McMAHON v FC of T
Members:J Block SM
Tribunal:
Administrative Appeals Tribunal
J Block (Senior Member)
This is an application to review an objection decision made on 6 February 1998 disallowing the Applicant's objection against a Notice of Private Ruling (``the Ruling'') which was issued on 23 December 1997.
2. The Applicant was represented at the hearing by Messrs B Skinner and D Allen of Counsel, instructed by Mr G Hannahan of Turnbull Hill Partners, and the Respondent was represented by Mr J Davis, an officer of the Respondent. The Tribunal had before it the documents lodged by the Respondent pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 which included the Applicant's Application for Private Ruling and the annexures thereto (T1) and including a relevant chronology of events (T54-57; the ``Chronology'') prepared by and on behalf of the Applicant. Oral evidence was given briefly by the Applicant.
3. As the Full Federal Court held in
FC of T v McMahon & Anor 97 ATC 4986, the Tribunal's function in a review of the Ruling is confined to a review of the application of the law to the facts which constitute the arrangement as identified by the Respondent in the Ruling. These views were followed by a differently constituted Full Federal Court in
Bellinz Pty Ltd & Ors v FC of T 98 ATC 4634, in which their Honours stated at page 4639 that a Court (or Tribunal) can have regard only to the arrangement as described in the private ruling, supplemented by any documentation referred to in it.
4. The Ruling is in the following terms:
``THIS RULING APPLIES TO:
Allan P McMahon [Tax File Number stated]
YEAR(S) OF INCOME TO WHICH THIS RULING APPLIES:
Year ended 30 June 1997
TAX LAW:
Income Tax Assessment Act 1936 s. 25(1)
Income Tax Assessment Act 1936 s. 26(e)
Income Tax Assessment Act 1936 s. 27A(1)
Income Tax Assessment Act 1936 s. 27A(3)
Income Tax Assessment Act 1936 s. 27A(1)(n)
Income Tax Assessment Act 1936 s. 27B
Income Tax Assessment Act 1936 s. 160ZA
Income Tax Assessment Act 1936 s. 160ZB(1)
WHAT THIS RULING IS ABOUT
Is the payment of $150,000 stated in the Heads of Agreement as being for `alleged loss of remuneration under the contract' of a revenue or capital nature?
Is the payment of $150,000 stated in the Heads of Agreement as being for `alleged damage to the rulee's reputation' of a revenue or a capital nature?
If capital, are the payments exempt from capital gains tax?
THE SUBJECT OF THE RULING:
The rulee was employed as a manager/coach by a Rugby League Football Club (the Club) on a three year contract, commencing in August 1995. The contract was by way of a letter with job description attached and specified a gross salary package of $250,000 per annum. The contract did not contain any provision for the rulee to be paid compensation if his services were terminated before the expiry of the 3 year period. The rulee's acceptance was also by letter.
After only 1 year, the Club sought to reduce the rulee's remuneration to $150,000 because of spending cutbacks and were willing to release the rulee from his contract. At this stage the rulee was also handed a written appraisal (the report) of his performance which was critical of his performance as a manager but not as a coach. A copy of his report and other comments about an alleged rift between the rulee and the Club's chief executive were published by the media.
Subsequent to these events, the rulee's employment was terminated on 27 September 1996 and on this day the solicitors for each party entered into a Heads of Agreement which stated that the Club would pay the rulee $317,500 by instalments:
- • $20,000 on or before 11/10/96;
- • $105,000 on or before 31/10/96;
- • $25,000 on the last working day of each month until 31/5/97; and
ATC 2027
- • $17,500 on or before 31/6/97.
As well, it was agreed that the Club would pay the rulee $2,500 for an outstanding insurance policy.
The Heads of Agreement specified that the $317 500 payment was represented as follows:
- • $17,500 for legal expenses
- • $150,000 for the rulee's alleged damage to his reputation
- • $150,000 for the rulee's alleged loss of remuneration under the contract.
This Agreement, dated 27 September 1996 and signed by both solicitors, also stipulated that the parties would enter into a mutual Deed of Release incorporating the provisions contained in the Agreement.
