Luke and Commissioner of Taxation

[2011] AATA 801

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 801

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2011/2852

TAXATION        APPEALS       DIVISION		)
Re		ROBIN LUKE

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

TribunalDr G Hughes, Member

Date14 November 2011

PlaceMelbourne

DecisionThe Tribunal affirms the decision under review.

[sgd] G Hughes

Member  

TAXATION:  Employment termination payment – lecturer withdrew casual services due to perceived harassment – whether a "termination" – whether compensation paid under deed of release was "in consequence of" termination – whether payment properly characterised as a capital sum paid in respect of personal injury.

Income Tax Assessment Act 1997 s 82-10, s 82-130, s 82-135

Re Applicant and Federal Commissioner of Taxation [2005] AATA 583

Commissioner of Taxation v Scully (2000) 201 CLR 148

Dibb v Federal Commissioner of Taxation (2004) 136 FCR 388

Graham v Robinson [1992] 1 VR 279

Le Grand v Federal Commissioner of Taxation (2002) 124 FCR 53

McIntosh v Federal Commissioner of Taxation (1979) 45 FLR 279

McMahon v Commissioner of Taxation (1999) 41 ATR 1056

McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381

Re Platell and Federal Commissioner of Taxation (1992) 23 ATR 1011

Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45

REASONS FOR DECISION

14 November 2011   Dr G Hughes, Member

BACKGROUND

1.This application relates to a decision by the respondent to characterise a payment, made to the applicant by his former employer under a deed of release dated 22 December 2010, as an employment termination payment rather than as a capital payment for personal injury.

2.The applicant commenced employment as a sessional lecturer/tutor in marketing and management with Monash College (the employer) in May 2007 and ceased employment on 18 May 2010. 

3.The parties entered into the deed of release following discussions regarding the applicant's sessional hours, employment arrangements and performance. The discussions also included claims by the applicant that he had suffered loss and damage as a consequence of certain prejudicial actions by the employer. 

4.Pursuant to paragraph 2(a)(i) of the deed, the employer paid the applicant,  an ex-gratia payment of $20,000 (gross and subject to statutory taxation), with a net amount of $16,700 on 6 January 2011, without an admission of liability.

5.As part of the settlement, the parties released each other from all claims, demands or proceedings then existing or arising in the future.

6.The applicant contended that he had not been terminated because his employment with Monash College had expired as of 18 May 2010.  He did not receive notice of termination or an employment certificate.  He conducted his last class on 18 May 2010, after having advised the employer in April 2010 that he would not be returning due to the belligerent behaviour of the employer's deputy director.  In the applicant’s opinion, the payment could therefore not be characterised as an employment termination payment but instead was a capital payment for or in respect of a personal injury.

7.With respect to the claim of personal injury, the applicant asserted that, during the term of his employment, he suffered management abuses including unauthorised disciplinary actions, victimisation and defamation.  He was involved in an industrial dispute with the employer after being stood down from teaching Marketing Theory and Practice.  He claimed to have been subsequently harassed, bullied and intimidated at meetings with the employer.  All of this had had an impact on his mental, physical and emotional state. 

8.The respondent contended that it was expressly set out in the deed that the payment of $20,000 had been made in consequence of the employer’s termination of the applicant's employment.  The payment had been made as a culmination of a series of events which included the applicant’s withdrawal of his services.  According to the respondent, the payment was not a capital payment in respect of a personal injury, taking into account the nature of the alleged personal injury and its likely effect on the applicant's capacity to derive income from personal exertion. 

LEGISLATION

9.The meaning of termination is set out in section 80-10(a) of the Income Tax Assessment Act 1997 (the Act):

For the purposes of this Part, treat the termination of employment as including:

(a)   retirement from employment; and

(b)   the cessation of employment because of death.

10.Employment termination payment is described in section 82-130(1) of the Act:

(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.

11.Certain payments are deemed not be employment termination payments by virtue of section 82-135 of the Act:

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);

DISCUSSION

12.For a payment to constitute an employment termination payment, it is necessary to satisfy each condition set out in section 82-130(1). 

13.A fundamental and threshold question is whether there has been a termination at all. 

Was there a termination?

14.The applicant contended that there was no termination because he withdrew his services, whereupon his casual employment expired.  He emphasised this in his oral evidence.  He stressed that his employer acknowledged on several occasions that he was not being terminated. 

15.In the context of eligible termination payments, however, the word termination does not equate with dismissal, as the applicant appears to have assumed.  Rather, it refers to the fact of cessation of employment.  The reason for termination, which could embrace dismissal, withdrawal or retirement, is not relevant. 

