Case J54

Judges: AM Donovan Ch
RK Todd M

LC Voumard M

Court:
No. 2 Board of Review

Judgment date: 30 September 1977.

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L.C. Voumard (Member): On a number of distinct occasions, the taxpayer involved in this reference was employed by a company operating in the north-west of Australia. The reference concerns employment commencing on 21st January, 1971, and concluding on 22nd March, 1972. The terms of the taxpayer's employment were embodied in two letters from his employer, each one dated 6th July, 1971. One of them confirmed the conditions of his re-appointment (``re-appointment'' because a prior appointment had been terminated in December 1970) at a stated salary, payable monthly, listed his annual leave entitlement and so forth. The second letter, omitting formal parts, read:

``This is to confirm my verbal advice on the payment of a Production completion bonus, subject to the following conditions: -

• 1. Effective date is 1st May, 1971.
• 2. The bonus will accrue at the rate of $250 per calendar month until retrenchment.
• 3. Payment is conditional on you remaining on this Project until retrenched.
• 4. Payment will be made by cheque prior to your departure from site.''

2. By letter dated 26th February, 1972, the taxpayer was informed by the employer that as the work for which he had been engaged was expected to be concluded by the end of March, 1972, his services would be terminated on or about 31st March, 1972. In fact they were terminated on 22nd March, 1972. On that date the taxpayer received a cheque for $4,051.73, made up of -

      (a) Payment in lieu of

          public holidays                $    70.00

      (b) Payment in lieu of

          accrued leave                    1,231.73

      (c) Production completion

          bonus                            2,750.00

                                          ---------

                                          $4,051.73

                                          ---------
      

The amount in item (c) covered the period of 11 months, May 1971 to March 1972 inclusive, at the stipulated rate of $250 per month, treating March as a full month. In his income tax return for the year ended 30th June, 1972, the taxpayer treated all of items (a), (b) and (c) as subject to sec. 26(d) of the Income Tax Assessment Act. Initially, the Commissioner conceded that only item (a) was so subject, but he partly allowed the taxpayer's objection against the inclusion in the assessment of the full amounts of items (b) and (c) by treating item (b) as likewise subject to sec. 26(d). In this reference the only issue is the treatment of item

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ATC 477

(c), the taxpayer claiming that only 5% of the sum of $2,750 represents assessable income because of sec. 26(d), and the Commissioner claiming that the amount of $2,750 is fully assessable because of either sec. 25(1), sec. 26(e) or sec. 26(i).

3. A letter from the taxpayer's former employer to the relevant Deputy Commissioner, dated 11th April, 1973, explained that the bonus payment was designed as an incentive to keep the employee on the project until he was no longer needed. Payment of the bonus was conditional upon him remaining on the project until retrenched, and indeed the taxpayer gave evidence that had he resigned at any time before the retrenchment date he would have received no part of the bonus. The employer's letter referred to went on:

``Production completion bonus was granted to a few employees considered by the management as necessary personnel required to complete the final year's contract work. The very nature of (the construction contract awarded to the company) bound the company to fixed dates of completion of certain areas of work governed by the... wet season conditions... It was, therefore, imperative that all work be completed prior to the wet season beginning, and in this respect the employees, in a supervisory capacity, were needed up until the work was 100% completed. (The taxpayer's duties) extended to repair of the equipment after it had been used on the contract work. The equipment had to be repaired in a condition ready for sale to prospective clients and (the taxpayer) was responsible for performing that operation. His efforts were needed, therefore, up until the notice of termination given to him on the 26th February, 1972...''

4. This recital of the facts may be concluded by noting that from the taxpayer's own evidence as to his activities after 22nd March, 1972, his employment with this company clearly terminated on that date, and this was not challenged. As it happened, some months later the taxpayer was engaged once more by the same employer (although to do somewhat different work); that, however, had not been contemplated when he was paid off in March 1972, and in no way affects the question before the Board.

