CASE 2/2014
Members:G Lazanas SM
Tribunal:
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
[2014] AATA 247
G Lazanas (Senior Member)
28 April 2014
INTRODUCTION
1. The Public Servant applied for a private ruling from the Commissioner of Taxation in relation to the income tax treatment of a payment of $15,000 made to her in accordance with the terms of a deed of release between her and her former employer. The Commissioner issued a private ruling stating that the payment was a taxable employment termination payment (ETP).
2. The Public Servant had argued that it was not an ETP under s 82-130(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) because, amongst other reasons, she considered that it was a capital payment in respect of personal injury within the terms of the exclusion in s 82-135(i) of the ITAA 1997. She objected to the private ruling and provided further documents in support of her position. Subsequently, the Commissioner disallowed her objection.
3. The sole issue before the Tribunal is whether the Commissioner's view of the law as it applies to the 'specified scheme' in the private ruling should have been made differently.
4. I have decided that the Commissioner's ruling is correct. However, as explained below, this was due to the self-fulfilling manner in which the Commissioner of Taxation described the 'scheme' in the private ruling issued to the Public Servant, leaving no room for any other answer on the question of law. The result is unsatisfactory as a matter of tax administration because of the way in which the so-called facts were identified as the 'specified scheme' by the Commissioner in the private ruling.
5. Accordingly, I have taken the opportunity to set out some concerns as to the way the Commissioner identifies the scheme to be ruled on, and the potential difficulties this causes taxpayers who choose to challenge private rulings under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA).
THE ISSUES BEFORE THE TRIBUNAL
6. The central issue to be decided in this case is whether the private ruling issued by the Commissioner to the Public Servant is correct. That entails an analysis of the Commissioner's view of the law regarding employment termination payments. Therefore, this is a case which is first and foremost about a question of law.
7. However, as with many disputes involving the application of the tax laws, there are also important issues in relation to the identification of the facts to which the law is to be applied. In this case, there is a problem with the way in which those 'facts' have been identified by the Commissioner. That problem is exacerbated by the constraints placed on the Tribunal with respect to reviewing the 'facts' as found by the Commissioner, when hearing an application for review of an objection decision regarding a private ruling. The Tribunal has no true fact finding role. These problems are examined in some detail below.
THE 'FACTS'
8. It is appropriate to start with a detailed exposition of the taxpayer's application for a private ruling lodged on 11 July 2012 and the private ruling issued by the Commissioner on
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14 August 2012. This is followed by an outline of the Public Servant's objection to the private ruling and the further material that the Public Servant provided to the Commissioner with her objection. I also canvass some of the evidence prepared by the Public Servant for these proceedings.
The application for the private ruling
9. The Public Servant completed one of the Commissioner's forms titled "Private ruling application (not for tax professionals)". Relevantly, under the sub heading "Questions and issues for the ruling", the Public Servant stated as follows:
Is any part of the payment received under the attached deed of release an employment termination payment in accordance with subsection 82.130(1) of the Income Tax Assessment Act 1997?
Does the payment necessitate the withholding of taxation by [the employer]?
Did [the employer] incorrectly withhold tax from the aforementioned payment?
Is the payment tax exempt?
10. Under the next sub-heading "Facts describing the scheme or circumstance", the Public Servant stated the following:
As a former employee of [the employer], I lodged a complaint with the Australian Human Rights Commission against [the employer] for discrimination I encountered during my work there. A conciliation process was initiated between myself and [the employer] under the auspices of the Human Rights Commission, and took place at the beginning of June 2012. The result of this process was an agreement between the parties that [the employer] would pay myself, [the Public Servant], a sum of $15000, a payment classified as general damages i.e. a payment for pain and suffering, without an admission of liability by [the employer].
The Deed states explicitly that the payment would be classified as "general damages" and would be paid "less any applicable taxes". It was the opinion of myself and my legal counsel that the payment would not require taxation to be withheld, as the amount would be tax free, given it falls outside the income tax system. [The employer] made a payment according to the deed on 13 June 2012, in the amount of $10275, withholding $4725 tax and classifying the payment as an "ETP" or Early Termination Payment (see attached pay advice).
I have since questioned [the employer's] classification of the payment as an ETP, since an ETP is a payment of loss of income, loss of job, or wrongful termination, and the contract states specifically that the payment should be "general damages". [The employer] have defended their actions, claiming that the ATO advised the payment must be classified as an ETP and taxed accordingly, going on to state that they are not in a position to "defy the legal advice given by the ATO".
This private ruling will assist in the final resolution of the conflict between myself and [the employer] over whether the payment should have been taxed or not taxed, and therefore whether or not I will be able to recover the amount withheld.
I would appreciate any assistance you can give in ruling on this matter as soon as possible. I am incredibly out of pocket as a result of the taxation [the employer] have withheld, and I will have trouble paying my rent and bills as a result of the delays in me receiving the withheld amount. Similarly, the ongoing stress this is causing for me is affecting my health.
11. The Public Servant explained her arguments under the next sub-heading "Your arguments and references (optional)" in the following manner:
Taxation Ruling no. IT 2424 makes specific mention of which types of compensation for discrimination are liable for taxation, and conversely which types are not:
A compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee. On the other hand a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment,
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depression, anxiety, etc. is not liable to income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in sub-section 160ZB(1) for compensation or damages paid for wrong or injury suffered by a taxpayer to his or her person or in his or her profession or vocation.It is clear that a general damages payment for the purposes of compensating for pain and suffering falls outside of the income tax system, and is exempt from capital gains tax by the exemption for compensation paid for wrongs suffered by a taxpayer (Income Tax Assessment Act 1997, sect 118.37).
