CASE 20/97
Members:J Dwyer SM
Tribunal:
Administrative Appeals Tribunal
J Dwyer (Senior Member)
This is an application for review of a decision of the Deputy Commissioner of Taxation in respect of an objection against an assessment under the Income Tax Assessment Act 1936 (``the Act'') for the year ended 30 June 1995.
2. At the hearing Mr A Powrie, a solicitor, appeared for the applicant. Mr S W Gibb of Counsel appeared for the Deputy Commissioner of Taxation. The Tribunal had before it the documents (``the T documents'') lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 and the exhibits tendered during the hearing. The applicant gave evidence.
Findings
3. The background facts were not in dispute. It is the construction to be given to those facts which is in issue. On the basis of the material contained in the T documents and the exhibits, and the evidence of the applicant, I find as set out in this and the following paragraphs:
- (i) In 1994 the applicant was employed as Finance Manager of the Corporate Superannuation Division of a State Government instrumentality (``the instrumentality'') and had worked for that instrumentality for twelve years.
- (ii) On 18 May 1994 (para 8, T30) or 24 May 1994 (para 9, T20) the applicant was given notice of termination of her employment.
- (iii) The applicant negotiated with the instrumentality and it was agreed that she would be allowed to remain in her position for one month to enable her to leave with some dignity.
- (iv) On 2 June 1994 the applicant lodged a dismissal application with the Queensland Industrial Relations Commission in which she sought reinstatement or compensation for wrongful dismissal.
- (v) At the time of the termination of her employment the applicant was in receipt of an annual salary of $47,200.
- (vi) The applicant was not given any explanation of the termination of her employment until she asked the General Manager why she had been dismissed. She was then told that he had received complaints about her but that no complaints were documented. The applicant at all times claimed that there were no valid reasons for the termination of her employment and that it was not connected with her capacity or conduct, and was not based on the operation or requirements of the respondent's undertaking, establishment or service. In her application to the Queensland Industrial Relations Commission, the applicant claimed that the termination of her employment was harsh, unjust, and unreasonable.
4. The applicant's solicitor, in a letter dated 27 May 1994, addressed to the instrumentality claimed damages of $71,100 made up as follows:
Remuneration lost over the next six
(6) months (yearly salary $47,200.00) $23,600.00
Loss of other benefits $30,000.00
Loss of opportunity of better career $ 7,500.00
Personal distress $10,000.00
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TOTAL $71,100.00
==========
5. After a conciliation conference, the parties agreed in principle to settle the claim for $47,200.
6. A deed was drawn up by the applicant's solicitor and forwarded to the instrumentality. It contained, in paragraph 3, the following clause:
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``The Employer shall pay to the Employee the sum of $47,200.00 which reflects the following payments:-
- (a) $23,600.00 being equivalent to six months' pay calculated on the basis of the Employee's salary package gross before tax;
- (b) $23,600.00 being damages for personal distress, loss of opportunity of better career, and loss of sick leave entitlements and superannuation benefits.''
7. When the signed deed was returned by the instrumentality clause 3 had been amended to read as follows:
``The Employer shall pay to the Employee the sum of $32,379.20 being equivalent to twelve months' pay calculated on the basis of the Employee's salary package nett after tax.''
The instrumentality returned a cheque for $37,379.20 with the signed copy of the amended deed.
8. The applicant decided to keep the cheque rather than return it and enter into further negotiations with the instrumentality. On 4 August 1995 she applied for a private ruling from the Deputy Commissioner.
9. The applicant was hurt, upset and humiliated about the way in which she was advised of the termination of her employment but she did not attend a doctor for treatment in regard to that hurt, upset and humiliation.
The issues before the Tribunal
10. The applicant's notice of objection stated as follows:
``I contend that my taxable income for the year ended 30 June 1995, should be reduced by the amount of $32,379.20. I further contend that I am not liable to pay penalty tax under any of the provisions of the Act.
In support of my contention I claim that:
- 1 The amount of $32,379.20 was an exempt capital receipt pursuant to section 160ZB(1) as it was received `by way of compensation' as an out of court settlement pursuant to an unlawful dismissal application where neither party admitted any liability.
