Reseck v. Federal Commissioner of Taxation.

Judges:
Gibbs J
Stephen J
Jacobs J

Court:
Full High Court

Judgment date: Judgment handed down 30 September 1975.

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Gibbs J.: I have had the advantage of reading the reasons for judgment prepared by my brother Jacobs. I agree with the conclusion that he has reached, but since the matter is not free from difficulty I would state my own reasons for reaching that conclusion.

By sec. 25(1)(a) of the Income Tax Assessment Act 1936, as amended (``the Act''), it is provided that the assessable income of a taxpayer shall include, where the taxpayer is a resident, the gross income derived directly or indirectly from all sources whether in or out of Australia. The effect of this provision is to include in the assessable income any receipt that is income in accordance with the ordinary concepts and usages of mankind. By sec. 26 of the Act certain specified items are included in

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the assessable income - in some cases, it appears, simply for greater certainty:
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 , at p. 555 . Speaking generally, sec. 26 does not limit sec. 25 but includes as assessable income some receipts that might not ordinarily have been regarded as income. In other words, a receipt may be included in the assessable income either because it is income in the ordinary understanding of that word or because it comes within the provisions of one of the paragraphs of sec. 26. When a receipt which is income in accordance with ordinary concepts also falls within sec. 26 - cases within sec. 26(a) provide some familiar examples - the receipt forms part of the assessable income and it is immaterial whether sec. 25 or sec. 26 brings about that result.

What has just been said is not fully applicable to all the paragraphs of sec. 26 and particularly to sec. 26(d). It is convenient to set out the provisions of that paragraph and of sec. 26(e): they are as follows -

``26. The assessable income of a taxpayer shall include -

...

• (d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law:

Provided that this paragraph shall not apply in respect of any amount which under any provision of this Act is deemed to be a dividend paid to the recipient, or in respect of deferred pay, including interest thereon, paid to a person who is or has been a member of the Defence Force in respect of his service as a member of that Defence Force during any period before 1 July 1947, in respect of which the pay and allowances earned by the member were or are paid under the War Financial (Military Forces) Regulations or the Air Force (War Financial) Regulations or, in the case of a member of the Naval Forces, were or are pay and allowances which the Secretary to the Treasury, or a person authorized by him to give such certificates, certifies, for the purposes of this provision, are special war-time pay and allowances;

• (e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise:

Provided that this paragraph shall not apply to any allowance, gratuity or compensation which is included in the last preceding paragraph or which under any provision of this Act is deemed to be a dividend paid to the recipient.''

The view has been expressed that sec. 26(e) does not bring into charge any receipt which is not income according to general concepts:
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 , at p. 54 ;
Scott v. F.C. of T. (1966) 117 C.L.R. 514 , at p. 526 . Whether or not such a statement is correct in relation to sec. 26(e) it would not be true in respect of sec. 26(d). That paragraph includes some receipts which would otherwise be capital. For example, a lump sum paid as compensation for the termination of the taxpayer's employment will, generally speaking, be of a capital nature
Bennett v. F.C. of T. (1947) 75 C.L.R. 480 , at p. 485 ;
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 , at pp. 219-220 ) but such a sum will fall within sec. 26(d). It is therefore clear that sec. 26(d) includes some receipts that would not be income according to ordinary concepts but the Commissioner goes further and submits that the paragraph includes only receipts of a capital nature; the use of the words ``of the capital amount'' is said to bring about that result. However, the words ``any allowance, gratuity or compensation... in consequence of retirement from, or the termination of, any office or employment'' are apt to include receipts that constitute income within ordinary usages and concepts, and it is apparent from the grammatical arrangement of sec. 26(d) that the words ``of the capital amount'' are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in the assessable income. The allowance, although it must be paid in a lump sum to come within sec. 26(d),

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may have been fixed at a rate payable in respect of a specified period - for example, at so much for every week worked. The words ``of the capital amount'' are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalized or total value. The words of sec. 26(d), given their ordinary meaning, include all allowances of the kind thereby described whether they are of an income or of a capital nature. The legislative history of the provision, to which we were referred, throws no light on its meaning and for that reason I do not think it necessary to discuss it in detail.

Where a receipt answers the description contained in sec. 26(d) only 5% of the capital amount is included in the assessable income; the whole amount is not so included, notwithstanding that the receipt is of an income nature. If sec. 25(1) continued to apply to a receipt which, although ordinarily regarded as income, fell within sec. 26(d), the result would be that the whole of the amount would be brought into the assessable income by sec. 25(1), and in addition 5% of the amount would be included by sec. 26(d). The legislature cannot possibly have intended such a result. Where the same receipt would come within the descriptions contained in both sections the specific provisions of the later section must have been intended to prevail over the general provisions of the earlier. This view is supported by the terms of the proviso to sec. 26(e). Any receipt that comes within sec. 26(d) would also have come within sec. 26(e) were it not for the proviso to the latter paragraph. The full amount of a receipt coming within sec. 26(e) is included in the assessable income and the proviso must have been designed to ensure that only 5% of the amount of any receipt coming within sec. 26(d) should be so included. I would therefore adopt as correct the statement as to the effect of sec. 26(d) made by Professor Ryan in his Manual of the Law of Income Tax in Australia, 3rd ed., at p. 54: ``It [sec. 26(d)] thus has both a charging and a liberating effect; it brings into charge a percentage of the amount paid though it would otherwise not be taxable at all, and it includes only a fractional amount of a sum which would otherwise be assessable in full.'' For practical purposes it is unnecessary to consider whether a particular receipt which answers the description contained in sec. 26(d) is income in accordance with ordinary concepts. Since the receipt falls within sec. 26(d) only 5% of it is included in the assessable income whether or not such receipt would in accordance with ordinary concepts be regarded as of an income nature.

The question in the present case is whether the amounts received by the taxpayer were allowances of the kind described in sec. 26(d). This matter was referred to the Supreme Court of Queensland by way of a case stated by a Board of Review and according to the facts so stated the employment of the taxpayer was terminated by his employer on 24th September 1971, he recommenced work for the same employer (although in a different district) on 27th September 1971 and his employment was again terminated on 11th February 1972. In most cases in which a workman ceased his employment on a Friday and commenced employment again with the same employer on the following Monday it would be impossible to say that his employment had ever been terminated. If there were a contract agreement or arrangement whereby the employment of the workman was terminated and recommenced it would no doubt be possible to invoke the provisions of sec. 260 of the Act, but even without the aid of that section in many cases when all the facts had been regarded the proper conclusion to be drawn would be that there had been no termination of the workman's employment at all. I of course do not cast any doubt on the correctness of the finding of the Board of Review in the present case, but I do think it necessary to emphasize that we have before us an unchallenged finding by the Board and that it is not open to us to hold that the services of the taxpayer were not terminated. Accordingly, our decision cannot be regarded as authority for holding in similar circumstances that there was a termination of the employment of the taxpayer.

Each of the two amounts in question in the present case was paid in a lump sum. In my opinion each of those amounts was an allowance within the meaning of sec. 26(d). It was an additional reward allowed to the taxpayer for the services that he had performed (cf.
Mutual Acceptance Co. Ltd. v. F.C. of T. (1944) 69 C.L.R. 389 at p. 403 ). The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment

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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. It follows that the receipts in the present case (except $73 as to which the appellant did not desire to submit an argument) came within the provisions of sec. 26(d), with the result that 5% of the amount only should have been included in the assessable income.

I would give leave to appeal and would allow the appeal.