The Deed of Release was not signed until 22 April 1997 because some final argument (not disclosed to the Commissioner) remained to be resolved. Under the Deed of Release, the rulee's employment was terminated on 27 September 1996 and he was to receive $317,500 payable in instalments plus $2,500, as per the Heads of Agreement, as full and final settlement of all claims against the Club. Most of these instalments had been paid by the time the Deed of Release was signed. This Deed of Release, however, did not dissect the payment of $317,500 because it was not seen as necessary.
Documentation provided shows that the instalments were paid, more or less, as indicated in the Heads of Agreement and were treated by the Club as eligible termination payments from which tax was deducted.
RULING:
Is the payment of $150,000 stated in the Heads of Agreement as being for `alleged loss of remuneration under the contract' of a revenue or capital nature?
This payment is of a revenue nature and assessable as an eligible termination payment (ETP).
Is the payment of $150,000 stated in the Heads of Agreement as being for `alleged damage to the rulee's reputation' of a revenue or a capital nature?
This payment is of a revenue nature and assessable as an ETP.
If capital, are the payments exempt from capital gains tax?
As the payments are assessable as an ETP, the capital gains tax legislation does not apply.''
5. It will be noted that although the Heads provided in their terms that they would be superseded by a Deed, and although clause 10 of the Deed provided that it superseded any prior agreement between the Applicant and the Illawarra District Rugby League Football Club (``the Club'') and including of course the Heads, and although the Deed did not provide for any dissection of the payments thereunder into separate components, the Ruling was issued on the basis that in relation to an aggregate amount of $300,000 the parties to the Heads intended that that amount would be treated as referable to and thus dissected into a loss of remuneration component of $150,000 (the ``remuneration component'') and as to a damage to reputation component also of $150,000 (the ``reputation component'').
6. The Heads were executed on 27 September 1998 which is also the date on which the services of the Applicant in relation to the Club were terminated; that date is referred to in these Reasons as the ``Termination Date''.
7. The Chronology indicates that prior to the Termination Date (and in anticipation of the termination of the Applicant's services) the Applicant and the Club were involved in negotiations in respect of the total amount to be paid to the Applicant by the Club. The Chronology is set out in full in these Reasons as follows:
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| ``Date | Type | From | To | Between/ | Content |
| | | | | with | |
|----------------------------------------------------------------------------|
| 10/07/95 | Letter | AM | BM | | Confirm acceptance of offer |
| | | | | | subject to conditions |
|----------------------------------------------------------------------------|
| 10/07/95 | Meeting | | | AM | Verbal notification of |
| | | | | Board | appointment |
|----------------------------------------------------------------------------|
| 19/07/95 | Agreement| | | AM | AM appointed Manager/Coach |
| | | | | Club | for 3 years $250 kpa |
|----------------------------------------------------------------------------|
| 19/07/95 | Letter | Club | AM | | Official advice of |
| | | | | | appointment. Contract to |
| | | | | | commence 5/8/95. |
| | | | | | Attached to this advice was |
| | | | | | a job description. |
|----------------------------------------------------------------------------|
| 25/06/96 | Letter | KHM | BM | | Advice re termination of |
| | | | | | contract of AM and PW |
|----------------------------------------------------------------------------|
| 11/07/96 | Meeting | | | AM | Spending of the club to be |
| | | | | BM | cut back, AM's remuneration |
| | | | | PB | for 1997 & 1998 years to be |
| | | | | | cut back to 150 kpa. |
| | | | | | AM asked to consider whether |
| | | | | | he wished to be released |
| | | | | | from the last 2 years of the |
| | | | | | contract. Club was prepared |
| | | | | | to do this. |
|----------------------------------------------------------------------------|
