Federal Commissioner of Taxation v. Knight
Judges:Kelly J
Court:
Supreme Court of the Australian Capital Territory
Kelly J.
The appellant to whom I will refer as the ``Commissioner'' and the respondent to whom I will refer as ``Mr. Knight'' have agreed on the facts out of which this appeal against the decision of the Taxation Board of Review No. 1 (the ``Board'') arises [Case M30,
80 ATC 220].
Mr. Knight was born on 25 August 1912. In October 1936 he commenced employment with the Department of Defence. On 29 April 1938 he became a permanent public servant in that Department. He retired on 4 March 1977. On 5 May 1939 he began to contribute to the superannuation scheme established and governed by the Superannuation Act 1922 as amended (the ``1922 Act''). In addition to the contributions for units of superannuation which he was required to make by its provisions, he contributed $3,240 for reserve units as permitted by sec. 30. In April 1976 he exercised a right of election provided for by sec. 32 of the 1922 Act and discontinued his reserve unit contributions. In June 1976 he was paid $4,198.53, the amount of those contributions together with compound interest at the appropriate rate on them.
During the years 1962 to 1966 Mr. Knight contributed $286.71 more than was required by the 1922 Act. That amount with interest of $27.68 was refunded to him during the 1966 year. By 1 July 1976 when the Superannuation Act 1976 (the ``1976 Act'') came into operation Mr. Knight had contributed under the 1922 Act a total of $29,895.16 including the amounts of $3,240 and $286.71 referred to above. All but $12,093 of that total had been either allowed as deductions under sec. 82H of the Income Tax Assessment Act 1936 as amended (the ``Act'') or treated as rebatable amounts pursuant to sec. 159R for the purposes of calculating the rebate allowable under sec. 159N of the Act.
An amount of $28,228.11 (being an amount equal to the amount allocated to Mr. Knight under sec. 177(3)(a) of the 1976 Act) was deemed by the operation of sec. 177(9) of that Act to be an amount of basic contributions paid by Mr. Knight on 1 July 1976.
An amount of $5,100.17 (being an amount equal to the amount allocated to Mr. Knight
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under sec. 177(3)(b) of the 1976 Act) was deemed by the operation of sec. 177(10) of that Act to be an amount of supplementary contributions paid by Mr. Knight on 1 July 1976.From 1 July 1976 until the date of Mr. Knight's retirement the total basic fortnightly contributions paid by him under sec. 45 of the 1976 Act was $1,339.24 of which all but $190 was treated as a rebatable amount pursuant to sec. 159R aforesaid for the purposes of calculating the rebate allowable under sec. 159N of the Act.
Mr. Knight did not elect under sec. 48 of the 1976 Act to pay supplementary contributions and none were in fact paid by him.
On 3 February 1977 Mr. Knight signed and lodged with the office of the Commissioner for Superannuation an election under sec. 68 of the 1976 Act. The election was in the following form:
``The Commissioner for Superannuation: Election under sec. 68 or 71 of the Superannuation Act 1976 (Invalidity Retirement)
As a result of my retirement on invalidity grounds I John Langford Knight hereby elect under the provisions of the Superannuation Act 1976 that in lieu of the maximum pension benefit due to me in accordance with sec. 66, a pension and a lump sum benefit equal to my accumulated contributions be payable to me.''
Again on 3 February 1977 Mr. Knight signed a form entitled ``Application by Contributor for Invalidity Retirement Pension or Pension Plus Lump Sum Benefit'' and lodged that form with the office of the Commissioner for Superannuation. The text of the relevant part of the application is:
``I, John Langford Knight of 25 Parkhill St Pearce A.C.T. 2607 formerly employed by Department of Productivity in the state of A.C.T.... hereby apply for Pension and a Lump Sum Benefit equivalent to Accumulated Contributions under the provisions of the Superannuation Act.''
Mr. Knight retired from the Public Service on the ground of invalidity. His final annual rate of salary was $28,326 per annum. His period of contributory service, from 5 May 1939 to 4 March 1977, was 37 complete years.
Mr. Knight was entitled to receive an invalidity benefit under sec. 66 of the 1976 Act and by virtue of his election made under sec. 68 the amount of the benefit was calculated under sec. 68(3). The annual rate of pension so calculated was 51.75% of his final annual rate of salary.
On 31 March 1977 the Commissioner for Superannuation sent a letter to Mr. Knight. The relevant parts of that letter were as follows:
``The pension due to you under the Superannuation Act 1976 following your retirement is at the rate of $14,658.71 per annum based on 37 years contributory service and final annual salary of $28,326.
...
6. Arrangements have been made to pay separately to your pension an interim payment of accumulated contributions amounting to $27,707.69. A cheque for this amount will be forwarded shortly to the address shown on your application.
