Federal Commissioner of Taxation v. Verzyden

Judges:
Woodward J
Lockhart J
Ryan J

Court:
Full Federal Court

Judgment date: Judgment handed down 15 August 1988.

---

Woodward, Lockhart and Ryan JJ.

This is an appeal from a decision of a single Judge of this Court (Spender J.) [reported at 88 ATC 4205] dismissing an appeal from the Administrative Appeals Tribunal (``the Tribunal'') [Case U66,
87 ATC 424] on questions of law pursuant to sec. 44 of the Administrative Appeals Tribunal Act 1975. The appellant is the Commissioner of Taxation who seeks to have treated as assessable income under the Income Tax Assessment Act 1936 (``the Assessment Act'') the payment of an amount of $20,945 received in June 1979 by Dirk Verzyden, the respondent. The amount was paid to the respondent by the Kingdom of the Netherlands pursuant to a law of that country entitled Benefit Payments to Victims of Persecution Act 1940-1945 (``the Benefits Act'').

---

ATC 4615

In his return of income for the year ended 30 June 1979 the respondent described the payment as compensation from the Netherlands Government for losses suffered during World War II and claimed that the payment was a non-assessable capital receipt. The Commissioner assessed the appellant on the basis that the payment was assessable income, was neither a capital receipt nor exempt income and that it was assessable in the year of receipt, namely, the year ended 30 June 1979. The assessment was the subject of a request for review by the Tribunal. The respondent was successful before both the Tribunal and the learned primary Judge on the appeal brought by the Commissioner from the Tribunal's decision.

We refer first to the facts found by the Tribunal. The respondent was born in 1915. He lived in Sumatra before the outbreak of World War II. The Tribunal assumed, as the contrary was not asserted, that the respondent was a Dutch citizen before taking up residence in Sumatra and that he remained a Dutch citizen at all relevant times until he became an Australian citizen some years after the end of World War II. Upon the outbreak of hostilities with Japan the appellant was mobilised into the Royal Dutch Indies Army (``KNIL'') on 10 December 1941. He served on military duties with KNIL until March 1942 when he was captured by the Japanese army. From March 1942 until August 1945 the respondent was incarcerated as a prisoner-of-war in Sumatra. The respondent left the former Dutch East Indies upon the cessation of colonial rule by the Kingdom of the Netherlands and settled in Australia.

The Tribunal found that the payment of $20,945 was in the nature of income but was exempt from income tax in Australia pursuant to para. 23AD(3)(c) of the Assessment Act.

The Tribunal also found that the payment of $20,945 was a pension coming within the terms of Art. 19 of an agreement between the Commonwealth of Australia and the Kingdom of the Netherlands, commonly known as the Double Tax Agreement. Section 11A of the Income Tax (International Agreements) Act 1953 (``the International Agreements Act'') provides that, subject to the Act, the provisions of the Netherlands Double Tax Agreement, so far as those provisions affect Australian law, have and shall be deemed to have had the force of law in relation to tax other than withholding tax, in respect of years of income including and since that which commenced on 1 July 1975. Subsection 4(1) of the International Agreements Act incorporates the Assessment Act into the International Agreements Act. Subsection 4(2) of the International Agreements Act provides that the provisions of that Act shall have effect notwithstanding inconsistency between those provisions and the provisions of the Assessment Act. The Tribunal found that Art. 19 of the Double Tax Agreement had the effect of making the amount of $20,945 taxable by the Kingdom of the Netherlands and accordingly not taxable by the Commonwealth of Australia. Article 19 provides, so far as is presently relevant, that remuneration, which includes 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 political subdivision of one of the States (in this case the Dutch East Indies) or to a local authority of one of the States may be taxed in that State.

Although the respondent received the sum of $20,945 in one amount in June 1979, it represented an accumulation of arrears of monthly payments for the preceding two years. It was not a commutation of rights to periodic payments into a lump sum. The Tribunal, having found that the amount of $20,945 was not taxable income of the respondent, did not find it necessary to consider the question whether the whole of the income of $20,945 was derived in the year of receipt or during the years in which the right to receive the monthly payments accrued.

It was not argued before the primary Judge or this Full Court that the finding of the Tribunal that the payment to the respondent was in the nature of income was erroneous.

