Case P47

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 17 June 1982.

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K.P. Brady (Chairman); L.C. Voumard and J.E. Stewart (Members)

Two questions are raised by this reference. First, whether a lump sum payment made to the taxpayer by his employer meets the requirements of sec. 26(d) of the Income Tax Assessment Act 1936 so that five per centum of it represents assessable income, and secondly, of sec. 26(d) does not govern the matter, whether the payment was of a non-assessable capital nature or whether it was fully assessable by virtue of sec. 25(1) or sec. 26(e) of the Income Tax Assessment Act.

2. In February 1976, the taxpayer began employment with a bank as a financial analyst in the mining area. There was apparently some doubt over his appointment because, despite a fine academic record, with higher degrees in the fields of engineering and business administration, it was felt that his background had perhaps been too technical to make him suitable for a long term appointment. He was, therefore, offered only a limited tenure appointment for a period of 36 months.

3. Because the appointment was a short term one, no provision was made for the taxpayer to become a member of the staff superannuation fund. For the same reason, he would not be able to achieve any long service leave entitlement during the period covered by the service agreement. For these reasons, the taxpayer told us, the service agreement of 2nd February, 1976, provided in cl. 17 that, with certain qualifications not here relevant:

``Upon termination of this Agreement... the (employer) hereby agrees to make a lump sum payment to the (taxpayer) adopting the following formula...

                           Average Monthly     No. of Months of
                   9        Emoluments           Employment
  (a) Formula:    ---  x  --------------    x  ---------------       ...
                  100          1                     1''
              

The agreement itself did not recite the reasons why the employer contracted to make this payment, but we accept the explanation given by the taxpayer.

4. Apparently the bank's reservations proved groundless, for some time before 11th July, 1978, the taxpayer had discussions with the employer about the possibility of changing from his limited tenure appointment to full time career employment, or varying the terms of the former. In a letter (Exhibit 1) dated 11th July, 1978, to the taxpayer, the bank's senior manager - group personnel resources referred to previous correspondence, and advised that the remuneration ``package'' offered to him for career and fixed term employment had been reviewed, and gave details of each ``package''. Then the letter went on:

``To assist you in further considering our offer, we attach a detailed summary of emoluments and benefits available under each alternative. On your acceptance of one or other of the alternatives your current fixed term employment contract may be rescinded (by mutual agreement) and a fresh agreement executed. The new emoluments and benefits detailed will apply from that date...''

By a reply dated 19th July, 1978, the taxpayer accepted the offer made, on the ``career'' basis. His acceptance of the offer involved him in a more senior position. Finally, the parties agreed in writing to the termination of the original service agreement on the same day, 19th July, 1978.

5. In consequence of these arrangements, the taxpayer received a lump sum payment of $4,386 in accordance with cl. 17 of the original service agreement dated 2nd February, 1976. In his return of income for the year ended 30th June, 1979, the taxpayer claimed that, in accordance with sec. 26(d), only five per centum of that amount was assessable, whereas the Commissioner treated the full amount as assessable. The

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matter is now before us to determine the questions set out in para. 1 of these reasons. It is convenient to deal first with the sec. 26(d) question.

6. Ignoring exceptions not here relevant, that provision treats as assessable income:

``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''

(emphasis added). (The arrangement of the wording has since been varied, but the effect of the provision remains unchanged.)

It may be conceded at once that the payment satisfied all the requirements of this provision, except perhaps that embodied in the words emphasised. It is only that requirement which we need to consider in determining the applicability of sec. 26(d).

7. The relevant service agreement, by cl. 17, provided for a right to payment of the sum in question ``upon termination of this agreement...''. Section 26(d), of course, requires more than this; namely, retirement from or termination of (a) an office or (b) employment. What is involved in this was explained by Mr. J.A. Nimmo (as he then was) in Case C103
(1953) 3 T.B.R.D. 602 at pp. 605-606, in a passage that has often been adopted. He said:

``Having regard to the ordinary meaning of the word `retirement', I consider that, in order to establish, for the purposes of sec. 26(d), that there has been retirement of a taxpayer from an office or employment it is necessary to prove: (a) that the taxpayer had relinquished his office or employment, and (b) that at the time he relinquished it, he had no intention of ever resuming it.''

With respect, we adopt this passage as part of these reasons. In addition, the evidence did not establish that the taxpayer held an ``office''. What this word means in a context similar to the present has recently been defined by Buckley L.J. in
Edwards (Inspector of Taxes) v. Clinch (1980) 3 All E.R. 278 at p. 281 (affirmed by the House of Lords (1981) 3 All E.R. 543). His Lordship said:

``An `office' in this context is, in my opinion, a post which can be recognised as existing, whether it be occupied for the time being or vacant, and which, if occupied, does not owe its existence in any way to the identity of the incumbent or his appointment to the post. It follows, I think, that the office must owe its existence to some constituent instrument, whether it be a charter, statute, declaration of trust, contract (other than a contract of personal service) or instrument of some other kind. It also follows, in my view, that the office must have a sufficient degree of continuance to admit of its being held by successive incumbents; it need not be capable of permanent or prolonged or indefinite existence, but it cannot be limited to the tenure of one man, for if it were so it would lack that independent existence which to my mind the word `office' imports. It may be that it should in some degree possess a public character, but it is unnecessary to decide that point in this case, for the taxpayer's functions in respect of which the fees were received undoubtedly had such a character.''

No office in this sense existed which could have been terminated or from which the taxpayer could have retired. Nor could he be properly described as having retired from or terminated his employment, for the evidence given to us indicates that on the contrary there was no interruption of his employment; he remained continuously in the employment of the bank, and that employment was at no stage terminated. It follows, therefore, that sec. 26(d) cannot apply to the lump sum payment the taxpayer received.

8. But that is not the end of the matter. Section 26(d), where it applies, treats as assessable income 5% of the relevant lump sums, whether independently of the provision they would be fully assessable income receipts or non-assessable capital receipts. Its non-application requires a consideration of the question on which side of the line dividing income and capital the receipt falls. We were referred to a number of cases, but to learn that on one set of facts a receipt was held to be income (or capital) is not of great assistance when faced with different facts. Nevertheless, some assistance

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may be derived from a passage from the judgment of Jenkins L.J. in
Henley v. Murray, 31 T.C. 351at p. 367. In an observation of general application he said:

``... the question in each case is whether, on the facts of the case, the lump sum paid is in the nature of remuneration or profits in respect of the office or is in the nature of a sum paid in consideration of the surrender by the recipient of his rights in respect of the office.''

(In view of what was said above about ``office'', and bearing in mind the use of that word in the relevant Schedule of the U.K. taxing legislation, the word ``employment'' might be substituted in an Australian context.) The taxpayer did not surrender any rights in return for the payment; he was entitled to it by the terms of the original contract of employment upon termination of that contract, and it was paid to him for that reason. It was therefore a receipt of income, and as such is assessable in full under sec. 25(1).

9. The taxpayer, who presented his own case very effectively, advanced other submissions regarding the claim that the sum received was not assessable, but it is enough to repeat that it was received as part of the remuneration and was not paid as compensation for the cancellation of the contract of employment, or as consideration for the surrender of his rights under it. The Commissioner's decision on the objection should therefore be upheld, and the assessment before us confirmed.

Claim disallowed