7. The refund mentioned above is an interim refund only and will be revised when your share of the Superannuation Fund at 30 June 1976 is finally established. This is expected to be known by approximately June 1978.''
By not later than 13 April 1977 Mr. Knight had received from the Commissioner for Superannuation a cheque for the sum of $27,707.69, the amount referred to in the letter despatched on 31 March 1977.
On 15 December 1978 the Commissioner for Superannuation forwarded to Mr. Knight a notice described as ``Notice under Subsection 177(4) of the Superannuation Act 1976''. Mr. Knight did not receive that notice and a replacement notice was forwarded on 15 January 1979. Meanwhile, on or about 15 December 1978, Mr. Knight had received a cheque drawn on behalf of the Commissioner for Superannuation for $10,315.85, the balance of the ``Lump Sum Benefit'' due to him pursuant to sec. 68(5) of the 1976 Act. The text of the notice addressed to Mr. Knight was as follows:
``Former contributors to the superseded scheme (i.e. the old unit of pension
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scheme or the Provident Account) on 30 Jun 1976 who commenced contributing to the new scheme on 1 Jul 1976 and who have since left the scheme as a result of retirement or death are entitled to participate in the allocatgion of the old Superannuation Fund at 30 Jun 1976.2. In accordance with subsec. 177(4) of the Superannuation Act 1976 notice is hereby given of the amount(s) allocated to you... at the commencement of the new scheme on 1 Jul 1976. These comprise:
Basic contributions 28228.11 Supplementary contri- butions (including any reserve units) 5100.17 These Supplementary con- tributions accumulated to the Distribution Date are included in the Lump Sum Benefit Due, shown below.3. Now that your... allocation of the fund at 30 Jun 1976 has been determined it is possible to establish the Balance of Lump Sum Benefit Due to you. This is shown in the statement hereunder and the balance takes into account the allocated amounts and contributions under the new scheme as well as accruals from 1 Jul 1976 to the distribution date:
Lump Sum Benefit Due including accruals to Distribution Date 42164.73 Less * Interim Lump Sum(s) paid 27707.69 * Accrual(s) on Interim Lump Sum(s) paid from payment date to distribution date 4141.19 Balance of Lump Sum Benefit Due 10315.85 The Distribution Date is [illegible]4. If you are a pensioner the Balance will be paid about the distribution date, in the same manner as you receive your fortnightly pension.
5. If you are not a pensioner and received a lump sum benefit the balance will be paid by cheque to the above address about the distribution date.
6. The Commissioner for Taxation has advised that 5% of the interim lump sum that you received from the fund on your retirement must be included in your assessable income in respect of the year in which it was received. No income tax will be payable, however, on the Balance of Lump Sum Benefit Due.''
On or about 7 April 1977 Mr. Knight received the first instalment of his invalidity pension from the Commissioner for Superannuation. It was calculated at the initial rate of $14,658.71 per annum payable at $563.80 per fortnight from 5 March 1977. During the year of income ended 30 June 1977 Mr. Knight received as pension $4,752.03.
According to the Australian Life Tables, those prescribed by reg. 4A made under the Act, Mr. Knight's life expectancy at the date of his retirement was 12.74 years.
In due course Mr. Knight was assessed to tax in respect of:
- (a) $1,385, 5% of the sum of $27,707.69 received by him from the Commissioner for Superannuation prior to 13 April 1977 and
- (b) $318 which he had claimed to be entitled to exclude from his taxable income under the provisions of sec. 26AA of the Act.
Mr. Knight objected to the Commissioner's assessment in respect of the items just referred to but the Commissioner maintained his assessment. Mr. Knight requested that both questions be referred to a Board of Review for review. By majority the Board upheld Mr. Knight's claim relating to the inclusion of the amount of $1,385 in his assessable income but confirmed the Commissioner's decision on the objection
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relating to Mr. Knight's sec. 26AA claim. The Commissioner appeals to this Court against the upholding of the objection to his assessment in respect of the sum of $1,385 while Mr. Knight cross-appeals in respect of the sum of $318 claimed as an exclusion under sec. 26AA.I will deal first with the Commissioner's appeal.
At the time of the events in question sec. 26(d) and (e) of the Act, omitting irrelevant provisos, read:
``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: [and]
- (e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise:''
Subsections (1) and (5) of sec. 68 of the 1976 Act read:
``(1) A person who becomes entitled to invalidity pension by virtue of sub-section 66(1) may, not later than 1 month after becoming so entitled, elect, by notice in writing to the Commissioner, that, in lieu of benefit being payable in accordance with section 67, pension and lump sum benefit be paid in accordance with this section.
...
(5) Where a person makes an election under sub-section (1), the lump sum benefit to which the person is entitled is an amount, payable out of the Fund, equal to the person's accumulated contributions.''
