McIntosh v. Federal Commissioner of Taxation.
Judges: Brennan JToohey J
Lockhart J
Court:
Full Federal Court
Lockhart J.: This is an appeal by the taxpayer from an order of the Supreme Court of Queensland dismissing the taxpayer's appeal to that Court against an assessment to income tax for the year of income ended 30 June 1976.
The appeal concerns the question whether 5% of a sum paid to the taxpayer after he had retired from his employment, by the administrators of a superannuation fund, following the taxpayer's election to commute 50% of his pension entitlement for a lump sum payment, forms part of his assessable income under sec. 26(d) of the Income Tax Assessment Act 1936 (``the Act'').
The facts are agreed between the parties and may be stated briefly.
The appellant was an officer of the National Bank of Australasia Ltd. (``the bank'' from 15 May 1930 until he retired on 24 March 1976, when he attained the age of 62 years.
He was first employed by the bank as a temporary officer, but soon became a permanent officer. His service was continuous until retirement except for immaterial periods of absence due to war service and sickness.
When he became a permanent officer of the bank he joined a fund then known as the Officers' Guarantee and Provident Fund which is now known as the Officers' Provident Fund (``the fund''). He remained a member of the fund until his retirement.
The fund consists of moneys and investments vested in the administrators representing grants, contributions and subsidies from the bank to the fund,
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contributions of officers to the fund, income and accretions from investments of the fund and other moneys or investments from time to time donated to the fund: rule 2 of the fund's rules.The general control and management of the fund and the administration of the rules is vested in the administrators of the fund: rule 4.
Contributions to the fund come from two sources: contributors and the bank. A contributor pays contributions to the fund during the period of his membership of the fund at the rate of 6% of his ``rated salary'' which, so far as material, means his annual salary: rule 15.
The bank contributes to the fund in two ways, namely an amount equal to 8 per centum of the ``rated salary'' of each contributor and voluntary contributions to the fund of an amount equal to 4% of the ``rated salary'' of each contributor up to a period of 20 years from 13 September 1973: rule 16.
A contributor who has completed 15 years' service and attains the age of 62 years and retires from service becomes entitled to a normal pension calculated in accordance with appendix 2: rule 17. It is not necessary to set out the appendix.
Rule 22, the critical rule in the present case, provides:
``On the application of any contributor or pensioner, either before but not later than one calendar month after his retirement, the administrators shall commute for a lump sum payment that part he elects to commute which is either twenty-five per centum or fifty per centum of the total pension payable at retirement to him or such lesser amount only as may be permitted by the restrictions of the appropriate taxation and revenue authorities for a lump sum payment. Where a pension is payable under rule 17a or 17c the amount of any lump sum payment will be calculated in accordance with appendix 5. Where a pension is payable under rule 17b or rule 23 the amount of any lump sum payment will be assessed by the actuary as being the cash value of the pension so commuted. That part of the pension which has not been commuted will be payable as a pension.''
The taxpayer became entitled to a pension payable under rule 17a, so that the amount of any lump sum payment is calculated in accordance with appendix 5. It is not necessary to set out the terms of that appendix.
During his period of membership of the fund, the taxpayer contributed to it a total of $5,784.96. Before his retirement on 24 March 1976 the taxpayer had arranged with the administrators of the fund for the payment of a pension to him from the fund. On 31 March 1976, within the period of one month permitted by rule 22, the taxpayer applied to the administrators to commute 50% of the total pension payable to him at retirement.
The administrators dealt with the taxpayer's application at their meeting on 8 April 1976 whereupon his pension was reduced by half, namely from an annual payment of $5,511.72 to $2,755.92 as from 25 March 1976, and he received from the fund the sum of $27,007.00 being the cash value of 50% of his pension entitlement commuted under rule 22.
The Commissioner included in the taxpayer's assessable income for the year ended 30 June 1976, 5% of the sum of $27,007.00 namely $1,350.00. The taxpayer objected to the assessment, the objection was disallowed and the taxpayer appealed to the Supreme Court of Queensland.
The learned trial judge held that the payment of $27,007.00 answered the description, within sec. 26(d) of the capital amount of an allowance paid in a lump sum in consequence of retirement from an office or employment and that 5% of that amount was correctly included in the taxpayer's assessable income.
Section 26(d) appears in Div. 2 of Part III of the Act and, so far as relevant, provides:
``26. The assessable income of a taxpayer shall include -
- (d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law:...''
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Section 26(d) includes some receipts that would not be income according to ordinary concepts under sec. 25 and some receipts which otherwise would be capital: see
Reseck
v.