| 11/07/96 | Meeting | | | | BM handed AM a written |
| | | | | | appraisal of his performance | | | | | | | as Manager/Coach (`the |
| | | | | | Millward Report') - AM asked |
| | | | | | to reply Appraisal critical |
| | | | | | of performance as MANAGER, |
| | | | | | not as COACH |
|----------------------------------------------------------------------------|
| 15/07/96 | Meeting | | | Board | Copies of Millward Report |
| | | | | | handed to all present |
|----------------------------------------------------------------------------|
| 17/07/96 | Letter | AM |Board| | Reply to Board on appraisal |
| | | | | | Letter refuted allegations |
| | | | | | made by BM |
|----------------------------------------------------------------------------|
| 21/07/96 | Newspaper| | | Sunday | Published photocopy of |
| | Report | | | Telegraph| Millward Report |
| | | | | | Published commentary on |
| | | | | | report |
| | | | | | Refers to McMahon as Coach |
| | | | | | Referred to police enquiry |
| | | | | | into how newspaper came into |
| | | | | | possession of Millward Report|
|----------------------------------------------------------------------------|
|22/07/96 |Letter/Fax| THP | KHM | | AM still under contract and |
| | | | | | will continue to fulfil |
| | | | | | commitments |
|----------------------------------------------------------------------------|
| 23/07/96 | Newspaper| | | Illawarra| Story `D-Day for McMahon' |
| | Report | | | Mercury | referring to `damning in- |
| | | | | | house appraisal' and |
| | | | | | possibility of AM's sacking |
| | | | | | Editorial `Steeler, let |
| | | | | | me go' |
|----------------------------------------------------------------------------|
| 25/07/96 | Fax | KHM | THP | | Offer of compromise from |
| | | | | | Club's solicitors - AM to |
| | | | | | resign & receive $50k |
|----------------------------------------------------------------------------|
| 25/07/96 |Letter/Fax| THP | KHM | | Response to newspaper |
| | | | | | assertions in Illawarra |
| | | | | | Mercury: |
| | | | | | Elvy - `Allan McMahon will |
| | | | | | continue to coach the |
| | | | | | Illawarra Steelers in 1996' & |
| | | | | | `Elvy would not confirm |
| | | | | | whether McMahon would see out|
| | | | | | his three year contract at |
| | | | | | the Steelers' |
|----------------------------------------------------------------------------|
| 25/07/96 | Letter | THP | KHM | | Response to KHM fax of |
| | | | | | 25/6/96 |
| | | | | | - Appointed as `coach', not |
| | | | | | `manager/coach' |
| | | | | | - No reason to resign |
| | | | | | - AM asked to accept reduced |
| | | | | | salary as `cost cutting |
| | | | | | exercise' |
| | | | | | - No opportunity to respond |
| | | | | | to allegations |
|----------------------------------------------------------------------------|
| 25/07/96 | Fax | KHM | THP | | Request for further |
| | | | | | information of requirement |
| | | | | | for finalisation of dispute |
|----------------------------------------------------------------------------|
| 26/07/96 | Fax | KHM | THP | | Answer letter dated 25/07/96 |
| | | | | | re: |
| | | | | | - job title |
| | | | | | - meeting held 11/7/96, BM PB|
| | | | | | and AM relieving AM of |
| | | | | | anagement role |
|----------------------------------------------------------------------------|
| 7/08/96 |Letter/Fax| THP | KHM | | AM intends to continue with |
| | | | | | contract and comply with its |
| | | | | | terms |
|----------------------------------------------------------------------------|
| 9/08/96 |Letter/Fax| KHM | THP | | Arrange conference between |
| | | | | | all parties |
|----------------------------------------------------------------------------|
| 9/08/96 |Letter/Fax| THP | KHM | | Agree to conference |
| | | | | | No settlement possible for |
| | | | | | $50k |
|----------------------------------------------------------------------------|
| 21/08/96 |Conference| | | Both | |
| | | | | Parties | |
| | | | | and their| |
| | | | | Represent| |
| | | | | atives | |
|----------------------------------------------------------------------------|
| 22/08/96 |Letter/Fax| THP | KHM | | Club not justified in |
| | | | | | terminating contract AM's |
| | | | | | career as first grade coach |
| | | | | | terminated as consequence of |
| | | | | | club's actions |
| | | | | | AM prepared to settle for |
