not to have been paid by him.”[7]
[6] DFDRB Act, s 20(2)
[7] DFDRB Act, s 20(2)
Mr Johnston was discharged from the ADF on the grounds of invalidity on 17 September 1991. By that time, Mr Johnston’s annual rate of pay as a Lance Corporal was $28,038.00. This was an annual rate greater than that which he had received as a Corporal. Indeed, it had exceeded that which he received as a Corporal since 7 June 1990 when it had been increased to $26,934.00. Mr Johnston’s salary, his DFDRB contributions and the salary on which those contributions was calculated from 13 April 1984 when he was a Corporal and for the period up to
17 June 1990 after his reduction in rank to Lance Corporal is shown in the following table taken from a letter dated 4 August 2008 from the DFDRB to Mr Johnston.[8] It also shows the salary payable to a person holding the rank of Corporal after that date:
[8] T documents at 93
| Effective Date | CPL level 4 | LCPL level 4 | Your salary and contributions on reduction in rank | |||
| Salary | DFDRB conts | Actual salary | DFDRB conts | Salary for DFDRB | DFDRB conts | |
| 13/4/1984 | $26,593 | $56.10 | ||||
| 10/7/1989 | $26,593 | $56.10 | $25,117 | $52.99 | $26,593 | $56.10 |
| 23/11/1989 | $26,593 | $56.10 | $26,024 | $54.90 | $26,593 | $56.10 |
| 7/6/1990 | $28,410 | $59.93 | $26,934 | $56.82 | $26,934 | $56.82 |
The Defence Force Retirement and Death Benefits Authority (Authority) determined Mr Johnston’s incapacity as being 60% or greater according to s 30 of the DFDRB Act. Consequently, he was classified as Class A. That meant
that under s 31(2):
“… the rate at which invalidity pay is payable …is such amount per annum as is equal to, in the case of a recipient member classified as Class A under section 30, 76.5%, … of the annual rate of pay applicable to him immediately before his retirement.”
The word “‘retirement’ means retirement as a member of the Defence Force, and includes discharge from the Defence Force …”.[9]
[9] DFDRB Act, s 3(1)
Section 31(2) is qualified by s 31(3) which provides:
“Subject to section 33, where but for this subsection, the rate of invalidity pay payable to a member of the scheme under sub section (2) at any time would be less than the rate at which retirement pay would have been payable to him at that time if, at the time when he was retired on the ground of invalidity or of physical or mental incapacity to perform his duties, he had retired on other grounds, the rate of invalidity pay payable to him at that first-mentioned time is the rate at which retirement pay would have been so payable at that time.”
The qualification to s 30(2) in s 33 is not relevant as it applies to a person to whom previous legislation relating to retirement benefits for members of the Defence Force that came into force before 1 October 1972.[10] There is no suggestion that legislation predating the DFDRB Act applies to Mr Johnston or that the circumstances to which s 33 applies are those in which he finds himself. It is relevant to refer to it, though, as it reveals part of the pattern of the DFDRB Act and so part of the policy underpinning it. I will take as an example, s 33(4), which relates to a person who was reclassified from Class A to Class B. It provides:
“Where the previous pension percentage of pay applicable to a person … who, on his retirement is classified as Class A under section 30 but is subsequently reclassified as Class B, is greater than the new pension percentage of pay applicable to him, he may, by notice in writing given to the Authority within a period of 90 days after the date from which the re-classification has effect, or within such further period as the Authority, in special circumstances, allows, elect that the rate at which invalidity pay shall be payable to him shall be an amount per annum that is such percentage of his annual rate of pay for the purposes of this Act immediately before his retirement as is the same as the previous pension percentage of pay applicable to him, and, subject to subsection (5), the election has effect accordingly.”
[10] DFDRB Act, ss 3(1) and 33(1) and (3)
The expression “previous pension percentage of pay”:
“… means the annual rate of pension … that would have been payable to him under the previous legislation if he had retired on 30 September 1972, otherwise than on the ground of invalidity or of physical or mental incapacity to perform his duties, and:
(a)in the case of a person who was, on 30 September 1972, an officer of the Permanent Forces – he had, on that date, attained the retiring age for the rank held by him on that date;
(b)…
and had, on 30 September 1972, completed a number of years of service for pension equal to the number of years of service for pension completed by him on his retirement.”[11]
[11] DFDRB Act, s 33(1)
In relation to a person to whom s 33 applies and who has been reclassified from Class A to Class B, the “new pension percentage of pay”:
“means the rate that would have been the annual rate of his invalidity pay … that would have been payable to him under this Act on his retirement if he had been classified as Class B on his retirement.”[12]
[12] DFDRB Act, s 33(1)(b)
Section 33(5) empowers the Authority to require the person making the election to pay the Commonwealth a contribution of an amount it determines appropriate in the circumstances.