F.C. of T.
75 ATC 4213
;
(1975) 133 C.L.R. 45
. It was decided in
Reseck's case
(
Gibbs
and
Jacobs
JJ.;
Stephen
J. dissenting) that where an amount paid to a taxpayer answers the description of the capital amount of an allowance etc. in sec. 26(d) and also answers the description of income according to ordinary concepts, so as ordinarily to be assessable as income under sec. 25, only 5% of the capital amount is included in the assessable income.
It was not asserted by the Commissioner that any provision of the Act save sec. 26(d) could operate to bring to tax in the taxpayer's hands any part of the sum of $27,007.00. Nor does the Commissioner assert that such sum could be a gratuity within the meaning of sec. 26(d).
Two questions arise for determination, the first being whether there was an allowance or compensation within the meaning of sec. 26(d); the second being whether the payment of the capital amount thereof in a lump sum was made in consequence of the taxpayer's retirement from his employment.
As to the first question, the words ``5% of the capital amount...'' do not describe the nature or character of the allowance or compensation: See Reseck's case (supra) per Gibbs J. at pp. 4215-16; 49 where his Honour said:
``However, the words `any allowance, gratuity or compensation... in consequence of retirement from, or the termination of, any office or employment' are apt to include receipts that constitute income within the ordinary usages and concepts, and it is apparent from the grammatical arrangement of sec. 26(d) that the words `of the capital amount' are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in the assessable income. The allowance, although it must be paid in a lump sum to come within sec. 26(d), may have been fixed at a rate payable in respect of a specified period - for example, at so much for every week worked. The words `of the capital amount' are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalised or total value.''
What then is an allowance or compensation within the meaning of the paragraph? First, the word ``allowance''. It is contended by Mr. Jackson, senior counsel for the taxpayer, that the word ``allowance'' is inappropriate to describe the nature of the taxpayer's entitlement under the fund. He contends that neither the bank nor the administrators of the fund ``allowed'' the taxpayer anything. All he did was to exercise his right to commute 50% of his pension entitlement and thus gave up one right for another; in effect a sale of the right.
``Allowance'' is defined in the Shorter Oxford English Dictionary, so far as relevant, as meaning ``the action of allowing; a thing allowed''.
In
Scot
v.
C. of T. (N.S.W.)
(1935) 3 A.T.D 142
;
3 S.R. 215
,
Jordan
C.J. said at p. 146; 221.
``The first question which arises is whether the sum in question can be regarded as an allowance or gratuity in the sense in which these words are used in cl. (i) and (j). An allowance is a definite portion or amount allotted or granted to meet requirements:
Buckingham v. F.C. of T. (1934) 3 A.T.D. 37 at 38 . A gratuity is something given generally without obligation and in return for services. Now, when one person ceases to be in the employment of another there are two different characters in which money may be paid to him by his ex-employer in relation to such cessation. It may be paid to him as a recognition of, or as further remuneration for, his past services; or it may be paid to him as compensation for his being deprived of a right, or an opportunity, to continue in the service and earn further emoluments therein. In either case, the payment may be made ex gratia or in discharge of an obligation to make it. In every case, it is a question of fact in which character it is made. If it is paid in the former character, `allowance' or `gratuity' may be an apt word to describe it, according to the circumstances. But if it is paid in the latter
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character, and is paid in discharge of an obligation imposed by law, it is certainly not a `gratuity', nor is it an `allowance' in any ordinary sense of either of those words.''
In
Mutual Acceptance Co. Ltd.
v.
F.C. of T.
(1944) 69 C.L.R. 389
the High Court considered whether certain payments paid to employees of a company were allowances and therefore ``wages'' within the meaning of the
Pay-roll Tax Assessment Act
1941-1942 (N.S.W.). Section 3 of that Act defined ``wages'' as:
```wages' means any wages, salary, commission, bonuses or allowances paid or payable... to any employee as such...''
Latham C.J. said at pp. 396-397:
``When the word is used in connection with the relation of employer and employee it means in my opinion a grant of something additional to ordinary wages for the purpose of meeting some particular requirement connected with the service rendered by the employee or as compensation for unusual conditions of that service. Expense allowances, travelling allowances, and entertainment allowances are payment additional to ordinary wages made for the purpose of meeting certain requirements of a service. Tropical allowances, overtime allowances, and extra pay by way of `dirt money' are allowances as compensation for unusual conditions of service.''