| | | | | |$425k within 7 days |
|----------------------------------------------------------------------------|
| 23/08/96 |Letter/Fax| KHM | THP | | Counter Offer $125k, to be |
| | | | | | paid by instalments AM to |
| | | | | | cease employment on 6/9/96 |
|----------------------------------------------------------------------------|
| 26/08/96 |Letter/Fax| THP | KHM | | Offer in letter dated |
| | | | | | 23/08/96 inadequate AM not in|
| | | | | | position to obtain similar |
| | | | | | employment - chances of this |
| | | | | | diminished AM will accept |
| | | | | | $375k within 7 days |
|----------------------------------------------------------------------------|
| 27/08/96 |Letter/Fax| KHM | THP | | Club offer of $150k, same |
| | | | | | terms as letters 23/8 & 6/9 |
| | | | | | (sic.) presumably this means |
| | | | | | paid in instalments |
|----------------------------------------------------------------------------|
| 27/08/96 |Letter/Fax| THP | KHM | | Response to KHM, $150k |
| | | | | |inadequate |
|----------------------------------------------------------------------------|
| 12/09/96 | Phone | MH | DP | | Next move up to Club |
|----------------------------------------------------------------------------|
| 12/09/96 |Letter/Fax| KHM | THP | | Offer of $200k open until |
| | | | | | 5pm 13/9/96 |
|----------------------------------------------------------------------------|
| 16/09/96 |Letter/Fax| THP | KHM | | AM will not accept less than |
| | | | | | $375k |
| | | | | | Grounds to believe club |
| | | | | | insolvent |
|----------------------------------------------------------------------------|
| 19/09/96 | Letter | BM | AM | | Board to terminate position |
| | | | | | Indication of problems with |
| | | | | | performance |
| | | | | | Board to consider position |
| | | | | | on 25 September |
|----------------------------------------------------------------------------|
| 19/09/96 |Letter/Fax| KHM | THP | | Offer of mediation - J Macken|
|----------------------------------------------------------------------------|
| 20/09/96 |Letter/Fax| THP | KHM | | No grounds for dismissal |
| | | | | | Club decision based on |
| | | | | |financial problems of the club|
|----------------------------------------------------------------------------|
| 25/09/96 | Meeting | | | Club | Resolved to terminate AM's |
| | | | | Board | services |
|----------------------------------------------------------------------------|
| 26/09/96 | Fax | KHM | THP | | Proposed termination |
| | | | | | agreement - offer of $317.5k |
| | | | | | by instalments: |
| | | | | | - 20k on or before 11/10/96 |
| | | | | | - 105k on or before 31/10/96 |
| | | | | | - 25k payment on last working|
| | | | | | day of each month until |
| | | | | | 31/5/97 |
| | | | | | - 17.5k payment on or before |
| | | | | | 31/6/97 (sic) |
|----------------------------------------------------------------------------|
| 26/09/96 | Fax | KHM | THP | | Payment to Am of 2.5k for |
| | | | | | outstanding insurance policy |
| | | | | | Proposed media release |
| | | | | | attached to be only club |
| | | | | | comment on the matter |
|----------------------------------------------------------------------------|
| 27/09/96 | Fax | KHM | THP | | Entered into Heads of |
| | | | | | Agreement in accordance with |
| | | | | | earlier proposal but |
| | | | | | including following |
| | | | | | allocation of 317.5 k: |
| | | | | | - 17.5k for legal expenses |
| | | | | | - 150k for alleged damage to |
| | | | | | reputation |
| | | | | | - 150k for alleged loss of |
| | | | | | remuneration |
|----------------------------------------------------------------------------|
| 27/09/96 | Fax | | | | AM to indemnify club for any |
| | | | | | claim correctly made by the |
| | | | | | ATO against the Club |
|----------------------------------------------------------------------------|
| 28/10/96 |Letter/Fax| THP | KHM | | Request re whether Deed of |
| | | | | | Release is final Telephone |
| | | | | | call from PB to GJH that |
| | | | | | unless draft tax ruling |
| | | | | | supplied, Club would deduct |
| | | | | | tax from next payment |
| | | | | | Tax responsibility of AM |
| | | | | | under the deed |
|----------------------------------------------------------------------------|
| 31/10/96 | Fax | Club | THP | | Deposited $105k less 33.285k |
