McIntosh v. Federal Commissioner of Taxation.

Members: Brennan J

Toohey J
Lockhart J

Tribunal:
Full Federal Court

Decision date: Judgment handed down 29 June 1979.

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Toohey J.: The point for determination is whether payment from a provident fund to a retired bank officer of a sum of $27,006.84 fell within sec. 26(d) of the Income Tax Assessment Act 1936. The Commissioner brought to tax 5% of that sum; the taxpayer objected, his objection was disallowed and the assessment was confirmed by the Supreme Court.

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ATC 4329

The point turns very much upon an analysis of the language of sec. 26(d) but some reference to the facts is necessary. First, it may be as well to say that the argument before this Court proceeded on the assumption that if the taxpayer were not assessable as to 5% of the sum, he was not otherwise liable to tax in respect of the payment.

On 24 March 1976 the taxpayer retired from the National Bank of Australasia Ltd., having reached the age of 62. He had been a permanent officer of the bank for many years and a member of a provident fund, called at the time of his retirement the Officers' Provident Fund. It was made up primarily of contributions by the bank and by bank officers.

The taxpayer having completed 15 years service, having attained the age of 62 and having thereupon retired from the bank, became entitled to ``a normal pension calculated in accordance with appendix 2'' (rule 17). Appendix 2 contains a formula which it is unnecessary to set out here except to say that, in the taxpayer's case, it produced an entitlement to $5,491.44 a year.

Rule 22 of the rules of the fund provides that on the application of a contributor (which the taxpayer was), ``but not later than one calendar month after his retirement'', the administrators of the fund shall commute ``for a lump sum payment'' a percentage of the total pension payable at retirement, calculated in accordance with appendix 5. Again, there is no need to refer to the appendix in detail. It is enough to say that within a month of retirement the taxpayer applied to commute 50% of his pension entitlement, as a result of which he was paid $27,006.84 in cash (the sum already mentioned) and a yearly sum of $2,755.92 as from 25 March 1976, the day after his retirement.

Section 26(d) includes in the assessable income of a taxpayer:

``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:''

There is a proviso that has no relevance in the present case.

Counsel for the taxpayer put as his basic submission that for sec. 26(d) to apply there must be a lump sum payment, capable of description as an allowance, gratuity or compensation paid in consequence of retirement from employment, and that where a person who has retired and who in consequence is entitled to a pension gives up that entitlement in exchange for a lump sum payment, the sum is not capable of description as an allowance, gratuity or pension paid in consequence of retirement.

During the course of argument I was inclined to think that the proper approach to sec. 26(d) was first to identify that which was said to be an ``allowance, gratuity or compensation'', ask whether in respect of that allowance, gratuity or compensation a capital amount had been paid in a lump sum and then enquire whether that amount had been paid in consequence of retirement from employment. There are, however, difficulties in that approach. And the main difficulty, I think, lies in trying to give meaning to the words ``allowance, gratuity or compensation'', except by reference to the context in which they appear. In
Mutual Acceptance Co. Ltd. v. F.C. of T. (1944) 69 C.L.R. 389 at p. 402 , Dixon J., speaking of the Pay-roll Tax Act 1941 which imposed a tax on wages and defined wages to include allowances, said:

``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.''

Much the same may be said of a word like gratuity which in its ordinary sense simply means a favour, a kindness or a gift in return for favours or services, and also compensation, which literally refers to the action of compensating or the condition of being compensated. Divorced from their context, these words may be so imprecise as to be devoid of content; alternatively they may be so wide as to draw in an almost unlimited range of payments.

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ATC 4330

Section 26 finds its place in Div. 2 of Part III of the Income Tax Assessment Act, ``Income''. The Division begins with a statement that the assessable income of a taxpayer shall include the gross income derived (sec. 25) and then proceeds in sec. 26 to enumerate classes of receipts, some of which are of an income nature and therefore already within sec. 25(1), and others of a capital nature. See
Reseck v. F.C. of T. 75 ATC 4213 ; (1975) 133 C.L.R. 45 per Gibbs J. at pp. 4214-15; 47-48 and Stephen J. at pp. 4217-18; 52-53.

Allowance, gratuity and compensation appear in their plural forms in sec. 26(e) which has a proviso exempting from the operation of that paragraph any allowance, gratuity or compensation already included in sec. 26(d). This of itself suggests that those words in sec. 26(d) have a limited application. Furthermore the whole tenor of sec. 26(d) indicates that it is designed to draw in particular payments, of a capital as well as of an income nature.

