Sladden v Commissioner of Taxation
[2024] FCAFC 122
•19 September 2024
FEDERAL COURT OF AUSTRALIA
Sladden v Commissioner of Taxation [2024] FCAFC 122
Appeal from: Julie Ann Sladden v Commissioner of Taxation [2023] AATA 3815 File number(s): QUD 560 of 2023 Judgment of: O'SULLIVAN, HESPE AND NESKOVCIN JJ Date of judgment: 19 September 2024 Catchwords: TAXATION — appeal from a decision of the Administrative Appeals Tribunal affirming the decision of the Commissioner of Taxation to disallow the applicant’s objection to an income tax assessment — where claim made by applicant for future income protection benefit entitlements under a policy of insurance which also included provision for Life Insurance — where applicant receives sum in settlement of claim for income benefits — where the AAT found the settlement sum is characterised as assessable ordinary income — where the settlement also included a component for the Life Insurance — whether AAT erred in determining the nature of the settlement sum other than entirely by the terms of the deed of release — whether the AAT erred in characterising the settlement sum as being entirely income in character by reference to parties’ subjective state of mind — lump sum settlement in satisfaction of the applicant’s claim for income benefits under the policy — appeal dismissed Legislation: Administrative Appeals Tribunal Act 1975 (Cth), s 44
Income Tax Assessment Act 1997 (Cth), ss 6-5, 15-30, 118-300(1)
Life Insurance Act 1995 (Cth), Part 9
Cases cited: AAI Ltd v Technology Swiss Pty Ltd (2021) 286 FCR 208; [2021] FCAFC 168
Allied Mills Industries Pty Ltd v Commissioner of Taxation (1989) 20 FCR 288; (1989) 20 ATR 457
Allsop v Commissioner of Taxation (1965) 113 CLR 341; [1965] HCA 48
Federal Commissioner of Taxation v CSR Ltd (2000) 104 FCR 44; [2000] FCA 1513
Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938; (1988) 88 ATC 4126
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124; [1990] HCA 25
Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315; [2015] FCAFC 92
Julie Ann Sladden v Commissioner of Taxation [2023] AATA 3815
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381; [1961] HCA 9
Reuter v Federal Commissioner of Taxation (1993) 27 ATR 256; (1993) 93 ATC 5030
Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; [1966] HCA 48
Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6; [1995] FCA 707
Sommer v Federal Commissioner of Taxation (2002) 51 ATR 102; [2002] FCA 1205
YCNM v Federal Commissioner of Taxation (2019) 110 ATR 151; [2019] AATA 1592
Division: General Division Registry: Queensland National Practice Area: Taxation Number of paragraphs: 75 Date of hearing: 29 August 2024 Counsel for the Applicant: Mr M O’Meara SC Solicitor for the Applicant: BLW Partners Pty Limited Counsel for the Respondent: Mr G Davies KC with Mr R Minson Solicitor for the Respondent: Australian Taxation Office ORDERS
QUD 560 of 2023 BETWEEN: JULIE ANN SLADDEN
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
O'SULLIVAN, HESPE AND NESKOVCIN JJ
DATE OF ORDER:
19 SEPTEMBER 2024
THE COURT ORDERS THAT:
1.The appeal is dismissed.
2.The applicant pay the respondent’s costs to be agreed or to be taxed in default of agreement.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THE COURT:
This is an appeal brought in this Court’s original jurisdiction by the applicant, Dr Sladden, under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) on a question of law from a decision of the Administrative Appeals Tribunal: Julie Ann Sladden v Commissioner of Taxation [2023] AATA 3815 (T).
Dr Sladden objected to an income tax assessment for the income year ended 30 June 2020 in which a settlement sum of $1,000,000, received by Dr Sladden under a deed of release between Dr Sladden and AMP Life Ltd, the insurer, was included in her assessable income as ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth) (1997 Act).
The Commissioner of Taxation disallowed Dr Sladden’s objection to the assessment and Dr Sladden applied to the Tribunal to review the Commissioner’s objection decision. On 16 November 2023, the Tribunal affirmed the Commissioner’s decision to disallow Dr Sladden’s objection, concluding that the settlement sum of $1,000,000 was paid to Dr Sladden to commute or settle her claim under an income protection plan and was income in nature.
For the reasons set out below, Dr Sladden has not established that the Tribunal made an error of law and the appeal should be dismissed.