- 2 The amount of $32,379.20 was a capital receipt received pursuant to an asset, namely the forbearance to sue, pursuant to an unlawful dismissal application. As such it constitutes an `exempt asset' for the purposes of section 160ZB(1) by virtue of the `look through' approach enunciated in
Tuite & Anor v Exelby & Ors 93 ATC 4293.''
11. The respondent, in its statement of facts, issues and contentions, set out two issues as follows:
``1. Whether the sum of $47,200.00 paid in settlement of the Applicant's claim for wrongful dismissal was an `eligible termination payment' in accordance with section 27A(1) of the Income Tax Assessment Act 1936 (the Act) and properly brought to account at the marginal rate of 31.4%.
2. Whether the sum of $32,379.20 was an exempt capital receipt pursuant to section 160ZB(1) of the Act.''
12. Mr Gibb at the hearing submitted that the matter should be finally determined under issue 1 and that the operation of s 160ZB(1) of the Act was not relevant. He submitted that s 160ZB(1) was relevant only to determining whether capital gains were taxable, and the Deputy Commissioner had not claimed that the sum in question should be taxed as a capital gain.
13. After some discussion at the commencement of the hearing Mr Powrie sought leave to amend his client's objection to include reliance on paragraph (n) of s 27A(1) of the Act as exempting the payment from the definition of eligible termination payment. That application was not objected to by Mr Gibb and leave was given in accordance with the principles set out in
Lighthouse Philatelics Pty Ltd v FC of T 91 ATC 4942; (1991) 103 ALR 156.
Relevant statutory provisions
14. It was not in issue that if the payment to the applicant were an eligible termination payment within the meaning of that term in s 27A(1) of the Act and if it were not exempt by virtue of s 160ZB(1) of the Act, then tax had been deducted at the appropriate rate. The relevant provisions in the Act are as follows:
``27A(1) ...
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`eligible termination payment' , in relation to a taxpayer, means:
- (a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer,...
but does not include:
- (n) consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion; or
- ...''
`` 160ZB(1) A capital gain shall not be taken to have accrued to a taxpayer by reason of the taxpayer having obtained a sum by way of compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation and no such wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such a wrong or injury, shall be taken to have resulted in the taxpayer having incurred a capital loss.''
15. Mr Powrie also relied on Taxation Ruling TR 95/35, date of ruling 6 December 1995, headed ``Income Tax: Capital Gains: Treatment of Compensation Receipts'' . Paragraphs 210-215 of that ruling are relevant to s 160ZB of the Act. They read as follows:
``Exemption for personal wrong or injury
210. Section 160ZB provides a statutory exemption from Part IIIA for certain types of capital receipts which might otherwise be included in the assessable income of the recipient.
211. Subsection 160ZB(1) provides:
`A capital gain shall not be taken to have accrued to a taxpayer by reason of the taxpayer having obtained a sum by way of compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation and no such wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such a wrong or injury, shall be taken to have resulted in the taxpayer having incurred a capital loss.'
(emphasis added)
212. We accept that the phrase `by way of' should be given a wide meaning (
Goldsbrough Mort & Co Ltd v FC of T 76 ATC 4343 at 4348; (1976) 6 ATR 580 at 586). It is not necessary that the amount received by a taxpayer be described as an amount of compensation. An amount received in an out of Court settlement (e.g., as a result of conciliation) where liability is not admitted by either party still represents a sum received `by way of compensation' in terms of subsection 160ZB(1).213. The subsection is also intended to be read widely in considering the types of compensation receipts which fall within its scope. Certainly the Explanatory Memorandum accompanying the original CGT legislation suggests a very wide interpretation of the phrases `to his or her person' and `in his or her vocation' by referring to `insurance monies under personal accident policies', and referring specifically to compensation for defamation.
214. We consider that the terms `to his or her person' and `in his or her vocation' should be read as widely as possible to cover the full range of employment and professional type claims, and include claims for discrimination, harassment and victimisation (or any directly related claims) arising out of State and Commonwealth anti-discrimination legislation, and wrongful dismissal.