In my view the identification of an allowance, gratuity or compensation in sec. 26(d) cannot be made without reference to retirement from or the termination of, an office or employment, the enquiry being whether there was payment in a lump sum of an allowance, gratuity or compensation in consequence of that retirement or termination.

In Reseck's case Gibbs J. commented:

``... 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.''

(at p. 4215; 49).

There may be situations in which no ``capitalisation'' is involved. Reseck's case appears to have been one, there being a lump sum payable to the taxpayer at the end of each of two periods of employment. On the other hand there may be situations in which there may be situations in which there is an entitlement to periodic payments, capable of being converted into a lump sum. The present case is such a one.

Section 26(d) speaks of a situation in which the capital amount of an allowance, gratuity or compensation is paid in a lump sum in consequence of retirement from or the termination of, an office or employment. The grammatical construction of the paragraph demands a relationship between the payment of an amount in a lump sum and (as in this case) the retirement from employment.

The question to be answered here is whether the $27,006.84 paid to the taxpayer can be properly described (it being clearly enough a lump sum) as an allowance, gratuity or compensation paid in consequence of retirement from employment. Put that way, the words ``allowance, gratuity or compensation'' take their meaning from the reference to retirement.

The taxpayer's submission was that the sum paid was neither an allowance, gratuity or compensation nor an amount paid in consequence of retirement. It was, said the taxpayer, money paid in exchange for the taxpayer's surrender of an entitlement to periodic payments and a sum paid by reason of the taxpayer's exercise of a contractual right offered by the provident fund.

In asserting the need for a causal relationship between payment and retirement, the taxpayer relied upon the remarks of Gibbs J. in Reseck's case, accepting his Honour's qualification that it is not necessary that the termination of employment be the dominant cause of the payment.

In the view of Gibbs J.:

``... a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination''

(at pp. 4216-17; 51).

Likewise Jacobs J. rejected the notion that the termination of employment must be the dominant cause of the payment.

``A consequence in this context is not the same as a result. It does not import causation but rather a `following on'.''

(at p. 4219; 56).

In the present case it may be true to say that the immediate cause of the payment to the taxpayer of the sum of $27,006.84 was the exercise by him of the right to commute a percentage of the pension to which he was

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ATC 4331

entitled. To say that is not to exclude the notion that the payment was in consequence of the taxpayer's retirement or that it followed on his retirement. In my view, the payment followed on the taxpayer's retirement, the only intervening event being the exercise of the option to commute. The connection was not simply temporal; retirement was a prerequisite to payment and in that sense there was a ``following on'' as I understand the language of Jacobs J.

The payment of the $27,006.84 did not come about as a result of independent bargaining between the taxpayer and the administrators of the fund. Rule 22 obliged the administrators, if called upon to do so, to commute a percentage ``of the total pension payable at retirement''. When a pension is payable under rule 17a (as in the present case), the amount of the lump sum payment must be calculated in accordance with appendix 5. In other words, retirement produced to the taxpayer an entitlement to a pension, payable annually or, at his option, by a combination of lump sum and annual payments.

The option to commute was simply a right to change one form of payment into another. It was not suggested that entitlement to a pension was not an effect or result of retirement from employment. Equally the payment of a lump sum produced by commutation was such an effect or result. The fact that the election might be exercised after retirement did not destroy that connection; indeed the prescription of such a short period as one month might be thought to strengthen it.

Furthermore, the payment constituted an allowance paid in consequence of retirement from employment. ``Allowance'' cannot simply stand on its own; it takes its meaning from the whole of the paragraph, the intent of which is to tie the payment to the retirement from employment of the taxpayer. In the present case the rules of the fund make it clear that the retirement benefits are payable by reason of the years of service with the bank completed by a contributor. The entitlement is referred to as a pension and that is what it is, a payment based upon services rendered to the employer.

``It was an additional reward allowed to the taxpayer for the services that he had performed''

( Reseck's case, per Gibbs J. at p. 4216; 51).

In the circumstances, the amount paid to the taxpayer was a capital amount and the capital amount of an allowance paid to the taxpayer in a lump sum in consequence of his retirement from employment. So classified, it answered the description in sec. 26(d), rendering 5% of it part of the assessable income of the taxpayer.

The appeal should be dismissed with costs.