BACKGROUND
The background facts are set out at T [5] to [56]. For the purposes of this appeal, the relevant facts are as follows.
On 13 April 1999, Dr Sladden entered into two linked policies of insurance (Policy) with National Mutual Life Association of Australasia Limited (collectively issued under the policy number P700129518): T [5].
The Policy provided the following cover (T [6]):
(a)a Life Protection Plan:
(i)with a commencement date of 13 April 1999;
(ii)with an expiry date of 3 April 2068; and
(iii)for a sum insured payable on death or trauma which sum diminished over time and was $27,471.96 when the deed of release was entered into.
(b)a Professional Income Protection Plan:
(i)with a commencement date of 13 April 1999;
(ii)with an expiry date of 3 April 2038;
(iii)for a sum insured which varied over time and was $2,979.21 per month when the deed of release was entered into; and
(iv)for a benefit period to age 65 for injury or sickness.
In February 2013, Dr Sladden was diagnosed with breast cancer: T [7].
On about 4 March 2013, Dr Sladden made a claim for an income protection benefit under the Income Protection Plan, following which Dr Sladden received monthly benefits under the Income Protection Plan: T [8].
On 1 January 2017, the life insurance business of National Mutual (which at that stage was owned by the Axa Group) was transferred to AMP in accordance with Part 9 of the Life Insurance Act 1995 (Cth): T [12].
On 9 May 2019, Dr Sladden appointed Mr Colin Fullagar, of Integrity Resolutions, to negotiate with AMP on her behalf “re a possible commutation of [her] income protection insurance benefit”: T [14].
On 9 May 2019, Mr Fullagar emailed a contact of his at AMP “in regard to [Dr Sladden’s] income protection insurance policy and claim.” On 10 May 2019, Mr Fullagar asked Dr Sladden’s case manager, to whom he had been directed, to “undertake the necessary calculations and come back with the amount [AMP] would be willing to offer Ms Sladden in exchange for future income protection benefit entitlements”: T [17].
On 26 June 2019, Mr Fullagar informed Dr Sladden that AMP was willing to offer $1,000,000 in full and final settlement of her claim, with the Policy to be surrendered: T [19].
On 1 July 2019, Mr Fullagar called the case manager about AMP’s offer and was advised that, whilst calculated on a “commercial basis”, “[b]asically, it is determined on PD M/B currently paid, reserve on the claim, life expectancy & receiving the lump sum now as opposed to payment being monthly till policy expiry”: T [24].
To assist in assessing AMP’s offer, Dr Sladden engaged an actuary to calculate “the present value of [her] income benefits”, which on 5 July 2019 the actuary estimated at between about $1.78 million and $1.94 million, depending on the assumed inflation and discount rates: T [25].
On 11 July 2019, Mr Fullagar informed AMP that Dr Sladden would accept the offer of $1,000,000 and asked for the necessary documentation to be drawn up and sent to him: T [32].
On 30 July 2019, Mr Fullagar received a letter from AMP which was relevantly in the following terms (T [34]):
The letter from AMP enclosed a draft deed of release, the recitals of which relevantly read as follows (T [35]):
Mr Fullagar forwarded the letter and draft deed to Dr Sladden, copying her insurance broker, with a reminder to obtain appropriate legal advice and asked her to “confirm that the policy is a stand‐alone income protection insurance contract ie there are no other benefits attached such as term, trauma or total and permanent disability”: T [36].
Dr Sladden’s insurance broker responded to say that Dr Sladden’s (T [37]):
“Income Protection policy also contains $27,471.96 in Life cover only that is costing $70.44 per annum (premium waived as the income protection policy is on claim) and will also be lost once the income protection policy has been paid out and the policy is cancelled. If the small amount of life cover is required, you could ask AMP to move it to a new standalone policy and then Julie would need to recommence paying the required premiums.”
Mr Fullagar then wrote to Dr Sladden (T [38]):
“There has been no mention of the life cover component in the commutation discussions and it could be argued that the life cover with premium waiver is a separate issue.
If you wish to retain this cover, I would suggest you have the Deed amended to this effect. I would further suggest that the cover should continue to index and that premiums should continue to be waived.
AMP may push back but I can seek to cover this off while you are having the Deed checked”.
After her insurance broker confirmed that “the Life cover is a separate component”, Dr Sladden instructed Mr Fullagar to “go ahead and ask AMP about [it]”: T [39].
