Goodfellow v. Federal Commissioner of Taxation

Judges:
Sheppard J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 22 July 1976.

Sheppard J.: To be dealt with are two questions of law referred to the Court pursuant to sec. 196 of the Income Tax Assessment Act 1936 as amended (hereinafter called ``the Act'') by a board of review. The appellant who was born on 15th May, 1934, commenced duty with the Royal Australian Navy on 11th December, 1966. Contributions to the Defence Forces Retirement Benefits Fund (hereinafter called ``the fund'') were made by him pursuant to sec. 23 of the Defence Forces Retirement Benefits Act 1948 as amended (hereinafter called ``the Retirement Benefits Act'') from the date on which he commenced duty. On 15th May, 1969, he was injured in the course of carrying out his duties, and as a result is now a paraplegic. He was discharged from the Navy on 21 May, 1970, on the ground that he was physically unfit for further naval service. At that date he held the rank of Lieutenant Commander and had not attained the retiring age for that rank. If he had continued to hold that rank he was bound to retire no later than 14 May 1978. The appellant was required by sec. 23 of the Retirement Benefits Act to contribute to the fund, and, on his retirement, would qualify for the benefits prescribed by the Retirement Benefits Act. By reason of his enforced retirement prior to reaching the normal retiring age, he became entitled to benefit in accordance with sec. 51 and 52 of that Act. Pursuant to sec. 51(2) thereof, the Defence Forces Retirement Board (hereinafter called ``the Board'') determined the percentage of total incapacity of the appellant in relation to civil employment at sixty per cent or over. The appellant was therefore classified as Class A under sec. 51(2) of the Retirement Benefits Act and the amount of his entitlement to invalidity benefit was determined in accordance with sec. 52(1) thereof, Payment of such benefit commenced on 9 July 1970, and since then payments have been received by the appellant fortnightly.

On 28 July 1971, the appellant lodged his return of income for the year ending 30 June 1971. By that return, he disclosed the receipt of gross income totalling $9,411 including $5,885 received from the fund. He claimed this amount as a deductions from his income and returned a taxable income of $1,898 after claiming other deductions. The Commissioner disallowed the deduction of $5,885 and assessed his taxable income at $7,783. The appellant lodged a notice of objection saying that the disability pension was exempt from income tax, but the objection was disallowed.

On 19 February 1973, the appellant submitted a return of his income for the year ending 30 June 1972. He disclosed the receipt of gross income totalling $9,292 including $5,939 received from the fund. He claimed this amount as a deduction, and showed a taxable income of $1,721 after claiming other deductions. The Commissioner disallowed the deduction of $5,939 and assessed the appellant's taxable income at $7,662. The appellant objected to the inclusion of the benefit received by him from the fund in his taxable income but the Commissioner also disallowed that objection. The Commissioner's decisions upon the appellant's objections were referred to a board of review and the reference came on for hearing on 21 March last. The board was asked to refer to this Court certain questions of law, the parties having agreed on the relevant facts, the substance of which I have stated in the foregoing paragraphs.

The questions of law to be determined are: -

``(1) Was the taxpayer entitled in law by reason of sec. 23(kab) of the Income Tax Assessment Act 1936 (as amended) to exemption from income tax on the amounts of $5,885 and $5,939 received by him as invalidity benefit payments pursuant to the Defence Forces Retirement Benefits Act 1948 (as amended) during the years of income ended 30 June 1971, and 30 June 1972, respectively?

(2) Were the aforesaid amounts of $5,885 and $5,939 pensions or allowances paid or

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payments made by the Commonwealth in regard to which the Commissioner was bound in law to form or alternatively in regard to which it was open to him in law to form the opinion pursuant to sec. 23(kaa) of the Income Tax Assessment Act 1936 (as amended) that the said amounts were pensions or allowances or payments of a similar nature to pensions allowances or payments specified in sec. 23(k) of the said Act?''

The questions were argued by counsel in the reverse order of that in which they were stated by the board of review, and that is the order in which I deal with them. Section 23(kaa) of the Act (the Act has since been amended; see sec. 23AD(3) is as follows:

``23. The following income shall be exempt from income tax:

...

(kaa) pensions and allowances paid, and payments made, by the Commonwealth or by the Government of the United Kingdom, being pensions allowances or payments which, in the opinion of the Commissioner, are of a similar nature to pensions, allowances or payments specified in the last preceding paragraph;''

The last preceding paragraph referred to in para. (kaa) is para. (k), which is in the following terms: -

``(k) pensions and attendants' allowances paid, and payments of a like nature made, under the Repatriation Act 1920-1962, the Repatriation (Far East Strategic Reserve) Act 1956-1962, the Repatriation (Special Overseas Service) Act 1962 or the Seamen's War Pensions and Allowances Act 1940-1961.''

The question to be determined is not complicated by the reference in the paragraph to the opinion of the Commissioner. Counsel for the Commissioner was content that I should approach the matter on the basis that if I thought that the payments received by the appellant were in fact of the kind referred to, the question should be answered in the affirmative.

The Commissioner submitted that para. (kaa) had no application, firstly because the payments in question were not made by the Commonwealth nor by the Government of the United Kingdom, and, secondly, because they were not of a similar nature to the pensions, allowances, or payments specified in para. (k). They were, of course, not payments made by the Government of the United Kingdom, but a question arises whether the payments were made by the Commonwealth or one of its agencies, namely the board which administered the fund. Because of the view which I take of the second submission made by the Commissioner, I do not need to decide the question of whether the payments were made by the Commonwealth.

In order to deal with that submission, namely, that the payments were not of a similar nature to pensions, allowances, or payments specified in para. (k), it is necessary to make some reference to the legislation therein referred to. The Repatriation Act 1920 (as amended) provided in Part III Division 1 for the payment of pensions to persons or dependants of persons who became incapacitated or died as a result of an occurrence which happened during the person's war service or whose death or incapacity resulted from employment in connection with naval or military preparations or operations. The war referred to was the war which commenced on 4th August, 1914, that is the First World War. By Division 6 of Part III, first inserted into the Act in 1940, the provisions of Divisions 1-5 of the Part, other than sec. 24, were extended to and in relation to members of the forces and their dependants as defined in sec. 100 of the Act. These were, in effect, persons who had been members of the forces or of the citizen forces during the war which commenced on 3 September 1939, that is the Second World War. In lieu of applying the provisions of sec. 24 of the Act to such persons, the provisions of sec. 101 in Division 6 were applied to them. It provided that upon the incapacity or death of a member of the forces who was employed on active service and whose incapacity or death resulted from any occurrence that happened during the period from his date of enlistment to the date of the termination of his service or of any member of the forces whose incapacity or death arose out of or was attributable to his war service, the Commonwealth was to be liable to pay to the member or his dependants a pension in accordance with Division 1.