Section 158 of the 1976 Act reads:
``Where a person has become entitled to a benefit under this Act, but the payment of the benefit cannot be made or commence to be made by reason that the rate or the amount of that benefit has not been ascertained, the Commissioner may, upon application in writing being made to him, direct that an interim payment or interim payments be made to the person, at such rate or rates, or in such amount or amounts, as he determines, and any interim payment so made shall be deemed to be a payment made in respect of that benefit.''
The question to be decided in the appeal is whether the sum of $27,707.69, paid as it was on an interim basis, was the capital amount of an allowance paid in a lump sum in consequence of Mr. Knight's retirement. It was not disputed that the total amount payable to Mr. Knight as a lump sum benefit following the election he made under sec. 68 of the 1976 Act was an allowance in consequence of his retirement:
McIntosh v. F.C. of T. 79 ATC 4325; (1979) 25 A.L.R. 557.
The words ``of the capital amount'' used in sec. 26(d) of the Act ``are used not to describe the nature of the allowance... but to fix the amount that is to be included in the assessable income... The words... are... 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'':
Reseck v. F.C. of T. 75 ATC 4213 at pp. 4215-4216; (1975) 133 C.L.R. 45 at p. 49, per Gibbs J. In the same case at ATC p. 4220; C.L.R. p. 57, Jacobs J. said that it was not possible to give the word ``capital'' a sense which is in contradistinction to income. As the agreed facts in this case show, the capital amount of the allowance ultimately paid to Mr. Knight in consequence of retirement from his employment was $38,023.54. That was its ``capitalized or total value.''
The question narrows itself further and may now be posed in the following form:
``Was the capital amount of $38,023.54 when paid -
- (a) so far as the sum of $27,707.69 is concerned, on or before 13 April 1977 and
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- (b) so far as the sum of $10,315.85 is concerned, on or before 15 December 1978
paid in a lump sum?''
Counsel for the Commissioner submitted that unless the interim payment were to be regarded as a lump sum payment, even though not a payment of the whole of the capital amount, a perverse result that could not possibly have been intended by the legislature would be reached. That result would be that no tax would be payable in respect of any part of the capital amount of an allowance paid in consequence of Mr. Knight's retirement. It would be reached although it was clear that the legislature intended that the allowances, etc., enumerated in sec. 26(d) and (e) of the Act should, by the comprehensive effect of both paragraphs, be assessable appropriately as income, either as to 5% or as to the whole. Counsel for the Commissioner did not contend that, if the Commissioner's submission as to the nature of the interim payment failed, a finding should be made inconsistently with the way the assessment was made for he did not seek to establish that the interim payment might be dealt with appropriately under sec. 26(e) of the Act.
Counsel for the Commissioner contended that sec. 23(b) of the Acts Interpretation Act 1901, which provides, inter alia, that in any Act, unless the contrary intention appears, words in the singular shall include the plural, enabled sec. 26(d) to be construed as though the words ``paid in a lump sum'' read ``paid in lump sums''. The operation of sec. 23 of the Acts Interpretation Act 1901 meant that an ambiguity arose in the construction of the phrase. ``a lump sum'' as used in sec. 26(d) of the Act. It was necessary therefore to take account of sec. 15AA of that Act and in choosing between the possible interpretations choose that construction which would promote the purpose or object underlying the Act. He referred to
F.C. of T. v. Top of the Cross Pty. Ltd. 81 ATC 4563 at p. 4571. Construed as counsel for the Commissioner contended it ought to be, sec. 26(d) of the Act meant that an interim payment made on account of a capital amount payable as an allowance upon retirement was paid in a lump sum and 5% of that amount was assessable to tax.
The High Court in Cooper Brookes
(Wollongong) Pty. Ltd. v. F.C. of T. 81 ATC 4292; (1981) 35 A.L.R. 151, has given authoritative guidance as to the approach to be adopted in such a question of construction as that with which I am concerned. I refer particularly to the judgments of Gibbs C.J. at ATC pp. 4295-4296; A.L.R. pp. 156-157, Stephen J. at ATC pp. 4299-4300; A.L.R. pp 161-162, and Mason and Wilson JJ. at ATC pp. 4305-4307; A.L.R. pp. 169-171. At ATC pp. 4305-4306; A.L.R. p. 170, Mason and Wilson JJ. said:
``The rules, as D.C. Pearce says in his Statutory Interpretation (p. 14), are no more than rules of common sense, designed to achieve this object. They are not rules of law. If the judge applies the literal rule it is because it gives emphasis to the factor which in the particular case he thinks is decisive. When he considers that the statute admits of no reasonable alternative construction it is because (a) the language is not intractable, or (b) although the language is not intractable, the operation of the statute, read literally, is not such as to indicate that it could not have been intended by the Legislature.
