Reseck v Federal Commissioner of Taxation

[1975] HCA 38

HIGH COURT OF AUSTRALIA

Gibbs, Stephen and Jacobs JJ.

RESECK v. FEDERAL COMMISSIONER OF TAXATION

(1975) 133 CLR 45

30 September 1975

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Lump sum allowance paid upon termination of employment—Payments "in consequence of termination"—Payments of an income nature under ordinary conceptions—"Capital amount"—Income Tax Assessment Act 1936-1973 (Cth), ss. 25 (1) (a), 26 (d)*. * Section 26 (d) of the Income Tax Assessment Act 1936-1973 (Cth) provides: "(d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law . . . "

Decisions

September 30.
The following written judgments were delivered:-
GIBBS J. I have had the advantage of reading the reasons for judgment prepared by my brother Jacobs. I agree with the conclusion that he has reached, but since the matter is not free from difficulty I would state my own reasons for reaching that conclusion. (at p47)

2. By s. 25 (1) (a) of the Income Tax Assessment Act 1936, as amended ("the Act"), it is provided that the assessable income of a taxpayer shall include, where the taxpayer is a resident, the gross income derived directly or indirectly from all sources whether in or out of Australia. The effect of this provision is to include in the assessable income any receipt that is income in accordance with the ordinary concepts and usages of mankind. By s. 26 of the Act certain specified items are included in the assessable income - in some cases, it appears, simply for greater certainty: Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540, at p 555 . Speaking generally, s. 26 does not limit s. 25 but includes as assessable income some receipts that might not ordinarily have been regarded as income. In other words, a receipt may be included in the assessable income either because it is income in the ordinary understanding of that word or because it comes within the provisions of one of the paragraphs of s. 26. When a receipt which is income in accordance with ordinary concepts also falls within s. 26 - cases within s. 26 (a) provide some familiar examples - the receipt forms part of the assessable income and it is immaterial whether s. 25 or s. 26 brings about that result. (at p48)

3. What has just been said is not fully applicable to all the paragraphs of s. 26 and particularly to s. 26 (d). It is convenient to set out the provisions of that paragraph and of s. 26 (e): they are as follows:

"26. The assessable income of a taxpayer shall include -

. . . (d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law: Provided that this paragraph shall not apply in respect of any amount which under any provision of this Act is deemed to be a dividend paid to the recipient, or in respect of deferred pay, including interest thereon, paid to a person who is or has been a member of the Defence Force in respect of his service as a member of that Force during any period before 1 July 1947, in respect of which the pay and allowances earned by the member were or are paid under the War Financial (Military Forces) Regulations or the Air Force (War Financial) Regulations or, in the case of a member of the Naval Forces, were or are pay and allowances which the Secretary to the Treasury, or a person authorized by him to give such certificates, certifies, for the purposes of this provision, are special war-time pay and allowances; (e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise: Provided that this paragraph shall not apply to any allowance, gratuity or compensation which is included in the last preceding paragraph or which under any provision of this Act is deemed to be a dividend paid to the recipient." (at p48)

4. The view has been expressed that s. 26 (e) does not bring into charge any receipt which is not income according to general concepts: Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47, at p 54 ; Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514, at p 526 . Whether or not such a statement is correct in relation to s. 26 (e) it would not be true in respect of s. 26 (d). That paragraph includes some receipts which would otherwise be capital. For example, a lump sum paid as compensation for the termination of the taxpayer's employment will, generally speaking, be of a capital nature (Bennett v. Federal Commissioner of Taxation (1947) 75 CLR 480, at p 485 ; Scott v. Federal Commissioner of Taxation (1935) 35 SR (NSW) 215, at pp 219-220 ) but such a sum will fall within s. 26 (d). It is therefore clear that s. 26 (d) includes some receipts that would not be income according to ordinary concepts but the Commissioner goes further and submits that the paragraph includes only receipts of a capital nature; the use of the words "of the capital amount" is said to bring about that result. However, the words "any allowance, gratuity or compensation...in consequence of retirement from, or the termination of, any office or employment" are apt to include receipts that constitute income within ordinary usages and concepts, and it is apparent from the grammatical arrangement of s. 26 (d) that the words "of the capital amount" are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in the assessable income. The allowance, although it must be paid in a lump sum to come within s. 26 (d), may have been fixed at a rate payable in respect of a specified period - for example, at so much for every week worked. The words "of the capital amount" are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalized or total value. The words of s. 26 (d), given their ordinary meaning, include all allowances of the kind thereby described whether they are of an income or of a capital nature. The legislative history of the provision, to which we were referred, throws no light on its meaning and for that reason I do not think it necessary to discuss it in detail. (at p49)

