Stark and Commissioner of Taxation (Taxation)
[2021] AATA 2583
•29 July 2021
Stark and Commissioner of Taxation (Taxation) [2021] AATA 2583 (29 July 2021)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2019/0757
Re:DAVID STARK
APPLICANT
And
COMMISSIONER OF TAXATION
RESPONDENT
DECISION
Tribunal:Senior Member R J Olding
Date:29 July 2021
Place:Brisbane
The decision under review is set aside and the matter is remitted to the respondent with a direction that the applicant’s income tax liability for the year ended 30 June 2009 be re-assessed on the basis that the Payment referred to in the Tribunal’s reasons of today’s date is an employment termination payment for the purposes of the Income Tax Assessment Act 1997.
..................[SGD]....................................................
Senior Member R J Olding
Catchwords
TAXATION – whether payment received in settlement of a claim for deceptive conduct and wrongful dismissal is an Employment Termination Payment – whether payment in consequence of termination of employment – whether payment because of genuine redundancy – whether payment for personal injury – held payment is an Employment Termination Payment – decision under review set aside
Legislation
Income Tax Assessment Act 1997 (Cth), ss 82-139, 82-135, 82-175, 83-285
Taxation Administration Act 1953 (Cth), s 14ZZKCases
Dibb v Commissioner of Taxation [2004] FCAFC 126
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148
Le Grand v Commissioner of Taxation (2002) 124 FCR 53
Torodovic v Waller (1981) 150 CLR 402REASONS FOR DECISION
Senior Member R J Olding
The applicant, Mr Stark, sued his former employer (“the Employer”). The litigation was settled upon payment of a sum of money to or for the benefit of Mr Stark. Part of that amount, $505,500 (“the Payment”), is the subject of this application for review.
The initial assessment of Mr Stark’s income tax for the 2009 income year, consistent with his return, was on the basis that the Payment was an “employment termination payment” (“ETP”). Mr Stark objected to the assessment. The Commissioner disallowed the objection on the basis of the view he formed at that time that the Payment was ordinary income. It is that objection decision that is before the Tribunal for review.
Mr Stark says the Payment is not subject to income tax because it is capital in nature being, as he submits, compensation for destruction of his earning capacity, and covered by a specific exclusion for capital gains tax (“CGT”) purposes.
I have decided that the Payment is subject to income tax, but not as ordinary income. I have concluded the Payment is taxed concessionally as an ETP. My reasons follow.
THE FACTS IN SUMMARY
The following facts are not in contention.
Mr Stark is a chartered accountant of many years standing. At the age of 55, Mr Stark was seeking employment. He had applied unsuccessfully for many positions. Then in October 2000 he was offered, and accepted, a position with a company (“the Company”).
However, after accepting that position but before taking it up, Mr Stark was in discussions with the Employer. The Employer also offered him a position. Mr Stark withdrew his acceptance of employment with the Company and accepted the Employer’s offer of employment.
Mr Stark duly commenced employment with the Employer. But his experience at the Employer was not a happy one and on 19 December 2001 the Employer terminated his employment.
Following the termination of his employment, Mr Stark instigated legal proceedings against the Employer. Those proceedings were part heard by the Supreme Court of Queensland when they were settled by Mr Stark accepting a sum of money, which included the Payment, in return for terminating the litigation. Mr Stark executed a deed dated 20 March 2009 to settle the litigation (“the Deed”).
Despite a large number of applications since his employment was terminated, Mr Stark has not secured further employment. Now 76 years of age, I accept he is unlikely to do so in the future.
THE PARTIES’ SUBMISSIONS IN SUMMARY
Although the Commissioner assessed the Payment as ordinary income in accordance with the objection decision, the Commissioner’s primary submission before the Tribunal was that the Payment is an ETP. Because I have concluded that this submission is correct, it is not necessary for me to consider the Commissioner’s alternative submissions or Mr Stark’s submissions in response to those alternative submissions.
Characterisation of the Payment as an ETP is favourable to Mr Stark, because ETPs are taxed concessionally. Nevertheless, Mr Stark rejects that characterisation and maintains that the Payment is not subject to tax at all.
The foundation for Mr Stark’s position is that the Payment is of a capital nature being compensation for the destruction of his earning capacity and not for loss of earnings. He says the Payment is not an ETP because it is covered by s 82-135(i) of the Income Tax Assessment Act 1999 (Cth).[1] Broadly speaking, s 82-135(i) excludes from characterisation as an ETP certain capital payments for “personal injury”. Although not emphasised at the hearing, in written submissions Mr Stark also asserted the Payment was excluded from being an ETP by s 82-135(e) as a “genuine redundancy payment”.