By sec. 107A of the Repatriation Act it is provided that the provisions of Divisions 1-5 (inclusive) of Part III of the Act (other than sec. 24) sec. 103 and the Schedules to the Act

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extend to and in relation to members of the forces within the meaning of Division 8 of the Act and the dependants of such members. ``Members of the forces'' is defined to mean a male member of the Naval, Military or Air Forces of the Commonwealth who served on war service. ``War service'' is defined to mean, in relation to a member of the forces, his service while a member of or attached to a body, contingent or detachment of the Naval, Military or Air Forces of the Commonwealth that was allotted for duty in an operational area or while he himself was allotted for duty in such an area. ``Operational area'' is defined to mean an area outside Australia that is prescribed to be an operational area for the purposes of warlike operations in Korea after 26 June 1950, or in Malaya after 28 June 1950. Section 107C of the Act provides for the payment of a pension upon the incapacity or death of a member of the forces to whom Division 8 applies in accordance with the provisions of Division 1 of Part III of the Act.

The Repatriation (Far East Strategic Reserve) Act 1956-62 provides in sec. 6 that upon the incapacity or death of a member of the forces (as in sec. 3 defined) whose incapacity or death resulted from an occurrence that happened during the member's Malayan service the Commonwealth would be liable to pay to the member or his dependants pensions in accordance with Division 1 of Part III of the Repatriation Act as applied by sec. 7 of the Act under consideration. Section 3 of the Act defines the expression ``member of the forces'' as a person who, while a member of the defence force, served on Malayan service. ``Malayan service'' is defined to mean, in relation to a member of the forces, the service of the member after the commencement of the Act while a member of or attached to a body, unit or detachment of the Naval, Military or Air Forces at a time when it was allotted for duty in Malaya as part of or in association with the Australian Contingent, British Commonwealth Far East Strategic Reserve, or allotted for duty in Malaya in connection with the Far East Strategic Reserve with any Naval, Military or Air Forces of a part of the Queen's Dominions other than the Commonwealth. Malayan service did not include service as a member of the naval forces in the complement of a sea-going vessel. ``Malaya'' is defined as the Federation of Malaya and the Colony of Singapore. Those areas were subsequently to become Malaysia. At a later stage Singapore ceased to be part of Malaysia and became a separate state.

The Repatriation (Special Overseas Service) Act 1962 provides in sec. 6 that upon the incapacity or death of a member of the forces whose incapacity or death has resulted from an occurrence that happened during a period of special service of the member the Commonwealth is liable to pay to the member, to his dependants or to both, as the case may be, pensions in accordance with Division 1 of Part III of the Repatriation Act as applied by sec. 7 of the Act. ``Member of the forces'' is defined in sec. 3 as a person who, while a member of the defence force, has served on special service. ``Special service'' in relation to a person is defined to mean services of the person in a special area while a member of or attached to a body, contingent or detachment of the Naval, Military or Air Forces at a time when it was allotted for special duty in that special area, or a member of the Naval, Military or Air Forces allotted for special duty in that special area.

Section 4 of the Act provides that the regulations may declare that, by reason of warlike operations, or a state of disturbance in or affecting a specified area outside Australia, that area should become, on a specified date, a special area for the purposes of the Act. The regulations may declare that a special area should, on and after a specified date, be no longer a special area for the purposes of the Act.

The Seamen's War Pensions and Allowances Act 1940-1961 provided that where any Australian mariner, not being a pilot, died or became incapacitated as a direct result of having sustained a war injury in the course of his employment as an Australian mariner, or, being a pilot, died or became incapacitated as a direct result of having sustained a war injury while on pilot duty, the Commonwealth should, subject to the Act, pay to his dependants or to him, or to both, pensions in accordance with the Act. Section 3 defined the expression ``Australian mariner'' to mean a variety of ships' masters, officers and seamen not only in seagoing service but on certain kinds of shore or port service. The expression ``war injury'' was widely defined, but in reference to the expressions ``the enemy'' and ``the present war''. The expression ``the enemy'' was defined as ``the forces or any part thereof of a State at war with His Majesty during the present war'', and that latter

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expression meant the war in which His Majesty was engaged and which commenced on 3rd September 1939, that is the Second World War.

In order that payments may qualify for exemption under para. (kaa) of sec. 23(2) they must be pensions, allowances or payments of a similar nature to pensions, allowances or payments specified in para. (k), that is they must be of a similar nature to pensions, allowances and payments under one or more of the Acts there mentioned. The Commissioner, through his counsel, approached this question by comparing the nature of the payment made under the Retirement Benefits Act with that of the payments made under the Acts in para. (k) to the terms of which I have referred. Each of these Acts provides for a payment without express regard to the capacity of the payee to earn money in civil employment. On the other hand, sec.51 of the Retirement Benefits Act, which deals only with what are compendiously called in its side note, ``invalidity benefits'', provides in subsec. (2) that where a person is or is to become entitled to benefit by virtue of the section the board is to determine the percentage of total incapacity of the person in relation to civil employment and is to classify the person according to the percentage of incapacity as follows: - 

      ``Percentage of Incapacity       Class

          Sixty or over                A

          Thirty or over but
           less than sixty             B

          Less than thirty             C.''

Section 52 of the Act provides that a person who is entitled to invalidity benefit and is classified as Class A under sec. 51(2) is to be paid a pension as therein provided for. Persons who are classified Class B and Class C receive smaller pensions. By sec. 53 of the Act the board may, from time to time, if it is satisfied that the percentage of incapacity of a pensioner classified under sec. 51 of the Act has altered, or, because of the nature of his employment, should be varied, reclassify him in accordance with the altered percentage of incapacity.