| | | | | | tax into THP Trust Account |
| | | | | | ($71.715k) |
|----------------------------------------------------------------------------|
| 1/11/96 |Letter/Fax| THP | KHM | | Club breached agreement by |
| | | | | | not depositing full $105k |
| | | | | | Request for balance to be |
| | | | | | paid |
|----------------------------------------------------------------------------|
| 7/11/96 |Letter/Fax| THP | KHM | | No provision for deduction of|
| | | | | | taxation |
| | | | | | AM indemnity only applies |
| | | | | | where `claim correctly made |
| | | | | | by ATO' |
| | | | | | First two instalments paid |
| | | | | | without deduction |
|----------------------------------------------------------------------------|
| 11/11/96 |Letter/Fax| KHM | THP | | Agree to amendments to Deed |
| | | | | | Club, as (prior) employer |
| | | | | | entitled to deduct tax |
|----------------------------------------------------------------------------|
| 13/11/96 | Fax | THP | KHM | | Tax advice from KB noting: |
| | | | | | - PAYE for instalment |
| | | | | | deduction from EMPLOYEE wages|
| | | | | | - AM no longer an employee |
| | | | | | and amount is not in respect |
| | | | | | of salary and wages |
|----------------------------------------------------------------------------|
| 19/11/96 |Letter/Fax| THP | KHM | | Balance of second instalment |
| | | | | | outstanding |
| | | | | | Payment within 7 days or |
| | | | | | legal proceedings for |
| | | | | | recovery to commence |
|----------------------------------------------------------------------------|
| 28/11/96 | Fax | Club | THP | | Deposited $25k less 7.925k |
| | | | | | tax into THP Trust Account |
| | | | | | ($17.075k) |
|----------------------------------------------------------------------------|
| 19/12/96 | Ruling | KB | ATO | | Application for private |
| | Request | | | | ruling to ATO |
|----------------------------------------------------------------------------|
| 3/01/97 |Letter/Fax| KHM | THP | | Part payment of December |
| | | | | | instalment received |
|----------------------------------------------------------------------------|
| 16/01/97 | Letter | ATO | KB | | Letter provided re AM's |
| | | | | | appointment does not satisfy |
| | | | | | request for copy of his |
| | | | | | contract |
| | | | | | Claim for `compensation for |
| | | | | | loss of future remuneration' |
| | | | | | is headed `COMPENSATION FOR |
| | | | | | LOSS OF FUTURE EARNING |
| | | | | | CAPACITY' |
| | | | | | Request date of signing Deed |
| | | | | | of Release |
|----------------------------------------------------------------------------|
| 22/04/97 | Deed | | | AM | Deed of Release signed |
| | | | | Club | |
| | | | | BM | |
|----------------------------------------------------------------------------|
| 9/05/97 | Letter | ATO | KB | | Private binding ruling |
| | | | | | against AM |
|----------------------------------------------------------------------------|
| 19/06/97 | Letter | ATO | KB | | Request further information |
| | | | | | for processing of objection |
| | | | | | (30/5/97) to private binding |
| | | | | | ruling (9/5/97) |
+----------------------------------------------------------------------------+
KEY (names that are not relevant have been omitted by the Tribunal)
AM Allan McMahon
THP Turnbull Hill Partners
Board Board of Directors - Illawarra District Rugby League Football Club
Club Illawarra District Rugby League Football Club
ATO Australian Tax Office''
8. It will be noted as appears from the Chronology that at the commencement of the negotiations there was a substantial difference between the aggregate amount which the Club was prepared to pay and the amount requested by the Applicant. That gap, in the course of the negotiations, gradually narrowed culminating in agreement as to an aggregate amount (payable in instalments over a period) which was less
ATC 2032
than the Applicant initially requested but more than the Club was initially prepared to pay.9. The dissection of $300,000 into the remuneration component and the reputation component occurred in the Heads. The reputation component relates as appears from the Ruling to publications which occurred prior to the Termination Date.
10. The Chronology is relevant in the view of the Tribunal to the question of whether the reputation component was paid in consequence of termination.
