Sladden v FC of T
Members:I Molloy DP
Tribunal:
Administrative Appeals Tribunal, Brisbane
MEDIA NEUTRAL CITATION:
[2023] AATA 3815
I Molloy (Deputy President)
INTRODUCTION
1. This is an application to review an objection decision made on 13 April 2022 disallowing the applicant's objection to an income tax assessment for the income year ending 30 June 2020.
ISSUES
2. There are broadly two issues. The first issue is whether an amount of $1 million ("the settlement sum " ) received by the applicant, Dr Sladden, in September 2019 pursuant a Deed of Release made on 30 August 2019 ("the deed ") between the applicant and two insurers, AMP Life Limited (" AMP ") and The National Mutual Life Association of Australasia Limited (" National Mutual "), is assessable as income, whether as ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth) ("the ITAA 1997 ") or as statutory income under s 15-30 of the ITTA 1997. The applicant submits that it is not assessable income under either provision.
3. The second issue, which only arises if the applicant is successful on the first issue, is whether the applicant is liable to an assessment pursuant to s 102-5 of the ITAA 1997 Act on a net capital gain relating to the settlement sum and, if so, is that a discounted capital gain (discounted by 50%) for the purposes of step 3 of s 102-5.
EVIDENCE
4. Three persons gave evidence at the hearing, namely, the applicant, Dr Sladden, Mr Colin Fullagar, a consumer advocate, and Mr Nick Florentzos, an actuary. They each also provided a written statement or report. I find each of the witnesses was truthful.
5. The applicant is a medical practitioner although not currently working in that capacity. On 13 April 1999, the applicant entered into two linked policies of insurance ("the Policy ") with National Mutual (collectively issued under the policy number P700129518).
6.
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The Policy provided the following:A Life Protection Plan ("the LP Plan "):
- (a) with a commencement date of 13 April 1999;
- (b) with an expiry date of 3 April 2068; and
- (c) for a sum insured payable on death or trauma which diminished over time and was $27,471.96 when the deed was entered into.
A Professional Income Protection Plan ("the PIP Plan "):
- (a) with a commencement date of 13 April 1999;
- (b) with an expiry date of 3 April 2038;
- (c) for a sum insured which varied over time and was $2,979.21 per month when the deed was entered into; and
- (d) for a benefit period to age 65 for injury or sickness.
7. In February 2013, the applicant was diagnosed with breast cancer.
8. On about 4 March 2013, the applicant made a claim for an income protection benefit under the PIP Plan. In consequence the applicant received benefits under the PIP Plan.
9. From that time onwards, under the terms of the Policy, but only so long as she was receiving benefits under the PIP Plan, the applicant was not required to pay any premiums in respect of the Policy.
10. In late 2013, the applicant was diagnosed with a debilitating immune system disorder known as Sjogren's syndrome.
11. Over the succeeding years, the applicant received payments under the PIP Plan, but not without having to battle, as she says, to receive her entitlements.
12. On 1 January 2017, the life insurance business of National Mutual which had previously been acquired by AXA Group was transferred to AMP in accordance with Part 9 of the Life Insurance Act 1995 (Cth).
13. Following the change, the applicant encountered further difficulties with the new insurer AMP.
Negotiations with AMP
14. On 9 May 2019, the applicant appointed Mr Fullagar, of Integrity Resolutions, to negotiate with AMP on her behalf "re a possible commutation of [her] income protection insurance benefit."[1]
15. The applicant agreed she was not considering anything other than commutation of this benefit at the time.
16. The course and content of the negotiations are summarised in the respondent's submissions.[2]
17. On 9 May 2019, Mr Fullagar, emailed a contact of his at AMP "in regard to [the applicant's] income protection insurance policy and claim."[3]
18. Mr Fullagar agreed that he was not considering anything other than the income protection benefit at the time.
19. On 26 June 2019, Mr Fullagar emailed the applicant and her husband to advise that:
- (a) AMP was "willing to offer $1,000,000 in full and final settlement of [the applicant's] claim";
- (b) he had "asked how the number was arrived at" and AMP "indicated it took into account reserves, discounting factors, early mortality, potential to return to work, etc";
- (c) if the offer was accepted, "the policy would be surrendered", "no further claims would be payable under it" and a "Deed of Settlement would need to be prepared by AMP and signed by [her]"; and
- (d) the applicant should "obtain appropriate financial and taxation advice", noting that her accountant "may want to check a recent Court ruling as it could be relevant -
JSJG and Commissioner of Taxation (2019) AATA 336".[5]Ibid at 26.
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20. Later that same day, the applicant's husband responded to say "[w]e will ask out [sic] accountant to [sic] the recent Court ruling".