It was submitted on behalf of the Commissioner that the intention of the Retirement Benefits Act was to provide a payment, in the case of invalidity, which would make up to the recipient that which he would have been able to earn, not as a member of the forces, but in civil employment had he not been incapacitated. It was said that the criterion for the payment of the pension was therefore altogether different from that which applied in the case of each of the Acts mentioned in para. (k). I go to that submission.

Under the Repatriation Act repatriation boards are provided for. By sec. 27 each board is charged with the duties of, inter alia, determining the nature and extent of any incapacity suffered by a member of the forces to whom the Act applies. Section 35 provides that the rates of pension payable are those specified in Schedules to the Act. It is unnecessary to refer to the Schedules in detail but Tables B and C of the Third Schedule provide for the rate of pension payable in the cases of total incapacity and of partial or specific incapacity of members of the forces. The rate of pension payable under Table C is said to be, ``such rate, being less than the rate or the maximum rate, as the case may be prescribed by Table B of this Schedule, as is assessed, having regard to the nature and probable duration of the incapacity, or in accordance with the Fourth and Fifth Schedules in the cases to which those Schedules apply''. The Fourth Schedule makes provision for the percentage of pension payable to persons who are physically incapacitated in various ways. For instance the Schedule provides for the payment of a pension of 100 per cent of the general rate to a person who has lost both eyes, both legs, both feet or both hands. It provides for the payment of eighty per cent of the general rate in the case of persons who have suffered severe facial disfigurement and fifty per cent of the general rate for a person who has lost the vision of one eye. The Fifth Schedule makes provision for the amount of pension payable to persons who have had various amputations, for example, two legs amputated above the knee, one leg amputated above the knee and one arm amputated below the elbow.

The term ``incapacity'' is not defined in the Act otherwise than to include incapacity that arose from disease, not due to the serious default of the member, contracted by him while employed on war service.

A consideration of the Schedule leads one to the conclusion that incapacity with which the Act is concerned is a physical incapacity on account of war service, whether caused directly by enemy action or indirectly, for example, by the contraction of a disease in an operational area. It is not a question of the extent to which

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a member of the forces is incapacitated for civil employment. It is the extent to which he is suffering from a physical incapacity which is made the criterion upon which entitlement to a pension depends. This is made clear by the provisions of the Fourth and Fifth Schedules to which I have referred, reference to which is to be found, as I have mentioned, in Table C, part of the Third Schedule, dealing with partial incapacity. Thus a person who had lost both legs would be physically incapacitated and entitled to a pension of 100 per cent of the general rate. Despite this entitlement he might be able to earn as much in civil employment as would have been the case had he not been injured. The same could be said in relation to injuries which involve either severe facial disfigurement or the loss of vision in one eye. Plainly there are different bases upon which pensions or compensation may be paid. Workers Compensation legislation illustrates the distinction. Under the New South Wales Act compensation is payable in respect of incapacity for work (sec. 8 and 11). It is also payable in the form of lump sums in respect of various physical incapacities enumerated in sec. 16 of the Act. The amounts referred to in sec. 16 are payable irrespective of a worker's incapacity for work but payments under sec. 8 and 11 will only be made if he is incapacitated for his usual employment.

Subject to what I have to say concerning payments made under Division 5 of the Repatriation Act, the payments made under each of the other Acts specified in para. (k) of the Act are of a similar kind to those paid under the Repatriation Act.

However, sec. 85 of the Repatriation Act which is to be found in Division 5 of Part III of that Act, provides for the payment of service pensions. These are to be distinguished from pensions payable pursuant to sec. 35 of and the Schedules to that Act. A pension is not payable pursuant to sec. 85 of the Repatriation Act unless the member, in the opinion of the Repatriation Commission or a board, is permanently unemployable and, in the case of a man, has served in a theatre of war or, in the case of a woman, has served in a theatre of war, served abroad or embarked for service abroad, or is suffering from pulmonary tuberculosis. Entitlement to a service pension under sec. 85 is therefore dependent upon the circumstance that the member is permanently unemployable. Division 5 of Part III of the Repatriation Act therefore makes provision for the payment of a pension which is only payable if the person applying for it is permanently unemployable. The expression ``permanently unemployable'' means permanently incapable, by reason of physical or mental disablement, of being employed in a remunerative occupation in which, in the opinion of the Commission, he can reasonably be expected to obtain regular employment.

If the Commissioner's approach to the construction of the words ``of a similar nature to pensions, allowances or payments specified in the last preceding paragraph'' in para. (kaa) of the Act were correct I would be driven to conclude, by reason of the provisions of sec. 85 of the Repatriation Act, that pensions payable under the Retirement Benefits Act, when paid in circumstances similar to those which exist here (total incapacity for work), were of a similar kind to one of the pensions paid under the Repatriation Act, and thus under two of the other Acts mentioned in para. (k), because entitlement to the pension depended on similar considerations to those which apply under sec. 85, namely the incapacity for employment or the unemployability of the person in question. I am not however satisfied the Commissioner's approach to the problem is the correct one.

Before developing my reasons for this view and, at the same time, dealing with the appellant's submissions, I deal shortly with an alternative submission made on behalf of the Commissioner, namely that the appellant's rights to a pension were founded in contract because he was bound by reason of sec. 23 to contribute to the fund, and his rights arose as a result of the contract which came about when he made his contribution. This situation was contrasted with that under each of the Acts mentioned in para. (k) of the Act. Each Act gave rise to a statutory right and not a contractual right. I agree with this view of the Acts mentioned in para. (k) of the Act, but I reject the argument, because I consider that the entitlement of a person to payment under the Retirement Benefits Act is primarily a statutory entitlement, although there may be some basis for saying that, in addition, the member of the forces in question has a contractual right to be paid.