5. Where a receipt answers the description contained in s. 26 (d) only five per cent of the capital amount is included in the assessable income; the whole amount is not so included, notwithstanding that the receipt is of an income nature. If s. 25 (1) continued to apply to a receipt which, although ordinarily regarded as income, fell within s. 26 (d), the result would be that the whole of the amount would be brought into the assessable income by s. 25 (1), and in addition five per cent of the amount would be included by 26 (d). The legislature cannot possibly have intended such a result. Where the same receipt would come within the descriptions contained in both sections the specific provisions of the later section must have been intended to prevail over the general provisions of the earlier. This view is supported by the terms of the proviso to s. 26 (e). Any receipt that comes within s. 26 (d) would also have come within s. 26 (e) were it not for the proviso to the latter paragraph. The full amount of a receipt coming within s. 26 (e) is included in the assessable income and the proviso must have been designed to ensure that only five per cent of the amount of any receipt coming within s. 26 (d) should be so included. I would therefore adopt as correct the statement as to the effect of s. 26 (d) made by Professor Ryan in his Manual of the Law of Income Tax in Australia, 3rd ed. (1972), at p. 54: "It (s. 26 (d)) thus has both a charging and a liberating effect; it brings into charge a percentage of the amount paid though it would otherwise not be taxable at all, and it includes only a fractional amount of a sum which would otherwise be assessable in full." For practical purposes it is unnecessary to consider whether a particular receipt which answers the description contained in s. 26 (d) is income in accordance with ordinary concepts. Since the receipt falls within s. 26 (d) only five per cent of it is included in the assessable income whether or not such receipt would in accordance with ordinary concepts be regarded as of an income nature. (at p50)

6. The question in the present case is whether the amounts received by the taxpayer were allowances of the kind described in s. 26 (d). This matter was referred to the Supreme Court of Queensland by way of a case stated by a Board of Review and according to the facts so stated the employment of the taxpayer was terminated by his employer on 24th September 1971, he re-commenced work for the same employer (although in a different district) on 27th September 1971 and his employment was again terminated on 11th February 1972. In most cases in which a workman ceased his employment on a Friday and commenced employment again with the same employer on the following Monday it would be impossible to say that his employment had ever been terminated. If there were a contract agreement or arrangement whereby the employment of the workman was terminated and recommenced it would no doubt be possible to invoke the provisions of s. 260 of the Act, but even without the aid of that section in many cases when all the facts had been regarded the proper conclusion to be drawn would be that there had been no termination of the workman's employment at all. I of course do not cast any doubt on the correctness of the finding of the Board of Review in the present case, but I do think it necessary to emphasize that we have before us an unchallenged finding by the Board and that it is not open to us to hold that the services of the taxpayer were not terminated. Accordingly, our decision cannot be regarded as authority for holding in similar circumstances that there was a termination of the employment of the taxpayer. (at p50)

7. Each of the two amounts in question in the present case was paid in a lump sum. In my opinion each of those amounts was an allowance within the meaning of s. 26 (d). It was an additional reward allowed to the taxpayer for the services that he had performed (cf. Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR 389, at p 403 ). The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. 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. The reasons for holding that "purpose" in s. 26 (a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of s. 26 (d). For example, a retiring allowance is plainly intended to be within s. 26 (d) but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause predominated over the latter. Moreover, in many cases allowances, gratuities or compensation are paid in consequence of the provisions of an industrial agreement or of the industrial law but the words appearing immediately before the proviso to par. (d) of s. 26 show that the paragraph will nevertheless be applicable. In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer's employment. It follows that the receipts in the present case (except $73 as to which the appellant did not desire to submit an argument) came within the provisions of s. 26 (d), with the result that five per cent of the amount only should have been included in the assessable income. (at p51)

8. I would give leave to appeal and would allow the appeal. (at p51)

STEPHEN J. Upon one important question arising for decision on this appeal I have arrived at a conclusion different from that reached by the other members of the Court and this has led me to a result at variance with what will be the order of the Court; in the circumstances, I will indicate, as shortly as may be, the reason for my dissent. (at p51)