On the other hand, when the judge labels the operation of the statute as `absurd', `extraordinary', `capricious', `irrational' or `obscure' he assigns a ground for concluding that the Legislature could not have intended such an operation and that an alternative interpretation must be preferred. But the propriety of departing from the literal interpretation is not confined to situations described by these labels. It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions.
Quite obviously questions of degree arise. If the choice is between two strongly competing interpretations, as we have said, the advantage may lie with that which produces the fairer and more convenient operation so long as it conforms to the legislative intention. If, however, one interpretation has a powerful advantage in ordinary meaning
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and grammatical sense, it will only be displaced if its operation is perceived to be unintended.''
They concluded their judgment by saying (at ATC p. 4307; A.L.R. p. 171):
``The fact that the Act is a taxing statute does not make it immune to the general principles governing the interpretation of statutes. The Courts are as much concerned in the interpretation of revenue statutes as in the case of other statutes to ascertain the legislative intention from the terms of the instrument viewed as a whole.''
I turn to the literal meaning of the words used. The Oxford English Dictionary defines the phrase ``lump sum'' as ``a sum which covers or includes a number of items''. The Shorter Oxford English Dictionary defines it similarly as does the Concise Oxford Dictionary (1976 ed.) which, however, has as a second meaning, ``money paid down at once (opp. instalments)''. The Macquarie Dictionary defines it as ``including a number of items taken together or in the lump''. I do not think the second meaning attributed to the phrase in the Concise Oxford Dictionary is to be interpreted as showing that a deposit can be a lump sum. Rather, I think that the second meaning is attributed to the phrase in contradistinction to its usual opposite ``instalment''. The Concise Oxford Dictionary defines that word relevantly as ``each of several parts, successively falling due, of sum payable.''
The precise meaning of the phrase has received little judicial attention. It is referred to in
Godden v. Corsten (1879) 5 C.P.D. 17, where, however, it is clear that what is meant is the total of an amount in question. In
Stanton v. F.C. of T. (1955) 92 C.L.R. 630 at p. 638, the Court, referring to a total price of £17,500 of which £7,500 was apportioned in respect of a quantity of pine timber and £10,000 in respect of a quantity of hardwood timber, said:
``... there are certain general provisions which form part of the consideration for the lump sum payments.''
Counsel for the Commissioner did not seek to rely upon that sentence as indicating that parts or instalments of a lump sum may themselves be described as lump sums. He referred to it only to indicate a use of language by the High Court. The use is, in my respectful opinion, explicable because there were two different types of timber involved to each of which was apportioned its separate price. In any event, the ordinary use of the phrase appears at p. 639 when the Court said:
``It will be seen that in substance the agreement amounts to a sale of standing timber, with a limitation as to quantity, at a lump sum price based in the end upon the amount of timber found to be standing upon the land whether the timber was cut or removed or not. It will be seen too that the price was payable in quarterly instalments which became due independently of the amount of timber removed, so that the full price remained payable without regard to the extent to which the purchaser might exercise his right to cut and remove the timber.''
In Reseck v. F.C. of T. (supra) Gibbs J. said, at ATC pp. 4215-4216; C.L.R. p. 49.
``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...''
In that case the Court was dealing with two separate severance payments made to a taxpayer during the course of one financial year. It was held that on the particular facts of the case as found both payments were capital amounts paid each as a lump sum by the employer to the taxpayer in consequence of termination of his employment within the meaning of sec. 26(d) of the Act. It is in respect of just such plurality of payments that one would expect to call in aid the provisions of sec. 23(b) of the Acts Interpretation Act 1901 referred to above.
It is perfectly common to refer to a lump sum contract. It is also common enough that payments in respect of such a contract are made by instalments, often progress payments, particularly when the lump sum contract. Nowhere, however, can I find any suggestion that in its ordinary meaning the phrase ``a lump sum'' means part of the total sum whether calculated or yet to be calculated. I conclude, therefore, that in its ordinary and literal meaning the phrase
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``paid in a lump sum'' as used in sec. 26(d) of the Act refers to the whole of the capital amount referred to earlier in the section and hence in this case to the sum of $38,023.54, the capitalized or total value of the allowance paid to Mr. Knight consequent upon his retirement.In McIntosh v. F.C. of T. (supra) Brennan J. said, at ATC p. 4327; A.L.R. pp. 558-559:
``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.''
It should be noted that there was only one lump sum payment made to the taxpayer.
Counsel for Mr. Knight relied upon the last sentence quoted as supporting his submission that the lump sum could not be an instalment or part payment of some larger sum. Counsel for the Commissioner submitted that the sentence was obiter and could not be authority for the contention advanced on behalf of Mr. Knight. It is true, I think, that, strictly speaking, the words ``not as an instalment or part payment of some larger sum'' were obiter but that does not mean that no legitimate use can be made of them. They seem to me to indicate how naturally one considers ``an instalment'' or ``part payment of some larger sum'' as being each the opposite of the phrases ``lump sum'' or ``lump sum payment''.