Additionally, it is clear that the payment is not intended to be, nor was it agreed to be, an ETP. An ETP is specified by the ATO (http://www.ato.gov.au/content/00103584.htm) to be the following:
An ETP is a lump sum payment made in consequence of termination of employment generally within 12 months of the termination.
An ETP can include:
An ETP may be made to you, known as a life benefit termination payment, or to your beneficiary if you have died, known as a death benefit termination payment.amounts for unused rostered days off or sick leave
amounts in lieu of notice
a gratuity or 'golden handshake'
compensation for loss of job
compensation for wrongful dismissal (if paid within 12 months of the termination)
a redundancy payment which exceeds the tax-free limit
payment under an early retirement scheme which exceeds the tax-free limit
an invalidity payment (for permanent disability, other than compensation for personal injury), and
certain payments after the death of an employee.
Given that the payment is not classified as an ETP, and similarly does not constitute or relate to income, and is additionally exempt from capital gains tax, the payment should be tax free and should be treated accordingly.
12. She then signed and dated the form and in doing so declared that the information contained in the form and any attached document, namely, the attached deed of release, is true and correct.
The private ruling under review
13. On 14 August 2012 the Commissioner of Taxation advised the Public Servant of the private ruling. The Commissioner's private ruling stated as follows:
Notice of private ruling
This ruling applies to:
Client name
[The Public Servant] TFN [XXX XXX XXX]
Question
Is the payment made under a Deed of Release an employment termination payment under section 82-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period:
2011-12 income year.
The scheme commences on:
1 July 2011
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You were employed as a [officer] at [Name of Employer] (the Employer) on a probationary basis from 8 August 2011.
On 7 February 2012, your employment ceased with the Employer.
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On 12 June 2012, a Deed of Release (the Deed) was made. At clause D of the Deed it states:Without admission of liability, the Employer and the Employee have agreed to the Cessation and to settle all matters and potential claims between them and arising out of, and in connection with, the Employment and the Cessation on the terms contained in this Deed.
The Employer agreed to a gross sum of $15,000 less any tax withheld upon cessation of your employment and subject to the terms and conditions under the Deed.
The Deed at clause 2.1 states:
Without admission of liability, the Employer will pay the Employee the amount of $15,000 as an ex-gratia payment for general damages, less any applicable taxation required to be withheld. The Payment does not include any notice by way of salary or leave entitlements (including recreation leave and extended leave), which were calculated and paid separately at the time of the Cessation.
Furthermore, the Deed at clause 3.2 states:
The Employee releases the Employer from all claims and liability arising directly or indirectly out of the Employment and the Cessation.
In addition, the Deed at clause 12.5 states:
- (a) This document contains the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to that subject matter is replaced by this document and has no further effect.
A pay advice, for the period ending 21 June 2012, shows a Life Benefit ETP of $15,000 with an amount of $4,725 tax withheld was made to you.
14. The Commissioner separately provided reasons for his decision, but they are not part of the private ruling.
The objection to the private ruling
15. On 3 October 2012 the Public Servant lodged an objection to the private ruling. Relevantly, she articulated her position as follows:
I requested a private ruling regarding whether a payment made to me by my formal (sic) employer was or was not an employment termination payment - my employer believes it is, I believe it is not. The private ruling indicated that, based on the Deed of Release I provided, that the payment was an employment termination payment.
This conclusion is incorrect for the following reasons:
- • The payment does not meet the criteria for an employment termination payment under subsection 82-130(1) of the ITAA 1997 which states that the payment must be "in consequence of the termination of your employment" and "is not a payment mentioned in section 82-135". The payment was made in consequence of proceedings I initiated against my former employer, [the employer], with the Human Rights Commission regarding discrimination throughout the course of my employment. We undertook a conciliation through the Commission, the result of which was a compensation payment to myself for pain and suffering and the worsening of a pre-existing medical condition I have as a result of the discrimination.
- • The payment clearly meets the criteria under section 82-135 of the ITA 1997 which states that certain payments are not employment termination payments, including "reasonable capital payments for personal injury".
- • The payment cannot be considered "in consequence of the termination" under Taxation Ruling TR2003/13, which proposes that but for the termination of employment, the payment would not have been made. In this instance, the payment was made as a result of complaints by myself against my former employer alleging discrimination throughout the course of my employment. That my employment with the employer ended was not a component of the complaint, and the monies were not sought to
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compensate me for loss of income, loss of job, or loss of earning - they were sought for pain and suffering and to compensate me for Major Depressive Disorder and Generalised Anxiety Disorder.- • The payment cannot be considered "in consequence of the termination" under the following decisions:
- ∘ (1975) 133 CLR 45 (Reseck) - the payment was not as an effect or result of the termination; the payment did not follow on from the termination; the payment was not the result of a claim against an employer for terminating the employment of the taxpayer.
- ∘ (2002) FCA 1258 (Le Grand) - a payment made as a consequence of an action taken by an individual against a former employer in relation to the termination of the employment is an employment termination payment; the payment under consideration in my private ruling was as a result of action taken against a former employer in relation to discrimination in the workplace that existed throughout the course of my employment.
- • Taxation Ruling no. IT 2424 makes specific mention of which types of compensation for discrimination are liable for taxation, and conversely which types are not:
- ∘ A compensation payment to make up for lost earnings or in substitution for income which would otherwise have been earned is in the nature of income and is liable to income tax in the hands of the employee. On the other hand a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment, depression, anxiety, etc. is not liable to income tax. It is a payment of a capital nature. Nor is the payment liable to tax under the capital gains tax provisions by reason of the exemption provided in sub-section 160ZB(1) for compensation or damages paid or wrong or injury suffered by a taxpayer to his or her person or in his or her profession or vocation.