Counsel for the appellant approached the construction of the relevant words in para. (kaa) of the Act as follows: It was his submission that one had to look at the circumstances under which the pension became payable, and that having examined each of the Acts mentioned in para. (k) the

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criterion was Crown service in circumstances of potential danger. Clearly the appellant was engaged upon Crown service. He was a member of the defence force. Furthermore, service in that force placed him, from time to time, in positions of potential danger, even though he was engaged on peacetime service. But there is some difficulty in construing the language of para. (kaa) to fit in with this approach because it requires that the pensions, allowances or payments be of a similar nature to those specified in para. (k). At first sight the criterion advanced by the taxpayer refers not so much to the nature of the pensions or payments but to the reasons why or the circumstances which must exist before the pensions or payments will become payable. But on reflection I think that those reasons or circumstances do shed light on what, for the purposes of the legislation, the nature of each type of pension or payments is. ``Nature'' means in this context the essential quality or fundamental character of the pensions, allowances and payments referred to.

In my opinion a consideration of the Acts mentioned in para. (k) discloses a legislative intention to exempt pensions, allowances and payments made to members of the forces who have had service during one of the wars or international disturbances in which this country has been involved since the beginning of the century. The exemption is extended to persons who, although not members of the forces, served in those wars or disturbances in situations of danger, for example, the merchant seamen who are provided for in the Seamen's War Pensions and Allowances Act. Pensions are payable under the Repatriation Act only to persons who saw service during the First and Second World Wars, the Korean War and the uprisings in Malaya. It is clear from the provisions of the Repatriation (Special Overseas Service) Act 1962 that benefit was only payable under that Act to members who served in special areas which, by reason of sec. 4, had to be areas where there were, in existence warlike operations or a state of disturbance. No doubt South Vietnam was an example.

The provisions of the Repatriation (Far East Strategic Reserve) Act are not quite so clear in revealing that service in warlike operations was the criterion for the payment of pensions, but the reference to Malaya and to the Far East Strategic Reserve, coupled with the date when the Act was passed, makes it plain that the Act was intended to provide compensation for those persons or their dependants who were incapacitated or killed during the Malayan insurgency which took place in the 1950s. Just what the relationship between the Repatriation (Far East Strategic Reserve) Act and Division 8 of Part III of the Repatriation Act, insofar as it deals with the Malayan situation, is, is not clear to me, but I think there is a sufficient indication in the legislation that the pensions provided for were to be payable as a result of service in Malaya when the uprisings were occurring. The Act would have no application to peacetime service in Malaysia and Singapore because it refers to a time before those states became established. Furthermore it is to be observed that the expression ``Malayan service'' was defined so as not to include service as a member of the Naval Forces in the complement of a sea-going vessel.

It follows that in the case of each of the Acts specified in para. (k) payment of benefit is conditioned, at least indirectly, upon incapacity or death having arisen as a result of service in a war, a warlike operation or an international disturbance. On the other hand, although there is no question that many aspects of life in the services during peacetime involve danger, sec. 51 of the Retirement Benefits Act does not require that the invalidity or incapacity therein mentioned be caused by or be in any way attributable directly or indirectly to service in the forces. The pension will be payable whether or not the member was injured in an accident directly connected with his service, as in the present case, or whether or not the incapacity arose due to some disease contracted by the member but not in any way due to service. It is true that payments of pensions under the Repatriation Act on account of incapacity caused by disease may also be made although the disease was not due directly or indirectly to war service. But such payments will not be available unless the disease was contracted whilst the member was on war service.

The task in hand is that of ascertaining from the words used in para. (kaa) and (k) of sec. 23 of the Act the extent of the operation which the Legislature intended para. (kaa) to have. The extent of the operation and effect of the four Acts mentioned in para. (k) lead me to think that the Legislature intended to make available the exemption provided for in para. (kaa) in cases only of payments made in respect of incapacity resulting from war service or service

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akin to it. Peacetime service is, in my opinion, outside its purview. Naturally peacetime military service involves elements of danger, but so does Crown service in a number of other fields. I instance the police forces and the fire brigades (of the territories if one is restricting oneself to the Crown in right of the Commonwealth). Service in these branches of the public service would equally involve Crown service and potential danger, that being the criterion contended for by the appellant. In fairness one ought perhaps further restrict that criterion to service in the armed services in circumstances of danger or potential danger but this really involves any form of military service. If this had been the intention of the Legislature it might be expected that it would have expressed its intention in much more simple terms than those to be found in the two paragraphs under consideration.

In my opinion the nature of the pensions, allowances and payments referred to in para. (kaa) was pensions, allowances or payments made in respect of war service using that expression in a broad sense. I do not think that such a meaning strains the language of the paragraph and I feel satisfied that it much more accurately reflects the intention of the Legislature than either of the criteria advanced by counsel for the parties during the argument.

The essential quality or nature of the payments here in question is therefore different. They are not of a similar nature to those referred to in para. (k) and are not, therefore, exempt from income tax under sec. 23(kaa) of the Act. I would add that if it had been the Legislature's intention to exempt such payments, by a provision such as para. (kaa), one would have expected to find express reference in the Income Tax Assessment Act to an Act such as the Retirement Benefits Act which has such a widespread operation in this community, especially bearing in mind the frequency with which the Income Tax Assessment Act is amended and the precision with which the Acts, payments under which are exempt, are listed in para. (k).

Question (2) will therefore be answered in the negative.

I turn to consider question (1). The effect of sec. 23(kab) of the Act is to exempt from income tax, wounds and disability pensions of the kinds specified in sec. 380(2) of the Income Tax Act, 1952 of the United Kingdom. The corresponding provision of the Act in its current form, sec. 23AD(3)(c), exempts payments of wounds and disability pensions of the kinds specified in sec. 365 of the Income and Corporation Taxes Act, 1970 (Imperial).

I digress for a moment to mention a problem which arises by reason of the use by the legislature of the device of picking up, in the way that the two provisions do, provisions contained in the English legislation.

This, as I have said, is a reference pursuant to sec. 196(2) of the Act by a board of review. This matter first came into my list for hearing on 23rd May, 1975. The argument concluded on that day and I reserved my decision. When I came to give the matter consideration I reached the conclusion that there were insufficient facts stated in the board's reference to enable me to reach a conclusion on what the answer to question (1) should be. That is not a criticism of the board. The fact that further evidence was needed could not have been discerned until there had been full argument upon the matter. Even then it did not immediately occur to counsel, nor myself, that more was needed. The matter was relisted on 20th June, 1975 when I indicated to counsel the information which I thought should be obtained. The matter was then adjourned generally.