In her evidence before the Tribunal, Dr Sladden agreed that she did not consider the life insurance component of the Policy until 30 July 2019, and only after she had expressed her willingness to accept AMP’s offer of $1,000,000 in commutation of her income protection benefits: T [40].
On 31 July 2019, Mr Fullagar emailed AMP as follows: “The policy contains a separate term insurance benefit for circa $25,000 for which premium waiver is in place. Can you please confirm that this benefit will continue on the same basis as a stand‐alone policy”: T [41].
On 1 August 2019, Mr Fullagar called AMP to enquire about Dr Sladden’s life insurance and was informed by the case manager that, whilst the matter had been “referred to legal”, the case manager’s understanding was that “the entire policy was being surrendered”: T [43].
In her evidence before the Tribunal, Dr Sladden agreed that, knowing that the Life Protection Plan was to be cancelled, she did not go back to AMP and ask for anything extra from AMP beyond the $1,000,000 which had been offered: T [45].
On 7 August 2019, Mr Fullagar sent proposed amendments to the draft deed to AMP and advised (T [51]):
“[A] decision has been made not to pursue retention of the death cover under the policy so could you please ask the AMP legal team not to worry about this matter. Having said that, the advice attached indicates correctly that the Deed should acknowledge the cancellation of that death cover”.
On 22 August 2019, AMP provided Mr Fullagar with a revised version of the draft deed of release: T [52].
On or about 11 September 2019, the parties executed the deed of release, which relevantly included the following terms:
INTRODUCTION
…
C: [Dr Sladden] is the owner of a life insurance policy issued by National Mutual, which is identified by policy number P7001295518 (‘the Policy’). The Policy provides for payments to be made in respect of lost income and other events including the death of [Dr Sladden].
D: On about 4 March 2013, [Dr Sladden], made a claim for an income protection benefit (“IP Benefit”) under the Policy, identified by claim number P1B3411 (‘the Claim’).
E: On 12 December 2016 the Federal Court of Australia approved the transfer of the life insurance business of [National Mutual] in Australia and New Zealand to AMP as and from 1 January 2017 pursuant to Part 9 of the Life Insurance Act 1995 (Cth). The rights and obligations of insureds under their existing policies and in respect of proceedings against [National Mutual] are unchanged by this transfer, except that those rights and obligations now continue against AMPL. By this Deed, [Dr Sladden] intends to release both AMPL and [National Mutual] equally.
F: AMP accepted the Claim and [Dr Sladden] received a monthly IP benefit in respect of the Claim from 10 April 2013 to 30 August 2019.
G: Without admission of liability, the parties to the Deed agree to compromise the Claim, the Policy and all insurance cover held under the Policy. [Dr Sladden] agrees to provide the release and indemnity set out in clause 3 in exchange for payment of the Settlement Sum pursuant to clause 2.
…
IT IS AGREED
1 DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Deed:
...
(e) Settlement Sum is $1,000,000;
...
2 SETTLEMENT
2.1 AMP will pay the Settlement Sum to [Dr Sladden] within 28 days of the date of receipt by AMP of this original Deed, duly executed by [Dr Sladden].
…
2.3 The Policy will be terminated by AMP on receipt of this Deed executed by [Dr Sladden].
…
3 RELEASE AND INDEMNITY
3.1 [Dr Sladden] releases and discharges AMP from all sums of money, accounts, claims, actions, proceedings, demands and expenses which [Dr Sladden] at any time had or may have against AMP, whether known or unknown to the parties (and if known by a party whether or not it was disclosed to the others) at the date of this Deed, in relation to the Claim and the Policy.
3.2 [Dr Sladden] will indemnify AMP by holding it harmless for any loss or expense it may incur if any person makes a demand on AMP about the Claim or the Policy.
Following execution and delivery of the deed of release to AMP, on 11 September 2019, Dr Sladden received the settlement sum: T [55].
At about the same time, AMP wrote to Dr Sladden in the following terms (at T [56]):
TRIBUNAL’S DECISION
Before the Tribunal, it was not in dispute that the monthly benefits that Dr Sladden was receiving under the Income Protection Plan was assessable income. However, Dr Sladden contended that the settlement sum was not assessable as ordinary income because it was an undissected lump sum comprising capital and income and, as such, it was all on capital account, relying on McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381; [1961] HCA 9 and Allsop v Commissioner of Taxation (1965) 113 CLR 341; [1965] HCA 48.
