Federal Commissioner of Taxation v. Verzyden

Judges:
Spender J

Court:
Federal Court

Judgment date: Judgment handed down 16 March 1988.

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Spender J.

This is an appeal from the Administrative Appeals Tribunal [reported as Case U66, 87 ATC 424] pursuant to sec. 44 of the Administrative Appeals Tribunal Act 1975.

The question before the Tribunal was whether an amount of $20,945 received as one payment in June 1979 by Mr Dirk Verzyden was assessable income. The taxpayer had, in the relevant tax year, described the payment as compensation from the Dutch Government for losses suffered during World War II, and claimed that the payment was a non-assessable capital receipt. Alternatively, the applicant claimed that the amount received should be assessable income in the year of income to which it relates. The Commissioner's view was that the payment was assessable income and was neither a capital receipt nor exempt income and that it was assessable in the year of receipt. The Tribunal allowed the taxpayer's objection to the disallowance by the Commissioner of that sum.

The facts so far as is relevant for the purposes of this appeal, appear from the findings of the Tribunal:

``6. The applicant, who was born in 1915, lived in Sumatra prior to the outbreak of World War II. Although it was not clearly established I infer that he was a Dutch citizen prior to taking up residence in Sumatra and that he remained a Dutch citizen at all relevant times until he became an Australian citizen. The applicant was employed by a public company carrying on business in Sumatra but had, at some unspecified time prior to the outbreak of World War II, spent four months in the Dutch Army training as a soldier in what the applicant described as `national service'.

7. Upon the outbreak of hostilities with Japan and the perception that the then Dutch East Indies were threatened with invasion the applicant was mobilised into the Royal Dutch Indies Army (KNIL) on 10 December 1941. The applicant served on military duties with the KNIL until March 1942 when he was captured by the Japanese Army.

8. From March 1942 until August 1945 the applicant was incarcerated as a prisoner of war in Sumatra.

9. At the conclusion of hostilities and his release from the prisoner of war camp, the applicant was then appointed as an Inspector of Police with special duties as a member of a British war crimes investigation team. He served in this capacity for 18 months and was maintained as to his food, accommodation, clothing etc. by the British Army.

10. After 18 months his former employer succeeded in gaining his release from his duties on the British war crimes investigation team and the applicant returned to his employment with his former employer.

11. Although not relevant to the issues arising in this application, for the sake of completeness it should be recorded that the applicant left the former Dutch East Indies upon the cessation of colonial rule by the Netherlands and settled in Australia. He has been a citizen of Australia since that time.

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ATC 4207

12. About 1977 the applicant became aware that the Netherlands Government was making certain reparation payments to ex-Dutch citizens living abroad who were victims of persecution during the 1940-1945 War.''

The evidence contains the document ``Guide for the Victims of Persecution during the 1940-1945 War who are resident outside the Netherlands'', which was issued by the Ministry of Cultural Affairs, Recreation and Social Welfare of the Dutch Government in July 1975. That pamphlet indicates that persecution within the framework of the ``Act Benefits for the 1940-1945 Victims of Persecution'' (ABVP) means ``(d)eprivation of liberty by imprisonment or detention in a concentration or enternment [sic] camp;...''. It seems that the ABVP is applicable to members of the former Royal Dutch Indies Army (KNIL).

So far as entitlement to benefits is concerned, the pamphlet states:

``By benefits is meant a periodical (monthly) payment, made as a supplement to a person's own income.

Anyone unable to earn an average income as a consequence of deseases [sic] or infirmities, caused or aggravated by persecution, is entitled to such benefits.''

The benefits are subject to a means test.

The Tribunal concluded that the payment is in the nature of income, but that it was a pension coming within the terms of Art. 19 of an agreement known as the Double Tax Agreement, and was also of a kind specified in sec. 365 of the United Kingdom Income and Corporation Taxes Act 1970, and therefore is exempt from tax in Australia under para. 23AD(3)(c). The Tribunal having found the amount of $20,945 was exempt income, found it unnecessary to consider the question as to when the income was derived.