16.Specifically, termination of employment is deemed under the Act to include retirement: see section 80-10(a). 

17.The applicant did not have a written employment contract.  Rather, his employment was governed by the terms of an Enterprise Bargaining Agreement.  The Staff Enterprise Agreement 2006 (the Agreement) provided that sessional employees, such as the applicant, would only be required to be rostered on for teaching duties during the teaching periods of a trimester.  Sessional employees would only be remunerated for activities with respect to classes, with other duties to be agreed with a supervisor and paid for separately.  The Agreement did not provide certainty of engagement for sessional employees during a teaching period.  When engaged they could be rostered on during a teaching period and remunerated only for classes actually conducted.

18.The respondent cited the Tribunal's decision in Re Platell and Federal Commissioner of Taxation (1992) 23 ATR 1011 in support of the proposition that termination of employment includes circumstances where a person relinquishes employment.  This decision is, however, only of marginal relevance.  It established, for the purposes of eligible termination payments under the Income Tax Assessment Act 1936 (Cth), that retirement requires a relinquishment of employment accompanied by an intention never to resume that employment.  Consistent with the issues under consideration in Platell, the applicant in the present case retired in the sense that he relinquished his employment on 18 May 2010 with no intention of returning.  Nevertheless, that decision did not directly address the question of whether retirement equates with termination, which is the issue raised by the applicant.

19.The respondent also pointed to the fact that the deed refers to the payment as being made in respect of the Termination.  In fact, the word Termination is not defined in the deed because the sentence in Recital A, which originally contained the definition, was deleted at the applicant’s instigation.  The deletion of the sentence in Recital A was consistent with the applicant's perspective that he had not been terminated.  Ultimately, neither party can draw particular comfort from the wording of the deed in addressing the question of whether there was, in fact, a termination. 

20.In any event, the issue is put to rest by section 80-10(a) of the Act which, as indicated above, provides that termination of employment includes retirement from employment.  There is no question that the applicant's circumstances fall within this category. 

Whether payment received in consequence of termination

21.For the purposes of section 82-130(1)(a), an employment termination payment must have been received in consequence of the termination of a person's employment.    

22.The words in consequence of the termination of your employment are not defined in the legislation.

23.The applicant maintained that he did not receive the payment in consequence of termination.  This assertion was based no doubt, in part, on the misconception that there has not been a termination.  Even so, the applicant further maintained that the payment from his employer was not connected with the fact of his cessation of employment but rather it was a payment in recognition of the mistreatment he claimed to have received in the course of his employment.  He also made the point that the Agreement expressly provided that a casual employee had no entitlement to payment upon cessation of employment.  He extrapolated from this that any payment received could therefore not be referrable to termination.

24.Under cross-examination, the applicant acknowledged, nevertheless, that he would not have entered into the deed of release had he not ceased employment.  He also acknowledged that the deed formally resolved his ongoing dispute with his employer, and represented a finality of his relationship with Monash College. 

25.In Taxation Ruling TR 2003/13 (paragraph 5), the Commissioner stated that it is necessary to determine whether:

but for the termination of employment, the payment would not have been made to the tax payer".  In paragraph 6, the Commissioner states that the characterisation of the payment will be determined by the relevant facts and circumstances of each case and that whilst a causal connection between the termination and the payment is required, "the termination need not be the dominant cause of the payment".  

26.In paragraph 31 of TR 2003/13, the Commissioner states that:

a payment to settle an employee's claim for wrongful dismissal or other claims of a similar nature would be deemed to have a sufficient causal connection with the termination because any such payment "would not have been made but for the termination".

27.In Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45, Gibbs and Jacobs JJ emphasised that the termination of services need not be the dominant cause of the payment in such circumstances but rather the payment must follow as an effect or result of the termination.

28.Gibbs J stated (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 … It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment.

29.Jacobs J stated (at 56):

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". 

30.In McIntosh v Federal Commissioner of Taxation (1979) 45 FLR 279, Brennan J considered the judgments of Gibbs and Jacobs JJ in Reseck and interpreted those judgments as requiring a causal nexus between termination and payment, though it was unnecessary for the termination to be the dominant cause of the payment.  In relation to the judgment of Jacobs J specifically, his Honour stated:

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.

31.The judgment of Gibbs J in Reseck was followed by Goldberg J in Le Grand v Federal Commissioner of Taxation (2002) 124 FCR 53, in which His Honour concluded that a settlement payment in respect of litigation relating to an employee's dismissal constituted an employment termination payment because the payment was:

an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. 