[1] All legislative references are to the Income Tax Assessment Act 1999 (Cth) unless otherwise indicated.
On the premise that the Payment is of a capital nature and not an ETP, Mr Stark goes on to submit the gain is excluded from the CGT provisions by s 118-37(a)(i). That provision requires gains relating to “compensation or damages you receive for . . .any wrong or injury you suffer in your occupation” to be disregarded for CGT purposes.
Mr Stark says he was induced to accept the position with the Employer by deceptive representations made on behalf of the Employer. It was because of those representations, Mr Stark says, that he gave up the opportunity for employment and substantial income and other financial benefits from employment at the Company.
Mr Stark says that by inducing him to give up the opportunity at the Company, the Employer destroyed his earning capacity, as evidenced by his many unsuccessful attempts to secure employment. He says the Payment is properly characterised as compensation for destroying his earning capacity.
To the extent it is put against him that the Deed refers to lost earnings, rather than loss or destruction of earning capacity, Mr Stark makes a number of submissions.
First, he says the reference in the Deed to the Payment being for “lost earnings” should be construed as “lost earning capacity” and in that regard directs the Tribunal’s attention to various factors to which I return below. Secondly, Mr Stark says the Deed was not properly witnessed and contains errors and therefore, as I understood the submission, should not be regarded as taking effect according to its terms, at least in so far as it refers to lost earnings. Thirdly, Mr Stark says he signed the Deed under duress as the resumption of the trial was looming and he did not have sufficient time to consider its contents.
The statutory provisions on which Mr Stark and the Commissioner rely are set out more fully below, followed by identification of the issues arising out of their submissions regarding those provisions.
STATUTORY FRAMEWORK
Burden of proof
The applicant in an application for review of a taxation objection decision concerning an assessment has the burden of proving the assessment “is excessive or otherwise incorrect and what the assessment should have been”: Taxation Administration Act 1953 (Cth),
s 14ZZK(b)(i). Thus, the Tribunal must determine whether Mr Stark has discharged the burden of proving the assessment is excessive and what the assessment should have been.[2][2] Because the parties have confined the issue in dispute to the characterisation of the Payment, Mr Stark could discharge the burden of proof by proving the Payment should have been characterised as a capital receipt that is not an ETP and is disregarded under the CGT provisions.
In carrying out that task, I apply the following principles:
(a)Facts may be found on the basis of oral evidence alone.
(b)There is no barrier to a fact being found on the uncorroborated evidence of a witness.
(c)There is no requirement that direct evidence by oral testimony may only be accepted if corroborated, for example, by documentary evidence.
(d)However, self-serving statements should be given close scrutiny.
(e)Nevertheless, evidence of a taxpayer is not to be regarded as prima facie unacceptable.[3]
(f)If the taxpayer succeeds in “weighing down [the] scales ever so slightly in his favour then he has discharged the burden he carries”.[4]
[3] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148, 155; and Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.
[4] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [88].
What is an “Employment Termination Payment”?
The expression “employment termination payment” is relevantly defined in s 82-130 as follows:
What is an employment termination payment?
(1) A payment is an employment termination payment if:
(a) it is received by you:
(i) in consequence of the termination of your employment; . . .
(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.
. . .
(4) Paragraph (1)(b) does not apply to you if:
(a) you are covered by a determination under subsection (5) or (7);
. . .
(5) The Commissioner may determine, in writing, that paragraph (1)(b) does not apply to you if the Commissioner considers the time between the employment termination and the payment to be reasonable, having regard to [specified circumstances].
Section 82-135 relevantly provides:
Payments that are not employment termination payments
The following payments that you receive are not employment termination payments
. . .
(e) the part of a *genuine redundancy payment . . . worked out under section 83-170 (see Subdivision 83-C);
. . .
(i) a capital payment for, or in respect of, personal injury to you . . .
Subject to conditions that are not contentious for present purposes, the expression “genuine redundancy payment” is relevantly defined in s 83-175(1) as follows:
What is a genuine redundancy payment?
(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee’s position is genuinely redundant as exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of the dismissal.
. . .
Section 83-170(1) provides that so much of a genuine redundancy payment as does not exceed the amount worked out in accordance with the formula in s 83-170(3) is not assessable income and is not exempt income. The integers to the formula are a “Base amount” and a “Service amount”, each specified in s 83-170(3), and the employee’s years of service.
ISSUES FOR DETERMINATION
Arising out of the provisions extracted above, and as Mr Stark argues the amount of income tax that should have been assessed in respect of the Payment is nil, the issues to be determined are:
(a)Has Mr Stark discharged the burden of proving the Payment was not received by Mr Stark “in consequence of the termination of [his] employment”?