Reseck's case shows, I think, that an appropriate and ordinary use of sec. 23(b) of the Acts Interpretation Act 1901 in connection with sec. 26(d) of the Act is capable of dealing with a situation which no doubt arises frequently enough. To select from a number of substantives one only and apply to it the provisions of sec. 23(b) so that the words ``a lump sum'' are to be taken to mean lump sums while, correspondingly, the words ``capital amount'' remain in their singular form, seems to me to be capricious. It follows that the interpretation contended for by the Commissioner is not, in my opinion, a strongly competing interpretation against the ordinary and literal meaning of the words used. I think the literal meaning of the words supports an interpretation which has a powerful advantage in ordinary meaning and grammatical sense. It is not therefore to be displaced unless its operation is seen to be unintended. I do not so see it. It would clearly be effective in most circumstances. The exceptional case such as the present (and I think it exceptional even though there may be many such cases) was the unexpected case which the draftsman did not foresee. To say that the ordinary and natural meaning of the words leads to a situation which could not have been intended because advantage may be taken of a lacuna to avoid tax does not mean, in my opinion, that the interpretation contended for is correct. Undoubtedly, the main purpose of the Act is the collection of revenue by way of income tax but that is not to say that in the circumstances an interpretation which it does not properly bear must be given a section to ensure that the Commissioner receives that tax which he considers appropriate. If the section were ambiguous to the point where the opposing contentions were more or less evenly balanced it might well be the case that the ambiguity should be resolved in the Commissioner's favour but in my opinion the words used admit of no ambiguity of substance.
It was further submitted that sec. 111(2) of the 1976 Act showed by its language that the words ``a lump sum'' were used in the Act in a sense distinct from their ordinary use so that the section supports the Commissioner's case. The section reads:
``Where the total amount of the benefit or benefits (whether paid by way of instalments of pension or as a lump sum or lump sums, or both) paid to or in respect of a person who has been an eligible employee (excluding, if he is a person who at any time ceased to be an eligible employee otherwise than by reason of having been retired on the ground of invalidity, any benefit or benefits paid to him before he so ceased)
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is, at a time when no further benefit is payable under this Act to or in respect of the person, less than the accumulated contributions of the person as at the time when he ceased to be an eligible employee, an amount equal to the difference shall be paid to the personal representatives of the person or to such person or persons (if any) as the Commissioner determines.''
In my opinion the words ``a lump sum or lump sums'' in the section look back naturally to the words ``benefit or benefits'' and are effectively in apposition to them. Where a word is used in its singular form and is followed immediately by its plural form in the alternative it is not in the least surprising to find that words used as it were in apposition are used also in the singular and in the plural. The language used by the draftsman is apt to the circumstances being considered in sec. 111 but the use of the words ``lump sum or lump sums'' in the section has no bearing on nor does it compel a different meaning from the literal meaning of ``a lump sum'' as used in sec. 26(d) of the Act.
It was also submitted on behalf of the Commissioner that a payment made under sec. 158 of the 1976 Act had the character of a lump sum payment. It is to be noted that the Commissioner for Superannuation might have made more than one interim payment. However, it seems to me that the words ``any interim payment so made shall be deemed to be made in respect of that benefit'' do no more than characterise such interim payments as part, in this case, of the capital amount of the benefit due under sec. 66(1)(b) of the 1976 Act upon the making of the appropriate election under sec. 68 of that Act. I do not think it forces an interpretation of sec. 26(d) of the Act in favour of the Commissioner for the reasons I have earlier given.
It follows that the appeal brought by the Commissioner must be dismissed.
By his notice of cross-appeal against the Board's decision to confirm the Commissioner's decision on the objection relating to Mr. Knight's claim under sec. 26AA of the Act Mr. Knight alleged that the questions of law involved in the cross-appeal were:
``(i) whether the pension payable to the taxpayer by the Commonwealth of Australia under the Superannuation Act 1976 (hereinafter called `the said pension') was an annuity which had been purchased for the purposes of sec. 26AA(1) of the Act;
(ii) whether contributions made by the taxpayer under the Superannuation Act 1922 (as amended) and the Superannuation Act 1976 were made for the purchase of an annuity within the meaning of sec. 26AA of the Act;
(iii) whether the election by the taxpayer to receive a lump sum benefit under sec. 68 of the Superannuation Act 1976 had the effect that the said pension was not an annuity which had been purchased for the purposes of sec. 26AA(1) of the Act.''
Until 9 November 1977 sec. 26AA of the Act read:
``(1) The assessable income of a taxpayer shall include the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the amount of the annuity which represents the undeducted purchase price.