32.Similarly, in Dibb v Federal Commissioner of Taxation (2004) 136 FCR 388, the Full Court of the Federal Court found that a payment to an employee under a deed of release, in order to settle various causes of action against the employer following the termination of employment, constituted an employment termination payment. 

33.In the present instance, the background to the settlement is set out in paragraph B of the Recitals to the Deed:

Following discussions between the parties regarding the Employee's sessional hours and employment arrangements, conduct and performance and claims the Employee as set out in a letter to the Vice-Chancellor of Monash University that he has suffered loss and damage as a consequence of certain actions by the Employer (which are disputed by the Employer) (the Dispute), the parties have decided that all remaining aspects associated with the Employment and the Dispute will be resolved in accordance with the terms contained in this Deed.

34.Paragraph C of the Recitals to the Deed states:

Without admission or concession the Employee and the Employer have agreed on a commercial basis to resolve any and all actual or potential Claims arising out of:

(a)        the Dispute;

(b)        the Employment; and

(c)        the Termination.

35.It is thus clear from the deed that the intention is to settle the applicant's Claims.  The term Claims is defined in paragraph 1.1 of the deed:

Claims includes, but is not limited to, all actions, claims, demands, suits, proceedings, liabilities, sums of money, damages and costs arising from, or in relation to, or connected with (whether directly or indirectly):

(a)the Dispute;

(b)the Employment;

(c)the Termination; and

(d)any act or omission of the Employer during the Employment,

whether past, present or future but does not include any claim under the relevant workers' compensation or superannuation legislation.

36.In the Tribunal's opinion, the payment was ultimately made to the applicant as a consequence of, or in connection with, the termination.  The payment was a culmination of a series of events which included the applicant's withdrawal of his services.  The act of withdrawal, or termination, may not have been the dominant cause underlying the payment but there was undeniably a causal connection between the termination and the payment.

37.For the above reasons, and in particular taking into account previous judicial consideration of this issue, the Tribunal concludes that the requirements of the first condition set out in section 82-130(1)(a) of the Act have been met. 

Whether payment received within 12 months of termination

38.The second condition which must be satisfied in order for a payment to be characterised as an employment termination payment is that, pursuant to section 82-130(1)(b) of the Act, the payment was received no later than 12 months after the termination.  As the applicant last worked with the employer on 18 May 2010, and received payment on 6 January 2011, this condition was clearly satisfied.

Whether capital payment for personal injury

39.The third condition to be satisfied, for the payment to be characterised as an employment termination payment, is that the payment did not fall within one of the exceptions set out in section 82-135.  It is for the applicant to establish, therefore, that one of the exceptions in section 82-135 applies to his situation.  Of specific relevance in this regard is the exception in paragraph (i) relating to reasonable capital payments for personal injury which is likely to affect his capacity to derive income from personal exertion.  If the applicant could establish that the sum of $20,000 constituted a reasonable capital payment for personal injury, the payment could not by virtue of section 82‑130 (1)(c) be deemed an employment termination payment.

40.In order to address this issue, it is first necessary to consider whether there was a personal injury.  If so, it is then necessary to consider whether the payment of $20,000 was a payment made in respect of that injury.

41.On the question of what constitutes a personal injury, a distinction has traditionally been drawn in this regard between physical injury or mental illness on the one hand, and agitation and emotional suffering on the other.

42.There is little doubt that the applicant was adversely affected by what he perceived as unreasonable harassment and discrimination in the course of his employment.  He described to the Tribunal how his name had been removed from the teaching list without adequate explanation.  He said he was criticised, threatened with termination and accused of not following employment guidelines.  After one meeting, he collapsed and was taken to hospital by ambulance. 

43.In Graham v Robinson [1992] 1 VR 279, Smith J in the Victorian Supreme Court concluded that the expression personal injury did not extend beyond physical injury and mental illness to include emotional hurt.  Specifically, his Honour stated (at 281):

In the absence of express authority, I have come to the conclusion that the expression "personal injury" does not extend beyond physical injury and mental illness to include emotional hurt.  I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence.

44.The Tribunal applied Graham v Robinson in McMahon v Commissioner of Taxation [1999] 41 ATR 1056. Senior Member Block concluded that the legislation only intended to embrace physical injuries or mental illnesses which had an assessable and identifiable impact on the capacity of the taxpayer to earn income and not, therefore, any form of injury to a person's reputation.  Mr Block stated (at 1069):

The tribunal considers that the inclusion by the legislature of the words "from personal exertion" tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injury is being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income.  The tribunal considers in summary that an injury to person is distinguishable from injury to a person's reputation.