2. The question to which I refer is whether an amount received by a taxpayer, conforming in all respects with the description of an allowance etc. in s. 26 (d) and which also possesses the quality of income in accordance with ordinary concepts, so as ordinarily to be assessable as income within s. 25 (1), is, by the effect of s. 26 (d), granted exemption from assessability as to ninety-five percent. The payments here received by the taxpayer were, as other judgments demonstrate, just such terms, being both allowances etc. within s. 26 (d) and also income in accordance with ordinary concepts; in my view, and whether or not, on the proper construction of s. 26 (d), they fall within its terms, there exists no ground for excluding them from the reach of s. 25 (1). (at p52)

3. For the appellant to succeed in this appeal he must do more than show that s. 26 (d) applies to allowances etc. of an income nature; for present purposes I am content to assume that s. 26 (d) does apply to all allowances etc. of the character which it describes, whether they be of a capital or of an income nature. The appellant must further establish that s. 26 (d), in addition to performing its explicit work of bringing to charge as assessable income five per cent of all allowances etc., also confers exemption from charge as assessable income, and hence removes from the general reach of s. 25 (1), the remaining ninety-five per cent of such of those allowances etc. as are in the nature of income and would therefore otherwise fall within s. 25 (1). (at p52)

4. Only in the case of par. (d) of s. 26 does the question arise whether s. 26 has any exempting function; this is because in no other of its thirteen paragraphs does s. 26 operate to include in assessable income a percentage only of a receipt. It is this partial inclusion which s. 26 (d) effects which is said to give rise to an implied exemption from assessable income of the remaining ninety-five per cent, whether or not it be in the nature of income according to ordinary concepts. (at p52)

5. The general legislative pattern adopted for the determination of assessable income was described in the joint judgment of Dixon C.J. and Williams J. in Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540, at p 555 :

"It begins with the general conception of gross income and specifies in s. 23 what is exempt and in s. 26 and other sections particular classes of income that are to be included. Sometimes these classes of income appear to be specified simply for greater certainty, sometimes because they do not fall within the natural understanding of gross income . . . " (at p52)

6. Section 26 performs the function thus assigned to it, as here described, by proceeding to enumerate various classes of receipts, many of which include, and some of which may consist entirely of, receipts of an income nature already brought into assessable income by s. 25 (1); familiar examples occur in ss. 26 (a) and 26 (e). It also includes, as in the first limb of s. 26 (a) and in s. 26 (d), some receipts which are of a capital nature according to ordinary concepts and which are, therefore, not already caught by s. 25 (1). (at p53)

7. When, as occurs for example in s. 26 (a) and s. 26 (e), receipts of income already falling within s. 25 (1) are for a second time included in assessable income the consequence is not to submit them to assessment of tax twice over; they are assessed but once but there will be two provisions of the Act which will then justify their inclusion in assessable income. Similarly, I would suppose, with s. 26 (d); if it applies to allowances etc. both of a capital and of an income nature the latter run no risk of double assessment, as to five per cent under it and again as to a hundred per cent under s. 25 (1). The only consequence will be that as to five per cent of such amounts there will exist two provisions of the Act, instead of one only, ensuring their inclusion in assessable income. This operation of s. 26 (d) upon five per cent of receipts which are of an income nature will be an unnecessary one, accomplishing nothing that s. 25 (1) would not accomplish unaided; but this, far from being a novelty, is a commonplace in the operation of s. 26, as emerges from experience of the second limb of s. 26 (a) and of s. 26 (e). It does not, of itself, provide a ground for attributing for any exempting operation to s. 26 (d). In the case of allowances etc. of a capital nature the legislation functions with a greater economy of effort; only by reason of the terms of s. 26 (d) will five per cent of such allowances etc. be included in assessable income. (at p53)

8. The working of s. 26 (d) may thus be seen clearly enough; it ensures that five per cent of all such allowances etc. as there described are included in assessable income; it does not concern itself one way or another with the remaining ninety-five per cent, which is either drawn into assessable income by s. 25 (1) and the general law if it bears the character of income or escapes assessability altogether if it bears the character of capital. (at p53)

9. Nothing seems to me to emerge from what I have so far dealt with which would justify giving to s. 26 (d) any exclusory operation. In particular I see no scope for the application of the principle that specific provisions such as s. 26 (d) should prevail over general provisions such as s. 25 (1). Such a rule of construction has its place where contrariety is manifest - Perpetual Executors and Trustees Association of Australia Ltd. v. Federal Commissioner of Taxation, per Dixon J. (1948) 77 CLR 1, at p 29 et seq , Butler v. Attorney-General (Vict.), per Fullagar J. (1961) 106 CLR 268, at pp 275-276 , Fonteio v. Morando Bros. Pty. Ltd. (1971) VR 658, at p 662 ; here however no conflict arises between general and particular unless there first be implied into s. 26 (d) an absolute exemption from assessability in respect of ninety-five per cent of allowances etc. This rule of construction can hardly support such an implication when it itself will only apply if that implication be first made. (at p54)