The primary Judge found that the payment of $20,945 was exempt income pursuant to the provisions of para. 23AD(3)(c) of the Assessment Act. His Honour disagreed, however, with the finding of the Tribunal that the pension paid to the respondent came within the terms of Art. 19 of the Double Tax Agreement. His Honour found that the pension was not properly characterised as one in respect of services rendered in the discharge of governmental functions to one of the States. The Art. 19 point was raised before us on appeal; but the primary question argued was whether the payment of the amount of $20,945

---

ATC 4616

by the Kingdom of the Netherlands to the respondent under the Benefits Act was exempt from Australian income tax on the ground that it was a payment of the kind referred to in para. 23AD(3)(c) of the Assessment Act. That paragraph provides, in its form prior to amendments pursuant to subsec. 5(1) of the Taxation Laws Amendment Act (No. 4) 1985, Act No. 173 of 1985:

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

• (a) payments (other than excepted payments) of pensions and attendants' allowances, and payments (other than excepted payments) of a like nature, made under the Repatriation Act 1920-1973, the Repatriation (Far East Strategic Reserve) Act 1956-1973, the Repatriation (Special Overseas Service) Act 1962-1973 or the Seamen's War Pensions and Allowances Act 1940-1973;
• (b) payments of pensions and allowances, and other payments, made by the Government of Australia or the Government of the United Kingdom of Great Britain and Northern Ireland, being payments that, in the opinion of the Commissioner, are of a similar nature to payments (other than excepted payments) referred to in paragraph (a);
• (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; and
• (d) payments (other than excepted payments) by way of:
  • (i) pension, allowance, endowment or benefit under the Social Services Act 1947-1973;
  • (ii) allowance under the Tuberculosis Act 1948; and
  • (iii) domiciliary nursing care benefit under Division 5B of Part V of the National Health Act 1953-1973.''

The expression ``excepted payment'' has the meaning given in subsec. 23AD(1). Nothing turns for the purpose of the present appeal on that definition, the position being that if the payment in question otherwise falls within the description in para. 23AD(3)(c), it does not on any basis fall within any of the exceptions.

Paragraph 23AD(3)(c) refers to subsec. 365(2) of the Imperial Act known as the Income and Corporation Taxes Act 1970 (``the Imperial Act''). Section 365 provides:

``(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 and 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 such 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

---

ATC 4617

appropriate Government Department, to be attributable to disablement or disability.''

It was argued on behalf of the respondent that para. (c) applies to the payment in question. It was not argued that any other paragraph of subsec. 365(2) applies.

We turn first to the question whether the payment to the respondent answered the description under para. 23AD(3)(c) of the Assessment Act of a payment of a wounds or disability pension of the kind specified in para. 365(2)(c) of the Imperial Act. The comparison to be made is between the particular pension which the respondent received and the kinds of pension specified in para. 365(2)(c) of the Imperial Act.

The interpretation of para. 23AD(3)(c) of the Assessment Act has been considered in various reported cases. In
Goodfellow v. F.C. of T. 76 ATC 4199 the Supreme Court of New South Wales, Administrative Law Division (Sheppard J.) said at p. 4211 that para. 23(kab) of the Assessment Act in its then form (which in all material respects is to the same effect as para. 23AD(3)(c)) embraced not only the specific pensions exempt from English income tax under the Imperial Act, but also other wounds and disability pensions of the same kind payable from sources outside the United Kingdom.

On appeal to the High Court in Goodfellow's case, 77 ATC 4086; (1977) 51 A.L.J.R. 437, Jacobs J. expressed agreement (at ATC p. 4087; A.L.J.R. p. 438) with the reasons of Sheppard J. on this point. Jacobs J. said that he was content to adopt Sheppard J.'s reasons on the point, but took a different view on the question whether the pension of the appellant in that case answered the description of a pension of the kind specified in subsec. 380(2) of the Imperial Act. Barwick C.J. and Aickin J., who were the other two members of the High Court in Goodfellow's case, expressed no views on this question.

The question arose before a Full court of this Court in
Melkman v. F.C. of T. 88 ATC 4468. The Court said at pp. 4474-4475:

``The question (i.e. the interpretation of para. 23AD(3)(c)) has also come before Income Tax Boards of Review in Australia and the reasons of the members of the Boards reflect divergent views: see Case N45,
81 ATC 220; Case P29,
82 ATC 136; Case T2,
86 ATC 107; and Case U66,
87 ATC 424. The question was considered by Spender J. in
F.C. of T. v. Verzyden 88 ATC 4205 at pp. 4209-4210, now on appeal to a Full Court of this Court.

At one end of the scale it is said that para. 23AD(3)(c) exempts only the pensions particularised in subsec. 365(2) of the Income and Corporation Taxes Act 1970. This view gives an effect to the words `of the kinds specified in' similar to that given to the words `of a kind specified in' in sec. 30 of the Compensation (Commonwealth Government Employees) Act 1971 (Cth) and reg. 12 of the Compensation (Commonwealth Government Employees) Regulations by Mason C.J., Brennan and Toohey JJ. in Bird v. Commonwealth of Australia (delivered 20 May 1988). The view is also supported by the use in para. 23AD(3)(b) of the different term `of a similar nature to'. A wider view is that the exemption extends to pensions payable by Governments other than the Government of the United Kingdom provided they answer the description `of the Crown' for the purposes of subsec. 365(2). At the other end of the scale it is said that the exemption extends further to include similar pensions payable by any Governments, including Governments formerly at war with the United Kingdom and Australia.