(b)If not, has Mr Stark discharged the burden of proving:
(i)the Payment is exempt as part of a genuine redundancy payment; or
(ii)the Payment is “a capital payment for, or in respect of, personal injury to [Mr Stark]”; and
(iii)the Payment is “compensation or damages [Mr Stark] received for . . .any wrong or injury [he] suffer[ed] in his occupation”.
However, as already noted and for the reasons which follow, I have concluded that Mr Stark has failed to establish that the Payment is not an ETP. It is therefore not necessary for me to consider whether the Payment is excluded from the CGT provisions by s 118-37(a)(i) as compensation or damages for a wrong or injury Mr Stark suffered in his occupation.
For completeness, I note that Mr Stark challenged (by reference to date/timing issues it is not necessary to detail) whether the Commissioner had in fact made a determination under s 82-130(5). However, that could not assist Mr Stark as s 83-295 provides that a payment which would be an ETP but for s 82-130(1)(b) is nonetheless assessable income. Suffice to say, I am satisfied the determination was duly made - it appears in correspondence signed on behalf of the Commissioner.[5]
[5] Exhibit 1, T Documents, T10, 144-5.
Before addressing these issues, it will be helpful to describe the Deed in more detail.
THE DEED
The Deed contains a number of provisions that are germane:
(a)In the Recitals, the Deed defines the following terms:
(i)“Employment”, as Mr Stark’s employment at [the Employer] (Recital A);
(ii)“Termination”, as the termination of the Employment on 19 December 2001 (Recital B);
(iii)“Proceedings”, as the Supreme Court proceedings instituted by Mr Stark against [the Employer] (Recital C);
(iv)“Complaint”, as Mr Stark’s allegations in the Proceedings of “breach of the terms of his Employment, breach of the Trade Practices Act 1974, breach of the Workplace Relations Act 1996 and deceptive conduct by [the Employer]. . .” (Recital D).
(b)Clause 2.1(a) provides:
2.1 Release by Mr Stark
In consideration of the payment by [the Employer] to Mr Stark under clause 2.2 of this deed, Mr Stark:
(a) releases [the Employer] from all Claims arising out of or in any way connected with the Employment, its Termination, the Complaints and the Proceedings or any one or more of them (Released Claims);
. . .
(c)“Claim” in turn is defined comprehensively in clause 1.1;
(d)Clause 2.2. provides:
2.2 Settlement Payment
In consideration of the release in clause 2.1 [The Employer] agrees to pay to Mr Stark the amount of $555,500, being:
(a) $50,000 for general damages; and
(b) $505,500 in respect of the claim by Mr Stark for lost earnings (less any amount required to be withheld by [the Employer] on account of taxation);
within 28 days of the date on which [the Employer’s] solicitors (Mallesons Stephen Jaques) receive this deed duly signed by Mr Stark and witnessed, and the Proceedings are discontinued according to clause 3, whichever is the later.
Clause 2.3 confirms the Employer made no admission of liability.
Notably, Clause 2.2 describes the Payment as “in respect of the claim by Mr Stark for lost earnings” (emphasis added) less tax required to be withheld. In relation to that description, Mr Stark made certain assertions about the circumstances in which the Deed was executed, to which I return below. In that regard, I note the following provisions in the Deed:
(a)Clause 6, under which Mr Stark warranted that:
(a) before executing this deed he was provided a reasonable opportunity to consider his position; and
(b) he understands the effect of this deed . . .
(b)Clause 7, which relevantly provides:
. . .
7.2 Entire agreement
This deed constitutes the entire agreement of the parties about its subject matter and supersedes all previous agreements, understandings, and negotiations on that subject matter.
7.3 No representations and warranties
Mr Stark acknowledges that in entering this deed he has not relied on any representations or warranties about its subject matter except as expressly provided by the written terms of this deed.
Taken together, the provisions of the Deed extracted above have the effect that Mr Stark released the Employer from all claims under the Supreme Court litigation in return for the agreed payment by the Employer, which included the Payment. It is therefore necessary to examine the claims made by Mr Stark in that litigation.
THE SUPREME COURT LITIGATION
Mr Stark’s pleadings in the Supreme Court litigation were amended in the course of the litigation. The final form in which they appeared when the Deed was executed is contained in a Further Amended Statement of Claim filed 10 August 2007.
The allegations made by Mr Stark in the Further Amended Statement of Claim included that:[6]
(a)Various conduct of the Employer, for the purposes of ss 51A and 53B the Trade Practices Act 1974 (Cth), amounted to a representation as to a future matter and was liable to mislead Mr Stark (Clauses 13(c), 13(d)).
