Reseck v. Federal Commissioner of Taxation.

Members: Gibbs J
Stephen J

Jacobs J

Tribunal:
Full High Court

Decision date: Judgment handed down 30 September 1975.

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

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

``(c) 7 day rostered workers to be paid an additional $2.00 per shift, on satisfactory termination of employment (past Bent 104).''

and

``(d) On satisfactory termination of employment the employee shall be paid a service payment of $2.00 for each week worked.''

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

At the end of each of the two periods of his employment the appellant was paid the sums to which he was entitled under the agreement on satisfactory termination of employment. The questions of law which arose before the Board of Review were whether the whole of those sums were income under sec. 25(1) or sec. 26(e) or only 5% thereof under sec. 26(d). Of the amounts in question a sum of $73 was referable to the agreement before it was varied on 21st September 1970. It is no longer claimed that this amount falls within sec. 26(d) and it is not necessary to refer to the language of the agreement under which that claim was made. The argument has been limited to so much of the amounts as was paid pursuant to the terms of the agreement after its variation.

I have no doubt that the amounts were allowances to the appellant, that they were paid in lump sums and that they were paid in consequence of the termination of his employment. It was submitted that the words ``in consequence of'' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a ``following on''. In the Supreme Court the view was taken that the amounts, computed as they were on a weekly basis, were not allowances because they were paid under a binding agreement so to pay them. I do not think that the word ``allowance'' can be given a meaning which excludes payments by agreement, particularly when sec. 26(d) refers specifically to payments of this kind. The substantial question is whether they were capital amounts within the meaning of sec. 26(d). It is clear that the amounts were income in the ordinary sense and would fall within sec. 25(1) unless they were excluded from the operation of sec. 25 by the express provisions

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ATC 4220

of sec. 26. It has been submitted that sec. 26(d) does not apply to every amount which is paid in a lump sum in consequence of retirement from or termination of an office or employment but only to such amounts as can be described as capital and not income amounts. It is well established that an amount paid in a lump sum in consequence of retirement from or termination of an office or employment is income of that office or employment if it is deferred remuneration:
Henry v. Foster (1931) 145 L.T. 225 ;
Dewhurst v. Hunter (1932) 146 L.T. 510 . In the latter case, the decision of the Court of Appeal was reversed by the House of Lords on one of the three cases before the Court of Appeal in the former case. But the principle as I have stated it was unaffected. The test applied in those decisions was in substance whether the amount received in a lump sum was part of the consideration for the services rendered in the office or employment. If it was, then it was income although payment was deferred. If it was not, then it was a capital amount.

The question to be determined is whether the purpose of sec. 26(d) was to include to the extent of 5% thereof in the assessable income of a taxpayer amounts received in a lump sum by a taxpayer in the stated circumstances only when they were not amounts of income in the ordinary sense of that word but were amounts or payments of capital under the general law.

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

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

I would therefore allow the appeal. In lieu of the answers to the questions of law which were given in the Supreme Court -

• (a) No, except as to a sum of $73.
• (b) Yes, except as to a sum of $73.

ORDER:

Grant leave to appeal.

Appeal allowed with costs. Judgment of the Supreme Court of Queensland set aside and in lieu thereof

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