215. We have considered the potential width of the exemption in Taxation Determinations TD 14 and TD 92/130. TD 14 considered payments made under accident and health assurance policies, while TD 92/130 considered payments of compensation amounts for defamation, for loss of support following wrongful death, and for the professional negligence of a solicitor in failing to institute personal injury claims. Draft Taxation Ruling TR 94/D20 also considers compensation for personal injury and makes it clear that damages in this context are generally received for the loss of earning capacity (and for claims such as future care costs) rather than for loss of income. In all of these circumstances the
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exemption provided by subsection 160ZB(1) applies.''(emphasis added)
16. In addition Mr Powrie referred the Tribunal to Income Tax Ruling IT 2424, date of ruling 2 July 1987, headed ``Income Tax: Compensation Payments in Respect of Unlawful Acts of Discrimination'' . It deals with s 27A(1) of the Act. Mr Powrie relied on paragraph 8 of that Ruling while Mr Gibb relied on paragraph 9. In my view paragraphs 1 and 6 of that Ruling indicate that it applies primarily, if not entirely, as its heading indicates, to payments made in respect of unlawful acts of discrimination. Paragraphs 6, 7, 8 and 9 read as follows:
``6. Aside from the Commonwealth Sex Discrimination Act a number of States currently have in force legislation covering the area of equal opportunity and sex discrimination. In New South Wales, for example, there is the Anti-Discrimination Act, 1977 and in Victoria there is the Equal Opportunity Act 1984. Under State legislation discriminatory conduct may also give rise to compensation payments to redress loss or damage suffered by an employee. Although this Ruling is concerned with the Commonwealth Sex Discrimination Act it applies equally to compensation payments of the same nature settled or awarded under State legislation.
Ruling
7. To illustrate the operation of the income tax law in relation to the receipt of compensation payments under the Act some common examples of sex discrimination and payments of compensation have been selected. The examples serve as a guide only. Ultimately, whether or not a particular payment of compensation is assessable will depend on the facts of the given case.
8. By way of general comment the determination of the character of a compensation payment, and in particular whether is is [sic] liable to tax in the hands of an employee, depends upon the nature of the payment. 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 subsec. 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.
9. A second issue which is relevant to determining the assessability of a compensation payment is whether a payment in respect of an unlawful dismissal of an employee constitutes an eligible termination payment and subject to special taxation treatment.''
17. Mr Gibb provided a clear and helpful written outline of his submissions. I propose to address each of his submissions before considering Mr Powrie's submissions which related primarily to s 160ZB(1) of the Act.
18. First, Mr Gibb submitted that paragraph (a) of the definition of ``eligible termination payment'' includes ``any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer''. For this purpose, ``employment'' is defined in s 27A(1) to include the holding of an office. Mr Powrie conceded that the payment made to the applicant was made in consequence of the termination of her employment with the instrumentality. That is clearly an appropriate concession.
19. It is therefore necessary to look at the payments which are specified in s 27A as not included in the definition of eligible termination payment. The only relevant payment is specified in paragraph (n) as follows:
``(n) consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion; or''
Mr Gibb submitted that the payment to the applicant did not come within the exemption in paragraph (n) because:
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``The Deed did not identify any part of the payment as for or in respect of personal injury to the applicant.''
20. Not only does the deed not identify any part of the payment as ``for, or in respect of, personal injury to the applicant'', it also expressly excludes from the ``claims, appeals and/or other remedies'' foregone by the applicant ``in return for the payment of the monies set out in clause 3'' of the deed, ``proceedings for personal injury''. Clause 6 of the deed signed by both parties provides as follows:
``In return for the payment of the monies set out in clause 3 hereof, the Employee agrees to forego all past, present and future legal and/or industrial claims, appeals and/or other remedies against the Employer, other than proceedings for personal injury.''
The fact that the signed deed expressly reserved the applicant's right to take proceedings for personal injury indicates that the monies paid were not ``consideration... for, or in respect of, personal injury''.
21. In addition clause 10(c) of the deed provides as follows:
``The parties agree and acknowledge:-
- (c) This Agreement terminates and supersedes any prior oral or written agreements between the parties concerning the termination and constitutes the entire understanding between them.''
22. Further, Mr Gibb and Mr Powrie agreed that the Industrial Relations Commission of Queensland has no jurisdiction to award damages for hurt feelings, humiliation, upset, damage to reputation, or other similar matters.