(b)The Employer represented that if the viability of a particular business unit of the Employer (“the Business Unit”) was not demonstrated within two years there would be an alternative position with the Employer for Mr Stark, utilising his experience in appraising proposals to acquire new businesses (Clause 12(c)).
(c)An employment agreement existed between the Employer and Mr Stark the terms of which included that the Employer would employ Mr Stark “for an initial period of 2 years in the [Business Unit], and thereafter either in [the Business Unit] or elsewhere within [the Employer].” (Clause 14(c)).
(d)The Employer’s termination of Mr Stark’s employment was in breach of his employment agreement because the two-year period had not expired and because it “denied [Mr Stark] further employment after the initial two year period” (Clauses 17(a), 17(b).
(e)“As a result of the termination of his employment, and/or the said breaches of the Trade Practices Act [Mr Stark] was prevented form (sic) working for [the Employer] at least until he was aged 65, and he has been handicapped from securing alternative employment as the skills that would have been utilised by the Company have become considered by alternate (sic) potential employers as out of date or too long ago, resulting in him suffering loss or damage” (Clause 30).
(f)An attachment to the Further Amended Statement of Claim entitled “EXPLANATION OF CLAIM As at 13 July 2007” contains various calculations of alleged losses including alleged loss of income from the Company. One such calculation, entitled “Alternative claim for loss of employment at [the Employer]” sets out projected earnings of salary, bonuses and other payments and benefits that would have been payable by the Employer through to 2010.
WAS THE PAYMENT RECEIVED BY MR STARK “IN CONSEQUENCE OF THE TERMINATION OF [HIS] EMPLOYMENT”?
[6] Exhibit 3, Further Supplementary T-Documents, ST16, 837-869.
The Le Grand case and earlier authorities
This case has close parallels with Le Grand v Commissioner of Taxation,[7] in which the taxpayer also settled both a claim for breach of an employment contract and misleading and deceptive conduct claims. There the taxpayer argued that the claim was substantially for misleading and deceptive conduct. Even though, as in the current matter, the allegedly deceptive conduct occurred before an employment contract was entered into, Goldberg J ruled that the settlement sum was received by the taxpayer in consequence of the termination of his employment.
[7] (2002) 124 FCR 53.
Goldberg J stated:
35. I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that 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. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages pursuant to the provisions of the Trade Practices Act and the Fair Trading Act in respect of the claims for misleading and deceptive conduct. But, as is pointed out in the judgments to which I have referred, it is not necessary for the termination of the employment to be the dominant cause of the payment.
36. Although the claims in the proceeding for misleading and deceptive conduct related to representations which had occurred prior to the termination of the employment and, indeed, prior to the making of the employment agreement and are conceptually separate causes of action, the claim that the representations were untrue was, in part, based upon the fact that the applicant's employment was terminated on 23 February 1998 and that by reason of that termination he was unable to receive his remuneration package and had suffered loss and damage. Thus the fact of the termination of the applicant's employment was interwoven, and intertwined, with the claims for misleading and deceptive conduct. I do not consider that the claims for misleading and deceptive conduct and the settlement of those claims insofar as they were settled by the acceptance of the offer of compromise broke the causal relationship which existed between the termination of the applicant's employment and the payment of the offer of the compromised amount. The fact that the offer was made by both defendants in the proceeding and not just the employer does not detract from the characterisation of the payment that it was related to, and was an effect or follow on from, the termination of the applicant's employment.
(Emphasis added.)[8][8] Adopted by the primary judge and approved by the Full Federal Court in Dibb v Commissioner of Taxation [2004] FCAFC 126, [16].
As his Honour’s comments make clear, where claims for damages for termination of employment and deceptive conduct are interwoven, the settlement of the latter does not break the causal relationship between termination of the employment and the payment of the settlement amount. It does not detract from the characterisation of the payment as an effect of or following on from, and thus in consequence of, termination of employment.
That reasoning is binding on the Tribunal and must be followed unless the present case is distinguishable from Le Grand. In that regard, the taxpayer’s case in Le Grand might be thought to have been stronger because both the employer and an individual alleged to have made the relevant representations were defendants to the action and both were parties to the settlement deed. As in Le Grand, the claim that the alleged representations were deceptive was in part based on the termination of Mr Stark’s employment. Given the nature of the claim, I infer that the Supreme Court proceedings, and the Payment, would never have arisen if Mr Stark’s employment had continued until he reached age 65.