Again, the retirement benefits payable to those who retire and who are not entitled to an invalidity benefit are not relevant to Mr Johnston. They are relevant, however, to seeing the pattern of the DFDRB Act. They are the subject of Part IV in which various references are made to the rank held by a contributing member before retirement. Section 23(1)(a) provides an example:
“Where a contributing member retires and is not entitled to invalidity benefit and:
(a)on his retirement:
(i)his total period of effective service is not less than 20 years; or
(ii)his total period of effective service is not less than 15 years and he has attained the retiring age for the rank held by him immediately before his retirement; or
(b)…
he is entitled, on his retirement, to retirement pay at the rate applicable to him in accordance with this section.”
Subject to qualifications in ss 25 and 75:
“… the rate at which retirement pay is payable to a recipient member is an amount per annum that is equal to such percentage of the annual rate of pay applicable to him immediately before his retirement as, having regard to the number of complete years included in his total period of effective service, is ascertained under Schedule 1.”[13]
Schedule 1 sets out a member’s retirement pay by reference to various percentages of his or her annual rate of pay. The percentages are fixed according to the number of complete years of a member’s total period of effective service.
[13] DFDRB Act, s 23(2)
Other references to rank are made in sections such as ss 75 and 78 relating to deferred benefits. It is also made in s 89, which enables eligible members of the Defence Force who had rendered service in the Defence Force before 1 October 1972 to purchase previous non-contributory service in certain circumstances. Purchase is made by the payment of an additional contribution to the Commonwealth. Section 89(4) sets out how to calculate the amount of additional contribution. Where an eligible member of the Defence Force is an existing contributor and has served continuously from a period before 1 October 1972 up to that date and was a contributor under previous legislation, the additional contribution is:
“… an amount equal to 5.5% of the amount of pay that the Authority determines would have been the pay received by him in respect of the period to which the election relates if, from time to time during that period, his rate of pay had been the maximum rate of pay payable to persons of the rank, branch and group that was from time to time applicable to him during that period, or such other rate of pay as the Authority determines as being appropriate in the circumstances”.
Another example of a reference to rank is found in s 98J relating to the waiving of contributions. Again it is not relevant to Mr Johnston’s circumstances as it applies to a person who was member of the ADF between 1 October 1972 and
13 May 1981, who “held an acting or temporary rank”[14] throughout any part of that
[14] DFDRB Act, s 98J(1)(a)
period and:
“(b) the amount paid by, or deducted from the pay of, the member in respect of a contribution payable by him during the relevant part of the prescribed period was less than the amount of that contribution but was equal to the amount that would have been the amount of that contribution if the member had not held that acting or temporary rank;
that member or the personal representative of that member, as the case requires, is not liable to pay the difference between the amount of that contribution and the amount so paid or deducted unless:
(c)the member retired or died at the end of the relevant part of the prescribed period; and
(d)by reason of his retirement or death, a pension benefit, or a deferred benefit applicable under Division 3 of Part IX, became payable during the prescribed period.”[15]
Division 3 of Part IX is concerned with the preservation of rights of contributing members who cease to be eligible members of the Defence Force.
[15] DFDRB Act, s 98J(1)(b)
CONSIDERATION
On behalf of Mr Johnston, Mr Finkelstein submitted that:
“… the proper legal interpretation of Section 20(1) of the Act is that the assessment of the applicable rate of pay is ambulatory in requiring the applicable rate to shift forward from time to time. Specifically, the Applicant contends that the applicable rate (upon which to calculate his said percentage entitlement) should be the same as that payable to a Corporal as at the date of his discharge whether he was in fact being paid at that rate or even entitled to be paid at that rate, at that particular time, because:
2.1The election given under Section 20(1) of the Act can be made once only, but once made, creates a reference point by way of statutory obligation which is imposed upon the Respondent to follow the rate of pay for the rank that has been lost into the future, but only for the purpose of calculating and deducting from the Applicant’s pay the actual money amount representing that person’s contributions under the Act, regardless of rank and current rate of pay.