On 16th September, 1975, there was lodged with my associate by counsel for the taxpayer a great quantity of material which it was said disclosed the position under the English legislation. On 23rd September, 1975, counsel for the Commissioner handed in to my associate written submissions dealing further with the matter. These did not deal at all with the factual material obtained by the taxpayer, nor with conclusions drawn by his counsel upon the basis of it; rather they bypassed that problem by saying, for a number of reasons, that whatever the English position was, the taxpayer should fail.

Accordingly I relisted the matter on 7th October, 1975 and impressed on counsel for the Commissioner my view that the Commissioner should, although he submitted them to be irrelevant, say whether he agreed with the taxpayer's view of the facts or not. Thereafter the Commissioner carried out extensive investigations which were not completed, as I understand the position, until March this year. The matter was put back into the list on 23rd April, 1976 when the hearing was concluded and I again reserved my decision.

The unsatisfactory situation which has arisen is due entirely to the use by the

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legislature of the device above referred to of picking up, by reference, the provisions of an English Act of Parliament. The length of time taken to investigate the matter shows that there is difficulty in ascertaining the precise position. The provision in question is, as I have said, not now in force but a similar provision is contained in the present sec. 23AD(3)(c).

The problem is therefore one which still obtains. I do think it desirable that a taxing statute be comprehensive in every sense. One ought not to have to go outside its provisions to ascertain whether income is exempt or not. Still less should there need to be an extensive overseas investigation for which one of these parties will have to pay in the form of legal costs before a court can decide what is really a question of construction which has arisen upon undisputed facts.

Further, it will shortly be seen that in the submission of the Commissioner the English section, as applied by the Australian Act, could have a very unfair and illogical operation in this country. I propose to reject the argument put by the Commissioner which would lead to this result, but the fact that I do does not mean that the submission is completely without substance. Its acceptance would mean that the pensions paid to retired officers whose period of service had been cut short by an incident arising as a result of their service were not exempt, whilst pensions paid to other ranks for similar reasons were.

I express the strong view that consideration should be given to replacing the provisions of sec. 23AD(3)(c) with a provision which itself spells out the circumstances in which the payments referred to are to be exempt.

I now return to consider what answer should be given to question (1).

Section 380 of the Income Tax Act, 1952 (Imperial), so far as it is relevant, is as follows:

``(1) Income from wounds and disability pensions to which this subsection applies shall be exempt from income tax and shall not be reckoned in computing income for any of the purposes of this Act.

(2) Subsec. (1) of this section applies to -

  • (a) wounds pensions granted to members of the naval, military or air forces of the Crown;
  • (b) retired pay of disabled officers granted on account of medical unfitness attributable to or aggravated by naval, military or air force service;
  • (c) disablement or disability pensions granted to members, other than commissioned officers, of the naval, military or air forces of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air force service;
  • (d) disablement pensions granted to persons who have been employed in the nursing services of any of the naval, military or air forces of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air force service;
  • (e) injury and disablement pensions payable under any scheme made under the Injuries in War (Compensation) Act, 1914, the Injuries in War Compensation Act, 1914 (Session 2), and the Injuries in War (Compensation) Act, 1915, or under any War Risks Compensation Scheme for the Mercantile Marine:

Provided that, where the amount of any retired pay or pension to which subsec. (1) of this section applies is not solely attributable to disablement or disability, the relief conferred by the said subsec. (1) shall extend only to such part as is certified by the Minister of Pensions, after consultation with the appropriate Government Department, to be attributable to disablement or disability.''

Paragraph (kab), along with para. (k) and (kaa) was introduced into sec. 23 of the Act on 6th November, 1954 by the Income Tax and Social Services Assessment Act, 1954, sec. 3. Both counsel agreed that in those circumstances the relevant date at which the position in the United Kingdom was to be looked at was either 6th November, 1954 or the date of the coming into force of the English Act, namely 6th April, 1952. There was no change in the English legislation between the two dates and it is of no import which is the correct one. I have not examined this question for myself but I would think, tentatively, that one of the joint views of counsel must be correct.

At the time in question there were different provisions in force in England with regard to pensions for retired members of the Royal Navy, the Army and the Royal Air Force. In the present case it is appropriate to have regard

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only to provisions providing for the payment of pensions to former members of the Royal Navy.

Counsel for the taxpayer prepared, as I have already mentioned, a detailed analysis of the English provisions down to the present time. Appended to the analysis were copies of various orders in council and Royal warrants as well as excerpts from the relevant volumes of Halsbury's Laws of England (3rd Edn) and Halsbury's Statutes of England (2nd Edn). I express my indebtedness to counsel for this analysis. I have left it and the accompanying documents with the papers. It has not been formally tendered as an exhibit but I regard it as part of the material before me for the purposes of this reference.

After the hearing which took place on 7th October, 1975, the Commissioner was asked to check the analysis. He entered into correspondence with the Australian High Commission in London which, in turn, took the matter up with the Department of Health and Social Security. The correspondence and certain annexures thereto are also to be regarded as forming part of the material before me and taken into account by me in reaching my decision.

An attempt to appreciate fully the significance of all the material is an elaborate and time-consuming exercise. I have some hesitation in saying that I have fully comprehended it. I have not examined the position post-1954 with any degree of care.

If one were concerned with the position as at 1973, as one would be, if one had to consider the provisions of sec. 23AD(3)(c) and the Income and Corporation Taxes Act, 1970, the position would be much more difficult because of changes which have been made since 1954 in the United Kingdom. This, I say in passing, is all the more reason why the Act here should be amended so as to spell out within its own confines what exemption it is intended to afford.

Section 3 of the Naval and Marine Pay and Pensions Act, 1865 (28 & 29 Vic. c. 73) provided that all pay, wages, pensions, bounty money, grants or other allowances in the nature thereof, payable in respect of services in Her Majesty's Naval or Marine force to a person, being or having been an officer, seaman or marine, or to the widow or any relative of a deceased officer, seaman or marine, should be paid in such a manner and subject to such restrictions, conditions and provisions, as were from time to time directed by Order in Council. Such an Order in Council was made on 29th September, 1949. After referring to the Act above mentioned, it recited:

``And whereas His Majesty deems it expedient to make further provision concerning retired pay, pensions and other grants for members of the naval forces and of the nursing and auxiliary services thereof disabled, and for the widows, children, parents and other dependants of such members deceased, in consequence of service after the 2nd September, 1939, and to provide for the administration of this Order in Council by the Minister of Pensions:''

In passing I should mention that there are two Orders in Council of 29th September, 1949. The other is not relevant because it applies to persons who served in the First World War.