(2) Subject to the next succeeding sub-section, the amount to be excluded under the last preceding sub-section from the amount of an annuity derived by a taxpayer during a year of income -
- (a) in the case of an annuity payable until the death of the taxpayer or for a term that will not end before his death - is an amount ascertained by dividing the undeducted purchase price of the annuity by the number of years in the complete expectation of life of the taxpayer, as ascertained by reference to the prescribed Life Tables, at the time when the annuity first commenced to be derived; and
- (b) in the case of an annuity payable for a term of years certain - is an amount ascertained by dividing the undeducted purchase price of the annuity by the number of years in the term.
(3) Where the amount of an annuity derived by the taxpayer during a year of income is more than, or less than, the
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amount payable for a whole year, the amount to be excluded from the amount so derived is the amount which bears to the amount which, but for this sub-section, would be the amount to be so excluded the same proportion as the amount so derived bears to the amount payable for a whole year.(4) For the purposes of this section `the undeducted purchase price', in relation to an annuity, means so much of the purchase price of the annuity paid by the taxpayer as has not been allowed and is not allowable as a deduction and in respect of which a rebate of income tax has not been allowed and is not allowable in assessments for income tax under this Act or any previous law of the Commonwealth.''
By Act No. 126 of 1977 a new subsec. (4) was substituted. It read:
``(4) For the purposes of this section, `the undeducted purchase price', in relation to an annuity, means so much of the purchase price of the annuity paid by the taxpayer as has not been allowed and is not allowable as a deduction, has not been, and is not to be, treated as a rebatable amount for the purposes of section 159N and is not an amount in respect of which a rebate of income tax has been allowed or is allowable in assessments for income tax under this Act or any previous law of the Commonwealth.''
The amendment did no more, in my opinion, than elaborate upon the words of the repealed subsection and was treated throughout the hearing as though it were the subsection in force at all relevant times.
So far as sec. 159N of the Act is concerned, it is enough to say that it was agreed between the parties, as indicated above, that the sum which had not been allowed and was not allowable as a deduction and had not been and could not be treated as a rebatable amount was $12,093.
At the material time the relevant part of sec. 66(1) of the 1976 Act read:
``... where a person ceases to be an eligible employee by reason of retirement on the ground of invalidity before attaining his maximum retiring age then, except in a case where sub-section (2) of this section applies, the person is entitled -
- (a) if the person does not make an election under section 68 or 69 - to invalidity pension in accordance with section 67 and, where the person has paid supplementary contributions, a lump sum benefit in accordance with that section;
- (b) if the person makes an election under section 68 - to invalidity pension, and a lump sum benefit, in accordance with that section; or
- (c) if the person is entitled to make an election under section 69 and makes such an election - to a lump sum benefit in accordance with sub-section 69(2) and, where the person has paid supplementary contributions, an additional lump sum benefit in accordance with sub-section 69(3).''
At that time sec. 68(3) of the 1976 Act read:
``Where a person makes an election under sub-section (1) and the period of contributory service of the person is not less than 31 years, the annual rate of the pension to which the person is entitled is such percentage of the person's final annual rate of salary as, having regard to the number of complete years included in that period of contributory service, is applicable in accordance with columns 1 and 3 of Schedule 3.''
Section 66 defines the nature of the benefits payable to Mr. Knight on his early retirement while sec. 68 enables them to be quantified.
The accumulated contributions referred to in sec. 68(5) of the 1976 Act are defined by sec. 3(1) of that Act to mean in relation to a person in Mr. Knight's position the sum of his accumulated basic contributions and his accumulated supplementary contributions (if any). It is not necessary to set out the detailed definitions of the phrases ``accumulated basic contributions'' and ``accumulated supplementary contributions''. It is sufficient to note that, as indicated above, the parties acknowledged by their agreed statement of facts that:
- (a) by the operation of sec. 177(9) of the 1976 Act an amount of $28,228.11 was
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deemed to be an amount of basic contributions paid by Mr. Knight under that Act on 1 July 1976; - (b) by the operation of sec. 177(10) of the 1976 Act an amount of $5,100.17 was deemed to be an amount of supplementary contributions paid by Mr. Knight under that Act on 1 July 1976; and
- (c) from 1 July 1976 until the date of his retirement the total of fortnightly basic contributions paid by Mr. Knight pursuant to sec. 45 of the 1976 Act was $1,339.24.
The sums deemed to have been paid as basic contributions and as supplementary contributions were calculated and allocated under the provisions of sec. 177(2) and (3) of the 1976 Act. They represent, in my opinion, the amount provided by Mr. Knight under the 1922 Act towards his retirement benefits, transmuted, of course, into a somewhat higher total sum by the alchemy of the 1976 Act.