Dixon J. said at pp. 402-403:
```Allowance' is one of the many words which take their meaning from a context rather than affecting or controlling the meaning of other words of the context in which they occur. For, considered alone and at rest rather than at work with other words, it means the allowing of a thing or a thing allowed. It is only by its application that you discover the kind of thing in mind.
In the present case I think that the whole context and subject matter shows that the definition of wages is dealing with the emoluments of employment paid in money or made over in kind to an employee by an employer. The figure of speech `pay-roll' used to describe the tax and supply a title to the Acts gives some indication of the subject taxed. In the definition of `wages' the two first words `wages' and `salary' refer to ordinary forms of remuneration for work done. `Commission' covers percentage rewards and `bonuses' occasional or periodical additions whether contracted for or voluntary. The next word `allowances' seems to me naturally to follow as an attempt to make sure that any other kind of gain or reward allowed or conceded by the employer to the employee for his work is brought within the definition. In language borrowed from Lord Esher, it is intended to cover any payment beyond the agreed salary of the employee for services or additional services rendered by him (
Burgess v. Clark (1884) 14 Q.B.D. 735 at p. 738 ). That remuneration for work is the subject is further shown by the four specified cases I mentioned above as included in the definition.''
It is true that the taxpayer, by his act of commutation, in a sense gave up one right for another; but he did so pursuant to the rules of the fund, in particular rule 22. The rules constitute the agreement to which the taxpayer is a party as contributor. That an ``allowance'' may be payable pursuant to an agreement is expressly recognised by sec. 26(d) itself. In Reseck's case (supra) Jacobs J. said at p. 4219; 56:
``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.''
It is not permissible to characterise the entitlement of the taxpayer under the fund merely by reference to the act of commutation as the taxpayer seeks to do. The right to commute is but one of a number of rights arising under the rules of the fund. A contributor who has completed 15 years' service and retires at the age of 62 is entitled to a pension. It is a reward for having completed 15 years' service, a payment for services rendered, notwithstanding that it is not paid by the employer but by the administrators of the fund.
It is perhaps a somewhat unfelicitous use of language to describe the amount in question as an ``allowance''. Nevertheless, in
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my opinion, the context and subject matter in which the word ``allowance'' appears in sec. 26(d) show that it is included in that description.The next question is whether the word ``compensation'' is apposite to describe the amount.
Mr. McPherson, senior counsel for the Commissioner, submitted that, by the act of commutation, the taxpayer elected to surrender 50% of his pension entitlement, and to receive in exchange therefor, a lump sum or compensation. He contended that the lump sum payment compensated him in the sense that it was given in exchange for his surrender, or loss, of the amount of 50% of his annuity rights.
The Shorter Oxford English Dictionary defines ``compensation'', so far as relevant, as ``the action of compensating, or condition of being compensated; counterbalance, requital, recompense''.
Sir Frederick Jordan used the word ``compensation'' at p. 146; 221 of his reasons for judgment in Scott v. F.C. of T. (supra), in the passage which I have already cited, in the sense of compensation for deprivation of a right or of an opportunity to continue in employment.
In my opinion, the word ``compensation'' as used in sec. 26(d) connotes something more than a mere exchange of rights at the election of the taxpayer, such as occurred here, where the taxpayer exercised his right of commutation under rule 22. ``Compensation'' involves something being paid to the taxpayer to recompense him for some loss or damage he has suffered or would suffer, such as for his being deprived the right or opportunity to continue in his employer's service.
Accordingly, in my opinion the amount in question does not answer the description of ``compensation'' in sec. 26(d).
I turn to the question whether the payment of the sum of $27,007.00 was a payment ``in consequence of'' the retirement of the taxpayer from his employment.
The word ``consequence'' is defined in the Shorter Oxford English Dictionary as " 1. A thing or circumstance which follows as an effect or result from something preceding.
2. The action, or condition, of so following; the relation of a result to its cause or antecedent " .
The word ``antecedent'' is defined in the same dictionary as ``a thing or circumstance which goes before in time or order; often also implying causal relation with its consequent''.
Senior counsel for the taxpayer contended that the expression ``in consequence of'' is used in sec. 26(d) in the sense of causation only, so that it must be the act of retirement that is the cause of the payment to the taxpayer. He contended that in the present case the cause of that payment was not the act of retirement of the taxpayer but the exercise by him of the right of election to commute his pension entitlement as to 50% to a lump sum payment pursuant to rule 22. Having exercised his right of election, the administrators were bound to make the lump sum payment to him; that was the cause of the payment and nothing else.