21. The applicant acknowledged in evidence that she understood AMP's offer of $1 million to be only in respect of the income protection benefit claim.
22. On 27 June 2019, the applicant and her husband received an email from their accountant stating that she "was at a tax training seminar today and there was a [sic] I think the same case to the one you had mentioned to me in regards to the payout option. It has a different name Kort and FCT", which she then purported to summarise.[6]
23. On 28 June 2019, the applicant's husband wrote to Mr Fullagar as follows: "After discussion with our accountant, it appears that lump sums for income protection are taxable. However, if AMP were to state that the payout, or part of it, relates to personal injury, then personal injury payouts are not taxable. Not sure if AMP would do this though?", to which Mr Fullagar relevantly responded: "if it is OK, I will not ask about designating the payment at this time. Suggest leave that until after decision made".[7]
24. On 1 July 2019, Mr Fullagar called the case manager about the offer and was advised that, whilst calculated on a "commercial basis", and "[b]asically, it is determined on PD M/B currently paid, reserve on the claim, life expectancy & receiving the lump sum now as opposed to payment being monthly till policy expiry".[8]
25. To assist in assessing AMP's offer, the applicant engaged an actuary, David Hotchkies, to calculate "the present value of [her] income benefits", which on 5 July 2019 he estimated at between about $1.78 million and $1.94 million, depending on the assumed inflation and discount rates.[9]
26. The applicant confirmed in evidence that Mr Hotchkies was only engaged to calculate the value of the income protection benefits.
27. On 6 July 2019, the applicant advised Mr Fullagar that "[w]e are currently thinking our best step might be to see if AMP is open to discussing how the payment is made given the significant tax disadvantage of a lump-sum payment".[10]
28. On 8 July 2019, the applicant asked her accountant to call Mr Fullagar to "discuss the information you were discussing with us last week about the tax implications of a potential payout (and under what circumstances a payout would be considered taxable income or not)".[11]
29. Later that same day, the applicant's accountant responded as follows:
"I called and spoke to Col, are you able to email through your perspective on was that you have been exposed to personal wrong or injury through the whole process of the claims in any way. Including having to fill in forms each month and what ever else you can think of. It would be great if you could have a doctors opinion that we can refer to where they indicated the impact of the continual worry of the forms etc being detrimental to your mental health now and in the future. Then I will put some tax words in there and we can get Col to have a look [sic]".[12]
Ibid at 46.
30. The following day, the applicant replied: "After consideration, Mike and I have decided we don't want to go down the path of 'personal injury'".[13]
31. On 11 July 2019, the applicant advised Mr Fullagar that she and her husband had "spoken at length and decided [they] would like to accept AMP's offer of $1 million" and that their decision was "based on the following reasons":[14]
- (a) "the offer is low, and we understood it would be. It is unfortunate that approximately 1/2 will go to tax but neither of us want to go down the 'personal injury' claim route";
- (b) "we are concerned that any counter offer by us may result in the offer being taken off the table all together. We do not wish this to happen"; and
- (c) "I feel we have exhausted all available options in this matter, and it's time to move on with our lives".
32. Later that same day, Mr Fullagar informed AMP that the applicant would accept the offer of $1,000,000 and asked for the
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necessary documentation to be drawn up and sent to him.[15]33. The applicant said at that stage she accepted that potentially half of the settlement sum would go to tax.
34. On 30 July 2019, Mr Fullagar received a letter from AMP which was relevantly in the following terms:[16]
35. The recitals to the enclosed deed of release relevantly read as follows:[17]
36.
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Mr Fullagar forwarded the letter and deed of release to the applicant, copying her insurance broker, with a reminder to obtain appropriate legal advice and asked her to "confirm that the policy is a stand-alone income protection insurance contract ie there are no other benefits attached such as term, trauma or total and permanent disability".[18]37. The applicant's insurance broker responded to say that the applicant's:
"Income Protection policy also contains $27,471.96 in Life cover only that is costing $70.44 per annum (premium waived as the income protection policy is on claim) and will also be lost once the income protection policy has been paid out and the policy is cancelled. If the small amount of life cover is required, you could ask AMP to move it to a new standalone policy and then Julie would need to recommence paying the required premiums."[19]
Ibid at 67.
38. Mr Fullagar then wrote to the applicant:
"There has been no mention of the life cover component in the commutation discussions and it could be argued that the life cover with premium waiver is a separate issue.
If you wish to retain this cover, I would suggest you have the Deed amended to this effect. I would further suggest that the cover should continue to index and that premiums should continue to be waived.
AMP may push back but I can seek to cover this off while you are having the Deed checked".[20]
Ibid.
