An Employee and Commissioner of Taxation [2010] AATA 912 (17 November 2010)

Last Updated: 17 November 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 912

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2009/5680

TAXATION APPEALS DIVISION		)
	Re		AN EMPLOYEE

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr S E Frost, Senior Member

Date 17 November 2010

Place Sydney

Decision

The decision under review, being the objection decision dated 30 September 2009, is affirmed.

..................[sgd]............................
S E Frost
Senior Member

CATCHWORDS

TAXATION AND REVENUE – income tax – private ruling – employment termination payment – whether payment received in consequence of the termination of the applicant’s employment – payment received to settle proceedings instituted by the Applicant seeking damages arising from alleged age discrimination and breach of contract – decision under review affirmed

Income Tax Assessment Act 1997 ss 82-10, 82-130, 82-135, 118-37

Commissioner of Taxation v McMahon [1997] FCA 1087; (1997) 79 FCR 127

Commissioner of Taxation v Scully [2000] HCA 6; (2000) 201 CLR 148

Dibb v Commissioner of Taxation [2003] FCA 673; (2003) 53 ATR 290

Dibb v Commissioner of Taxation [2004] FCAFC 126; (2004) 136 FCR 388

Le Grand v Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53

McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557

McLaurin v Federal Commissioner of Taxation [1961] HCA 9; (1961) 104 CLR 381

Reseck v Commissioner of Taxation [1975] HCA 38; (1975) 133 CLR 45

REASONS FOR DECISION

17 November 2010

Mr S E Frost, Senior Member

INTRODUCTION

1. In July 2009 the Commissioner issued a private ruling setting out the Commissioner’s view of the taxation treatment of a payment made to the taxpayer by his former employer. The Commissioner’s ruling said that the payment was an “employment termination payment” within s 82-130(1) of the Income Tax Assessment Act 1997 (the Act), having been received by the taxpayer “in consequence of the termination” of his employment.
2. The taxpayer was dissatisfied with the ruling and objected against it. There were three main limbs to his argument. One was that he did not receive the payment in consequence of the termination of his employment. Another was that, even if the payment answered that description, then either the whole payment or at least a significant part of it was covered by s 82-135(i) of the Act as a “capital payment for, or in respect of, personal injury” to him. His final argument was that the payment was “compensation or damages”, covered by s 118-37(1) of the Act, having been received either for a wrong or injury he suffered in his employment, or for a wrong, injury or illness he suffered personally. The Commissioner disallowed the objection, and that unfavourable objection decision is now the subject of review by the Tribunal.

ISSUES

3. The issue is whether the Commissioner correctly characterised the payment as an “employment termination payment”, or ETP.
4. Because the application relates to a private ruling, my role is simply to take the facts as identified by the Commissioner in the ruling (those facts representing the “scheme” in relation to which the Commissioner has made the ruling – see s 359-5(1) in Schedule 1 to the Taxation Administration Act 1953 (the TAA)), and decide whether the Commissioner’s view of the law in relation to that scheme is correct, or whether, in the alternative (in the language of s 14ZZK of the TAA), the ruling in that form “should not have been made or should have been made differently”: Commissioner of Taxation v McMahon [1997] FCA 1087; (1997) 79 FCR 127.

THE SCHEME

5. The scheme as set out in the ruling (under the heading “Facts as provided”) is as follows:

You were born on [date of birth].
You commenced employment with [the Company], the wholly owned Australian subsidiary of [the overseas parent] on 1 January 1971.
On or about 20 August 1976 you were appointed to the Board of Directors of [the Company] and your functional title changed to Finance Director.
In an email dated 30 June 2004 to the Chief Legal Officer of [the overseas parent] you lodged complaints in accordance with [the parent company’s] Corporate Governance Principles, the Code of Conduct and Ethics – Clause 11 Concerns and Complaints. You also wrote:
... I have now advised [the Managing Director of the Company] that I will retire from employment with the Company as at the 31 March 2005.
...
... The only reason I have tendered the notice to retire is that my current health does not permit me to contemplate continuing in a regular employment situation involving stress or pressure of the level associated with a senior management position such as currently held, be it being employed by [the Company] or anyone else. ...
Your employment ceased on 31 March 2005.
Following cessation of your employment you engaged [a firm of lawyers] for advice on legal recourse against [the overseas parent].
You then put in a claim alleging unlawful discrimination and breach of contract. A Letter of Demand was sent to [the overseas parent] on 7 December 2005. Following unsatisfactory reply, the letter was resubmitted to [the Company] on 9 February 2006.
Not having been successful in resolving the issues, a written complaint was lodged on 24 August 2006 with the Human Rights and Equal Opportunity Commission and a lodgement to the Federal Court was subsequently made.
The matter was settled on 16 December 2008 and a deed of release was signed on 30 March 2009.
The deed of release states at paragraph 4.1:
The Employee hereby agrees:
(a) to release and does unconditionally release the Company from all Claims he has or may have, or but for this Deed may have had, against the Company; and
(b) not to make, or institute any Claims he has or may have, or but for this Deed may have had, against the Company.
The deed of release defines Claims as:
Claims means all actions, suits, applications, arbitrations, causes of action, complaints, costs, damages, debt due, demands, determinations, enquiries, judgments, liabilities, proceedings, sums of money and verdicts (with the exception of workers compensation claims), which arise directly from:
(i) the Employment;
(ii) any contract of employment between the Employee and the Company;
(iii) the termination of the Employment; or
(iv) the Proceedings;
Claims may arise at law, in equity under a statute, under an award, enterprise agreement or under any other instrument made or approved under any law.
Claims do not include claims which relate to the enforcement of this Deed.
[The Company] is to make you a settlement payment of $395,000 less applicable tax.