Considerable reliance was placed by senior counsel for the taxpayer on the reasons for judgment of Gibbs J. in Reseck's case. It was contended that his Honour construed the phrase ``in consequence of'' so as to necessarily require a causal connection between the circumstance of retirement and the payment to the taxpayer. I shall set out the relevant passages from Gibbs J.'s reasons for judgment in full. At pp. 4216-17; 51 his Honour said:
``The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that `purpose' in sec. 26(a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of sec. 26(d). For example, a retiring allowance is plainly intended to be within sec. 26(d) but such an allowance is made in consequence of the employee's
ATC 4336
past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause predominated over the latter. Moreover, in many cases allowances, gratuities or compensation are paid in consequence of the provisions of an industrial agreement or of the industrial law but the words appearing immediately before the proviso to para. (d) of sec. 26 show that the paragraph will nevertheless be applicable. In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer's employment.''
His Honour was rejecting the test propounded by the learned trial judge that it is necessary for the termination of the services of the employee to be the dominant cause of the payment. His Honour said that payment to an employee may be due to more than one cause. In saying that the allowance in Reseck's case was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but that the allowance was nevertheless paid in consequence of the termination of the taxpayer's employment, I do not myself understand his Honour to be saying that the phrase ``in consequence of'' is necessarily speaking only of causation. It is difficult to see how the fact that a taxpayer's services had been satisfactory could be said to be a cause of the payment to him upon his employment being terminated; but it would be a condition precedent to payment and a circumstance providing a link or connection between termination of his employment and the payment.
In my opinion his Honour was saying that the phrase includes the case where retirement or termination is a cause of the payment in question; but he was not excluding from the ambit of the phrase, payments which, although not following as a matter of causation from the termination of employment, nevertheless followed on the termination of employment and had connection therewith.
Senior counsel for the taxpayer contended that the phrase was construed by Jacobs, J. in Reseck's case fundamentally differently from the construction preferred by Gibbs J. Jacobs J. said at p. 4219; 56:
``A consequence in this context is not the same as a result. It does not import causation but rather a `following on'.''
In my opinion his Honour did not use the words ``following on'' as referring merely to a temporal progression of events. Rather his Honour had in mind a connection between the retirement from or the termination of employment and the payment in question as well as a temporal progression of events. I do not read the words of his Honour as excluding a connection that is causal in character; rather his Honour enunciated a wider test than one merely of causation and expressed it as a ``following on''; a concept that may in an appropriate case include a relevant causal connection. In other words a payment that is caused by the act of retirement from or termination of employment would fall within the test of a ``following on'', but so would other payments that do not have such causal connection between the termination of or retirement from employment and the making of the payments. In my opinion Gibbs J. and Jacobs J. were not construing the phrase ``in consequence of'' differently.
In my opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connection between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment. The phrase used in sec. 26(d) is not ``caused by'' but ``in consequence of''. It has a wider connotation than causation and assumes a connection between the circumstance of retirement and the act of payment such that the payment can be said to be a ``following on'' of the retirement.
Sometimes the relevant connection may be that the retirement is a condition precedent to the right to payment of the sum in question.
ATC 4337
If the phrase ``in consequence of'' were to necessarily import causation, in my opinion the payment made to the taxpayer in the present case would not be a consequence of his retirement. The cause would be the exercise by him of his right to commute 50% of his pension entitlement to a lump sum which, upon its being exercised, required the administrators to pay the lump sum to him. That would be not merely a cause, but the cause of the payment. It is true that the payment would not have been made unless the taxpayer had completed 15 years of service with the bank and had retired from his employment at the age of 62; but these are conditions precedent to his right to commute his pension entitlement in part to a lump sum payment, provided the right was exercised within one month after his retirement.
In the present case in my opinion there is a relevant connection between the retirement of the taxpayer and the payment of the sum of $27,006.84. He served the bank for 15 years and retired at the age of 62. He became entitled to a pension under the rules of the fund. Within the period of one month he exercised his right to commute 50% of his pension entitlement to a lump sum. The administrators of the fund became bound to pay it to him and payment was made. In my opinion the payment was made ``in consequence of'' the retirement of the taxpayer from his employment.
The amount of $27,006.84 paid to the taxpayer was the capital amount of an allowance paid to him in a lump sum in consequence of his retirement from employment. 5% of that sum falls for tax under sec. 26(d).
For these reasons in my opinion the appeal should be dismissed with costs.
ORDER:
1. The appeal be dismissed.
2. The appellant pay to the respondent his costs of the appeal to be taxed.
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