39. After her insurance broker confirmed that "the Life cover is a separate component", the applicant instructed Mr Fullagar to "go ahead and ask AMP about [it]".[21]
40. In evidence the applicant agreed that she did not consider the life insurance component of the policy until 30 July 2019, and only after she had expressed her willingness to accept AMP's offer of $1 million in commutation of her income protection benefits.
41. On 31 July 2019, Mr Fullagar emailed AMP as follows: "The policy contains a separate term insurance benefit for circa $25,000 for which premium waiver is in place. Can you please confirm that this benefit will continue on the same basis as a stand-alone policy."[22]
42. That same day, the applicant engaged Peter Mackenzie of Mackenzie Thomas Lawyers to review the draft deed of release and drew his attention to the fact that "there is a small (approx $27,000) life insurance policy attached to the income protection policy which has not been mentioned in the Deed".[23]
43. On 1 August 2019, Mr Fullagar called AMP to enquire about the applicant's life insurance and was informed by the case manager that, whilst the matter had been "referred to legal", the case manager's understanding was that "the entire policy was being surrendered."[24]
44. Upon being informed of the same, the applicant told Mr Fullagar that her "preference at this stage would be to assume that the life insurance component is cancelled, rather than delay things any longer than necessary."[25]
45. In evidence, the applicant agreed that, knowing that the life cover was being cancelled, she did not go back to AMP and ask for anything extra from AMP beyond the $1 million which had been offered.
46. When it was suggested to the applicant, in cross-examination, that she did not place any value on the life cover at the time, the applicant said she was simply accepting the $1 million, and that it was accepted in respect of the income protection benefits.
47. Also on 1 August 2019, the applicant advised Mr Fullagar that "on Peter's strong recommendation Mike and I are considering engaging specialist tax advice".[26]
48. Subsequently, on 6 August 2019, the applicant:[27]
- (a) sent Mr Fullagar some proposed amendments to the deed of settlement prepared by the applicant's representative, Mr Balazs, which Mr Balazs "doubts AMP will agree to … but says it is worth asking as it may affect how the ATO views the payment"; and
- (b) said that "I don't want to jeopardise the offer … [s]o it would be nice to have a prompt response from AMP on this if they can. If they are going to drag it out or it's clear they are not going to agree
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to the proposed amendments I am prepared to sign what is in front of me."
49. The amendments proposed by Mr Balazs relevantly included the following:[28]
- (a) Add a second sentence to recital C that says:
The Policy provides not just for the payments to be made in respect of lost income, but also in respect of the death of the Releasor.
- (b) Amend recital C (which is meant to be recital G) to read as follows:
Without admission of liability, the parties to this Deed agree to the cancellation of the Policy, terminating the insurance in respect of the Releasor's life, the compromise of the Claim and the assignment of the Releasor's rights in respect of the Policy and any claims that might otherwise be made in respect of the Policy. The Releasor has also agreed to provide the release and indemnity as set out in clauses 2.4 and 2.5.
50. Mr Fullagar subsequently suggested,[29]
51. On 7 August 2019, Mr Fullagar sent the varied form of the proposed amendments to AMP and advised:
"[A] decision has been made not to pursue retention of the death cover under the policy so could you please ask the AMP legal team not to worry about this matter. Having said that, the advice attached indicates correctly that the Deed should acknowledge the cancellation of that death cover".[31]
Ibid at 104.
52. On 22 August 2019, AMP provided Mr Fullagar with a revised version of the deed that incorporated some but not all of the applicant's proposed amendments.
53. The applicant agreed in evidence that she would have signed the deed without inclusion of any of the amendments.
Deed of Release
54. On or about 11 September 2019, the parties executed the revised version of the deed, which included the following:[32]
Recital C: "The Releasor [the applicant] is the owner of a life insurance policy issued by NMLA [National Mutual], which is identified by policy number P7001295518 ('the Policy'). The Policy provides for payments to be made in respect of lost income and other events including the death of the Releasor."
Recital D: "On about 4 March 2013, the Releasor, made a claim for an income protection benefit ("IP Benefit") under the Policy, identified by claim number P1B3411 ('the Claim')."
Recital E: "On 12 December 2016 the Federal Court of Australia approved the transfer of the life insurance business of NMLA in Australia and New Zealand to AMP as and from 1 January 2017 pursuant to Part 9 of the Life Insurance Act 1995 (Cth). The rights and obligations of insureds under their existing policies and in respect of proceedings against NMLA are unchanged by this transfer, except that those rights and obligations now continue against AMPL. By this Deed, the Releasor intends to release both AMPL and NMLA equally."