Subject to certain exceptions not relevant to be mentioned here the provisions of the Order in Council were ordered to take effect and ``shall be established and obeyed as the sole authority in the matters herein treated of''.

Part II of the Order was entitled ``General Principles of Awards''. Clause 3 provided that awards thereunder might be made where the disablement or death of a member of the naval forces was due to service. Clause 4(1) of the Order was in the following terms:

``(1) Where, not later than seven years after the termination of the Service of a member of the naval forces, a claim is made in respect of a disablement of that member, or the death occurs of that member and a claim is made (at any time) in respect of that death, such disablement or death, as the case may be, shall be accepted as due to service for the purposes of this Order provided it is certified that -

  • (a) the disablement is due to an injury which -
    • (i) is attributable to service; or
    • (ii) existed before or arose during service and has been and remains aggravated thereby; or
  • (b) the death was due to or hastened by -
    • (i) an injury which was attributable to service; or

      ATC 4209

    • (ii) the aggravation by service of an injury which existed before or arose during service.''

Part III of the Order in Council was headed ``Awards in respect of disablement''. Clause 8(1) provided that under Part III of the Order awards might be made in respect of the disablement of a member of the naval forces which was due to service, Clause 9(1) provided that an award in respect of the disablement of a member of the naval forces should not be made to take effect before the termination of his service, or, in the case of an officer on the active list, ``while he is in receipt of unemployed pay or half pay''. Clause 10(1) and (2) was as follows:

``(1) Subject to the following provisions of this Order, the degree of the disablement due to service of a member of the naval forces shall be assessed by making a comparison between the condition of the member as so disabled and the condition of a normal healthy person of the same age and sex, without taking into account the earning capacity of the member in his disabled condition in his own or any other specific trade or occupation, and without taking into account the effect of any individual factors or extraneous circumstances:

Provided that, where such disablement is due to more than one injury a composite assessment of the degree of disablement shall be made by reference to the combined effect of all such injuries.

(2) The degree of disablement assessed as aforesaid shall be certified by way of a percentage, total disablement being represented by 100 per cent. (which shall be the maximum assessment) and a lesser degree being represented by such percentage as bears to 100 per cent. the same proportion as the lesser degree of disablement bears to total disablement, so, however, that a degree of disablement of 20 per cent. or more shall be certified at a percentage which is a multiple of ten, and a degree of disablement which is less than 20 per cent. shall, except in a case to which Table 1 in the Third Schedule applies, be certified in the manner required by Table 2 or 3 in that Schedule.''

Table 1 of the Second Schedule was entitled ``Yearly Rates of Retired Pay for Disabled Officers''. Table 2 was headed ``Weekly Rates of Pensions for Disabled Ratings''. Various amounts are prescribed to be paid depending on the rank held at retirement and the degree of disability. The percentage of disability rises in steps of ten per cent. to 100 per cent. At the relevant time the retired pay for a Lieutenant Commander who was 100 per cent. disabled was £270 per year. The rates of pensions for disabled ratings were, as indicated by the heading to Table 2, specified in weekly and not yearly sums.

It is as well that I now underline the distinction which exists within the nomenclature which is used in England to describe payments made to retired officers and payments made to retired ratings. In the case of officers the expression used is ``retired pay''. It is to be noted that that is the expression which is used in sec. 380(2)(b) of the Income Tax Act, 1952. In the case of ratings or other ranks the payment is a pension. That is the expression which is used in sec. 380(2)(c) of the Income Tax Act, 1952.

The expression ``retired pay'' is to be compared with the expression ``half pay'' which is used to describe a payment being received by an officer who is on the active reserve or who has retired not due to any injury received by him in the course of his service and who is entitled, for whatever reason, to be paid an allowance. The distinction between the two types of payment is brought out in cl. 9(1) of the Order in Council above referred to. It provides, inter alia, that in the case of an officer on the active list an award in respect of his disablement is not to take effect while he is in receipt of half pay.

The first important enquiry which it is necessary to make as a result of reading these provisions is whether the provisions of sec. 380 of the English Income Tax Act, 1952 operated to exempt from income tax pensions which became payable to former members of the Royal Navy as a result only of wartime service or of any service, wartime or peacetime. The recital to the Order in Council above set out uses the words ``in consequence of service after the 2nd September 1939''. On the face of it, therefore, it applies to any service after that date, whether during the Second World War or thereafter. It must, therefore, include peacetime service. That view of the provision is confirmed in a letter dated 2nd February, 1976, written by the Department of Health and

ATC 4210

Social Security to the Australian High Commission, where it is said:

``...all disabled ex-servicemen, officers and `other ranks', whose disablement has been accepted by the Department of Health and Social Security as attributable to or aggravated by service in the Armed Forces since 3 September 1939 whether during wartime or peacetime, and where the assessment of the degree of disability is 20% or more, will be entitled to a war disablement pension of an amount determined by the degree of amount determined by the degree of disablement and the small rank addition. That pension will be exempt from income tax.''

Accordingly, the English section operated to exempt from income tax payable in the United Kingdom retired pay of disabled officers and disablement or disability pensions granted on account of medical unfitness attributable to or aggravated by naval service. No distinction was drawn between cases where the service was performed during wartime and cases where it was performed during peacetime.