Mr Stark’s attempt to distinguish Le Grand
Mr Stark sought to distinguish Le Grand from the current matter in this way:
This case has many similarities to mine, but a notable difference (paragraph 10) is that in Le Grand’s case the only settlement offer was calculated in relation to the employee’s earnings, whereas my case involved 9 increasing offers, each a rounded amount, and none related to my earnings.
In Le Grand, a settlement offer in the amount of $547,959.54 was made and accepted. The offer did not indicate how that amount was calculated.[9] Paragraph [10] of Goldberg J’s judgement, referenced by Mr Stark, states:
On 25 June 1998 the applicant's solicitors wrote to the applicant recommending that he accept the offer of compromise. The solicitors set out calculations in relation to the amount of $547,959.54 noting that he had an entitlement to salary of $516,475 in respect of management profit and that the difference between his agreement termination entitlement and the amount offered was $31,484.54, of which $16,000 was attributable to interest and approximately $15,500 was attributable to what the solicitors called "margin for error". The solicitors advised the applicant that his maximum claim for damages for breach of contract was in accordance with their calculations and that they believed that the claim under the Trade Practices Act would not add any further benefit to his claim.[10]
[9] (2002) 124 FCR 53, [8].
[10] (2002) 124 FCR 53, [10].
There are, with respect, a number of difficulties with Mr Stark’s submission. First, the cited paragraph does not establish that the settlement offer was calculated by reference to taxpayer’s earnings, any more than Mr Stark’s assertion establishes that the offer in his case was not. Nothing in Goldberg J’s judgement indicates that a basis for the calculation of the offer was communicated by the defendants. Paragraph [10] of the judgement merely recites how the taxpayer’s lawyers arrived at their advice that he accept the offer. In both cases, the settlement sum was in return for discontinuance of the entirety of the taxpayer’s claims which included claims for wrongful termination and deceptive conduct.
Secondly, it is difficult to see how the multiple offers made in Mr Stark’s case provides a relevant distinction such that the reasoning in Le Grand would not bind this Tribunal. Even if it were relevant, there is no basis for concluding there were not, in fact, multiple offers made in the course of settling the proceedings the subject of the contested payment in Le Grand.
In any case, and more fundamentally, paragraph [10] does not form part of the ratio decidendi for his Honour’s conclusion. It is clear the reasoning in Le Grand applies the principle established in earlier decisions that a payment will be “in consequence of” termination of employment if it follows on from the termination, which need not be the dominant cause of the payment.[11]
[11] See discussion at (2002) 124 FCR 53, [26] and following.
Mr Stark’s attempt to distance himself from the terms of the Deed
Mr Stark’s submissions in relation to the nature of the litigation are relevant both to whether the Payment is properly characterised as in consequence of the termination of his employment, for the purposes of the definition of an ETP, and to the exclusions from that definition. It is convenient to discuss them in this part of these reasons.
It will be recalled that Mr Stark referred to certain alleged aspects of the Deed and the circumstances in which it was executed. This appeared to be in support of his submission that the Tribunal should not decide this matter on the basis of the Deed’s characterisation of the Payment as in respect of Mr Stark’s claim for “lost earnings”.
Construction of the Deed
I respectfully reject the submission that I should construe the reference in the Deed to the claim being for lost earnings as for lost earning capacity. There is nothing on the face of the Deed nor in the surrounding circumstances – on which I say more below – to support a departure from the plain words of the Deed and, in particular, a construction that restricts the characterisation of the Payment to one made only in respect of loss of earning capacity.
In any case, it is plain from other provisions in the Deed, as extracted above, and his Further Amended Statement of Claim, that Mr Stark claimed damages for both wrongful termination and deceptive conduct and the Deed settled all claims under the litigation including those two claims. Even if the reference to “lost earnings” were construed to include “lost earning capacity” that would not assist Mr Stark. As the authorities cited above confirm, it is not necessary for the dominant cause of a payment to be termination of employment for it to be in consequence of termination.
Allegation that the Deed was signed under duress
As for Mr Stark’s claim that he signed the Deed under duress because he had insufficient time to consider it and was under pressure because of the looming resumption of the trial, I am again, with respect, unable to accept that this assists Mr Stark.
First, that allegation is inconsistent with the express statements in the Deed to the contrary extracted above.
Secondly, over 12 years have passed since the parties executed the Deed and no proceeding has been instituted to have it set aside or rectified. I can only approach the matter on the basis of the extant Deed, not on the footing that it might be or might have been set aside.
Thirdly, even if the Deed were set aside, I would be left with Mr Stark’s Further Amended Statement of Claim in which he claimed damages for both wrongful dismissal and deceptive conduct, and the Payment followed by discontinuance of the litigation. It is undeniable, and indeed Mr Stark does not deny, that the Payment ended the litigation. If the Deed were disregarded, in its context the Payment would attract the same characterisation as being in consequence of termination of Mr Stark’s employment.