The Tribunal rejected Dr Sladden’s submission that the nature of the consideration for which the settlement sum was to be paid was to be determined entirely by the terms of the deed of release: T [63].
The Tribunal stated (at [64]):
The terms of the deed are not determinative of the issue. Instead regard may be had to the facts and circumstances that led to the deed being executed, notwithstanding the deed is not a sham, so as to determine the true nature of the settlement sum including whether it was income according to ordinary concepts [Federal Commissioner of Taxation v Spedley Securities (1988) 19 ATR 938; (1988) 88 ATC 4126; Allied Mills Industries Pty Ltd v Commissioner of Taxation (1988) 20 FCR 288; (1988) 20 ATR 457; Sommer v Federal Commissioner of Taxation (2002) 51 ATR 102; [2002] FCA 1205; Reuter v Federal Commissioner of Taxation (1993) 27 ATR 256; (1993) 93 ATC 5030; Federal Commissioner of Taxation v CSR Ltd (2000) 104 FCR 4; (2000) 45 ATR 559; [2000] FCA 1513 at [61]].
In having regard to the facts and circumstances that led to the execution of the deed of release, the Tribunal found that:
(a)as at 11 July 2019, when Dr Sladden expressed her willingness to accept AMP’s offer of $1,000,000, both Dr Sladden and AMP considered, and had communicated, that what became the settlement sum represented what AMP would pay for the commutation or settlement of Dr Sladden’s income protection benefits: T [65];
(b)it was only later, when the draft deed of release was drawn up and Dr Sladden sought taxation advice, that any consideration was given to the life cover or other matters. Although Dr Sladden agreed under the deed of release to surrender the life cover, and release AMP from any claims she may at any time have or have had against it, the settlement sum remained $1,000,000: T [66]; and
(c)Dr Sladden engaged an actuary to value the income protection benefits for the purpose of gauging AMP’s offer of $1,000,000. However, she did not take any similar steps to value the life cover before entering into the deed of release. The latter had only occurred when Dr Sladden engaged an actuary for the purpose of providing a report in the proceeding before the Tribunal: T [67].
The Tribunal observed (at T [68]), using the expression in Sommer v Federal Commissioner of Taxation (2002) 51 ATR 102; [2002] FCA 1205 at [18] (Merkel J), that there was “an air of unreality and artificiality” about Dr Sladden’s contention that there was a capital element involved in the settlement sum. Instead, the Tribunal found that “[t]he reality was that [Dr Sladden] and AMP negotiated and resolved to commute [Dr Sladden’s] entitlements in respect of the income protection claim in consideration of payment of the settlement sum. No other claim or entitlement was considered by either party in reaching agreement on the amount AMP was to pay”: T [69].
The Tribunal noted (at T [70]) that, in some circumstances, when determining the character of a receipt of a settlement sum, regard may be had to the nature of claims that are neither made nor even threatened but are objectively open, citing Allsop and YCNM v Federal Commissioner of Taxation (2019) 110 ATR 151; [2019] AATA 1592 at [147] (SM Hespe, as her Honour then was). However, the Tribunal found that consideration did not arise in this case because it was “clear that the substance and commerciality of the settlement was income protection benefits which were commuted”: T [70].
The Tribunal found (at T [71]) that, in contradistinction to McLaurin and Allsop, the lump sum received by way of settlement in this case was not “incapable of dissection between income and capital” because the settlement sum was only in respect of commutation of Dr Sladden’s monthly benefits payable under the Income Protection Plan.
In conclusion, the Tribunal found that, on the totality of the evidence, it was not satisfied that the settlement sum related to claims, entitlements or benefits of a mixed income and capital nature and that Dr Sladden assented to acceptance of the settlement sum of $1,000,000 to commute or settle her claim under the Income Protection Plan. Accordingly, the Tribunal affirmed the objection decision: T [72]-[74].
GROUND OF APPEAL
By the time of the hearing, the principal ground of appeal was whether the Tribunal erred in law in characterising the settlement sum as being entirely income in character by reference to findings about what Dr Sladden contended was each of the parties’ subjective state of mind (what they considered and valued) drawn from an examination of the prior negotiations.