For reasons which appear later it is not necessary for us to decide this question and we think it inappropriate to do so. The question was not argued before us and only arose incidentally when raised by the Bench in the course of argument. Further, the correctness of the views expressed by Sheppard J. and by Jacobs J. in Goodfellow's case was assumed by counsel for both parties. Nor, as we said earlier, were we referred to any of the relevant Orders in Council or Royal warrants pursuant to which schemes were made under the Acts mentioned in para. (e) of subsec. 365(2) of the Income and Corporation Taxes Act 1970.''

---

ATC 4618

The facts in Melkman's case were materially different from the facts in the present case. The taxpayer in Melkman's case became subject to the restrictions imposed on Jews when the German Armed Forces invaded and occupied the Netherlands in 1940; and, although during the German occupation he was placed in a concentration camp, possibly because of his connection with the underground, he was not a member of any relevant Armed Forces.

The Benefits Act is common to this case and Melkman's case as is the question whether a pension paid to an Australian resident was exempt income by reason of the operation of para. 23AD(3)(c) of the Assessment Act, the taxpayer in each case having been at relevant times (World War II) a Dutch national. However, Melkman's case was concerned with para. (e) of subsec. 365(2) of the Imperial Act. It was not argued that para. (c) applied. In the present case the only paragraph of subsec. 365(2) which was said to be applicable was para. (c). The conclusion which we have reached in the present appeal is consonant, however, with the views expressed by the Full Court in Melkman's case.

The application of the exempting provisions of para. 23AD(3)(c) arises with respect to pensions payable to persons who are, during the relevant year of income, Australian residents, most of whom would be Australian citizens.

Notwithstanding that para. 23AD(3)(c) of the Assessment Act is an exempting provision in a taxing statute, the construction of the expression ``of the kinds specified in sub-section 365(2) of the Imperial Act'' (our emphasis) in the context of payments of wounds and disability pensions to Australian residents calls for no narrow or pedantic approach. Plainly that expression envisages a wider class of pensions than those specified in subsec. 365(2) of the Imperial Act.

It was conceded by counsel for the Commissioner that the Government of the Kingdom of the Netherlands can be equated with ``the Crown'' in para. (c) of subsec. 365(2) of the Imperial Act for the purpose of considering whether the pension payable by the Kingdom of the Netherlands to the respondent with which this case is concerned is of one ``of the kinds'' referred to in para. 23AD(3)(c). It is unnecessary, therefore, for us to consider the interpretation and scope of application of the expression ``the Crown'' in para. (c) of the Imperial Act for the purposes of para. 23AD(3)(c) of the Assessment Act.

The only evidence as to the nature of the pension paid to the respondent is a document described as ``Guide for the victims of persecution during the 1940-1945 war who are resident outside the Netherlands'' and apparently issued in July 1975 by the Ministry of Cultural Affairs, Recreation and Social Welfare of the Netherlands. It is regrettable feature of the case that reliance must be placed solely on this document to determine the character of the pension payable to the respondent. It is explained, at least in part, by the fact that the respondent represented himself before the Tribunal, and the Commissioner did not seek to tender material of greater probative value. We have examined the facts as recorded in the judgments in Melkman's case and in Goodfellow's case which refer to some extent to the Benefits Act and its provisions. We draw to some extent on those cases for present purposes.

An examination of the Guide shows that the basic principle of the Benefits Act is the:

``joint liability of the Dutch people towards their persecuted compatriots;''

The Benefits Act is intended to benefit:

``Dutch citizens, at home or abroad, and their next of kin, as well as for a specific group of aliens who were persecuted on account of their race, religion or world-conception, by the enemy during the occupation of the Netherlands and the former Dutch East Indies.''

Since 1 July 1975 the Benefits Act has been applied to ``a certain group of ex-Dutch citizens living abroad and their next of kin''. The Benefits Act is intended to apply to people who:

``as a result of the persecution they have suffered, are handicapped by diseases or infirmities...''

---

ATC 4619

The Benefits Act benefits certain groups of people:

``regarded as victims of persecution provided that they were persecuted by the occupying forces of the Netherlands during the Second World War on account of their race, religion and world-conception.''