11. Although the Heads were superseded by the Deed, which did not include a dissection provision, and although the Tribunal must have regard to both the Heads and the Deed, the Tribunal has approached this matter on the basis that it must accept that the dissection contained in the Heads reflected the intentions of the parties to the Heads (as did the Respondent in its Ruling), and that accordingly the Tribunal must consider whether each of the remuneration payment and the compensation payment were correctly assessed as eligible termination payments (``ETPs'' and each an ``ETP''). It may be noted that the Applicant argued that neither payment was correctly assessed as an ETP; most of the argument before the Tribunal related to the reputation payment.
Whether the reputation payment is an ETP
12. Section 25(1) of the Income Tax Assessment Act 1936 (``the Act'') relevantly provides that the assessable income of a taxpayer includes his gross income derived directly or indirectly from all sources which is not an eligible termination payment within the meaning of Subdivision AA. Section 27A(1) of the Act defines ``eligible termination payment'', in relation to a taxpayer, as any payment other than certain specified payments ``made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer''.
13. The Applicant contended that the reputation payment was not made ``in consequence of'' the termination of his employment. The Applicant argued that because the publication of material alleged to be defamatory of the Applicant occurred prior to the Termination Date that there was therefore no causal relationship between his cause of action in defamation and the termination of his employment.
14. The expression ``in consequence of the termination of any employment'' was considered by two members of the High Court in
Reseck v FC of T 75 ATC 4213. The issue in that case was whether severance payments made at the termination of two separate periods of employment with the same employer were assessable under s. 25(1) or the former s. 26(d) of the Act. Gibbs J stated at pages 4216-4217:
``... 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 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.''
Jacobs J stated at page 4219:
``... 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
ATC 2033
the same as a result. It does not import causation but rather a `following on' .''(Tribunal's emphasis)
15. Any apparent conflict between the views expressed by Gibbs J and Jacobs J in Reseck's case was reconciled in
McIntosh v FC of T 79 ATC 4325, in which the Full Federal Court considered the question of whether a lump sum payment to the taxpayer upon commutation of his retirement pension was ``in consequence of'' his retirement within the meaning of s. 26(d). The taxpayer submitted that the payment was not an allowance paid in consequence of retirement but a payment in exchange for the taxpayer's surrender of an entitlement to periodic payments. In holding that the payment was assessable under s. 26(d), the Court considered whether a payment caused by the retirement of a taxpayer could be said to be ``in consequence of'' the taxpayer's retirement. Brennan J referred to the passages in Reseck's case quoted above and said at page 4328:
``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 .
... [Jacobs J] denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement....
...
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 .''
(Tribunal's emphasis)
Lockhart J said at page 4336:
``In my opinion his Honour [Jacobs J] 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.
...
... 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, provided there is a link or 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.''
(Tribunal's emphasis)
16. The fact that the Termination Date and the date of the Heads are the same is by no means coincidental. The Heads were entered into in order to record the terms and conditions applicable to the termination of the Applicant's employment by the Club; the fact that the Deed contains a recital as to certain publications and an allocation of a part of the aggregate payments to those publications cannot preclude
ATC 2034
those allocated payments from being classified as having been made in consequence of that termination. The reputation payment clearly was one which was ``following on'' the termination. It is clear having regard in particular to the Chronology and the negotiations recorded in it that the Heads (and subsequently the Deed) would not have been entered into by the Club if the employment of the Applicant had not terminated. The Tribunal holds that the termination of the Applicant's employment was the occasion of, and a condition of, entitlement to the payment; accordingly, the Tribunal finds that the payment was in consequence of termination.17. Section 27A(1) of the Act specifies that certain types of payment are not to be treated as ETPs. In this case, the Applicant contended that the reputation payment is excluded from the definition of ETP pursuant to s. 27A(1)(n) of the Act which reads 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...''
18. The Applicant contended that a payment for damages to a person's reputation is a consideration for personal injury and therefore excluded under s. 27A(1)(n) of the Act. The Applicant relied in this context on the Federal Court decision of
Faulkner v Bluett (1981) 52 FLR 115 in which a bankrupt sought a declaration that the provisions of s. 116(2)(g) of the Bankruptcy Act 1966 applied to her right to recover damages in an action commenced in the High Court arising out of the negligent advice or misrepresentations of the defendants. Lockhart J held that the right of action was a right directly related to the applicant's property or estate and made the following comments, to which the Applicant referred, at pages 118-119:
``The rationale of the distinction between earnings of a bankrupt personal to him and those derived from a business carried on by him underlies also a distinction between rights of action that vest in the trustee of a bankrupt's estate and those that do not.