45.In ReApplicant and Federal Commissioner of Taxation [2005] AATA 583, Senior Member Ettinger applied Graham v Robinson and agreed with McMahon v Commissioner of Taxation in concluding that the expression personal injury did not extend beyond physical injury and mental illness to include emotional hurt. 

46.The applicant in this case has experienced, and continues to experience, a degree of stress which he attributes to the treatment he received from his employer.  He has been hurt and he feels his reputation has been tarnished.  All of this is clear from the claim he presented at a mediation with his employer in December 2010.  It is also clear from the evidence given by the applicant and his wife before the Tribunal.

47.On the other hand, the Tribunal does not have the advantage of a medical diagnosis as to the extent of the applicant's debilitation, or the assessment of an expert which formally links the applicant's present condition to his former employment.  Indeed, the Tribunal did not have the benefit of independent verification of the applicant's assertions as to his treatment by his employer.  From the Tribunal's observations at the hearing, the applicant appears emotional but in no way mentally ill or incapacitated.  The applicant has been affronted, and continues to feel angry and emotional about his perceived mistreatment but this does not amount to a personal injury. 

48.In one sense, therefore, the question of whether the payment received by the applicant was in respect of personal injury falls away because the Tribunal does not consider that he was suffering from a personal injury within the meaning of the legislation.  Nevertheless, for completeness, the Tribunal sets out its conclusions below on the question of whether the payment of $20,000 constituted a payment in respect of personal injury or something else. 

49.In Commissioner of Taxation v Scully (2000) 201 CLR 148, the High Court considered previous legislation relating to eligible termination payments and held that compensation must be calculated by reference to the nature and extent of the injury or likely loss to the taxpayer. In considering the equivalent provisions under the Income Tax Assessment Act 1936, the court observed (at 171):

In our opinion, the words "in respect of" are principally concerned with payments such as those for loss of earnings consequent on personal injury.  … In their context, the words "in respect of" do not cut down the requirement that the payment must be a payment to compensate for the injury.

50.In other words, evidence is required that the payment had some form of identifiable and unambiguous connection with a personal injury, for which compensation was necessary as a reflection of the fact that the applicant's capacity to derive income from personal exertion had been impaired.  There is insufficient evidence to this effect in the present case. 

51.At the mediation, held on 15 December 2010, the applicant quantified his claims for compensation as follows:

1.Loss of Earning  & Super   $37,000

2.Bullying, Harassment, Intimidation &

Victimisation as process was neither open nor honest   $20,000

3.Loss of Staff Appointment   $15,000

4.Defamation   $ 5,000

There is no indication, however, that the sum ultimately paid to the applicant related to personal injury, or the personal injury component of the claim as originally formulated. 

52.In McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381, the High Court observed that it was inappropriate to apportion a single payment amongst several heads where the payment related to a claim for unliquidated damages and was accepted under a compromise which treated it as a single, undissected amount of damages.

53.It thus becomes significant that paragraph 2 of the Deed did not provide an apportionment of the sum of $20,000 and made no mention of how the amounts related, if at all, to the applicant's injury (if any) or likely loss of income producing capacity.  Although the applicant contended that the payment could not relate to anything other than personal injury, the applicant's claim did include loss of earning and superannuation, loss of staff appointment and defamation.  The employer made the payment with no admission of liability and hence there was no evidence to indicate whether, and if so what portion, of the settlement had been calculated with regard to the applicant's likely loss of income producing capacity.  The employer made the payment in full resolution of all claims arising in relation to the dispute, including the termination of employment.

DECISION

54.The applicant's employment was terminated within the meaning of the legislation.  He received a payment which he would not have sought, and which presumably would not have been made but for the fact that his employment had been terminated.  The employer made the payment within 12 months of the termination.  The applicant is not suffering a personal injury within the meaning of the legislation, nor was the employer’s payment of $20,000 a payment which was made in respect of any personal injury. 

55.The Tribunal was impressed by the applicant's demeanour and sincerity and has no doubt he continues to feel genuinely aggrieved by what he perceives as mistreatment in the course of his employment.  The Tribunal has not considered whether, or to what extent, the applicant's aggrievement is warranted.  Ultimately, any harassment which he may have suffered was not sufficient to overcome the Tribunal's findings as to the true character of the payment. 

56.For the above reasons, the Tribunal affirms the decision under review.

I certify that the fifty-six [56] preceding paragraphs are a true copy of the reasons for the decision herein of:
Dr G Hughes, Member

Signed: .................Emma Heggie..............................................

Clerk

Date of Hearing  20 October 2011
Date of Decision  14 November 2011
Advocate for the Applicant       Self-represented

Advocate for the Respondent   Mr K. Wojtasik, Australian Taxation Office