Recital F: "AMP accepted the Claim and the Releasor received a monthly IP benefit in respect of the Claim from 10 April 2013 to 30 August 2019."
Recital G: "Without admission of liability, the parties to the Deed agree to compromise the Claim, the Policy and all insurance cover held under the Policy. The Releasor agrees to provide the release and indemnity set out in clause 3 in exchange for payment of the Settlement Sum pursuant to clause 2."
Clause 1.1(e): "Settlement Sum is $1,000,000;"
Clause 2.1: "AMP will pay the Settlement Sum to the Releasor within 28 days of the date of receipt by AMP of this original Deed, duly executed by the Releasor."
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Clause 2.3: "The Policy will be terminated by AMP on receipt of this Deed executed by the Releasor."Clause 3.1: "The Releasor releases and discharges AMP from all sums of money, accounts, claims, actions, proceedings, demands and expenses which the Releasor at any time had or may have against AMP, whether known or unknown to the parties (and if known by a party whether or not it was disclosed to the others) at the date of this Deed, in relation to the Claim and the Policy."
Clause 3.2: "The Releasor will indemnify AMP by holding it harmless for any loss or expense it may incur if any person makes a demand on AMP about the Claim or the Policy."
55. Immediately following the execution and delivery of the deed to AMP on 11 September 2019, the applicant received the Settlement Sum.
56. At about the same time, AMP wrote to the applicant in the following terms:[33]
Valuation of Life Cover
57. By letter of instruction dated 22 March 2023, Mr Florentzos was requested to value the applicant's life cover under the policy.[34]
58. That assumption, which Mr Florentzos was asked to make, was not strictly correct, in that, once the insurer lawfully ceased to pay the income protection benefits, for whatever reason, including by commutation of that entitlement, the liability to pay a premium revived.
59. It was pointed out that, even if the income protection benefit was not commuted, and continued to be paid, that benefit would cease to be payable when the applicant turned 66, at which time waiver in respect of the premium would cease to apply.
60. Mr Florentzos valued the life cover at $14,000, including based upon there being no premium payable.[35]
CONSIDERATION
61. There is no dispute that the monthly benefits the applicant was receiving under the income protection cover were assessable income.[36]
62. The applicant submits the settlement sum is not ordinary income and not assessable as such. The submission is that the payment is an undissected lump sum comprising capital and
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income and, in accordance with cases such as McLaurin v Federal Commissioner of Taxation[37]63. The applicant submits that in characterising the settlement sum, the matter is governed by the "agreement between the payer and the payee" and, as the deed is not a sham, the nature of the consideration for which the settlement sum was paid is determined by the terms of the deed. I do not accept that submission, or that the case cited by the applicant,[39]
64. The terms of the deed are not determinative of the issue. Instead regard may be had to the facts and circumstances that led to the deed being executed, notwithstanding the deed is not a sham, so as to determine the true nature of the settlement sum including whether it was income according to ordinary concepts.[40]
65. As at 11 July 2019, when the applicant expressed her willingness to accept AMP's offer of $1 million, both she and AMP considered, and had communicated, that what became the settlement sum represented what AMP would pay for the commutation or settlement of the applicant's income protection benefits.
66. It was only later, when the draft deed was drawn up, and the applicant sought taxation advice, that any consideration was given to the life cover or other matters. But although the applicant agreed under the deed to surrender the life cover and release AMP from any claims she may at any time have or have had against it, the settlement sum remained $1 million.
67. The applicant engaged an actuary to value the income protection benefits for the purpose of gauging AMP's offer of $1 million. She did not take any similar steps to value the life cover before entering into the deed. That occurred only relatively recently, by the engagement of Mr Florentzos, for the purpose of this proceeding.
68. To use Merkel J's words, in Sommer,[41]
69. The reality was that the applicant and AMP negotiated and resolved to commute the applicant's entitlements in respect of the income protection claim in consideration of payment of the settlement sum. No other claim or entitlement was considered by either party in reaching agreement on the amount AMP was to pay.
70. In some circumstances, when determining the character of a receipt of a settlement sum, regard may be had to the nature of claims that are neither made nor even threatened but are objectively open.[42]
71. In McLaurin and Allsop the lump sum received was incapable of dissection between income and capital. That is not this case. In this case no part of the settlement amount was other than in respect of commutation of the applicant's monthly benefits payable under the income protection cover.
72. On the totality of the evidence, I am not satisfied that the settlement amount related to claims, entitlements or benefits of a mixed income and capital nature. The applicant assented to acceptance of the settlement amount being a figure of $1 million to commute or settle her claim under the income protection plan.
CONCLUSION
73. In view of my finding on the first issue, the second issue does not arise.
74. The objection decision should be affirmed.
Footnotes
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