- • The payment is classified under the Deed of Release as general damages i.e. monies paid for injuries suffered (such as pain, suffering, illness).
16. The Public Servant also provided the materials listed below to the Commissioner of Taxation as supporting evidence and documents and, furthermore, declared that the objection is true and correct. It is noted that a few of these documents had also been earlier provided by the Public Servant to the Commissioner with the application for the private ruling.
- • Copy of complaint made to the Australian Human Rights Commission
- • Letter from Australian Human Rights Commission to [the employer] re: complaint by the Public Servant
- • Email confirming Conciliation at the Human Rights Commission, including agenda
- • Deed of Release between [the employer] and the Public Servant
- • Private Ruling Application Form
- • Emails between [the employer] and [the Public Servant's legal representative] re: payment of general damages
17. On 12 November 2012 the Commissioner disallowed the Public Servant's objection to the unfavourable private ruling.
18. On 10 January 2013 the Public Servant applied to the Tribunal for a review of the Commissioner's objection decision.
The additional facts based on the evidence
19. It is appropriate to set out those additional facts which emerged from the Public Servant's evidence in this proceeding particularly as she submitted that the Tribunal should have regard to the entire factual background and not just the terms of the deed of release which is what the Commissioner concentrated on.
20. The Public Servant was the only witness who gave evidence at the hearing. The Public Servant commenced probationary employment as an officer with a government agency in
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August 2011. In October 2011 the Public Servant lodged a workers' compensation claim relating to a workplace injury, namely, exacerbation of major depressive disorder and generalized anxiety disorder, and this injury was managed under the workers' compensation system through the government agency's insurer after the insurer accepted provisional liability for the claim in December 2011.21. The Public Servant's last day at work was on 9 December 2011 and the insurer accepted full liability for the claim on 19 January 2012.
22. The probationary employment period of the Public Servant expired on 7 February 2012, the Public Servant having received notification in the last week in January 2012, that the employment would not continue past that date. Subsequently, the insurer rejected ongoing liability for a claim on the basis that if the Public Servant was no longer in employment and working with the employer, she could no longer be suffering from the work related injury.
23. After the insurer rejected ongoing liability for the claim and withdrew financial and medical support, the Public Servant lodged a complaint with the Australian Human Rights Commission (AHRC) in February 2012. The complaint was made on the basis that she had been discriminated against in her employment because of her mental illnesses, namely, major depression and generalised anxiety disorder. She stated as follows in relation to the loss or harm experienced: "I have lost my job…I have suffered immense trauma, and have accumulated significant medical and personal expenses … I am now in the position of being unemployed, facing a long process of medical treatment and recovery and trying to overcome the mental damage caused by the actions of [the employer]." In the complaint form lodged with the AHRC she sought, amongst other things, financial compensation as a form of resolution.
24. During the course of the proceedings before the AHRC, a conciliation meeting was held in May 2012 attended by the Public Servant and her barrister and representatives of her employer as well as a mediator from the AHRC. The Public Servant also had family members supporting her at the conciliation.
25. The Public Servant stated that the employer made it clear in the conciliation meeting that they were unwilling to consider a settlement related to unfair dismissal or the termination of her employment because the employer considered it had acted within the law in discontinuing her probationary employment. The Public Servant says that her claim was on the basis of the injury that she sustained during her period of employment, and that compensation was sought for the costs associated with that injury. The conciliation concluded with the employer agreeing to pay the Public Servant $15,000 as an ex-gratia payment for general damages, which the Public Servant states was agreed to be reasonable compensation for her injury.
26. On 12 June 2012 the employer wrote to the Public Servant and provided her with a deed of release pursuant to which the employer agreed to make the ex-gratia payment of $15,000 for general damages. She stated that she and her lawyers reviewed the deed of release and formed the view that it did not reflect the agreement reached at the AHRC conciliation because, pursuant to the deed, she was waiving rights to pursue claims in relation to the termination of her employment. However, on legal advice, she formed the view that it was inconsequential if she gave up rights that in any event she did not have against her employer for termination of her probationary employment. She also stated that she felt confident that she "would have pursued a remedy against the employer [on the grounds of alleged discrimination] even if she had continued employment because she remained upset and aggrieved and injured". [1]
27. Under cross-examination by the Commissioner's counsel, she accepted that she signed the deed of release in the form in which it was provided by the employer, because the employer made it clear that they used a generic, standard deed and were not willing to deviate from it. She candidly observed that "when one is faced with being offered an ex gratia payment for one's injury or being not offered it on the basis of not signing a generic deed…that's a decision that I made on the basis that I wanted the payment."[3]
28.
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On 21 June 2012 the Public Servant received an amount of $10,275 and a payment advice that classified the payment as an ETP. That payment advice also indicated that tax in the amount of $4,725 had been withheld.29. On 22 June 2012 the Public Servant sought advice from her lawyers as to the tax withheld. The employer later advised the Public Servant's representatives that they had sought the advice of the Australian Taxation Office (ATO) regarding how to treat the payment and were advised to treat it as an ETP. In response to the queries received from the Public Servant's lawyers, the employer confirmed in an email dated 26 June 2012 that it had advised the ATO of the following when seeking specific advice as to the tax treatment of the payment:
- 1) The amount payable represented an agreement (without any admission of liability) by the Parliament to pay General Damages (exact term used by [the employer]) to the ATO to a former staff member following a complaint made by that former staff member to the Australian Human Rights Commission based on a form of discrimination …alleged by the former staff member to have occurred within their employment…
- 2) That the payment did not include any payment for outstanding leave or wages or any other industrial entitlement, these having been paid in a prior separation payment. (Emphasis in original)
30. Turning to the evidence produced for this proceeding, there were numerous witness statements including those made by the Public Servant's barrister representing her in the conciliation before the AHRC. The barrister stated that "it became apparent very early on in the negotiations that [the employer] was not willing to make an offer of settlement likely to compensate [the Public Servant] for her loss of income".[4]
31. In two subsequent emails dated 26 and 30 April 2013, provided by the employer to the Public Servant's lawyers (after the commencement of these proceedings), the employer confirmed as follows. First, in the employer's email dated 26 April 2013, the employer stated:
I confirm the information below as being an accurate record of the discussions at the Conciliation Conference.