THE RULING

6. The ruling itself was contained in answers to two questions. The first question was:

Is any part of the payment received under a deed of release an employment termination payment in accordance with subsection 82-130(1) of [the Act]?

The answer to that question was simply “Yes”.

7. The second question was:

Is any part of the payment received under a deed of release assessable under the capital gains tax provisions?

The answer to that question was:

No, as it has already been determined that the payment you received was an employment termination payment.

8. The parties agree that those two answers, when read together, must mean that the Commissioner took the view that the entire payment was an ETP.

SHOULD THE RULING HAVE BEEN MADE DIFFERENTLY?

9. To displace the ruling, the Applicant must first establish either that the payment was not received in consequence of the termination of his employment, or, if it was, that it was excluded as a capital payment for, or in respect of, personal injury to him.
10. The payment, according to the ruling, was to be in the amount of $395,000, as an apparent commercial settlement of the dispute between the taxpayer and the former employer. Although the ruling does not detail the substance of the action commenced by the taxpayer in the Federal Court, a copy of his amended statement of claim filed in August 2008 accompanied his ruling request. This claimed that in various ways the former employer had breached the Age Discrimination Act 2004 in requiring his retirement at the age of 65, that it had breached the taxpayer’s employment contract, and that the taxpayer had been disadvantaged by certain changes to the company’s superannuation arrangements. There was also a claim that the taxpayer had been subjected to bullying and harassment by senior officers of the former employer and that this and other matters had brought on late onset post traumatic stress disorder.
11. The relief sought in the amended statement of claim was:

(a) Compensation for hurt, humiliation and distress arising from the said age discrimination.
(b) General damages for pain, suffering, anxiety, hurt, stress and humiliation including a claim for aggravated and/or exemplary damages due to the Respondent’s breach of contract.
(c) Compensation or damages for economic loss equivalent to the total remuneration that the Applicant would have earned had the Respondent permitted the Applicant to continue in his employment until age of 70, being [a specified amount].
(d) Compensation or damages for economic loss in respect of the shortfall in the company funded superannuation as paid to the Applicant on the cessation of his employment on 31 March 2005.
(e) Compensation or damages for economic loss in respect of the non-receipt of [parent company] share options in the years 2004 and 2005.

12. The Commissioner submitted that the authorities support his characterisation of the payment as one “in consequence of the termination” of the taxpayer’s employment. He referred to Reseck v Commissioner of Taxation [1975] HCA 38; (1975) 133 CLR 45, where the High Court held that so long as the payment follows as an effect or result of the termination, then it will be within the provision.
13. The judgment in Reseck was considered by the Full Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557 where Brennan J said at 560:

To say that a payment “follows as an effect or result of the termination” imports causation as the relevant nexus between the termination and the payment, but it is clear that termination need not be the dominant cause of the payment.
...

His Honour [Jacobs J in Reseck] denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement. [emphasis added]

14. The Commissioner’s written submissions also referred to the judgment of Goldberg J in Le Grand v Commissioner of Taxation [2002] FCA 1258; (2002) 124 FCR 53 where at 63 his Honour said:

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.

15. In Dibb v Commissioner of Taxation [2003] FCA 673; (2003) 53 ATR 290 the applicant had been dismissed from his employment. He brought proceedings in the Queensland Industrial Relations Commission seeking reinstatement under the relevant Queensland legislation. When that was unsuccessful he commenced proceedings in the Federal Court. Those proceedings were eventually settled. At first instance Heerey J held that the payment received by Mr Dibb on settlement was made “in consequence of the termination” of Mr Dibb’s employment. His Honour observed at [23]:

The various causes of action, whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act 1974 (Cth) were, as Goldberg J would say (Le Grand at ATR 148-49; ATC 4915 at [36]), “interwoven and intertwined” with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination. [emphasis added]