10. Section 26 (e) is relied upon by the appellant; it is linked to s. 26 (d) by the reference to the latter in the proviso to s. 26 (e). This proviso serves to exclude from the inclusory operation of s. 26 (e) any allowance etc. which falls within s. 26 (d). Its presence no doubt strengthens the view that s. 26 (d) extends allowances etc. of an income character; were it otherwise and if, as has been said in this Court, s. 26 (e) itself brings into charge no receipt which is not income, either according to ordinary concepts or by statutory definition, the presence of the proviso would be pointless. However the proviso appears to me to afford no support for the further proposition, essential to the appellant, that s. 26 (d) confers exemption from charge upon ninety-five per cent of allowances etc. of an income nature. So long as there was thought to exist a possibility that the terms of s. 26 (e) might extend to allowances etc. of a capital nature, and the presence of "directly or indirectly" in s. 26 (e) may reasonably have lent colour to such a view, the presence of the proviso is immediately explicable. It serves to dispose of the possibility that s. 26 (e) might, contrary to the legislative intent, be treated as sweeping such allowances etc. into assessable income, whether or not of a capital nature. (at p54)

11. Accordingly I find in the statutory context of s. 26 (d) no reason for regarding it as conferring any exemption from charge; nor are the words of s. 26 (d) itself susceptible of such a construction. Moreover the general legislative pattern, whereby exemptions are found in s. 23 and the lettered sections which now follow it, whereas s. 26 has quite different work assigned to it, is not one favourable to the giving of an exempting operation to s. 26 (d). It is for these reasons that I find myself unable to regard the payments received by the present appellant otherwise than as forming part of his assessable income within s. 25 (1). (at p54)

12. In other respects, as will appear from what I have said above, I would respectfully agree with the reasons for judgment of the other members of the Court; I would, in particular, wish to associate myself with all that is said by Gibbs J. concerning the unchallenged findings of fact which are before us and the light which they must cast upon the propositions for which this case will be authority. (at p54)

13. I would dismiss this appeal. (at p55)

JACOBS J. On the application for leave to appeal under s. 196(5) of the Income Tax Assessment Act 1936-1973 it was found convenient to hear the whole of the argument which would be presented on the appeal if leave were granted as the question of law raised lay within a small compass. The matter raised a question of some general importance upon which many other assessments depend and leave should be granted. I proceed therefore on that basis. The appellant was employed by Fluor Australia Pty. Ltd. from 25th November 1969 to 24th September 1971 in the Hay Point District. On this day his employment was terminated as work was no longer available in that district. Two days later, on Monday 27th September 1971, he was re-engaged for work in the Peak Downs District where he worked for the employer until 11th February 1972. His employment was then terminated because work was no longer available. (at p55)

2. The appellant was employed under the terms of the Railway Workers' Construction Award and his weekly wages were paid in terms of that award. There was, however, also in existence over the relevant time an agreement between his industrial union and the employer to which he became a party on entering the employment. This agreement was varied on 21st September 1970 in a way which is presently relevant, so that it was provided by cl. 7(b) that on satisfactory termination of employment an employee should be paid a severance payment, calculated at the rate of $2.50 per shift, for each normal shift worked during the period of his employment. On 29th March 1971 cl. 7 was further amended. The payment of $2.50 per shift was increased to $3 and two sub-clauses were added as follows: "(c) 7 day rostered workers to be paid an additional $2.00 per shift, on satisfactory termination of employment (past Bent 104)." and "(d) On satisfactory termination of employment the employee shall be paid a service payment of $2.00 for each week worked." (at p55)

3. There were further variations of the agreement on 1st June 1971. Sub-clause (c) was deleted. (at p55)

4. At the end of each of the two periods of his employment the appellant was paid the sums to which he was entitled under the agreement on satisfactory termination of employment. The questions of law which arose before the Board of Review were whether the whole of those sums were income under s. 25(1) or s. 26(e) or only five per cent thereof under s. 26(d). Of the amounts in question a sum of $73 was referable to the agreement before it was varied on 21st September 1970. It is no longer claimed that this amount falls within s. 26(d) and it is not necessary to refer to the language of the agreement under which that claim was made. The argument has been limited to so much of the amounts as was paid pursuant to the terms of the agreement after its variation. (at p56)