Dr Sladden submitted that the Tribunal’s approach was contrary to McLaurin, Allsop and Federal Commissioner of Taxation v CSR Ltd (2000) 104 FCR 44; [2000] FCA 1513, which require the character of an undissected payment to be determined objectively, by reference to the rights released as consideration for the payment. Dr Sladden submitted that that question is to be determined according to the parties’ agreement (construed objectively in its factual context). If the rights so released are of a mixed character, the payment is to be treated as capital.
Dr Sladden submitted that the Tribunal placed a heavy emphasis on Dr Sladden’s and her representatives’ state of mind in negotiations, including what they attached value to, considered and understood. As a result, it was submitted, the Tribunal effectively set aside the terms of the deed of release and characterised the settlement sum by reference to what claims and rights the parties considered and valued during the course of their negotiations, contrary to McLaurin, Allsop and CSR.
Dr Sladden submitted that those authorities stand for the principle that where a payment is made as consideration for a release of rights or claims, the character of the payment is to be determined by: (1) the rights or claims objectively in existence, whether or not they were contemplated or valued by the parties in negotiations; (2) the rights or claims released by the parties’ agreement, construed objectively in its whole context, whether or not they were contemplated or valued by the parties in negotiations, so long as they had sufficient basis in fact; and (3) the release, so long as it was not illusory, or a sham, which was to operate according to its terms.
In the event that the settlement sum was not assessable as ordinary income pursuant to s 6-5 of the 1997 Act, Dr Sladden submitted that s 15-30 of the 1997 Act did not apply to include the settlement sum in her assessable income because no amount was received “by way of insurance”. Furthermore, Dr Sladden submitted that, because a CGT event occurred upon the entry into the deed of release, any capital gain she may have made from the happening of the CGT event was disregarded by reason of s 118-300(1) of the 1997 Act.
CONSIDERATION
For the reasons set out below, we reject the submission made on behalf of Dr Sladden that the Tribunal erred in law by not confining itself to the deed of release or in having regard to the parties’ subjective state of mind. In our view, the former submission is unsustainable as a matter of law and the latter submission is unsustainable having regard to the Tribunal’s findings of fact.
The character of a receipt is to be determined by the quality of the receipt in the hands of the recipient: GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124; [1990] HCA 25 at 136 (Brennan, Dawson, Toohey, Gaudron and McHugh JJ), citing Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; [1966] HCA 48 at 526 (Windeyer J).
An undissected, undifferentiated lump sum received by a taxpayer in settlement of claims, some of which are on revenue account and some of which are on capital account, is a capital receipt: McLaurin at 391, Allsop at 351 and CSR at [68]-[71].
However, whether a receipt is to be characterised as an undissected lump sum in the hands of the recipient is not determined exclusively by reference to the terms of settlement pursuant to which it has been received, but requires an examination of the entirety of the facts and circumstances surrounding the agreement: Federal Commissioner of Taxation v Spedley Securities Ltd (1988) 19 ATR 938; (1988) 88 ATC 4126 at 942-943 (Fox, Fisher and Sheppard JJ).
In Allied Mills Industries Pty Ltd v Commissioner of Taxation (1989) 20 FCR 288; (1989) 20 ATR 457, the Full Court (Bowen CJ, Lockhart and Foster JJ) said (at 309):
In characterising payments made under an agreement, the terms of the agreement must, of course, be examined; but so must the whole of the circumstances surrounding its execution, its operation and the receipt of the money in question: Federal Coke Co Pty Ltd v Commissioner of Taxation (Cth) (1977) 34 FLR 375 at 385; 7 ATR 519 at 526, per Bowen CJ.
See also Reuter v Federal Commissioner of Taxation (1993) 27 ATR 256; (1993) 93 ATC 5030 at 261 (Jenkinson, Lee and O’Loughlin JJ); AAI Ltd v Technology Swiss Pty Ltd (2021) 286 FCR 208; [2021] FCAFC 168 at [43] (Perram J) and [209] (Sarah Derrington J, with whom Jagot J agreed at [68]).
The surrounding circumstances include the objective facts and the circumstances known to both parties. The surrounding circumstances do not extend to uncommunicated reasoning which led the payer to agree to pay it (McLaurin at 391) or to the payee agreeing to accept it. Where the surrounding circumstances support the existence of a number of causes of action for unliquidated damages (regardless of whether proceedings are threatened or not), a lump sum of damages accepted in full satisfaction of the entirety of the taxpayer’s claims may be characterised as an undissected lump sum and in such circumstances the course of negotiation is not particularly probative: McLaurin at 391.