The Commissioner appeals from the decision of the Tribunal. The questions of law which, pursuant to sec. 44, are the basis on which an appeal from the Taxation Appeals Division of the Administrative Appeals Tribunal lies to the Federal Court of Australia, are specified in the Notice of Appeal as follows:

• (1) What is the proper interpretation of Art. 18 and 19 of the Agreement between Australia and the Kingdom of the Netherlands (hereafter ``the Netherlands Agreement'') as that Agreement is applied by sec. 4 and 11A of the Income Tax (International Agreement) Act.
• (2) Whether a pension paid for persecution suffered as a prisoner of war is capable of being described as remuneration in respect of services rendered as that expression appears in Art. 19 of the Netherlands Agreement.
• (3) What is the proper interpretation to be placed upon sec. 23AD(3)(c) of the Income Tax Assessment Act, particularly, the interpretation to be given to the phrases:
  • (i) ``wounds and disability pensions'',
  • (ii) ``of the kinds specified in sub-section 365(2) of the Imperial Act known as the Income and Corporation Taxes Act 1970''.

The grounds which O. 53 r. 3 of the Federal Court Rules requires to be specified, are as follows:

• 1. The Tribunal erred in law in holding, on the facts as found, that the amount of $20,945 received by the Respondent taxpayer in June, 1979 (hereafter ``the said amount'') was a pension coming within the terms of Article 19 of the Netherlands Agreement in that: -
  • (a) The said amount was not remuneration paid in respect of services rendered in the discharge of governmental functions
  • (b) The said amount was paid, as was found, for persecution suffered while the taxpayer was a member of the Royal Dutch Indies Army.
• 2. The Tribunal erred in law in holding, on the facts as found, that Article 19 of the Netherlands Agreement had the effect of making the said amount taxable by the State paying the said amount and accordingly not taxable in Australia.
• 3. The Tribunal erred in law in holding, on the facts as found, that the said amount was a pension to which Article 19 of the Netherlands Agreement applied and in so doing applied an incorrect interpretation of Article 19.

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  ATC 4208

• 4. The Tribunal erred in law in holding, on the facts as found, that the said amount was of a kind specified in Section 365 of the Imperial Act known as the Income and Corporation Taxes Act 1970 and accordingly holding that the Netherlands Agreement was exempt from income tax, in that: -
  • (a) The payment made was not a wounds or disability pension;
  • (b) The payment was not of the kind specified in the Imperial Act.

Section 23AD(3)(c) of the Income Tax Assessment Act 1936 provides:

``(3) The following payments are exempt from income tax: -

• ...
• (c) payments of wounds and disability pensions of the kinds specified in subsection 365(2) of the Imperial Act known as the Income and Corporation Taxes Act 1970, other than payments that, in the opinion of the Commissioner, are of a similar nature to excepted payments;''

Section 365 of the Imperial Act reads 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 the Income Tax Acts.

(2) Subsection (1) above 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, and
• (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 subsection (1) above applies is not solely attributable to disablement or disability, the relief conferred by the said subsection (1) shall extend only to such part as is certified by the Secretary of State for Social Services, after consultation with the appropriate Government Department, to be attributable to disablement or disability.''

Section 4 of the Income Tax (International Agreement) Act 1953 provides that the Income Tax Assessment Act is incorporated in and is to be read as one with the Income Tax (International Agreement) Act. Section 11A of the International Agreement Act provides for the incorporation into that Act of an agreement with the Kingdom of the Netherlands known as the Double Tax Agreement, which was incorporated with general effect from 1 July 1975.

Articles 18 and 19 of that agreement are as follows:

``18(1) Pensions, including pensions provided under the provisions of a public social security system, but not including pensions to which Article 19 applies, paid to a resident of one of the States, and annuities so paid, shall be taxable only in that State.

18(2) The term `annuity' means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.

19(1) Remuneration (including a pension) paid to any individual in respect of services rendered in the discharge of governmental functions to one of the States or to a

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ATC 4209

political sub-division of one of the States or to a local authority of one of the States may be taxed in that State. However, any such remuneration, not being a pension, shall be taxable only in the other State if the services are rendered in that other State and the recipient is a resident of that other State who -

• (a) is a citizen or national of that State; or
• (b) did not become a resident of that State solely for the purpose of performing the services.

19(2) This Article shall not apply to remuneration (including a pension) in respect of services rendered in connection with any trade or business carried on by one of the States or a political sub-division of one of the States or a local authority of one of the States. In such a case, the provisions of Articles 15, 16 and 18 shall apply.''

No question was argued on the appeal as to the finding by the Tribunal that the payment to Mr Verzyden was in the nature of income. As the Guide indicates, the benefits under the scheme are periodic in nature and they are calculated by reference to loss of income.