I also confirm the content of my email dated 26 June 2012 attached to your email below is an accurate record.
32. The employer was referring to an email sent by the Public Servant's lawyers on the same day which relevantly stated:
The ATO has requested confirmation by your organisation of comments made by you in an email dated 26 June 2012 a copy of which is enclosed herewith.
The ATO seeks confirmation that the discussion within the Conciliation Conference and the payment made to [the Public Servant] was in relation to the complaint she made to the Australian Human Rights Commission relating to discrimination alleged to have occurred within [the Public Servant's] employment with [the employer].
33. In the second email dated 30 April 2013, the Public Servant's employer stated again:
I confirm that as a result of a claim made by [the Public Servant] for alleged discrimination to the Australian Human Rights Commission, without admission of liability the [employer] agreed to make a payment to [the Public Servant] of $15,000 as an ex-gratia payment for General Damages, less any applicable taxation that was required to be withheld.
That payment did not include salary or leave entitlements.
34. The above emails were provided by the Public Servant's lawyers in response to the Commissioner's request for information about the apportionment of the $15,000 payment between the part referable to the personal injury and the part referable to the termination of employment. The Public Servant's lawyers, relying on the abovementioned emails, stated
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that the payment was attributable in its entirety as compensation for personal injury.35. In addition, also in evidence, was an extract from a report from the Public Servant's treating psychiatrist dated 16 January 2012. It suffices to say that the psychiatrist recorded that he had been treating the Public Servant since 1 November 2011. He recounted, amongst other things, the history of the incidents at work involving the Public Servant and her manager, the alleged causes, and the Public Servant's reactions and experiences. The doctor also gave his prognosis of the Public Servant's injury, concluding that her symptoms could show improvement if she could be moved to a different department.
36. The Commissioner's counsel did not take any specific issue with any of the evidence that I have referred to above, although I note for completeness that legitimate questions emerged as to the utility of the Public Servant's evidence, having regard to the Tribunal's role in reviewing the objection decision regarding the private ruling. I will return to this aspect below.
37. Significantly, the following 'facts' in the application for the private ruling lodged by the Public Servant were omitted from those identified by the Commissioner as the 'specified scheme' in the private ruling:
- (a) the Public Servant had lodged a complaint against the employer for discrimination with the AHRC encountered throughout the course of her employment;
- (b) a conciliation involving the Public Servant and her employer took place in the course of the AHRC proceedings;
- (c) the payment of $15,000 by the employer to the Public Servant, agreed to at the conciliation, and expressed to be for general damages, was compensation for pain and suffering.
38. It is further noted that the Commissioner did not ask for further information from the Public Servant about the complaint to the AHRC or the conciliation at the AHRC nor seek to verify the accuracy of any of these matters. Rather, the Commissioner appears to have confined his analysis to the deed of release, as evident from the extracts referred to in the private ruling. I discuss the deed of release below.
39. The abovementioned 'facts' were also repeated in the Public Servant's objection to the private ruling and the Commissioner restated some of these in "a summary of your statements" in the reasons set out in the objection decision, including:
The payment was made in consequence of proceedings you initiated against your former employer …with the Human Rights Commission regarding discrimination throughout the course of your employment.
The payment was compensation for pain and suffering and the worsening of a pre-existing medical condition you have as a result of the alleged discrimination. …
The cessation of your employment was not a component of the complaint and the monies were not sought to compensate for loss of income, loss of job or loss of earning, they were sought for pain and suffering to compensate for Major Depressive Disorder and Generalised Anxiety Disorder. …
40. In addition, as noted above at paragraph 16, the Public Servant provided a number of documents to the Commissioner together with her objection including the employer's correspondence referred to in paragraph 29 above.
41. The additional matters which emerged from the evidence filed by the Public Servant in these proceedings included the following:
- (a) the Public Servant had lodged a workers' compensation claim relating to a workplace injury, namely, the exacerbation of major depressive disorder and generalised anxiety disorder;
- (b) the Public Servant's last day at work was in December 2011;
- (c) the insurer accepted full liability for the workers' compensation claim in January 2012 but later rejected ongoing liability for that claim on the basis that the Public Servant was no longer working with the employer;
- (d) the evidence of the Public Servant and her barrister as to the negotiations at the AHRC conciliation and the subsequent concerns of the Public Servant in relation to signing the deed of release, in the form in
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which it was provided to her as well as the advice given by her lawyers.
THE LEGISLATIVE FRAMEWORK
Private rulings regime
42. As the decision under review is an objection decision to a private ruling, it is necessary to set out in some detail the law relating to the Tribunal's jurisdiction in this proceeding before examining the law relating to employment termination payments. It is necessary to do this because, as noted above, the Tribunal's role is confined in this case to reviewing whether the private ruling issued by the Commissioner is correct or should have been different.
43. Sub-section 359-5(1) of Schedule 1 to the TAA provides that the Commissioner may, on application, make a private ruling on the way in which the Commissioner considers a relevant provision applies or would apply to an applicant in relation to a specified scheme. Such a ruling is called a 'private ruling'. Sub-section 359-20(2) states that a private ruling must identify the entity to whom it applies and specify the scheme and the relevant provision to which it relates. A private ruling is therefore confined to a consideration of the 'scheme' identified in the private ruling.