In D.F.C. of Land Tax,
Sydney v. Hindmarsh (1912) 14 C.L.R. 334 at p. 338, Barton J. said:
``What then is the meaning of `annuity' as a legal or technical term? According to Co. Litt., 144b, an annuity is `a yearly payment of a certain sum of money granted to another in fee for life or years, charging the person of the grantor only'. Viner's Abridgment, vol. II., p. 504, repeats the definition, with further passages showing that the sum need not be payable each year if only it is a yearly sum. Bacon's Abridgment, vol. I., p. 233, says that `an annuity, strictly taken, is a yearly payment of a certain sum of money granted to another in fee simple, fee tail, or life or years, charging the person of the grantor only: if payable out of lands, it is properly called a rent-charge; but if both the person and estate be made liable, as they most commonly are, then it is generally called an annuity.'
The text books generally adopt the definition in Co. Litt.; no case was found in which any other definition was offered; nor any case in which an indeterminate sum was held to be an annuity.
It is therefore a characteristic of an annuity that it be of a sum certain.''
Isaacs J. also adopted the definition in Co. Litt.,144b, and went on to say at p. 340:
``... in saying an annuity charges the person only, that is merely as to its primary effect. It may also be charged on the land, and... an action for debt will in certain cases lie for a rent charge.''
It follows, I think, that payment of the sum agreed to be paid as an annuity need not in all cases be charged upon land or personalty of the grantor for an action may lie upon the personal covenant of the grantor. This accords with the definition of the word ``annuity'' in Jowitt's Dictionary of English Law, 2nd ed., where it is defined to mean ``a yearly payment of a certain sum of money granted to another in fee, or for life, or for a term of years, either payable under a personal obligation of the grantor or charged upon his pure personalty, although it may be a charge upon his freehold or leasehold land...''
The element of certainty in the sum payable is sufficiently satisfied, I think, because by calculation and upon the happening of certain events it becomes certain even though it may vary from year to year. The basic figure is certain. It represents 51.75% of Mr. Knight's final salary. The provisions of Pt. X of the 1976 Act ensure that Mr. Knight's entitlement to a pension may be calculated with certainty upon the publication of the relevant all groups consumer price index number and the application of the provisions of Pt. X. The amount of the pension is no more uncertain than was the rent in Ex parte Voisey; In re Knight (1882) 21 Ch.D. 442 at p. 458, per Brett L.J. (as he then was).
Counsel for Mr. Knight submitted that it was not a necessary element of an annuity that it be chargeable upon some person or property. If the submission means that nobody is to be charged with the payment of an annuity in the sense that he is personally responsible for the payment, at least on a simple indebitatus count, I would have difficulty in accepting this submission. However, I find it unnecessary to rule definitively upon the point because it seems to me that when the 1976 Act came into operation it translated the responsibility under sec. 5 of the 1922 Act for payment of benefits under that Act from the
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Superannuation Fund to the Commonwealth (sec. 112(2) of the 1976 Act). There was thus an acceptance by the Commonwealth of the burden of payment of the benefits in question and Mr. Knight was bound (because of the provisions of the statute) to accept the transfer of the liability. His position was no worse than it would have been had the original liability been in a private grantor who with Mr. Knight's consent had transferred the burden of the liability to another person who was then effectively bound to pay what was due to Mr. Knight.Because of Mr. Knight's circumstances and the election made by him, a question arises as to whether his right to receive a lump sum benefit together with a reduced pension under sec. 66(1) of the 1976 Act takes away from his pension the character of an annuity. It is to be noted that para. (a) of sec. 66(1) is the only paragraph which provides for what may be described as a pure pension even though it makes provision also for a lump sum benefit in certain circumstances while para. (b) and (c) both make provision for payment of a lump sum benefit in addition to the appropriate pension. I think the question is resolved by
Atkinson v. F.C. of T. (1951) 84 C.L.R. 298 where, under the terms of an insurance policy, a lump sum of £100 proved payable on death, quarterly payments of £39 were to continue for a fixed period and a further lump sum of £900 was payable on the last day of that fixed period. The High Court held that the quarterly payments constituted an annuity notwithstanding the fact that lump sum payments were payable in addition. It follows, in my opinion, that in Mr. Knight's case the payment of the lump sum benefit to him does not take away the character of an annuity from his pension.
I am satisfied, therefore, that in all the circumstances the pension payable to Mr. Knight is an annuity.
The next question is whether Mr. Knight purchased the annuity. I think that on its true construction sec. 26AA(1) of the Act is concerned with the purchase price in money of the annuity and is not concerned with any other consideration such as service which might have been paid for the annuity. I am satisfied that Mr. Knight purchased his pension. I adopt, with respect, the reasoning of Jacobs J.A. (as he then was) in
Wayne v. Commr. of Stamp Duties (1966) 85 W.N. (Pt. 1) (N.S.W.) 301 at pp. 311-312, particularly at p. 312 where he said:
``... where the scheme is a contributing scheme, even though the contributions are compulsory, I think that the interest created must be regarded as one which is purchased or provided by the employee.''