There are thus two questions on the appeal. First, whether the benefit under the ABVP scheme is properly to be characterised within the meaning of Art. 19 of the Double Tax Agreement with the Netherlands as ``remuneration, including a pension, paid to any individual in respect of services rendered in discharge of governmental functions to one of the States''. Secondly, is the receipt exempt from tax pursuant to sec. 23AD(3) in that it is a payment under the ABVP scheme properly to be characterised as a disability pension of a kind specified in sec. 365(2) of the Income and Corporation Taxes Act 1970. In particular, whether in fact that pension is of the kind specified in sec. 365(2)(c), namely:

``Disablement or disability pension granted to members, other than commissioned officers, of the naval, military or air force of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air-force service,...''

As to the first question, I disagree with the conclusion of the Tribunal that the pension may properly be characterised as one in respect of services rendered in the discharge of Governmental functions to one of the States. An ABVP pension, in my view, is clearly a means-tested disability pension and cannot be characterised as a pension ``in respect of services rendered in the discharge of Governmental functions''. While the words ``in respect of'' are wide in their scope, payment under the ABVP scheme is not in any way attributable to any sort of military service, let alone ``government service'', but the entitlement depends on the fact of disability suffered as the result of deprivation of liberty by imprisonment or detention in a concentration or internment camp.

However, I am of the view that the ABVP payment is exempt income pursuant to the provisions of sec. 23AD(3)(c).

The history of that section is detailed in the judgment of Aickin J. in
Goodfellow v. F.C. of T. (1977) 51 A.L.J.R. 437 at p. 440, from the left hand column at letter ``D'' to the following column at letter ``F''. The Court was in that case concerned with the precursor of sec. 23AD.

The pension payable to the applicant under the ABVP is now exempt from income tax under para. 23(kca). Prior to the introduction of that subparagraph, the Taxation Board of Review No. 3 in Case N45,
81 ATC 220 held by a majority, Dr Beck dissenting, that para. 23AD(3)(c) only applies to wounds and disability pensions specifically listed under sec. 365 of the Income and Corporation Taxes Act 1970, and therefore only applied to pensions payable to members of the armed forces of the British Crown. That judgment makes no reference to the decision of the High Court in Goodfellow v. F.C. of T. (supra).

In that case, Barwick C.J. agreed with Aickin J., who held that the features of the payment made to the appellant by the Commonwealth properly called for a conclusion that the payments are of a similar nature to pensions, allowances or payments specified in sec. 23(k) of the Income Tax Assessments Act 1936 as amended. Jacobs J. was of a similar view, but also held that such payments were exempt under sec. 23(kab).

In April 1982, the Taxation Board of Review No. 2 in Case P29,
82 ATC 136 determined that a pension paid by the Dutch Government was a pension of a kind specified in sec. 365 of

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ATC 4210

the United Kingdom Income and Corporation Taxes Act 1970 and therefore qualified for exemption from Australian tax. The amendments making it clear that the pension payable under the ABVP was exempt from income tax under para. 23(kca) received the Royal Assent on 13 September 1982. The Commissioner seeks to apply the observations of Dixon J., as he was then, in
Grain Elevators Board (Vic.) v. Dunmunkle Corporation (1946) 73 C.L.R. 70 at p. 86, to the passing of that legislation. It seems to me, however, that the observations of the Privy Council in
Re Samuel (1913) A.C. 514 at p. 526 are apposite. Viscount Haldane L.C., giving the advice of the Board said:

``It is not a conclusive argument as to the construction of an earlier Act to say that unless it be construed in a particular way a later enactment would be surplusage. The later Act may have been designed, ex abundante cautela to remove possible doubts.''

It was submitted by the Commissioner that the pension under the ABVP scheme was essentially a payment for persecution and the question of disability merely quantified the amount of the pension. It seems to me plain that this is an erroneous characterisation of the pension and it is properly to be regarded as a disability pension.

It was expressly accepted for the purposes of this appeal by both parties that a member of the Australian and U.K. military forces who was interned as a prisoner of war should be considered to have been on military service during the period of his internment. In
Repatriation Commission v. Law (1980) 147 C.L.R. 635, a prisoner of war was a ``member of the Forces who was employed on active service'' within the meaning of sec. 101 of the Repatriation Act 1920 (see Aickin J. at p. 642). The conclusion of the Tribunal in this respect was in these terms:

``I think the remuneration received by the applicant under the provisions of the ABVP is clearly of the kind specified in s. 365 of the United Kingdom Income and Corporation Taxes Act 1970 and therefore it is exempt from tax in Australia under paragraph 23AD(3)(c).''

In my view this conclusion is correct.

For this reason the appeal should be dismissed with costs.