44. 'Scheme' is defined in s 995-1 of the ITAA 1997 to mean any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. It is the 'specified scheme', namely, that identified by the Commissioner in the private ruling, that is important.
45. Section 357-105 of Schedule 1 to the TAA provides that if the Commissioner considers further information is required to make a private ruling, the Commissioner must request that the applicant give that information to him. In considering an application for a private ruling, the Commissioner may take into account additional information provided by the applicant after the application was made (whether in response to a request under s 357-105 or otherwise): s 357-115.
46. There are a number of principles relevant to the review by the Tribunal or a Court of an objection decision relating to a private ruling which emerge from the jurisprudence regarding the above sections (or equivalent former provisions) which it is convenient to summarise at this juncture. Most recently, in
Re Cooper Bros Holdings Pty Ltd trading as Triple Waste Management and Commissioner of Taxation [2013] AATA 99 (Cooper Bros), Deputy President Alpins explained the Tribunal's role in reviewing objection decisions with respect to private rulings. The following summary from Cooper Bros is directly relevant to how I have approached the issues in this proceeding and is also consistent with the numerous Court cases also referred to and relied on in that case:
- 6. As the prefatory provision of Div 359 (s 359-1) explains, "[a] private ruling is an expression of the Commissioner's opinion". As that opinion concerns a particular question about the application of tax law to the facts identified in the ruling comprising the specified scheme, the Tribunal's jurisdiction is therefore limited to a review of the Commissioner's opinion on that same question. The question before the Tribunal is whether the Commissioner's opinion was correct (
Federal Commissioner of Taxation v McMahon and Another (1997) 79 FCR 127 at 132-134, 140-141, 149-150;
Federal Commissioner of Taxation v Reef Networks Pty Ltd (2004) 57 ATR 375 at [6];
Lamont v Federal Commissioner of Taxation (2005) 144 FCR 312 at 319;
Cooperative Bulk Handling Ltd v Federal Commissioner of Taxation [2010] FCA 508 at [13], [15] [16]). The answer to that question therefore depends upon the scheme on which the ruling is founded - the Tribunal's review turns on the specified scheme just as the ruling did.- 7. As Lockhart J said in McMahon at 133, quoted with approval by the Full
Federal Court in Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496 at [3]:When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.
(see also McMahon at 149 per Emmett J; Lamont at [23]; Cooperative Bulk Handling at [15]).
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- 8. That being so, the Tribunal cannot make findings of fact in this proceeding. The Tribunal can only consider the stated facts comprising the scheme the subject of the ruling. Furthermore, the Tribunal cannot "redefine" the scheme (see McMahon at 133, 141, 144-146, 150) - the Tribunal is confined by the scheme as it has been described in the ruling and cannot depart from that description in any respect. The Tribunal cannot create its own description of the scheme, elaborate upon or make assumptions about the scheme, nor can the Tribunal add further facts, substitute other facts or otherwise alter the scheme (McMahon at 133-134, 140-146, 149-150;
Bellinz v Federal Commissioner of Taxation (1998) 84 FCR 154 at 160; Reef Networks at [6]; Lamont at [21], [26]; Hastie Group at [3]; Cooperative Bulk Handling at [16]).
47. In the Cooper Bros case, the Tribunal decided that the notice of private ruling was the single relevant document. That was because the ruling did not describe the scheme by reference to other information in other documents, including the private ruling application or any attachments to it. That is also the case here. There is no reference in the Commissioner's specified scheme to any additional information or documents. Even the references to the deed are specific and narrow with the result that only those clauses actually cited form part of the scheme. If the scheme had instead been expressed in such a way as to incorporate all of the information from the application for the private ruling, the scheme would have been different and so might the outcome. Nevertheless, the position here is exactly the same as the one described in Cooper Bros where the Tribunal held at [21] as follows:
….. The notice of private ruling in issue is a self-contained document, in that it does not describe the scheme by reference to material contained in any other document. Accordingly, the Tribunal can only have regard to the scheme as described in the ruling itself (see
Bellinz v Commissioner of Taxation at 160, endorsed in
Cooperative Bulk Handling Ltd v Commissioner of Taxation at [16] per Gilmour J with respect to Div 359;
Federal Commissioner of Taxation v McMahon at 150).
48. Second, in relation to additional material that the Commissioner can consider pursuant to s 359-65(1) of Schedule 1 to the TAA, the Tribunal in Cooper Bros relevantly decided as follows:
- 34. Section 359-65(1), when read in isolation, appears to have a wide operation in terms of the kinds of additional material to which the Commissioner may have regard. The use of the preposition "[i]n" preceding the words "deciding whether to allow (wholly or in part), or to disallow, an objection under Part IVC against a private ruling" (see s 14ZY of the TAA) is generally understood when used in similar syntactic contexts as being synonymous with the phrase "in the course of", and therefore having a meaning differing from that of phrases such as "for the purpose of" (see
Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 at 99). Put another way, the prefatory words of s 359-65(1) concern the occasion giving rise to the exercise of the discretion to consider additional information rather than, in themselves, limiting the kind of additional information to which regard may be had (see also ss 357-115, 357-120). Furthermore, s 359-65(1) provides that the Commissioner may consider any additional information within the terms of the provision. I note that the word "information" is relevantly defined in the Macquarie Dictionary (5th edition) to mean "knowledge communicated or received concerning some fact or circumstance".- 35. However, in my view, s 359-65(1), when read properly in the wider context of that section, Div 359 as a whole and the relevant provisions of Pt IVC of the TAA, only permits consideration of material that is informative about the facts comprising the scheme, as it has been described in the ruling. Section 359-65 permits neither the Commissioner in making his objection decision, nor the Tribunal in reviewing that decision, to redefine the scheme. (By way of contradistinction, additional information taken into account by the Commissioner
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pursuant to s 357-115 in considering an application for a ruling may, in my view, be reflected in the scheme specified in a ruling made under s 359-5).