The next matter to note is that the payments to which disabled former members of the Royal Navy became entitled, pursuant to the Order in Council, were paid to them without their having to provide any contribution out of their own resources. That position needs to be contrasted with that prevailing under the Retirement Benefits Act to which I have earlier referred. Members of the Royal Navy were, however, required to contribute to the National Insurance Scheme in England. The following paragraph from the letter from the Department of Health and Social Security of 2nd February, 1976 refers to this matter:

``...both the war pensions scheme and the Armed Forces Pension Scheme are non-contributory (although as explained in para 4:21 of the attached comments servicemen may contribute to the special widows fund which is an optional contributory scheme). Servicemen are required to contribute to the National Insurance Scheme and they are entitled to receive all the benefits provided by the scheme with the exception of industrial injuries sickness and unemployment benefit. On discharge from the Armed Forces a serviceman is entitled immediately to all national insurance benefits under the same conditions as any member of the civilian population. National insurance benefits for which an ex-serviceman qualifies are paid in addition to disablement pension through the war pension scheme. This was the position in 1954; this is the position today.''

The third matter which it is important to note is the distinction which exists between the provisions of cl. 10(1) of the Order in Council and sec. 51 of the Retirement Benefits Act. The former provision requires the making of a comparison between the condition of the member as disabled and the condition of a normal healthy person of the same age and sex without taking into account the earning capacity of the member in his disabled condition in his own or any other specific trade or occupation. The latter provision obliges the board to determine the percentage of total incapacity of the person in relation to civil employment. In my opinion that provision would oblige the board to take into account, if it were the fact in an individual case, that the person in question, although disabled, was capable, despite his incapacity, of earning a living and was not, therefore, wholly or partly incapacitated.

The final matter to be noted is that the Australian provision operates in any case of incapacity. It is not restricted, as is the relevant English provision, to disablement as a result of service. In other words, a former member of the Royal Navy would only be entitled to benefit under the Order in Council if he had become disabled by reason of his service (cl. 8(1)). The Australian provision would apply no matter what the cause of incapacity was. It could be due to service or it could be due to the onset of a disease unconnected with that service, or to the effects of an accident unconnected therewith, for example, an accident which occurred whilst the person in question was on leave.

The provisions of sec. 380 of the Income Tax Act, 1952 are ambulatory. They affix themselves to such income as will at any time fit one of the prescriptions referred to in sub-sec. (2). In this respect para. (kaa) of the Australian Act in its reference to payments of a similar nature to the payments specified in para. (k) and sec. 380 of the English Act are similar in character. If one is liable for income tax in the United Kingdom the position is simple. But what is the effect of para. (kab). At the original hearing each counsel propounded a simple solution. If either proposition were accepted there would not have been the need to have made enquiries overseas of the extent which

ATC 4211

were made, although it may still have been necessary to make some. Counsel for the Commissioner said that the only effect that the paragraph had was to exempt from Australian income tax payments which would have been or were exempt from United Kingdom income tax. In other words, for the paragraph to apply, the taxpayer had in fact to be in receipt from the Crown in England of one of the payments referred to in sec. 380(2). Paragraph (kab) had no other effect. Counsel for the appellant, on the other hand, contended that one simply read each paragraph of sec. 380(2) as if it had been enacted in Australia. In the particular circumstances of this case the taxpayer was, within the meaning of sec. 380(2)(b), receiving retired pay (in reality a disability pension) granted to him as a disabled officer on account of medical unfitness attributable to his naval service. Once one understood the significance of the expression ``retired pay'' - there was a reference to this in Halsbury, 3rd edn., vol. 39, p. 161 - one had only to apply the words of para. (b) to the facts of this case for it to be seen that the appellant was entitled to the benefit of the exemption.

The Commissioner's primary submission is, in my opinion, erroneous. If the Legislature had, by para. (kab), intended to do no more than to make payments exempt from English income tax also exempt from Australian income tax I think different words would have been used. The paragraph might in those circumstances have been expected to read. ``The wounds and disability pensions referred to in sec. 380(2) of the Income Tax Act, 1952 (I).'' But one has to give effect to the use in para. (kab) of the words ``of the kinds specified''. To my mind these presuppose that sec. 380 applies to particular wounds and disability pensions, and indicate that the legislature was intending to exempt from income tax not only those very wounds and disability pensions but others, if there were any, of the same kind. What others, if there were any, of the same kind. What others could there be? There could be none (not caught up by sec. 380(2) itself) which originated in the United Kingdom. It is an extremely comprehensive provision. One is then led to consider wounds and disability pensions payable from sources outside the United Kingdom. Bearing in mind the substantial migration that had occurred between the end of the Second World War and 1954 when para. (kab) was introduced into the Act, and the fact that migration was likely to continue, perhaps one was to look at wounds and disability pensions payable to migrants by the governments of their former countries on account of military service. This view may be thought to gain some strength from the fact that it would not appear that migrants, even from other dominions, would be entitled to an exemption for any pension being paid to them by the governments of their former countries. Paragraph (kaa) does not operate unless the payment is made either by the Commonwealth or the Government of the United Kingdom. But if that were the only additional type of pension which it was intended to catch up by the use of the words ``of the kinds specified'', it would have been so much easier to add in to para. (kaa) the governments of such countries the former citizens of which it was intended to benefit. In any event, whether it was the intention of the legislature to exempt what I might term foreign wounds and disability pensions or not, I do not myself perceive, once one is led, as I have concluded one is, away from pensions which are payable only to former members of the United Kingdom forces, why one does not look to see what, if any, Australian pensions fall within the categories mentioned in sec. 380(2) of the English Act. No doubt one would find, in many cases, that Australian pensions falling into one or other of those categories would already be exempt from income tax by reason of para.(k). But there might be others. For these reasons I reject the Commissioner's primary submission.

I also reject that of the appellant. In my opinion it involves an oversimplification. Although the provisions of sec. 380(2) are ambulatory I think one must inquire what operation it in fact had in the United Kingdom when the Australian provision, para. (kab), was enacted in 1954. As the analysis of counsel shows its operation was extensive. I have made reference to the only disability pension (retired pay) which could be appropriately relied upon by the taxpayer here. But not only were there the specific enactments referred to in para. (e) of sec. 380(2); there were other provisions applying to members of the Royal Navy and numerous provisions applying to members of the Army and the Royal Air Force. All these provisions were such as to make it quite plain in England what sec. 380 of the Income Tax Act, 1952, was intended to affect. It is knowledge of that state of affairs which I think one must impute to the Legislature here when one comes to inquire what operation the paragraph in question has. The conclusion is that it intended Australian taxpayers to have the same exemption from Australian income

ATC 4212

tax as was enjoyed by those in the United Kingdom in any case where what was being received was, relevantly, a disability pension ``of a kind specified'' in the English section. To know whether it was of such a kind one needed to know not only the provisions of sec. 380(2), but also the provisions in England to which it applied.