Alleged errors in the Deed
Similar observations apply in respect of Mr Stark’s submission that the Deed wrongly references a claim under the Workplace Relations Act when he made no claim under that Act. All this could establish is that the Deed contained an error.
Mr Stark invites me to leap from that ultimately irrelevant error to a conclusion that the Deed elsewhere does not reflect the intentions of the parties. That is, with respect, too much of a leap. I cannot accept that this minor error provides a basis for concluding that the deed in its entirety does not reflect the intentions of the parties – it was plainly acted upon by the payment of the agreed amount and discontinuance of the litigation - let alone justifies substituting different language for that adopted by the Deed.
Again, even if the Deed were to be disregarded for this reason, it is plain that the Payment was received in settlement of the Supreme Court proceedings. For the reasons already set out, that is sufficient to require the Payment to be characterised made as in consequence of the termination of Mr Stark’s employment.
Witnessing of Mr Stark’s execution of the Deed
Mr Stark alleges that, although on its face his execution of the Deed is duly witnessed, the witness’s signature was appended at some later time because the witness was not present when Mr Stark signed the Deed. Therefore, Mr Stark says, it was not duly witnessed and, because of clause 2.2 set out above, is not a binding deed.
Again, this does not assist Mr Stark. Even assuming in Mr Stark’s favour that the absence of witnessing would mean it is not binding as a Deed, the document plainly constitutes a binding contract. The parties’ mutual promises contained in the document constitute valuable consideration and it is plain the parties intended to enter into legal relations to settle the dispute.
In any case, my earlier observations apply: even without the Deed or a written agreement, the damages claimed and the Payment, immediately followed by discontinuance of the litigation, illustrate the character of the Payment as made in settlement of the claims under litigation and, for the reasons indicated earlier, in consequence of the termination of Mr Stark’s employment.
Mr Stark’s submission that because he had already been paid for two years of his contract the Payment must have been for lost earning capacity.
This submission also does not survive scrutiny of the Further Amended Statement of Claim. It is clear from the clauses extracted above that Mr Stark claimed the employment contract was not limited to two years of employment. He directly alleges as much and the explanation attached to the Statement of Claim includes a calculation of lost wages up to when Mr Stark would have retired from the Employer upon reaching 65 years of age in 2010, well after expiry of the initial two years of his employment contract.
Judicial observations in the course of the Supreme Court litigation
Mr Stark referred to comments of various judges as the Supreme Court litigation progressed, both in respect of rulings on interlocutory applications and by the trial judge, Justice Wilson, in support of his submission that his case was about loss of earning capacity.
I have examined the transcript references provided by Mr Stark. There are various occasions on which Mr Stark emphasised that his main claim was for deceptive conduct. None of them evidence that Mr Stark abandoned his claim relating to termination of employment. This is consistent with the Further Amended Statement of Claim which, as already noted, articulated both bases for Mr Stark’s claim against the Employer.
For example, Mr Stark referred to a ruling on disclosure by Byrne J on 8 December 2008. His Honour’s reasons clearly left open as an issue in the case whether the employment contract was for a fixed term of two years or not and if not whether the notice given was reasonable and related issues of quantum of damages.
As Mr Stark himself said in written submissions filed in the Tribunal on 31 March 2021,[12] referencing a hearing before Wilson J on 10 March 2009:
My Statement of Claim had previously contracted to only a claim for the destruction of my earning capacity, and a lower alternate claim for the loss of continued employment with [the Employer]. The judge indicated it would be unlikely she would allow an amendment to add claims for exemplary or aggravated damages. She had already indicated that my claims needed to be supported by expert evidence. The forensic accountants report dealt only with my claim for the Employer’s deceptive conduct that destroyed my earning capacity, because it seemed to me that the judge appeared to favour the Employer’s view that my employment was only for two years, which had been substantially paid out.
[12] Submissions filed by the Applicant, Part 1, 39.
Mr Stark commissioned Mr David Williams to prepare an expert report for the Supreme Court. The report made clear that it was prepared in accordance with Mr Stark’s instructions to estimate the losses that Mr Stark alleged he suffered as a consequence of giving up the opportunity at the Company. In brief oral evidence in the hearing of this application for review, Mr Williams confirmed the basis on which his report was prepared. I accept that Mr Williams provided truthful evidence. However, his evidence was not particularly helpful to Mr Stark. Unsurprisingly, given the effluxion of time, Mr Williams merely confirmed, as appeared from his report in any case, that his calculations were made on the basis of Mr Stark’s instructions to the effect that he had suffered the alleged loss of earning capacity.