5. 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". In the Supreme Court the view was taken that the amounts, computed as they were on a weekly basis, were not allowances because they were paid under a binding agreement so to pay them. I do not think that the word "allowance" can be given a meaning which excludes payments by agreement, particularly when s. 26(d) refers specifically to payments of this kind. The substantial question is whether they were capital amounts within the meaning of s. 26(d). It is clear that the amounts were income in the ordinary sense and would fall within s. 25(1) unless they were excluded from the operation of s. 25 by the express provisions of s. 26. It has been submitted that s. 26(d) does not apply to every amount which is paid in a lump sum in consequence of retirement from or termination of an office or employment but only to such amounts as can be described as capital and not income amounts. It is well established that an amount paid in a lump sum in consequence of retirement from or termination of an office or employment is income of that office or employment if it is deferred remuneration: Henry v. Foster (1931) 145 LT 225; 16 TC 605. ; Dewhurst v. Hunter (1932) 146 LT 510; 16 TC 637. . In the latter case, the decision of the Court of Appeal was reversed by the House of Lords on one of the three cases before the Court of Appeal in the former case. But the principle as I have stated it was unaffected. The test applied in those decisions was in substance whether the amount received in a lump sum was part of the consideration for the services rendered in the office or employment. If it was, then it was income although payment was deferred. If it was not, then it was a capital amount. (at p56)

6. The question to be determined is whether the purpose of s. 26(d) was to include to the extent of five per cent thereof in the assessable income of a taxpayer amounts received in a lump sum by a taxpayer in the stated circumstances only when they were not amounts of income in the ordinary sense of that word but were amounts or payments of capital under the general law. (at p56)

7. It will be observed from the decisions to which I have referred that the test whether or not a lump sum payment of the kind being considered is capital or income depends upon whether it is a price for services to be rendered. Therefore, if the paragraph referred only to amounts paid voluntarily it would be permissible to give the word "capital" a sense which distinguished the amount so described from an amount of income. But s. 26(d) refers not only to amounts paid voluntarily but also to amounts paid by agreement. Since an amount paid by agreement is income if the agreement precedes the service in the office or employment it is not possible to give the word "capital" a sense which is in contradistinction to income. Agreement refers not only to such agreement as may be made after service in the office or employment but also to such agreement as may be made before such service. This is made clear by the proviso which excludes any part of deferred service pay being included in the paragraph. (at p57)

8. The payments in the present case would fall within s. 25(1) if it were not for the express provision in s. 26(d). But the effect of the latter provision read together with the succeeding par. (e) is to cover the whole subject matter of allowances, gratuities and compensation. Although a receipt may be income by virtue of s. 26 which is not income falling within the ordinary meaning of that word as it is used in s. 25 it does not follow that receipts or a proportion thereof which are specifically dealt with in s. 26 will necessarily be income also within s. 25 simply because they fall within the ordinary meaning of the word "income". They may do so, depending on the legislative intention which is disclosed. Ordinarily it does not matter when the whole amount is brought into assessable income under both sections. However, where, as in the present case, only a proportionate part is brought into assessable income, one or other of the sections can alone be applicable. The special provision in s. 26(d) must be given its effect in preference to the general provision in s. 25(1). (at p57)

9. I would therefore allow the appeal. In lieu of the answers to the questions of law which were given in the Supreme Court:-
(a) No, except as to a sum of $73.
(b) Yes, except as to a sum of $73. (at p57)

Orders

Grant leave to appeal.

Appeal allowed with costs. Judgment of the Supreme Court of Queensland set aside and in lieu thereof
(1) Order that the questions be answered as follows:
(a) $73.66 (part of the sum of $932.66) is assessable income of the taxpayer within s. 25(1) (a) or s. 26(e) of the Income Tax Assessment Act.
(b) The sum of $859 (the balance of the sum of $932.66) and the whole of the sum of $302 are lump sums paid by the employer of the taxpayer to him in consequence of termination of employment within the meaning of s. 26(d) of the Income Tax Assessment Act whereby only five per centum of the aforesaid sums is to be included in the assessable income of the taxpayer.
(2) Order that the respondent Commissioner pay to the appellant his costs of and incidental to the reference.