By the same token, the nature of a sum received pursuant to an agreement is not determined by reference to the surrounding circumstances to the exclusion of the terms of the agreement. As the Full Court observed in CSR, where a payment is made pursuant to an agreement that is not a sham, the “why and how” of the payment is determined according to the terms of the agreement. The Full Court went on to state at [61]:
Attention must be paid to determining what is truly represented by the amount received. Ordinarily this is most easily gleaned from the terms agreed between the parties. However, these terms will also always have to have some basis in the facts surrounding the payment. This was recognised in Federal Coke Co Pty Ltd v Commissioner of Taxation (Cth) (1977) 34 FLR 375, where Brennan J said (at 4040):
“The evidence [of the agreement between the taxpayer and the donor] tends to identify the matter in respect of which the payments were received, but the conclusion to which it tends must be tested by reference to other evidence.”
In Sommer, Merkel J concluded that in characterising a settlement amount paid under the terms of settlement, the Tribunal did not err in law in having regard to the surrounding circumstances rather than confining itself to the terms of settlement.
In that case, the applicant had taken out a professional income replacement insurance policy which provided that the insurer would pay the applicant a monthly benefit in the event that he was totally or partially disabled from working as a medical practitioner. The applicant made a claim on his insurer for payment of the monthly benefits. After the claim was denied, the applicant commenced a proceeding, which was later settled. Under the terms of settlement, the insurer agreed to pay the applicant a lump sum in consideration for the cancellation of the policy.
Merkel J considered (at [12]) that “the true nature and proper characterisation of the settlement amount is to be determined by having regard to the policy, the applicant's claims under the policy, the terms of settlement which, inter alia, settled those claims and the rights the applicant will be surrendering upon the cancellation of the policy.” After considering each of those matters, Merkel J concluded (at [19]) that:
The substance and the commercial reality of the settlement was that it was a full and final settlement of the dispute between the applicant and the insurer in relation to the applicant's past and future claims to be entitled to income replacement benefits as a result of his total or partial disability …. As explained above, it is well established that a payment in settlement of such claims is a payment on revenue account.
We respectfully agree with that approach.
In our view, having regard to the principles set out above, the Tribunal made no error in considering the deed of release in light of the surrounding circumstances known to both parties. We accept that the character of the receipt is not to be determined by reference to the uncommunicated subjective state of mind of either party: McLaurin at 391. However, we reject that the Tribunal’s conclusion relied on findings of fact that were based on any parties’ subjective state of mind.
The Tribunal’s consideration was set out at T [61]-[72]. Relevantly, the Tribunal found (at T [65]) that, as at 11 July 2019, when Dr Sladden expressed her willingness to accept AMP’s offer of $1,000,000, Dr Sladden and AMP considered, and had communicated, that what became the settlement sum represented what AMP would pay for the commutation or settlement of Dr Sladden’s income protection benefits, the claim for which AMP had accepted. Those matters were known to both parties, as was evident from the facts found by the Tribunal at T [19], [24], [32], [34] and [35].
The Tribunal found (at T [66]) that it was only later, when the draft deed of release was drawn up, that any consideration was given to the life cover or other matters and, although Dr Sladden agreed under the deed to surrender the life cover and release AMP from any claims she may at any time have or have had against it, the settlement sum remained at $1,000,000. Those matters were objective facts known to both parties, as was evident from the facts found by the Tribunal at T [34], [35], [41], [43] and [51].
The Tribunal found (at T [67]) that while Dr Sladden engaged an actuary to value the income protection benefits for the purpose of gauging AMP’s offer, she did not take similar steps to value the cover under the Life Protection Plan before entering into the deed of release. While those matters were only known to Dr Sladden, those findings merely reinforced the findings at T [66] that Dr Sladden did not seek to re-negotiate the settlement sum after the surrender of the Life Protection Plan was included in the deed of release.
The Tribunal found (at T [69]) that the reality was that Dr Sladden and AMP negotiated and resolved to commute Dr Sladden’s entitlements in respect of the income protection claim in consideration of payment of the settlement sum and no other claim or entitlement was considered by either party in reaching agreement on the amount AMP was to pay.
The Tribunal concluded that “the substance and commerciality of the settlement was income protection benefits which were commuted”: T [70], and that “no part of the settlement amount was other than in respect of commutation of [Dr Sladden’s] monthly benefits payable under the income protection cover”: T [71].