The groups include ``Dutch citizens at home or abroad'' and certain other classes of persons, and relevantly for present purposes:

``c. Aliens who were Dutch Citizens during the war, but have since become citizens of another country;''

It is common ground that the respondent was a Dutch citizen at all material times during the Second World War, that he has since become a citizen of Australia and is therefore within the description of an ``alien'' for the purposes of the Benefits Act.

The Guide describes ``persecution'', ``within the framework of'' the Benefits Act, as meaning:

``- Deprivation of liberty by imprisonment or detention in a concentration or internment camp;

- Submitting to sterilisation to escape deprivation of liberty;

- Go into hiding to elude deprivation of liberty.''

The deprivation of liberty must have been:

``motivated by persecution for reasons of race, religion or world-conception.''

The Guide states:

``In the case of victims from the former Dutch East Indies, this can best be translated as persecution on the grounds of their Dutch nationality or their European disposition. Persecution, consequently, does not include measures taken by the occupying forces against individuals or groups of individuals on account of their withdrawal from forced labour or internment in prisoner-of-war camps. Individuals who went into hiding during the war to escape `arbeitsceinsatz' (forced labour) or internment in prisoner-of-war camps, or who were deprived of their liberty as a result of such actions are, therefore, not considered to be victims of persecution in the sense of the (Benefits Act).''

The passage just cited as to what persecution does not include is cast in slightly ambiguous language; but its meaning is clear, namely, that persecution does not include measures taken by the occupying forces against individuals or groups of individuals on account of their withdrawal either from forced labour or from internment in prisoner-of-war camps. It appears that ``withdrawal'' in this context connotes, as the last sentence of the passage makes clear, the action of individuals who went into hiding during the war to escape either forced labour or internment in prisoner-of-war camps.

The Guide goes on to say:

``Furthermore, it should be observed that the (Benefits Act) is not applicable to victims or their next of kin, who are entitled to benefits in virtue of the... (Special Pension 1940-1945 Act), nor to those who on the strength of persecution can lay claims to the provisions in force for the members of the armed forces, unless the victim was a member of the former Royal Dutch Indies Army (KNIL).''

The Guide contains a section headed ``Entitlement to benefits'' which 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 diseases or infirmities, caused or aggravated by persecution, is entitled to such benefits. In so far as such diseases or infirmities have not clearly developed from or been aggravated by other causes, they are assumed to be the result of persecution, provided this assumption is not contrary to general accepted medical views and experience.''

The description of victims of persecution and the definition of persecution under the Benefits Act includes various classes of persons. One such class consists of persons who were Dutch citizens during World War II, but who have since become citizens of another country who were interned in prisoner-of-war camps (and therefore, by definition in the Benefits Act, persecuted by the Japanese Armed Forces on the ground of their Dutch nationality or their ``European disposition''). The fact that a person was a member of the former Royal Dutch Indies Army does not disqualify him or

---

ATC 4620

her from the class of persons entitled to receive the pension. This may be because members of the Netherlands Armed Forces during World War II have specific entitlements to pensions under other legislation of the Kingdom of the Netherlands which may not extend to former members of the Royal Dutch Indies Army.

The pension granted to the respondent under the Benefits Act was a disablement or disability pension. The respondent was a member, not being a commissioned officer (or its equivalent in the Royal Dutch Indies Army), of the Royal Dutch Indies Army. The pension was granted to him on account of his medical unfitness attributable to his internment by the Japanese military forces in Sumatra during the Second World War. Whilst he was interned as a prisoner-of-war he was a member of the Royal Dutch Indies Army so that his unfitness was plainly attributable to his military service. The respondent therefore fits precisely into one of the categories of persons entitled to receive pensions under para. 365(2)(c) of the Imperial Act.

We consider it an unduly restrictive interpretation of para. 23AD(3)(c), an interpretation for which the Commissioner argued, to regard a pension as not being one of the kinds specified in subsec. 365(2) of the Imperial Act if it is payable under a statutory regime which also allows a person to qualify for the same or a similar pension by reference to a disability incurred otherwise than in the course of service of a defence or analogous force.

Accordingly, in our opinion the payment of the sum in question in this case answers the description of the payment of a wound or disability pension of the kind specified in para. 365(2)(c) of the Imperial Act and therefore is exempt from income tax under para. 23AD(3)(c) of the Assessment Act.

We note that the introduction of sec. 23(kca) into the Assessment Act by subsec. 4(1) of the Income Tax Assessment Amendment Act (No. 4) 1982, Act No. 76 of 1982, which applies to pensions derived on or after 3 March 1982, allows a specific exemption for pensions of the kind received by the respondent in so far as entitlements under the pension were derived on or after that date.

In view of our findings on the primary question in the case it is unnecessary to consider the question relating to Art. 19 of the Double Tax Agreement.

We would dismiss the appeal with costs.