McIntosh v. Federal Commissioner of Taxation.

Judges:
Brennan J
Toohey J
Lockhart J

Court:
Full Federal Court

Judgment date: Judgment handed down 29 June 1979.

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Brennan J.: The National Bank of Australasia Ltd. established an Officers' Provident Fund out of which benefits are paid to officers of the Bank on their retirement from its service. The control and management of the fund is vested in administrators, under the rules which govern the administration of the fund. The appellant taxpayer had been an officer of the bank and a contributor to the fund until his retirement on 24 March 1976. He then became entitled to a pension which, in his case, was payable at the rate of $5,511.72 per annum from 25 March 1976. He elected to commute half of this pension for a lump sum payment, as he was entitled to do by virtue of rule 22. It provides:

``On the application of any contributor or pensioner, either before but not later than one calendar month after his retirement, the administrators shall commute for a lump sum payment that part he elects to commute which is either twenty-five per centum or fifty per centum of the total pension payable at retirement to him or such lesser amount only as may be permitted by the restrictions of the appropriate taxation and revenue authorities for a lump sum payment... That part of the pension which has not been commuted will be payable as a pension.''

The rule also sets out the means of calculating the amount of the lump sum to be paid. In the taxpayer's case that sum was $27,006.84 and he was paid it in the income year ended 30 June 1976. His pension entitlement was accordingly reduced to $2,755.92 per annum.

The respondent Commissioner in reliance upon sec. 26(d) of the Income Tax Assessment Act 1936 included in the taxpayer's assessable income 5% of the sum received by the taxpayer, rounded out to $27,007.00. The taxpayer objected to his assessment, claiming:

``that an amount of $27,007.00 representing a commutation of my pension entitlement under The National Bank of Australasia Ltd. Officers' Provident Fund should not have been assessed in whole or in part as income.''

and setting out the grounds of his claim. His objection was disallowed. He appealed against the disallowance to the Supreme Court of Queensland where Andrews J. dismissed his appeal with costs. He now appeals from the judgment of the Supreme Court.

Section 26(d), omitting an irrelevant proviso, reads:

``The assessable income of a taxpayer shall include -

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

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ATC 4327

The conditions of application of sec. 26(d) include three which relate to the ``amount'', five per centum of which is brought to charge. First, the amount must be paid in a lump sum; second, the amount must be the capital amount of an allowance, gratuity or compensation; and third, the payment of the amount must be ``in consequence of'' retirement from or termination of an office or employment.

The first of those conditions was clearly fulfilled by the payment of $27,006.84. It was paid but once, not as an instalment or part payment of some larger sum, but in full discharge of the obligation which made it payable.

The second condition requires that the amount be the capitalised or total value of the relevant allowance, gratuity or compensation. Gibbs J. in
Reseck v. F.C. of T. 75 ATC 4213 ; (1975) 133 C.L.R. 45 said at pp. 4215-16; 49 :

``... it is apparent from the grammatical arrangement of sec. 26(d) that the words `of the capital amount' are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in the assessable income. The allowance, although it must be paid in a lump sum to come within sec. 26(d), may have been fixed at a rate payable in respect of a specified period - for example, at so much for every week worked. The words `of the capital amount' are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalized or total value.''

The $27,006.84 was the total value of the pension entitlement which was commuted, calculated in accordance with the rules which conferred the right to require a proportion of the pension entitlement to be commuted.

It was argued that the amount paid to the taxpayer was not itself an ``allowance, gratuity or compensation'', but that argument does not distinguish between the allowance etc., and the amount which represents its capitalised or total value. When the payment in question is the allowance etc. the distinction is immaterial; but when an amount is paid which represents the capitalised or total value of other sums, it is not the amount paid but the other sums which must answer the description of allowance, etc. if sec. 26(d) is to apply. The pension to which the taxpayer was entitled under the rules of the fund was an allowance: it was a stipend payable to one whose wages has ceased on retirement, and the $27,006.84 which he received in lieu of half of that stipend was the capital amount of half of that stipend. Where the payment in question is the capital amount of an allowance, as the present payment is, the opening words of sec. 26(d) are satisfied.

It is immaterial that the payment was not made by the employer. That is not an element of sec. 26(d). The character of allowance, etc. is not necessarily determined by the identity of the person liable to pay it. In the present case, if the pension which the administrators of the fund were liable to pay had been payable by the bank on the retirement of the taxpayer, the pension would clearly be an allowance by an employer in partial replacement of the income from employment lost by the taxpayer on his retirement. It was nonetheless an ``allowance'' in the statutory sense when it was payable by the administrators of the fund which the employer established.

The third condition of the application of sec. 26(d) requires that the payment of the relevant amount be ``in consequence of'' retirement from, or the termination of, an office or employment. The quoted phrase was referred to by Gibbs and Jacobs JJ. in Reseck's case (supra) . Gibbs J. said (at pp. 4216-17; 51):

``Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that `purpose' in sec. 26(a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of sec. 26(d). For example, a retiring allowance is plainly intended to be

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ATC 4328

within sec. 26(d) but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause predominated over the latter.''

To say that a payment ``follows as an effect or result of the termination'' imports causation as the relevant nexus between the termination and the payment, but it is clear that termination need not be the dominant cause of the payment.

Though Jacobs J. speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J. Jacobs J. said (at p. 4219; 56):

``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'.''

His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement. In the Supreme Court Andrews J. said:

``I think it clear that the statement of Jacobs J. refers to something more than the occurrence of events in a purely temporal progression and that it connotes a relationship between events or states of things and the payment in question to which some persons might apply the adjective causal, while others would see the link in that one or more of such events or states of things must necessarily exist or occur as precedent to the payment, so as to constitute a condition or conditions precedent, both meaning the same thing.''

[78 ATC 4324 at p. 4328]

It may not be appropriate to speak of conditions if a payment is made voluntarily, but if a payment is made to satisfy a payee's entitlement, the phrase ``in consequence of retirement'' requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established.

Was the taxpayer's retirement the occasion of and a condition of entitlement to the payment of $27,006.84? On and by reason of his retirement, and at the time when he retired, he acquired an entitlement to a pension (rule 17a). One half of that pension was commutable and the taxpayer then had a month in which to exercise his right to require commutation (rule 22). Prior to retirement, the taxpayer might have elected to require commutation of the pension presumptively payable, but until retirement there was no entitlement to a pension upon which the right to require commutation might operate. On and by reason of retirement, a contributor who has earlier elected to require commutation is entitled to payment of a lump sum; on and by reason of retirement, a contributor who has not elected to require commutation, acquires the right to become entitled to payment of a lump sum. In either case retirement is the occasion of and a necessary condition of becoming so entitled, and a payment made to satisfy the entitlement is made in consequence of retirement. The taxpayer's retirement was the occasion and a necessary condition of his becoming entitled to $27,006.84. Though entitlement awaited the exercise of the taxpayer's election to require commutation his entitlement to payment did not depend upon the occurrence of any other event or upon the act or consent of any other person. When the payment was made in discharge of the entitlement, it was made ``in consequence of'' his retirement, and the payment thus falls within the statute. The appeal should be dismissed with costs.