In our view, those findings were open to the Tribunal on the facts as well as on the proper construction of the deed of release.
As noted in Recital C of the deed of release, in addition to an income protection benefit (referred to and defined in Recital D as the “IP Benefit”), the “Policy” provided “for payments to be made in respect of lost income and other events including the death of [Dr Sladden]”. That must be a reference to the life cover under the Life Protection Plan. Recital C contains the only reference in the deed of release to such cover under the Policy, that is, cover in addition to the “IP Benefit”.
As noted in the deed of release, the only claim that Dr Sladden had made under the Policy was the claim made on 4 March 2013 for an income protection benefit (defined in Recital D as “the Claim”).
Recital G stated that “[w]ithout admission of liability, the parties to the Deed agree to compromise the Claim, the Policy and all insurance cover held under the Policy. [Dr Sladden] agrees to provide the release and indemnity set out in clause 3 in exchange for payment of the Settlement Sum pursuant to clause 2”.
Under clause 2.1 of the deed of release, AMP was required to pay the “Settlement Sum” of $1,000,000 within 28 days of receipt of the deed executed by Dr Sladden.
Under clause 2.3, the Policy would “be terminated by AMP on receipt of this deed” executed by Dr Sladden.
Clause 3.1 of the deed of release contained the “Release” and provided:
[Dr Sladden] releases and discharges AMP from all sums of money, accounts, claims, actions, proceedings, demands and expenses which [Dr Sladden] at any time had or may have against AMP, whether known or unknown to the parties (and if known by a party whether or not it was disclosed to the others) at the date of this Deed, in relation to the Claim and the Policy.
Counsel for Dr Sladden submitted that Dr Sladden surrendered and released AMP from her “rights under the Policy”, by which he meant rights Dr Sladden might have in the future, including “contingent claims” under the Life Protection Plan. We do not accept that submission.
According to the deed of release, the only “Claim” that had been made under the Policy was Dr Sladden’s claim under the Income Protection Plan. Under the deed of release, Dr Sladden released AMP from claims she “had or may have against AMP … at the date of [the deed of release], in relation to the Claim and the Policy”. The nature of the Life Protection Plan was that cover, and the right to make a claim under the Life Protection Plan, vested upon the occurrence of an event (ie death or trauma). Therefore, as at the date of the deed of release, the right to make a claim under the Life Protection Plan had either vested or it had not. No such claim under the Life Protection Plan had been made at the date of the deed of release. Counsel for Dr Sladden did not identify any potential claim that may have possibly been made or threatened at the date of execution of the deed of release. The circumstances did not suggest that any other possible claim existed at the date of the deed of release. Unlike McLaurin, there was no suggestion here that a claimable event had, or might have, occurred aside from the events giving rise the claim for income protection (which claim had been accepted by AMP).
Upon delivery of the executed deed of release, Dr Sladden released AMP from the “Claim” and any claims she had or may have had under the Policy as at the date of the deed, including in relation to the Life Protection Plan. Thereafter the Policy was terminated. The settlement sum was paid for the release given in cl 3 (Recital G). According to the Recitals, the settlement sum was not paid for the termination of the Policy under cl 2.3. The release in clause 3 of the deed was not expressed to, and did not, release “rights under the Policy” which Dr Sladden might have in the future, because the Policy was terminated by AMP upon receipt of the executed deed of release.
The applicant has not demonstrated that the Tribunal erred in law in the process of fact finding. Where the facts as found are capable of falling within the statute, the decision of which side of the line they fall is a question of fact: Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315; [2015] FCAFC 92 at [195]-[197], citing Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6; [1995] FCA 707 at 16. It was open to the Tribunal to find on the facts, and the terms of the deed of release, that the “Settlement Sum” of $1,000,000 was in respect of commutation of Dr Sladden’s monthly benefits payable under the income protection cover and no part of the settlement sum was paid or payable in respect of the termination of the life cover plan.
In light of those reasons, it is unnecessary for us to decide Dr Sladden’s alternative arguments.
CONCLUSION
For the reasons set out above, Dr Sladden has not demonstrated that the Tribunal made an error of law in characterising the settlement sum as having been paid to Dr Sladden to commute or settle her claim under an Income Protection Plan and as income in nature.
The appeal should be dismissed with costs.
I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices O'Sullivan, Hespe and Neskovcin. Associate:
Dated: 19 September 2024
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