23. The combined effect of clauses 6 and 10 of the deed, in my view, precludes the Tribunal finding that any part of the consideration paid to the applicant by the instrumentality, in settlement of the unlawful dismissal proceedings, was ``consideration... in respect of, personal injury to the taxpayer''. That is sufficient to establish that the applicant cannot bring the payment within the exclusion in paragraph (n) of the definition of eligible termination payment in s 27A(1) of the Act.
24. However, Mr Gibb also drew to the Tribunal's attention the comments of Smith J of the Victorian Supreme Court in
Graham v Robinson (1992) 1 VR 279 at 281. His Honour was called on to decide a jurisdictional issue as to whether a claim for damages for defamation was a claim for damages in respect of personal injury. The jurisdiction of the Magistrates' Court at the relevant time was limited to $5,000 where the damages claimed consisted of, or included, damages in respect of personal injury, and $20,000 in any other case. Thus, Smith J had to decide whether the Magistrates' Court had jurisdiction when the total damages claimed for defamation exceeded $5,000. He held that the expression ``personal injury'' did not extend beyond physical injury and mental illness to include emotional hurt.
25. Smith J first referred to the definition of personal injury which appeared in s 37(2) of the County Court (Jurisdiction) Act 1972 (Vic). That definition was as follows:
``(2) In paragraph (a) of sub-section (i) `personal injury' includes any disease and any impairment of a person's physical or mental condition.''
His Honour continued:
``That definition, it is common ground, does not appear in the Magistrates' Court Act 1971 as amended in 1986. The definition used was identical with that in the Limitation of Actions Act 1958, s.3(1).
It would be surprising if Parliament had intended to have the expression `personal injury' interpreted differently in the two sections. Any case which exceeded the Magistrates' Court jurisdictional limit would be dealt with in the County Court which applies a similar dichotomy in determining its jurisdiction. If that is the correct conclusion, then it was argued for the respondent that the damages claimed for hurt and distress and for being brought into public scandal, hatred, odium, ridicule and contempt did not amount to damages for any impairment of the complainant's mental or physical condition. The definition, however, is inclusive so that even if the statutory definition is applied, it remains necessary to determine whether the damages claimed are in respect of personal injury.
Counsel have not been able to refer me to any authority on the expression `personal injury' which shed any light on its meaning. I have been unable to find any authority that assists.
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The provision is one that seeks to limit the jurisdiction of the Magistrates' Court and, to that end, the interpretation urged upon me by the applicant would bring the limit into operation whenever a complainant sought damages for any form of hurt personal to the complainant - for example, a claim for breach of contract where damages for emotional distress were claimed: e.g.
Jarvis v. Swans Tours Ltd. [1973] Q.B. 233. It seems to me that this is casting the net too wide.In the absence of express authority, I have come to the conclusion that the expression `personal injury' does not extend beyond physical injury and mental illness to include emotional hurt. I am encouraged to this view by the fact that the law has rejected grief or sorrow as a form of injury which can be relied on to mount a claim in negligence:
Mount Isa Mines Ltd. v. Pusey (1970) 125 C.L.R. 383, at p. 394 and
Jaensch v. Coffey (1984) 155 C.L.R. 549, at p. 587. It is true that damages are awarded for pain and suffering in the typical personal injury case. They are awarded, however, where pain and suffering flow from and are connected with physical or mental injury and may therefore be said to be damages `in respect of personal injury'.''
26. Mr Powrie submitted that the term ``personal injury'' in paragraph (n) of the definition of eligible termination payment should be given a wider interpretation than that given by Smith J in Graham v Robinson. He relied for that submission on paragraph 8 of IT 2424, which relates to s 27A(1)(n) and provides:
``By way of general comment the determination of the character of a compensation payment, and in particular whether is is [sic] liable to tax in the hands of an employee, depends upon the nature of the payment. 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 subsec. 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 .''
(emphasis added)
Mr Powrie relied on that ruling as showing that ``a payment to compensate for personal injury, injury to feelings, humiliation, embarrassment'' is ``not liable to income tax'' under s 27A(1) and is excluded from capital gains tax liability by s 160ZB(1).