In any case, the evidence does not show that Mr Stark withdrew the claim so far as it related to wrongful termination. Further, even if it did, this would not prevent the Payment being characterised as having been received in consequence of the termination of Mr Stark’s employment. It arose out of litigation which, as I have inferred, would not have been commenced if the Employer had not terminated Mr Stark’s employment.
Conclusion in respect of whether the Payment was received in consequence of termination of Mr Stark’s employment
What I am left with is this: The authorities establish that it is not necessary for a payment to relate solely to a wrongful dismissal or other termination of employment, or even for that to be the dominant cause, in order for a payment to be characterised as received in consequence of termination of employment. It is sufficient if it follows on from termination of employment. In the litigation, Mr Stark claimed damages for both deceptive conduct and wrongful termination. Those claims were on foot when the litigation was settled by Mr Stark discontinuing the litigation. Neither party made any admissions or concessions.
I do not doubt that Mr Stark came to regard the litigation as primarily or even exclusively driven by his grievance that, by accepting the Employer’s employment offer, he gave up the opportunity at the Company and, by the time his employment at the Employer was terminated, he was unable to secure alternative employment. But damages for loss of earning capacity was not all he claimed. He also claimed damages for termination of his employment. The Payment settled all claims and on that basis is properly characterised as received by Mr Stark in consequence of termination of his employment.
In any case, even if the Payment were, as Mr Stark maintains, solely compensation for lost earning capacity, it would not follow that it was not made in consequence of termination of his employment. Mr Stark did not deny that the litigation would not have occurred if his employment had not been terminated. Although it agitated Mr Stark’s grievance about the alleged destruction of his earning capacity, the litigation followed as a consequence of the termination of Mr Stark’s employment and the Payment is directly linked to the discontinuance of the litigation. It followed from and is in consequence of the termination of Mr Stark’s employment. That is sufficient, on the authorities cited, to require the Tribunal to conclude that the Payment was made in consequence of termination of Mr Stark’s employment.
For these reasons, I conclude that the Payment was received by Mr Stark in consequence of the termination of his employment for the purposes of the definition of an ETP.
IS THE PAYMENT A GENUINE REDUNDANCY PAYMENT?
In written submissions, Mr Stark asserted:
To enable me to start obtaining the Newstart Allowance I was required to obtain and submit a statement from [the Employer] as to the reason for the end of my employment, which [the Employer] certified . . . was for “end of contract”. This may have been done to mask that my employment termination was really a genuine redundancy as [the Employer] closed [the Business Unit] immediately after my employment was terminated. Redundancy also renders a termination payment not an ETP under s82-135.”
The assertion that the Payment was for a genuine redundancy was not raised in Mr Stark’s objection. Taxpayers are confined by s 14ZZK of the Taxation Administration Act 1953 (Cth) to their grounds of objection unless the Tribunal grants leave to extend those grounds. No application for leave was made in this matter. Nor was the issue included in any Statement of Facts, Issues and Contentions filed by Mr Stark.
It may be that Mr Stark is therefore precluded from raising this ground. However, as no submissions were made by either party in this regard, I refrain from deciding whether the grounds of objection were broad enough to cover this ground. Assuming in Mr Stark’s favour, for the purposes of the following discussion, that his grounds of objection permit this issue to be raised, I have considered whether the Payment is covered by s 82-135.
Mr Stark’s submission is surprising when it is recalled that the Payment was received in settlement of litigation that Mr Stark so adamantly maintains was for a claim for loss of earning capacity. There is nothing in evidence to suggest the Payment was calculated or made because Mr Stark’s position was genuinely redundant. The Payment was received because Mr Stark sued for damages for deceptive conduct and wrongful dismissal and agreed to discontinue that litigation.
More to the point, though, in my view the evidence does not establish that Mr Stark’s position was redundant. His employment continued for a period after the Employer decided his services were not required in the Business Unit. There is no evidence drawn to my attention by Mr Stark that the Payment was treated as a redundancy payment by the Employer. I am, accordingly, not persuaded Mr Stark has discharged the burden of proving the Payment was received because his position was genuinely redundant.
In any case, even if the Payment could be characterised as a genuine redundancy payment, that would not result in the Payment being tax-free as Mr Stark asserts. It is only the part of such payments calculated in accordance with s 82-130 that is exempt from tax. Even if part of the Payment is exempt, the balance would remain an ETP.
Accordingly, I respectfully reject Mr Stark’s submission that the Payment escapes characterisation as an ETP on this basis.
