CASE 9/93

BJ McMahon DP

Administrative Appeals Tribunal

Decision date: 22 March 1993

BJ McMahon (Deputy President)

I gave full oral reasons for my decision when this application was heard. The respondent has now requested that the reasons be given in writing.

2. The applicant held the position of Inspector of Schools/Secondary with the New South Wales Department of Education. Her duties involved inspecting teachers for promotion, counselling teachers whose efficiency was in question, monitoring school programs and giving leadership in developing curricula. The applicant had special responsibility for English and History in her region.

3. Throughout New South Wales there were 10 regions. In the metropolitan area of Sydney there were 4. In each of these regions there were appropriate inspectors, who carried out their duties from premises located in the region in which they were appointed. The applicant's office was originally at an address in suburban Sydney. From here, she inspected schools over a very large area extending to the south and the west, all the inner city schools, and all the schools in the surrounding suburbs. Her region was therefore quite large. She had carried out these duties since her appointment in 1981.

4. In 1990, there was a radical rearrangement of education services by the New South Wales Government. Evidence was given that one of the ways the Government intended to reform public administration was to change the relevant personnel and to employ others on contracts. In education, the Government's plans called for a program of reform, restructure and change. As part of the implementation of that plan, the positions of school inspectors were to be phased out.

5. A new position of Cluster Director was created to deal with clusters of various schools. Applications were invited from all interested parties for appointment to these positions. Applicants included not only existing school inspectors but also others with general business experience. Evidence was given that it was the Department's policy to widen the scope of expertise of people involved in the administration of education.

6. As a result of these appointments, the position of Inspector of Schools was phased out. This aspect of the rearrangement appears in a press release issued by the Government concerning the creation of the Cluster Directors' appointments. It also appears from the happening of subsequent events. The inspector's role was something the Government saw as appropriate to the past and not appropriate to the new style which it wanted to implement.

ATC 150

7. The duties of the Cluster Director were quite different from those of a school inspector. There were changes related to financial management and to management generally. The applicant found herself involved in financial management for the first time in her career. Evidence was given concerning the different roles which each of the two positions was designed to fulfil. A Cluster Director no longer inspected schools or teachers. A policy of devolution provided that this role was to be filled by local school principals. Furthermore, there was to be no inspection of non- Government schools. A Cluster Director was expected to promote community involvement in the schools and in the centres. The applicant gave evidence that when she was an inspector of schools, she did not have much to do with the community at all.

8. She was successful in her application to be appointed as a Cluster Director and took up the position in April 1990. She did not continue to occupy the same premises. Although she continued to be employed by the Department of School Education, she was relocated in a nearby building that was renovated. The purpose of the renovations was to give an ``up market'' look to the new position. The Cluster Directors were to have ``a shop front''. It was important, according to evidence that was given, that Cluster Directors were not seen to be occupying ``little offices for inspectors'' but were seen to have this new profile.

9. The conditions of the applicant's employment changed considerably. She ceased to be a full-time paid employee and ceased to be covered by superannuation. She lost her security of tenure and was granted a contract. Her remuneration, however, went from approximately $56,000 to $90,000 per year. This was calculated by reference to a package which included a car and other benefits, none of which were available in her previous position. Pursuant to an enabling provision in the Public Sector Management Act (NSW), designed to encourage people to join the senior executive service, payment of long service leave was authorised by s 42V. There were many school inspectors who did not succeed to the position of Cluster Director. It was not relevant to enquire what happened to them, except to note there was no automatic transition from one position to another.

10. In exercise of her rights under her new employment contract, the applicant arranged for payment of her accrued long service leave of $35,468.72. The question to be determined in this application is the manner in which that sum should be taxed.

11. There was some confusion in the return of income and in the way the applicant's objection was dealt with. A claim framed on the basis that the amount represented an Eligible Termination Payment, must fail. The amount paid was calculated with reference to the applicant's previous service. There is a letter in the s 37 documents from the Department setting out the calculation showing the pre-1978 and the post-1978 amounts. The amount paid to the applicant is clearly long service leave. As such, it is excluded by subparagraph (iv) of paragraph (a) from the definition of Eligible Termination Payment in s 27A(1) of the Income Tax Assessment Act. In the course of the hearing, it became clear that all parties agreed that this was the correct way to view the amount in question.

12. If the amount was not to be taxed in accordance with the normal concepts of income, it is necessary that the circumstances of its receipt match the requirements of s 26AD(1). This is in the following terms-

``26AD(1) This section applies to any amount paid after 15 August 1978 (whether voluntarily, by agreement or by compulsion of law) to a taxpayer in a lump sum in consequence of the retirement of the taxpayer after that date from any office or employment or in consequence of the termination after that date of any office or employment of the taxpayer, being an amount that is paid in respect of unused long service leave.''

13. The first matter to be considered is whether the applicant retired from her employment. Having regard to the observations of the Full Federal Court in
Grealy v FC of T 89 ATC 4192 at 4197, it is probably true to say that she did not retire from her employment. As in Grealy's case, her first contract of appointment was terminated and replaced by another. In my view, however, it is not necessary to form a concluded view on this question whether she retired from her employment or whether the conditions under which she was previously employed and the conditions under which she was subsequently employed by the same employer formed a

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continuum. The original decision-maker came to the conclusion that there had been no termination of employment and thought that the matter ended there. In my view, it is more appropriate to look at the other qualifying branch of s 26AD(1) and to ask whether there was a retirement from or a termination of office.