As I have said the only relevant provision is that contained in the Order in Council of 29th September, 1949, to the provisions of which I have already referred. It is plain that sec. 380(2)(b)&(c) applies to exempt from income tax retired pay and pensions payable pursuant to that Order in Council. Such retired pay and pensions will be paid if there is disability on account of service after 2nd September, 1939, whether service during wartime or peacetime. But there are essential differences between the nature of the payments made pursuant to the Order in Council and the nature of the payments made pursuant to the Retirement Benefits Act. To all but one of these I have referred. The differences are:

The question I now ask myself is whether, having taken the distinctions listed above into account, I should reach the conclusion that the pension paid in this case to the appellant was not of a kind specified in sec. 380(2)(b) of the Income Tax Act, 1952. It is plain that if it is not it is unlikely that para. (kab) can have any real operation. It may have some operation in exempting from Australian income tax wounds and disability pensions payable to former members of the United Kingdom Forces who are now resident in this country. But I have already concluded that it was intended to have a wider operation than that. It may apply in some cases where persons resident in this country receive wounds and disability pensions from the governments of their former countries. There is no indication that its operation in this regard would be extensive.

As I have said, the Legislature must be taken to have known of the situation in England. It must also be taken to have been aware of the provisions of the Retirement Benefits Act as they were in 1954. Although some of those provisions have since undergone substantial change, the general scheme of the Act then was the same as it is now.

In some cases where a question of the extent of the operation of an Act of Parliament arises

ATC 4213

for consideration it will be clear that it was intended to have a wide or a narrow operation. The answer to the question will in some cases be difficult of ascertainment, but in the end the Court will select one or the other of two possible views. In other cases it will be clear that an Act is to apply to situation A, situation B, or to both; again the process of arriving at a conclusion may be difficult, but on any view, the Act will have a clear field of operation.

Subject to the qualifications I have mentioned above, this provision, para. (kab), will have no field of operation whatever if the Commissioner's contentions be upheld. This is a matter which has weighed very much with me in coming to a conclusion as to what should be done. It does not seem to me that a provision in a taxing statute which is designed to exempt certain income from taxation ought to be construed in any narrow or pedantic way.

But I must take into account the four distinctions of substance between the English Order in Council and the Australian Act earlier mentioned. From the appellant's point of view I have found the first the stumbling block. The pension will be payable under the Retirement Benefits Act for incapacity however caused. To give effect to the appellant's submission would mean that it is plain that the Legislature has evinced an intention to exempt from income tax a pension payable pursuant to sec. 51 of the Retirement Benefits Act where the incapacity is due to a member's service, and not to exempt it where the incapacity is not due thereto. There may be, to the minds of some, a logical reason why the Legislature should make this distinction. But I must be satisfied that the words used by the Legislature lead to this conclusion. As I remarked when dealing with the second question, I would have thought that the Legislature, if it intended to exempt from income tax, any pension payable pursuant to the Retirement Benefits Act, either in all circumstances or only where the pension is paid because of incapacity due to some, would have referred to the Act in terms and the circumstances which must exist before a taxpayer was entitled to exemption. In short I am not persuaded that the pension being received by the appellant here is of a kind specified in the English section referred to in para. (kab). The first question ought therefore also be answered in the negative.

Before I conclude I should deal shortly with certain other submissions put on behalf of the Commissioner.

Much was made of the use of the expression in sec. 380(2)(b) of the English Act, ``retired pay''. It was said that although para. (kab) might operate to pick up disablement or disability pensions being received by ratings, because they were referred to in sec. 380(2)(c), there was no basis for picking up ``retired pay of disabled officers'' because the words used in para. (kab) were ``wounds and disability pensions'', and no reference to ``retired pay'' was made.

What I have earlier said concerning the distinction which has always been drawn in England between the name by which a payment to an officer and the name by which a payment to other ranks are known, and the distinction which also exists between the expressions ``half pay'' and ``retired pay'', indicates that ``retired pay'' refers to a pension payable to an officer. Section 380(2)(b) is plainly the provision pursuant to which the taxpayer here would have been entitled to exemption if the pension he receives had, in fact, been of a kind specified in the English legislation.

Then it was said that it was necessary to read the expression ``wounds and disability pensions'' conjunctively. so that for the pension to qualify it had to be paid in respect not only of a disability but also of a wound. Frankly, I think this is an absurd submission. The words ``wounds'' and ``disability'' are obviously used disjunctively. They are intended to refer, in a comprehensive way, to the various classes of pension referred to in sec. 380(2) of the English Act. The first category, para. (a) is wounds pensions; the third category, para. (c), is disablement or disability pensions.

Finally it was submitted on behalf of the Commissioner that the taxpayer was not suffering medical unfitness within the meaning of para. (b) of sec. 380(2) of the English Act, but was suffering physical incapacity. I regard this argument also as absurd. The taxpayer is, by reason of his injuries, medically unfit, and, because of this unfitness, incapacitated for his duties. The word ``medically'' in the English section is not, in my opinion, used in any narrow sense so as to restrict it to unfitness arising from disease or constitutional causes, as distinct from those brought about by trauma. It is used rather to distinguish the type of unfitness mentioned from other reasons for unfitness in the Services, such as an unfitness arising by reason of an attitude to a member's

ATC 4214

duties which would make continuation in the service impossible.

Finally, before I come to the question of costs, I should mention, for the sake of completeness, that the Retirement Benefits Act has been replaced by the Defence Force and Retirement and Death Benefits Act, 1973; sec. 30 and 31 of that Act may be compared with sec. 51 and 52 of the former Act.

I order the appellant to pay the Commissioner's costs of the reference. I express the view, however, that because the appellant's investigation of the position in the United Kingdom was of general benefit, the Commissioner ought to be prepared to pay the appellant's costs of it. I also express the view that the Commissioner ought not to seek to enforce the order he has in respect of the hearings which took place on 20th June and 7th October, 1975.

 

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