49. The Tribunal therefore concluded in Cooper Bros that only information which is informative about the 'facts' described in the scheme can be considered by the Commissioner on the objection decision or by the Tribunal when reviewing an objection decision. That is to say, neither the Commissioner nor the Tribunal (or a Court) can redefine the scheme after the private ruling has issued. That proposition is made good with respect to the Tribunal's jurisdiction with respect to reviewing objection decisions regarding private rulings in Cooper Bros as follows:
- 33. Given the "intersecting operation" of ss 25 and 43 of the AAT Act and Pt IVC of the TAA and Div 359 (see
Shi v Migration Agents Registration Authority at [93] per Hayne and Heydon JJ), at [25] per Kirby J), in my view the Tribunal is therefore empowered, by operation of s 43(1), to exercise the Commissioner's discretion under s 359-65(1) for the purpose of reviewing the Commissioner's objection decision. Furthermore, I consider that the Tribunal may consider additional information otherwise within the terms of s 359-65(1) irrespective of whether the Commissioner has in fact considered that material in making his objection decision (
Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409;
Shi v Migration Agents Registration Authority (2008) 235 CLR 286).- ..
- 36. As I have explained, in this proceeding the Tribunal is concerned with the correctness of the Commissioner's opinion expressed in the ruling in issue. It remains the case under Div 359 that the Tribunal is confined by the scheme specified in the ruling (see
Hastie Group Ltd v Commissioner of Taxation at [3]; Cooperative Bulk Handling at [16]). Accordingly, in my view the Tribunal may only consider additional information pursuant to s 359-65(1) to the extent that it bears upon the correctness of the ruling in issue.
50. Third, it is necessary to say something about the issue of 'facts' and the idea of the Commissioner 'finding facts'. It is abundantly clear from the summary of the private rulings system in Cooper Bros and in particular, the decision of Lockhart J in
Federal Commissioner of Taxation v McMahon (1997) 79 FCR 127 at 133, quoted with approval by the Full Federal Court in
Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496 at [3], that the Commissioner does not find facts when it comes to issuing private rulings. The private rulings system merely provides for the Commissioner to express his opinion about the application of the law to certain propositions, which are referred to as 'facts' but are not necessarily events known to have occurred and verified after inquiry and close scrutiny of evidence. This is because the 'specified scheme' can be an outline of steps in a proposed transaction. It can also be, as in the present matter, pieces of information which the Commissioner has cherry picked from the taxpayer's application for a private ruling. As pointed out in
Pillay and Commissioner of Taxation [2013] AATA 447 by Deputy President Frost (citing
Co-operative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508 at [15] and the cases there referred to), neither the Commissioner nor the Tribunal necessarily accepts the accuracy of what is stated as the factual substratum underpinning the scheme in a private ruling. It follows that neither the Commissioner nor the Tribunal can find facts when it comes to private rulings or reviewing objection decisions regarding private rulings, as appropriate.
51. Finally, in Cooper Bros, the Tribunal noted that even if it had been able to consider the additional information, the decision on the primary issue would not have been different because it related to specifications which were not material. In evaluating the differences in the 'facts' in the present case, I am of the view that important information was additionally provided by the Public Servant at the time of her objection (as well as in the evidence which she produced in this proceeding) such that the scheme would have been materially different if
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this information could have been taken into account.52. As noted above, this information including the complaint to the AHRC and the subsequent conciliation regarding compensation for the medical injury were provided in the application for the private ruling but the Commissioner did not incorporate that information into the scheme, focusing instead on certain terms of the deed of release. In other words, this matter is not solely concerned with additional information which was subsequently provided; important information was initially provided to the Commissioner in the application for the private ruling and was overlooked. That is why some fault as to how this matter has progressed lays at the feet of the Commissioner. He knew or should have known that information was omitted from the scheme he identified in the private ruling. The Commissioner also knew about the futility of the Public Servant providing evidence in this proceeding. So much is clear from the fact that a copy of the decision in Cooper Bros was provided to the Public Servant by the Commissioner's representatives at an early stage in this proceeding although it does not appear that the Public Servant appreciated the implications of that decision for her matter.
53. The Tribunal is unable, for the reasons summarised by the Tribunal in Cooper Bros to have regard to the additional information. The Tribunal's role with respect to the review of an objection decision regarding a private ruling is confined to reviewing the correctness of the ruling premised on the 'specified scheme' in the private ruling and it has no role whatsoever in fact finding.
The deed of release
54. The Commissioner focused on the deed of release to the exclusion of all other information and materials provided by the Public Servant in her application for the private ruling. Specifically, he focused on the following extracts which were restated as the 'scheme' in the private ruling:
- (a) Recital D which states that "[w]ithout admission of liability, the Employer and the Employee have agreed to the Cessation and to settle all matters and potential claims between them and arising out of and in connection with the Employment and the Cessation…";
- (b) Clause 2.1 which states that "[w]ithout admission of liability, the Employer will pay the Employee the amount of $15,000 as an ex-gratia payment for general damages…";
- (c) Clause 3.2 which states that "[t]he Employee releases the Employer from all claims and liability arising directly or indirectly out of the Employment and the Cessation."; and
- (d) Clause 12.5(a) which states that "[T]his document contains the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to that subject matter is replaced by this document and has no further effect."