...
Where the essential cause of action is the personal injury done to the person or feelings of the bankrupt the right to sue remains with the bankrupt.''
19. Faulkner v Bluett does not in the view of the Tribunal assist the Applicant in his contention that the term personal injury as referred to in s. 27A(1)(n) of the Act extends to an injury to a person's reputation or feelings. Whereas s. 27A(1)(n) of the Act refers specifically and only to consideration in respect of personal injury to the taxpayer, s. 116(2)(g)(i) of the Bankruptcy Act 1966 refers to the recovery of damages or compensation ``for personal injury or wrong done to the bankrupt...'' (Tribunal's emphasis). As Lockhart stated at page 119:
``As Erle J. said in an oft-cited passage in Beckham v Drake: `The right of action does not pass where the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate reference to his rights or property.'''
It would seem then that the rule that a right of action for defamation does not vest in a bankrupt's trustee was formulated because an injury to the bankrupt's reputation does not affect the bankrupt's estate. Judicial interpretation of s. 116(2)(g)(i) of the Bankruptcy Act does not in the view of the Tribunal assist the Applicant's contention that loss of reputation is a personal injury for the purposes of s. 27A(1)(n) of the Act.
20. The Respondent referred to several dictionary definitions for the words ``personal injury''. Relevantly, Osborn's Concise Law Dictionary (8th ed.) defines ``personal injuries'' as follows:
``personal injuries . Damage to the physical person rather than a person's property.''
Butterworths' Words and Phrases Legally Defined (3rd ed.) relevantly provides the following definition of the term ``Injury to person'':
``Australia `In order that a worker may become entitled to receive compensation, it is necessary, inter alia, (1) that he should receive a personal injury, and (2) that the injury should incapacitate him, totally or partially, for work, for a minimum period. Personal injury means, in my opinion, injury to his person, that is, to some part of his
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body.'
Storey v McCawley (1948) 48 SR (NSW) 474 at 475, per Jordan CJ.''
Butterworths' Legal Terms (not referred to by the Respondent) defines ``personal injury'' as follows:
``Personal injury Any disease or injury sustained by an individual to his or her person, including broken limbs, for which another is legally liable.''
21. In
Graham v Robinson (1992) 1 VR 279, Smith J considered whether emotional hurt, or injury to reputation, is an injury to the person. 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. In holding that the expression ``personal injury'' did not extend beyond physical injury and mental illness to include emotional hurt, Smith J stated at page 281:
``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'.''
22. In Case 20/97,
97 ATC 258, Senior Member Dwyer considered whether an amount paid in settlement of the taxpayer's claim for wrongful dismissal was properly included in the taxpayer's assessable income as an ETP. The taxpayer in that case argued that the term ``personal injury'' in s. 27A(1)(n) should be given a wider interpretation than that given by Smith J in Graham v Robinson, and relied for that submission on paragraph 8 of Taxation Ruling IT 2424 which provides:
``By way of general comment the determination of the character of a compensation payment, and in particular whether it is 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)
The taxpayer in Case 20/97 also relied on paragraph 214 of Taxation Ruling 95/35 which refers to the exemption contained in s. 160ZB of the Act from capital gains tax in respect 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 provides that damages for wrongful dismissal are exempt from capital gains tax. Senior Member Dwyer stated at page 265:
``... 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).''
23. The Tribunal respectfully agrees with Senior Member Dwyer's finding that s. 160ZB(1) provides a wider exemption from capital gains tax than does the exclusion from taxable income of that part of an ETP which is consideration in respect of personal injury to the taxpayer pursuant to s. 27A(1)(n) of the Act.
24. In considering the different treatment of defamation payments for the purposes of ss. 160ZB(1) and 27A(1)(n) of the Act, it is also relevant to note paragraph 213 of Taxation Ruling 95/35 which reads as follows:
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``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.''