2.2The overtopping of that money amount by any increased rate of pay (at that person’s actual current rank) subsequent to the date of making the election is irrelevant to the purposes of Section 20(1).
2.3The intention of Section 20(1) of the Act is to enable a current serving member of the Australian Defence Force to ‘lock-in’ a formula for calculation and deduction of contributions that will continue to be based upon the rate applicable to the rank previously enjoyed, regardless of the member’s current rank or rate of pay at that rank.”[16]
[16] Applicant’s Statement of Facts and Contentions, [2]
Mr Finkelstein developed this submission orally. I agree with him that the DFDRB Act assumes that the annual rate of pay, and so the fortnightly rate of pay, on which a member’s fortnightly contributions are based, will vary from time to time. That is apparent from s 19(1) and the definitions of the relevant terms to which I have already referred.[17] What is also apparent from those provisions is that the rate of pay, be it an annual rate of pay or a fortnightly rate of pay, is the rate of pay “applicable to the member on” either “that day” in the case of an annual rate or, in the case of a fortnightly rate, “on the day on which the contribution is payable”. It is not a rate of pay that would have been applicable had the member been in other circumstances or, more particularly, had the member held a different rank from that which he or she actually holds. The general rule is that contributions are paid on what is and not on what might have been.
[17] See [2] above
The provisions to which I have referred in relation to retirement benefits and invalidity benefits show that, as a general rule, they are also assessed on the basis of a formula that includes the member’s annual rate of pay. Accordingly, they are assessed on the basis of the member’s “annual rate of pay applicable to the member on that day”. Section 23 and Schedule 1 provide an example of that in relation to retirement benefits and s 31 in relation to invalidity benefits. Some regard is had to what would give the member the greater amount of benefit. Section 33(3) provides an example of that when it provides for the member to be paid the rate at which retirement pay would have been payable if he or she could have retired on grounds other than on the ground of invalidity and his or her retirement pay would be greater than invalidity pay otherwise payable.[18]
[18] See [8] above
Section 98J, which provides for the waiving of contributions, also provides another example. Its basis is that the “contribution payable” during a period in which a member held an acting or temporary rank was greater than the amount actually contributed. When read with s 19, it is clear that the amount of the “contribution payable” should be assessed on the basis of the annual rate of pay payable to the member while he or she held the acting or temporary rank and not on the lesser amount payable to him or her on the basis of his or her substantive rank.
Sections 98J(1)(c) and (d) make it clear that liability to pay the difference between what was payable and what was paid remains if the member retired or died and a pension benefit became payable or a deferred benefit under Division 3 of Part IX of the DFDRB Act became payable. A “pension benefit” means retirement pay, invalidity pay, widow’s pension, spouse pension or child’s pension.[19] Assessment of each of those pensions is based in the annual rate of pay and so on the annual pay applicable to the member on the particular day. The liability to pay the difference between the contribution payable on the annual rate of pay applicable to the member and the lesser amount actually paid must remain because the benefits are assessed on that higher rate.
[19] DFDRB Act, s 3(1)
If pension benefits do not become payable, the member is not liable to pay the difference. That would follow from the fact that the member would have continued to pay the contributions payable on the annual salary applicable to his or her substantive rank and the Authority was not liable to pay pension benefits on the basis of an annual salary in relation to which the member had not paid the appropriate amount of fortnightly contribution.
Section 20 is formulated on the same principles. Unlike s 98J, it is not concerned with temporary promotions affecting the member. It is concerned with permanent changes in the annual rate of pay that reduce the amount of fortnightly contributions otherwise payable by a member. It enables the member to make an election to have the change in his annual rate of pay disregarded. The effect of the election is that the rate of pay is disregarded “for the purpose of the Act.” That must mean that, should the member retire or die while that election remains in force, his or her pension benefits will be assessed on the basis of the annual rate of pay that was applicable to him or her immediately before his or her annual rate of pay changed.