55. Another 'fact' identified in the scheme in the private ruling, but which it is worth pointing out is not in the deed, is the statement that "[t]he Employer agreed to a gross sum of $15,000 less any tax withheld upon cessation of your employment and subject to the terms and conditions under the Deed." This was a conclusion of 'fact' reached by the Commissioner which is difficult to reconcile with the known circumstances that led to the resolution of the dispute.
56. The Commissioner submitted that the deed supported his contention that the Public Servant would not have received the settlement payment if she had not ceased her employment with the employer and, therefore, the payment was causally connected to her termination. Furthermore, the Commissioner stated that as the settlement payment is a single undissected lump sum payment which was exchanged in return for the Public Servant releasing and indemnifying her employer under the deed related to both her employment and her termination, the payment cannot be characterised as a capital payment for or in respect of personal injury to the Public Servant.
57. It is necessary here to say something about the importance of the deed. The following summary of the position at law regarding deeds is based on the chapter on Estoppel in Halsbury's Laws of Australia. Estoppel by deed refers to the principle that a party to a deed is
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prevented from disputing any distinct allegation of fact which he or she made in it. Relevantly, it is a rule of evidence based on the principle that an unambiguous statement in a deed must be taken as binding between the parties and therefore not allowing any contradictory proof. An important qualification, however, is that the statement of fact must be precise and unambiguous and, in this regard, it is not enough to draw inferences from the deed.58. Turning to the extracts of the deed used by the Commissioner in the specified scheme, the clauses are, in my view, vague. The repeated use of the words "without admission of liability" and the reference to the release of "all claims and liability arising directly or indirectly out of the Employment and the Cessation" in the clauses do not assist in ascertaining what the payment was made for, especially for consequential taxation purposes. Rather, the statements in the deed serve to cover off all scenarios in a settlement context. Notably, the deed is silent on the AHRC proceedings which led to the settlement. This lends credence to the Public Servant's evidence that this was a generic, standard deed which her employer would not amend on account of her individual circumstances. Importantly, however, the employer's subsequent correspondence, especially the email dated 26 June 2012 referred to in paragraph 29 above confirms the factual background and the fact that the payment represented general damages "following a complaint made by that former staff member to the Australian Human Rights Commission based on a form of discrimination …alleged by the former staff member to have occurred within their employment". In other words, the employer did not explain the payment as being consequential to or following her termination of employment.
59. That brings me to the issue of whether the decision of the Tribunal would have been any different if the additional information, including the evidence, could be taken into account. If the Tribunal had had jurisdiction to make findings of fact, I would have found that the payment of $15,000 was in its entirety compensation for the Public Servant's claim of discrimination and the injury she suffered during the course of her employment. Significantly, the abovementioned email dated 26 June 2012 from the employer which clarified the nature of the payment made under the deed within a matter of weeks after its execution, together with the evidence of the Public Servant's lawyers, barrister and treating psychiatrist corroborates her own evidence that the employer was compensating her for alleged discrimination and deterioration of her medical injury.
60. In my view, the payment of $15,000 was as a consequence of a settlement which was in turn a consequence of the AHRC proceedings for alleged discrimination suffered during the course of employment which exacerbated the Public Servant's mental illnesses. Her injury had, moreover, already been the subject of a worker's compensation claim that had been accepted by the employer's insurer. It is appropriate to now turn to the taxation aspects of this matter.
Employment termination payments
61. Subsection 82-130(1) of the ITAA 1997 states:
- (1) A payment is an employment termination payment if:
- (a) it is received by you:
- (i) in consequence of the termination of your employment; or
- (ii) after another person's death, in consequence of the termination of the other person's employment; and
- (b) it is received no later than 12 months after that termination (but see subsection (4)); and
- (c) it is not a payment mentioned in section 82-135.
(Notes omitted)
62. It follows that there are three conditions that have to be satisfied. First, a payment is an ETP if it is received by a person in consequence of the termination of the employment (s 82-130(1)(a)(i)). Second, the payment has to be received no later than 12 months after the termination (s 82-130(1)(b)). Third, the payment has to be not covered by s 82-135 which relevantly provides as follows:
- (i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of
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the personal injury and its likely effect on your capacity to * derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936)
63. As the payment was clearly received within 12 months of the termination of employment, the second requirement in s 82-130(1)(b) is satisfied and only the first and third conditions are considered below.
- (a) Payment in consequence of the termination of your employment
64. As to the first condition, the Commissioner submitted that the payment received by the Public Servant was received by her in consequence of the termination of her employment because, on the facts set out in the specified scheme in the private ruling, there is a causal link between the termination of the employment and the payment. This is said to be the case because the payment followed as an effect of, or a result of, the termination of the employment and that but for the termination, the payment would not have been made. In this regard, numerous cases establish that the relevant test is whether the payment followed as a result of the termination of the taxpayer's employment and, further, that it is not necessary that the termination should be the dominant cause of the payment (
Reseck v Commissioner of Taxation (1975) 133 CLR 45 per Gibbs J at 51). See also
McIntosh v Federal Commissioner of Taxation (1979) 45 FLR 279,
Le Grand v Commissioner of Taxation (2002) 124 FCR 53 and
Dibb v Commissioner of Taxation (2004) 136 FCR 388.
65. In support of his position, the Commissioner points out that paragraph D of the recitals of the deed in conjunction with clause 2.1 of the deed both of which are relevantly reproduced in the specified scheme explicitly link the making of the payment with the termination of the Public Servant's employment. The Commissioner further stated that only those terms of the deed of release, as extracted in the private ruling are relevant because clause 12.5 of the deed (also re-stated in the private ruling) expressly confirms that the deed contains the entire agreement between the parties about its subject matter. Finally, there is the following statement in the 'scheme' identified in the private ruling which I referred to above:
The Employer agreed to a gross sum of $15,000 less any tax withheld upon cessation of your Employment and subject to the terms and conditions under the Deed.