25. The Explanatory Memorandum (``EM'') accompanying the original ETP legislation does not suggest that the wording of s. 27A(1)(n) of the Act be accorded such a wide interpretation. The EM in respect of the Income Tax Assessment Amendment Bill (No 3) 1984 relevantly states at page 67:
``Payments being excluded from the definition [of ETP] by paragraphs (k), (m) and (n) are sums paid as loans, or under covenants in restraint of trade, or by way of compensation for loss of income through personal injury.''
(emphasis added)
As the Full Federal Court stated in
Scully v FC of T 98 ATC 4671 at page 4680, the language of the EM simply substitutes different words for those used in s. 27A(1)(n) of the Act. The Tribunal notes that the word ``compensation'' which appears in the EM does not appear in the section. The EM referable to s. 27A(1)(n) of the Act is however of limited assistance in interpreting the words ``personal injury''.
26. The Tribunal also notes the stipulation in the concluding portion of s. 27A(1)(n) of the Act that the amount of consideration for personal injury is to be regarded as an ETP only to the extent that it is reasonable having regard to the nature of the injury and the taxpayer's capacity to derive income from personal exertion. The Tribunal considers that the inclusion by the legislature of the words ``from personal exertion'' tends to confirm that the section is intended to exclude from the definition of ETP payments in respect of injuries to the person, where such injuries being physical injuries or mental illnesses which have an assessable and identifiable impact on the capacity of the taxpayer to earn income. The Tribunal considers in summary that an injury to person is distinguishable from an injury to a person's reputation.
27. For the Reasons set out previously, (and bearing in mind that the decision in Graham v Robinson is binding on the Tribunal), the reputation payment was not made in respect of personal injury within s. 27A(1)(n) of the Act which does not operate to exclude it from the provisions of s. 27A of the Act; accordingly the reputation payment was correctly assessable as an ETP.
Whether the remuneration payment is an ETP
28. The Applicant was employed by the Club on a three year contract specifying a gross salary package of $250,000 per annum commencing in August 1995. The Heads specified that the Applicant was to receive $150,000 for alleged loss of remuneration under the contract.
29. The Applicant argued that the payment for loss of remuneration was not an assessable ETP because it was agreed upon prior to termination and in contemplation of, rather than ``in consequence of'', the termination of his employment.
30. For the Reasons stated previously in relation to the reputation payment, the Tribunal finds that the remuneration payment was made in consequence of his termination in accordance with the reasoning in Reseck's case and McIntosh's case. In particular, the Termination Date and the Heads were entered into on the same day; the remuneration payment made thereafter was clearly in consequence of termination. The termination of the Applicant's employment was the occasion and condition of payment. It cannot be said that the arguments for the Applicant in this context were seriously pressed, and in the view of the Tribunal correctly so, as they were clearly untenable. It was noted during the course of the hearing that if the remuneration payment were not correctly assessable as an ETP, it might well be taxable as income according to ordinary concepts, and in such event not entitled to the concessional treatment afforded in relation to an ETP.
31. The remuneration payment is thus clearly caught by the ETP definition in s. 27A(1) of the Act and there is no relevant excluding provision. The Tribunal notes that in
Wheeler v Philip Morris Ltd (1989) 97 ALR 282 damages awarded to a taxpayer for unfair dismissal, contrary to the terms of an industrial award, were held by Gray J to be in consequence of the termination of the taxpayer's employment and thus assessable as an ETP. In the course of
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deciding that the damages were to be assessed according to gross earnings rather than net earnings, His Honour considered whether and on what basis tax was payable on the damages, stating at page 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.''(Tribunal's emphasis)
That decision was cited with approval in Case 20/97 by Senior Member Dwyer who found that a payment to the taxpayer for wrongful dismissal was an ETP. Likewise, a payment for loss of remuneration made in respect of the taxpayer in consequence of the termination of employment must be assessable as an ETP.
32. Therefore the Tribunal finds that the remuneration payment was correctly assessable as an ETP.
33. For these Reasons, the Tribunal affirms the objection decision under review.
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