14. The word ``office'' is a word that had been considered in many cases but no satisfactory definition has emerged. As was pointed out in Grealy's case the word usually connotes a position of defined authority in an organisation, such as a director of a company, or a tertiary educational body. Their Honours held (at 4197 column 2) that it was not a word normally applicable to a relatively low level employee, such as a university lecturer. As the court observed, the applicant, like other holders of professional employment, is not made an office holder merely because her position has a name.

15. This view was consistently taken by the Boards of Review. For example, in Case K4,
78 ATC 29, Mr Dempsey suggested that an office connotes something more than substantial, something more in the nature of a continuing executive position, the holder of which has distinct responsibilities. In Grealy's case itself, their Honours noted that the word ``office'' usually connoted a position of defined authority.

16. In my view, the position of Inspector of Schools/Secondary was such an office. It was a position that was not a common one. There were 10 regions for administration purposes throughout the whole of New South Wales and 4 of them were in the City of Sydney. The number of inspectors in the Metropolitan East district, where the applicant held her position, indicates that it was a position of some seniority and responsibility and it was a position that was recognised as a separate position. In fact the way in which it was subsequently dealt with in the reorganisation of education services indicates that it must have been regarded as almost fundamental to the concepts of education which the Government wished to change. I am therefore satisfied that the position which the applicant held was an office until the relevant date.

17. The next question to be determined is whether the applicant retired from that office or whether the office itself was terminated or whether both events happened. The only way in which it could be suggested that the applicant had not retired from the office would be to show that the duties of Cluster Director and the duties of Inspector of Schools/Secondary were equivalent. The evidence compels a finding that only in the grossest way could this submission be acceded to. The 2 positions bear some similarity only in that they are both concerned with education and they are both offices in the same Department of School Education. In my view, this is not sufficient to establish a continuity of tenure of office. The position of Cluster Director was the result of the implementation of a new and radically different philosophy of education. The Cluster Director occupied significantly new premises, designed to emphasise the difference in the functions of that appointment from those of a school inspector. The new responsibilities, the devolution of responsibilities to local schools, and the introduction of financial management into the applicant's duties, all played a part in the reorganisation. In my view the applicant retired from an office. Furthermore the evidence supports a finding in relation to the second branch of s 26AD(1), namely that the office itself was terminated.

18. This last conclusion was borne out by evidence given by a witness called on behalf of the respondent, Mr Johnson. He was involved in the Premier's Department SES Unit and had the overall role of guiding the development of the SES (the Senior Executive Service) and administering that across the Public Sector. The implementation of that policy in the Department of School Education was part of his responsibility. He spent 12 months as an Acting Manager of Organisation, Design and Development, which had a role in overseeing the restructuring of the Department. His clear evidence was (Transcript page 22): ``Now the Cluster Directors at that stage replaced the positions of Inspectors of Schools which were abolished''. He described the duties of Cluster Directors who were appointed under the Public Sector Management Act as distinct from those of Inspectors of Schools who were employed under the Teaching Services Act. It is clear from his evidence that there was a termination of office.

19. The final question to be determined therefore is whether the payment was made in consequence of the applicant's retirement from

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office or the termination of her office. The Commissioner submitted that the payment was made in consequence of the provisions of s 42V of the Public Sector Management Act (NSW). To my mind that section cannot be said to be the cause of the payment. It simply legalises payment under certain circumstances. It makes legal that which would otherwise be illegal. It may have been an incentive to intending SES officers, but it cannot be said to be the source of the payment, nor can it be said that the payment was made in consequence of the provisions in the Act.

20. The apparent differences between the approaches of Jacobs J and Gibbs J in
Reseck v FC of T 75 ATC 4213 were reconciled by Brennan J in
McIntosh v FC of T 79 ATC 4325 at 4328. His Honour said-

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

It may not be appropriate to speak of conditions if a payment is made voluntarily, but if a payment is made to satisfy a payee's entitlement, the phrase `in consequence of retirement' requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established.''

21. At pages 4330 and 4331 Toohey J said-

``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 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.''

Their Honours were considering the terms of the former s 26(d). Their observations, however, are just as apposite in considering s 26AD.

22. The correct way of viewing the payment made to the applicant, therefore, is to enquire whether the payment was made upon the occasion of her retirement from office or the termination of her office. In my view, the payment was a ``following on'' which was not displaced by the intervening event of the applicant's application for appointment to the position of Cluster Director. The causal nexus between payment and the retirement and subsequent termination of office is established by the series of events leading to the transition from one defunct office to a newly created office. Her retirement from office was the occasion of, and a condition of, entitlement to the payment. The termination of her office reinforces this analysis. In my view, both the preconditions of s 26AD to which I have referred have been met.

23. These are the reasons why I set aside the objection decision and remitted the matter to the Commissioner with the direction that calculations be made and that the payment in question be taxed pursuant to the provisions of that section.

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