5. In my opinion, the taxpayer is correct in his claim that the payment falls within sec. 26(d) for the following reasons. First (although the Commissioner's arguments to the contrary included a proposition that as the word ``bonus'' is used in subsec. 26(e) and 26(i), but not in sec. 26(d), it followed that because the parties had chosen to call the payment a bonus it fell outside sec. 26(d)), the payment of $2,750 constituted an ``allowance... or compensation'' as those words are used in sec. 26(d). The use by the parties of the word ``bonus'' does not alter that. Secondly, the amount was paid in a lump sum; the contrary was not and could not be suggested. Thirdly, although the payment was of an income, rather than of a capital, nature, being in the nature of an additional reward allowed to the taxpayer for the services he had rendered, the use of the expression ``capital amount'', as has been explained by Gibbs and Jacobs JJ. in
Reseck v. F.C. of T. (1975) 75 ATC 4213 , does not mean that the receipt will fall within sec. 26(d) only if it is one of capital. Gibbs J. said ( supra ) at p. 4216: ``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.'' And see per Jacobs J. (supra) at p. 4220, and para. 20 of the reasons of this Board, as then constituted, in Case 6,
14 C.T.B.R. 38 . Fourthly, it seems to me that the lump sum payment was made ``in consequence of'' the termination of his employment. The meaning of that phrase was discussed by Gibbs and Jacobs JJ. in Reseck's case (supra), and their judgments included certain statements of principle. At pp. 4216-7, Gibbs J. expressed the view: ``Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination'', while Jacobs J., at p. 4219, said: ``It was submitted that the words `in consequence of import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a `following on'.'' The payment to the taxpayer in this case appears to satisfy both these tests. It clearly ``followed on'' the termination of the taxpayer's employment for the purpose of the test propounded by Jacobs J. even if, as has been suggested (see the article in Australian Tax Review, Vol. 5, p. 27

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ATC 478

at p. 29) ``consequence'' imports some causal connection. Also, I think that having regard to the circumstances in which the entitlement to it arose the payment was ``an effect or result'' of the termination of the taxpayer's employment on 22nd March, and so satisfied the test preferred by Gibbs J.

6. Having concluded that sec. 26(d) does apply to the payment involved in this reference, it follows that, in my opinion, the payment is not to be governed by either sec. 25(1) or sec. 26(e), as contended for the Commissioner. The proviso to sec. 26(e) ensures that any receipt that comes within sec. 26(d) does not come within sec. 26(e), and Gibbs and Jacobs JJ. ( Stephen J. dissenting on the point) held in Reseck's case (supra) that sec. 26(d) has an exclusory operation as regards sec. 25(1). At p. 4216, Gibbs J. said:

``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... 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.''

And Jacobs J., at p. 4220, reached a similar conclusion, preferring to give effect to the special provision in sec. 26(d) rather than to the general provision in sec. 25(1).

7. There remains the final submission put by the Commissioners representative that the full amount of the receipt represented assessable income under sec. 26(i), being an ``amount received as or by way of bonus other than a reversionary bonus on a policy of life assurance''. In my opinion, this provision should be read as including in the assessable income any amount received as or by way of bonus on a policy of life assurance, other than a reversionary bonus on such a policy. It may be that so to read it is to give it only a limited operation, as the Commissioner's representative pointed out, but there seems to be nothing illogical in an interpretation that would treat as assessable income an annual bonus on a life assurance policy that is payable in praesenti in cash, while at the same time exempting reversionary bonuses payable, not annually in cash, but at face value upon maturity. It would be somewhat remarkable if, in a provision that excludes from assessable income such reversionary bonuses the opportunity were taken to enact specifically that the assessable income is to include all bonuses, of whatsoever nature, including those that are already income according to ordinary concepts, or that are already governed by sec. 26(d) or sec. 26(e). I do not think that sec. 26(i) should be given the wide meaning contended for on behalf of the Commissioner, but rather that the word ``bonus'' where first appearing in the provision should be accorded the restricted meaning given above.

8. I would therefore allow the taxpayer's objection and include in his assessable income of the year ended 30th June, 1972, only 5% of the lump sum of $2,750 paid to him on his retrenchment.

Claim allowed