IS THE PAYMENT A “CAPITAL PAYMENT FOR, OR IN RESPECT OF, PERSONAL INJURY TO [MR STARK]?
“Personal injury” is a well-known expression. There is nothing in the context in which it is used in s 82-135(i) to suggest it is intended to take other than its normal meaning which does not extend to mere financial injury. There was no claim for injury to Mr Stark’s person arising out of the conduct of the Employer when the Payment was made in settlement of the litigation.
Further, the Deed dissected the amount payable to Mr Stark into two categories of payment: $50,000 for general damages and $505,500 for lost earnings. The specific identification of $50,000 for general damages suggests that the balance is for another purpose, as stated in the Deed. For the reasons already indicated, Mr Stark has not established a basis on which I should depart from the clear terms of the Deed. In any case, even if, contrary to my conclusion, the Payment included an amount for personal injury, it plainly settled all extant and future claims relating to Mr Stark’s employment. There is no basis on which to identify any part of this undissected sum as relating to personal injury.[13]
[13] Dibb v Commissioner of Taxation [2004] FCAFC 126, [46].
It follows that, even if Mr Stark were to establish that the Payment is capital in nature, I would not accept that it was for or in respect of personal injury to Mr Stark.
For these reasons, I conclude that the Payment is an ETP and should be assessed accordingly.
Todorovic v Waller
For completeness, I note that Mr Stark emphasised, in various correspondence with the Commissioner which he asked the Tribunal to take into account, extracts from the High Court’s judgement in Todorovic v Waller.[14] This case concerned the calculation of damages for future loss or expenditure, in particular the appropriate basis for allowing for inflation.
[14] (1981) 150 CLR 402.
Mr Stark referred to the following observations of Aickin J:
It is now accepted that a calculation of the present value of lost future net earnings is an appropriate measure of damages for diminution of earning capacity . . . and, if it were practicable to ascertain what the plaintiff would have earned during his working life, there is no reason why those amounts should not be taken to be “the financial loss which he will probably suffer”, and why the present value of those amounts should not be regarded as an appropriate assessment of damages for diminution of earning capacity.[15]
[15] (1981) 150 CLR 402 per Aickin J, [7].
In my respectful view, this uncontroversial statement of principle does not assist Mr Stark. It was, I assume, put forward to support an argument that, Mr Stark’s expert having provided a report which included calculation of his opinion of the loss suffered by Mr Stark for the alleged destruction of earning capacity based on lost future earnings, this supported Mr Stark’s characterisation of the Payment as a capital sum compensating him for personal injury.
The difficulties with accepting that proposition have already been outlined: it is inconsistent with the parties’ own characterisation of the payment in the Deed; it is inconsistent with the Deed settling all claims including the extant claim for damages for wrongful dismissal included in Mr Stark’s Further Amended Statement of Claim when the Deed was executed; the absence of any sound basis for treating any part of the Payment as damages for personal injury; and that the Payment would, in any case, be characterised as in consequence of termination of his employment because, on the authorities that bind this Tribunal, the Payment followed on from termination of Mr Stark’s employment.
DISPOSITION OF THE APPLICATION FOR REVIEW
Because I have concluded the Payment is an ETP the assessment against which Mr Stark objected is not excessive as that is the basis on which it was issued.
However, in accordance with his reasons for the objection decision, the Commissioner issued an amended assessment treating the Payment as ordinary income, which is inconsistent with my conclusion that it is an ETP. In the event that I reached that conclusion, Mr Butler, who appeared for the Commissioner, submitted that I should set aside the objection decision and remit it to the Commissioner for re-assessment of Mr Stark’s income tax liability on the footing that the Payment is an ETP. Mr Stark did not submit otherwise. I adopt that course.
Noting the complexities of this matter and that Mr Stark was not legally represented, I conclude by recording my appreciation of the thorough submissions made by Mr Stark and the diligent and patient manner in which Mr Butler discharged the Commissioner’s duty to assist the Tribunal in the context of an unrepresented applicant. Mr Stark’s comprehensive submissions were, with respect, a mixed blessing. I have considered every point made in the various lengthy documents filed by Mr Stark. Pursuit of the Tribunal’s statutory objective of providing a review that is quick and proportionate to the importance and complexity of the matter necessitated referring in these reasons only to those I perceived to be the key considerations.
I certify that the preceding 87 (eighty-seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member R J Olding
[SGD].......................................................................
Associate
Dated: 29 July 2021
Date of hearing:
18-19 March 2021 and 19 May 2021
Applicant’s representative:
Self-represented
Counsel for the Respondent:
D Butler
Solicitors for the Respondent:
Australian Taxation Office Review and Dispute Resolution
0
4
0