There is nothing in s 20(1) that suggests that the election is an election to make fortnightly contributions assessed on the basis of the annual rate of pay applicable to the member as if the change had never occurred. There is nothing that suggests that the fortnightly contributions are to be assessed on the basis of the substantive rank held by the contributing member before any change. It would have to say something like that if Mr Johnston were to be permitted to make fortnightly contributions based on the annual rate of pay payable to a Corporal. Parliament has chosen to refer to the rank that a person held in certain provisions of the DFDRB Act and I have referred to examples above.[20] No reference is made to rank in s 20(1). Instead, it focuses entirely on a change in a member’s annual rate of pay and on the consequential change in fortnightly contributions regardless of the reasons for that change. It does so by comparing the annual rate of pay applicable to the particular member before the change and that applicable after the change. If the amount of each fortnightly contribution payable on the latter would be less than the former, it permits the contributing member to make an election to have the change in annual rate of pay disregarded and so to pay the greater amount of fortnightly contribution.
[20] See [15] above
For all practical purposes, s 20(1) requires the comparison between the annual rate of pay applicable to the particular contributing member before the change and that applicable after the change to be made each time the fortnightly contribution becomes payable. In practice, the comparison would only be made when the annual rate of pay applicable to the member changed. Once the comparison shows that the amount of each fortnightly contribution is no longer less than that which he or she paid before the change in his or her annual rate of pay, s 20(1) no longer has any relevance. The election the member made no longer has any relevance. Should the circumstances to which s 20(1) applies arise again in relation to the member, he or she could make a further election.
The practical outcome of this interpretation is that the member who makes an election continues to pay fortnightly contributions at the higher rate is ensuring that, should he or she retire or die, he or she, or his or her dependents, will be paid pension benefits at the higher rate rather than the lower rate that would otherwise be applicable on the basis of his or her reduced annual rate of pay. It is intended as a buffer to temper a consequence of the reduction of the annual rate of pay should the member wish to take advantage of it. It is not intended to give the member an ongoing entitlement to make fortnightly contributions and to have pension benefits assessed on the basis of an annual rate of pay that was never applicable to him or her. That is to say, s 20(1) is not intended to enable Mr Johnston to make fortnightly contributions and to have his pension benefits assessed on the basis of an annual rate of pay that was applicable to a person who held the rank of Corporal after his demotion on 10 July 1989 but that was never an annual rate of pay applicable to him.
I have written these reasons without reference to the judgment of the Full Court of the Federal Court in Duncan v Defence Force Retirement and Death Benefits Authority and Commonwealth of Australia.[21] It dealt in passing with s 20(1) before its amendment on 21 October 1981 to exclude changes in the annual rate of pay “by reason of the member ceasing to hold an acting or temporary rank”.[22] Despite that, it is clear that regard is had to the annual rates of pay that were payable and are now payable to the member and that regard is not had to the annual rate payable to a person holding a certain rank. The Full Court said:
“… If a member, holding acting rank, is liable to contribute and contributes a larger sum than he would have been liable to contribute if he had not been granted the acting rank, and he reverts to his substantive rank and is liable to contribute a lesser amount, s 20 gives him an election: he may continue to contribute as though his annual rate of pay had not changed (in which event his entitlement under s 23 would be calculable on the same annual rate of pay if he should retire while his s 20 election governed his contribution); or he may obtain a refund of the excess of past contributions over the amount of his present liability to contribute. …”[23]
Those members who hold acting or temporary ranks are now the subject of s 98J, which was also inserted by the Defence Force Retirement and Death Benefits Amendment Act 1981.[24]
[21] (1980) 47 FLR 256; 30 ALR 165; 3 ALD 113 Brennan, Keely and Lockhart JJ
[22] Defence Force Retirement and Death Benefits Amendment Act 1981, No 144 of 1981, s 4(1)
[23] (1980) 47 FLR 256; 30 ALR 165; 3 ALD 113 at 264-265; 173; 120-121
[24] Defence Force Retirement and Death Benefits Amendment Act 1981, No 144 of 1981, s 8 and see [15] above
For the reasons that I have given, I have decided that the Authority correctly assessed the rate of pension payable to Mr Johnston under the DFDRB Act on the basis of the annual rate of pay he received as a Lance Corporal at the time of his discharge rather than at the higher annual rate of pay which was then payable to a Corporal but which was an annual rate of pay that had never been applicable to
Mr Johnson. Therefore, I affirm the Authority’s decision dated 7 November 2008.
I certify that the preceding twenty seven paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: .......................................................................
Kate Conners Associate
Dates of Hearing 14 April 2009
Date of Decision 28 April 2009
Solicitors for the Applicant FLA Partners
Mr Peter Finkelstein
Counsel for the Respondent Mr Andrew Dillon
Solicitor of the Applicant Australian Government Solicitor
Ms Jenny Davenport
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