66. It is abundantly clear that this statement, together with the clauses of the Deed set out in the private ruling, leave the Tribunal with no alternative but to decide that the payment of $15,000 was in consequence of the termination of the Public Servant's employment. It is impossible to reach any other conclusion from the description in the 'scheme' that "the employer agreed to a gross sum of $15,000 upon cessation of your employment".
- (b) Payment not a capital payment in respect of personal injury
67. The Commissioner further submitted that the same clauses of the Deed extracted in the 'specified scheme', in particular clauses 2.1 and 3.2 also indicate that the payment is not a capital payment in respect of personal injury; that is, it is not a payment covered by s 82-135(i) of ITAA 1997.
68. Section 82-135(i) of the ITAA 1997 states that a payment is a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to derive income from personal exertion (within the meaning of the definition of 'income derived from personal exertion' in subsection 6(1) of the Income Tax Assessment Act 1936 (Cth)). Therefore, in order to exclude all or part of an amount from a settlement payment under s 82-135(i) of the ITAA 1997, there must be an identifiable amount which has been calculated in respect of the personal injury that is capable of being dissected from the total settlement sum. The cases which have decided this very point are
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381,
Dibb v Commissioner of Taxation (2004) 136 FCR 388 and
Commissioner of Taxation v Scully (2000) 201 CLR 148.
69. The Commissioner determined that the clauses of the Deed indicate that the payment is consideration for the termination of
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employment and not in relation to any specific personal injury. Again, the Tribunal has no alternative but to arrive at the same conclusion because of the 'specified scheme'. The Commissioner stated that accordingly, s 82-135(i) of the ITAA 1997 does not apply to exclude the payment (nor a portion of the payment) from being an ETP. I agree based on the 'specified scheme'.
Limited objection rights to assessment
70. It is necessary to say something brief about s 14ZVA of the TAA which provides limited objection rights to an assessment in certain circumstances to understand the predicament of the Public Servant. The Commissioner's counsel helpfully pointed out that that section applies here because where there has been a taxation objection against a private ruling, then the right of objection under Part IVC of the TAA against an assessment relating to the matter ruled on is limited to a right to object on grounds that neither were, nor could have been, grounds for the taxation objection against the ruling. In other words, according to the Commissioner's submission, absent new grounds that could not have been previously raised, the Public Servant cannot object to any assessment in relation to the payment to her of $15,000 by her former employer under the deed, and then challenge any objection decision. It is unlikely that the Public Servant would have appreciated the implications of her choosing to object to the private ruling. Also, it is unlikely that she understood the differences with the alternative path of lodging her tax return consistent with the Commissioner's view, then objecting to an assessment and then applying to the Tribunal for the review of the objection decision regarding the assessment.
71. There may be some question about whether s 14ZVA would necessarily restrict an attack on lodging an objection to any subsequent assessment. The section affects a taxpayer's right of objection against an assessment "relating to the matter ruled". Where the "matter ruled" so obviously differs from the true factual scenario, there must be at least some doubt as to whether the assessment can be said to "relate" to that matter. However, I note that in
Commissioner of Taxation v Executors of the Estate of Santha Thevy Subrahmanyam [2001] FCA 1836, Emmett J remarked that "it is not open to a taxpayer who has objected against a private ruling to ventilate in connection with an objection against an assessment, the same question that was ventilated in connection with the objection against the ruling". In addition, in light of the restricted scope of objections against private rulings, there is a further question as to whether the grounds raised by the Public Servant in her objection against the private ruling were truly "grounds" of objection against it. It would seem a perverse outcome that the Commissioner could so misstate a person's affairs and yet make the asserted taxation outcome completely unassailable. These are questions that should be decided in a case where they are squarely raised.
IS THE COMMISSIONER'S RULING CORRECT?
72. The Commissioner's private ruling is correct as it was self fulfilling in its approach. That is to say, his view of the law in its application to the 'facts' is correct because, as explained above, the 'facts' that he identified in the scheme are such that the only possible answer on the legal question is that which he determined. In other words, the 'facts', as identified by him, were determinative of the ultimate legal issue. Therefore, the ruling to the effect that the payment of $15,000 is a taxable employment termination payment is correct.
73. I make the following further observations about the Commissioner's conduct in this matter. As noted above, the Commissioner was correct in not considering the additional material produced by the Public Servant at the time of the objection because the scheme would, in my view, have been materially different to that identified by him in the private ruling. However, having been presented with the additional material at the objection stage, the Commissioner should have asked the Public Servant to apply for another private ruling, as he was required to do under the TAA. He should have also recognised that some of this information had in fact been provided by the Public Servant at the time of her making the application for the private ruling.
74.
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Not only did he did not do this, he later participated in directions hearings in these proceedings without bringing to the attention of the Public Servant or those officers at the Tribunal who were dealing with the application, the limited nature of the review, namely, involving the correctness of the private ruling based on the 'scheme'. He allowed directions to be made requiring the Public Servant to put on evidence and only after she had gone to the considerable effort and expense of doing so, did the Commissioner's counsel point out at the hearing concerns as to the relevance of the evidence because of the nature of the private rulings system. It is an unsatisfactory approach on the part of the Commissioner, particularly as the Public Servant had no legal representation. In my view, it would have been appropriate for the Commissioner to spell out the difficulties with the Public Servant's challenge to the private ruling objection decision and to have alerted the Tribunal's officers at the earliest opportunity.CONCLUSION
75. The Commissioner's objection decision is affirmed.
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