16. The Full Court agreed with Heerey J’s reasoning on this point: Dibb v Commissioner of Taxation [2004] FCAFC 126; (2004) 136 FCR 388 at 397.
17. It follows from the reasoning in Reseck, McIntosh, Le Grand and Dibb that the payment was received by the taxpayer “in consequence of the termination” of his employment. Even accepting that the termination of the taxpayer’s employment need not be the dominant cause of the payment, it is clear that, as was the case in Dibb, the payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination. Or, as Brennan J summarised the position in McIntosh, the payment would not have been made but for the termination. The payment is therefore an ETP (and the taxable component is assessable income – see s 82-130(2) and s 82-10(2) of the Act) unless it is a payment mentioned in s 82-135 of the Act.
18. The taxpayer submitted that s 82-135 of the Act applied to the payment so as to remove it from s 82-130(1). The particular requirements of s 82-135 on which he relied are those in paragraph (i), which specifies that the payment of the following type is not an ETP:

a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion [as defined].

19. On the authority of the High Court in Commissioner of Taxation v Scully [2000] HCA 6; (2000) 201 CLR 148 (dealing with the predecessor provision in s 27A(1)(n) of the Income Tax Assessment Act 1936 (the 1936 Act)), the taxpayer would have to establish that the payment was “calculated by reference to the nature and extent of the injury or likely loss ...”.
20. The circumstances leading up to the payment are set out in [10] and [11] of these reasons. Those circumstances show that the settlement amount was a single, undissected lump sum with no attribution of any portion of it to any of the various heads of relief claimed by the taxpayer. In McLaurin v Federal Commissioner of Taxation [1961] HCA 9; (1961) 104 CLR 381 the High Court said at 391:

It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly ... But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated ... or are otherwise ascertainable by calculation ... it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole ...

21. As to whether the taxpayer has been compensated, in any event, for “personal injury”, it is instructive to recall the comments of the Full Court in Dibb v Commissioner of Taxation [2004] FCAFC 126; (2004) 136 FCR 388 at 406 (which concerned, like McLaurin, the predecessor provision in s 27A(1)(n) of the 1936 Act). First, the Full Court quoted paragraph 35 of the judgment of the primary judge, Heerey J, as follows:

[35] “Personal injury” encompasses injury or disease of a physical or psychological nature. However it would not extend to anguish, distress or embarrassment of the kind traditionally taken into account in assessing damages for defamation: Federal Commissioner of Taxation v Scully [2000] HCA 6; (2000) 201 CLR 148 at [28], Graham v Robinson [1992] VicRp 18; [1992] VR 279. However, even accepting that some of the complaints of damage the applicant raised in the Federal Court proceeding consisted of anxiety and depression and thus “personal injury”, the Commissioner was correct in concluding there was no way of dissecting the total settlement sum to include an amount for such a payment: McLaurin v Federal Commissioner of Taxation (1960-1961) 184 CLR 391.

and then said:

The last sentence of [35] of the primary judge’s reasons contains a premise with which we agree. The occasion for apportionment pursuant to s 27A(1)(n) only arises if there can be said to be “consideration of a capital nature for, or in respect of, personal injury to the taxpayer ...”. Here, it is impossible to say whether there was or was not personal injury. AVCO [the former employer] denied it. The section does not provide for “consideration ... of, or in respect of, allegations of personal injury.” As can be seen from the description of the allegations in the Federal Court proceedings and the terms of the deed, there was no agreement between the parties that Mr Dibb had suffered personal injury. It was submitted on his behalf (as it had to be) that the respondent was obliged to sit, in effect, as a tribunal to decide whether he suffered personal injury and if so, the amount of a reasonable payment therefore. We disagree. The respondent was correct, as was his Honour, in concluding that it was impossible to identify any part of the total sum of $788,544 as consideration for, or in respect of personal injury.

22. Here, there was no admission of liability by the former employer (Recital F to the Deed of Release). It must follow, similarly to the case of Mr Dibb, that even if the “pain, suffering, anxiety, hurt, stress and humiliation” claimed by the taxpayer amount to “personal injury”, no part of the payment to him can represent a payment “for, or in respect of, personal injury”. In the circumstances, the taxpayer has not established that the Commissioner should have made the ruling on the alternative basis that s 82-135(i) of the Act applied.
23. The taxpayer’s argument in relation to s 118-37 of the Act must fall away once the payment is found to be an ETP within s 82-130. Division 82 makes the taxable component of the payment assessable income, and nothing in s 118-37 can undo that fact. In any event, and for reasons similar to those just expressed in relation to s 82-135, it is not possible to characterise the payment as “compensation or damages you receive for any wrong or injury you suffer in your occupation” or as “compensation or damages you receive for any wrong, injury or illness you or your relative suffers personally.”

DECISION

24. The objection decision is affirmed.
    

I certify that the 24 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Senior Member

Signed: ............[sgd]..................................................................

Associate

Date of Hearing 25 October 2010

Date of Decision 17 November 2010

Applicant self-represented

Appearance for the Respondent Ms Wei-Li Su, ATO Legal Services Branch