27. Mr Gibb pointed out that, as Mr Powrie conceded, Taxation Rulings are not binding on the Tribunal. He also submitted that paragraph 8 of IT 2424 must be read subject to the qualification in paragraph 9, that paragraph 8 does not deal with what is there described as ``a second issue'', namely whether a payment in respect of an unlawful dismissal of an employee constitutes an eligible termination payment and is therefore subject to the special taxation treatment for eligible termination payments. Mr Gibb submitted further that even if some or all of the payment in question was a payment in respect of injury to feelings, humiliation, and embarrassment, it would still be liable to income tax as an eligible termination payment if it was not covered by the ``personal injury'' exclusion in s 27A(1)(n). I have found that exclusion does not apply to the monies received by the applicant.
28. Mr Powrie also relied on paragraph 214 of Taxation Ruling 95/35 which refers to the exemption in s 160ZB from capital gains tax of ``compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation'' and which specifically refers to damages for wrongful dismissal as exempt from capital gains tax. Paragraph 214 reads as follows:
``214. We consider that the terms `to his or her person' and `in his or her vocation' should be read as widely as possible to cover the full range of employment and professional type claims, and include claims for discrimination, harassment and victimisation (or any directly related claims) arising out of State and Commonwealth anti- discrimination legislation, and wrongful dismissal .''
(emphasis added)
Mr Powrie contended that that same wide meaning should be given to the slightly
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differently expressed exemption in paragraph (n) of the definition of eligible termination payment in s 27A(1) of the Act. He submitted that the words ``consideration of a capital nature for, or in respect of personal injury to the taxpayer'' should be read so as to include compensation for unlawful dismissal.29. Mr Gibb conceded that the payment to the applicant could be characterised as ``compensation or damages for any wrong or injury suffered by the taxpayer to his or her person or in his or her profession or vocation '' (emphasis added) (s 160ZB(1)). But he submitted that, if the payment were properly described as an eligible termination payment, it would not matter that it would, were it not an eligible termination payment, be exempt from capital gains tax by virtue of s 160ZB(1). He also pointed to the difference in meaning between ``consideration of a capital nature for, or in respect of personal injury to the taxpayer'' (s 27A(1)(n)) and the wider expression used in s 160ZB(1).
30. Mr Gibb drew to the Tribunal's attention a passage from the reasons for judgment of Gray J in
Wheeler v Philip Morris Ltd (1989) 97 ALR 282. His Honour there decided that an employee's dismissal was ``harsh, unjust and unreasonable'' and thereby a breach of the relevant industrial award. He awarded damages to the applicant and imposed a penalty for breach of the award on the respondent. In deciding on the quantum of damages Gray J looked at the loss of benefit such as future long- term employment, superannuation and long service leave entitlements and payment of health benefits cover. His Honour then considered whether the damages awarded should be based on gross earnings or earnings after tax. He referred to the amendments to the Act in regard to taxation of retirement packages and concluded, at p 313:
``The provisions of Sub-div AA of Pt III of that Act now include in assessable income any `eligible termination payment'. That phrase is defined in s 27A(1) as including `any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer...'. Under s 27A(3), a payment is an eligible termination payment whether it is made voluntarily, by agreement or by compulsion of law. So much of an eligible termination payment as is referrable to employment occurring after 30 June 1983 is now included in a taxpayer's assessable income: see s 27B(1). In my view, these provisions operate to make taxable an award of damages for dismissal in a case such as the present. They thereby undermine the reasoning in Cullen v Trappell [(1980) 146 CLR 1] and dictate that the recipient of damages should receive them calculated according to rates of gross earnings .''
That passage supports my finding that the payment in this matter, which is analogous to that in Wheeler, is also a taxable eligible termination payment.
31. I accept Mr Gibb's submission that if the payment is caught, as I am satisfied it is, by s 27A(1), there is no advantage to the applicant in the fact that it would have been exempt by virtue of s 160ZB(1), if it were not so caught. Further, I agree that because of the difference in terminology s 160ZB(1) provides a wider exemption from capital gains tax than the exclusion from taxable income of that part of an eligible termination payment which is ``consideration of a capital nature for, or in respect of, personal injury to the taxpayer'' (s 27A(1)(n)). For that reason the Ruling dealing with s 160ZB(1) is not relevant to the construction of the term ``consideration for or in respect of personal injury'' in paragraph 27A(1)(n).
32. I consider that I am bound to hold that the payment received by the applicant from the instrumentality is covered by the definition of eligible termination payment in s 27A(1) of the Act, and is therefore subject to tax as an eligible termination payment.
33. The decision under review will be affirmed.
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