Cf.
Just v. F.C. of T. (1949) 8 A.T.D. 419; (1949) Argus L.R. 438. It is to be noted that counsel for the Commissioner did not contend that the pension payable to Mr. Knight was not an annuity.
Counsel for the Commissioner contended that because of the election made by Mr. Knight it was impossible to determine what the undeducted purchase price was. That being the case sec. 26AA of the Act could have no operation because what ought to be excluded from assessable income could not be ascertained. Alternatively he submitted what he suggested might be a different way of saying the same thing that ``where a taxpayer makes an election on an invalidity benefit under the section [68 of the 1976 Act], having the result that the benefit payable to him is both a lump sum payable out of the Fund and a pension payable out of Consolidated Revenue, a taxpayer cannot show that there are any moneys invested by him that there are any moneys invested by him that could be said to be, or more accurately to represent the purchase price paid by him.''
Counsel for Mr. Knight contended, on the other hand, that Mr. Knight should be regarded as having purchased the annuity and that the contributions made fortnightly by him for 37 years represented instalments of the purchase price paid by him for the pension that he received upon his retirement for invalidity. These contributions are the consideration prescribed or stipulated, he said, by the relevant legislation as the price payable by a Commonwealth employee for his right to a pension. The total of the contributions made comprised the purchase price of the pension.
What did Mr. Knight seek to purchase? Under the 1922 Act his contributions could only have purchased a pension for him, a pension fixed by reference to the number of units to which he effectively contributed and each of which was represented by a sum fixed under that Act. However, the 1976 Act
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introduced a rather different situation. He was required by sec. 45 and 46 to make fortnightly basic contributions equal to five per centum of his fortnightly basic salary payable or deemed to be payable on the anniversary of his birth last preceding that contribution day. He could under sec. 48 elect to pay supplementary contributions. On early retirement for invalidity he could expect to receive if he made no election under sec. 68 of the 1976 Act and had made no supplementary contributions under sec. 48 an invalidity pension in accordance with sec. 67 of the 1976 Act. It is unnecessary to express a concluded view upon what would be the proper result if a claim were made under sec. 26AA of the Act in those circumstances. If he had paid supplementary contributions he would have been entitled, if he made no election, to receive in addition to his ``full'' pension his accumulated supplementary contributions payable out of the Fund and not out of Consolidated Revenue. Broadly speaking the accumulated supplementary contributions may be said to be the supplementary contributions plus interest thereon. The significant feature of their payment is that they come out of the Superannuation Fund. Again Mr. Knight might have done what he in fact did. Thereupon the annuity to which he became entitled was, in his circumstances, 51.75% of his final salary. Additionally, he was entitled to receive out of the Superannuation Fund, again not out of Consolidated Revenue, his accumulated contributions, basic and supplementary.One then turns to sec. 26AA of the Act to find that it is concerned with the amount of the annuity, representing 51.75% of Mr. Knight's final salary. The exclusion from that annuity must, it seems to me, be the undeducted purchase price of that annuity and not of some greater sum which Mr. Knight might have received had he not made his sec. 68 election.
What part of the amount of that annuity represents its undeducted purchase price?
Counsel for Mr. Knight submitted that the payment of the accumulated contributions to Mr. Knight was not a refund to him of his contributions. He relied on the fact that the word ``benefit'' was used consistently in the appropriate sections and meant, he said, that pension and lum sum benefit were to be regarded as a bundle of rights in Mr. Knight with a statutory method of calculating the lump sum benefit. It was immaterial and irrelevant, he submitted, that the lump sum benefit was calculated in Mr. Knight's case by reference to his basic contributions and his supplementary contributions. His basic contributions increased to the amount of his accumulated basic contributions were the price he paid for the purchase of his full pension, had he chosen to receive it. On that argument, and it may in any event be the case, it would be unnecessary to consider the supplementary contributions as part of the purchase price because plainly in Mr. Knight's case they were dealt with as a kind of investment with the principal of the supplementary contributions and appropriate accretions being returned in any event as the accumulated supplementary contributions. I find it unnecessary to rule on this submission because I think the solution to the question posed is to be found in another way.
Since I am concerned only with the pension or annuity actually payable, I am concerned with the purchase price said to have been paid for that pension. Accepting all that counsel for Mr. Knight has said, it would still be the case that it would be impossible to determine what was the precise purchase price paid for the annuity in question. The formula he suggested, 51.75 parts of 71.75 parts seems to me to be an arbitrary formula without any real basis in the facts of the case or in the legislation. Mr. Knight's position then is very similar to that of the father in
Egerton-Warburton v. D.F.C. of T. (1934) 51 C.L.R. 568. At p. 575, the Court said of a provision expressly excluding so much of the annual payments as represented the purchase price of an annuity that was purchased:
``The statutory provision gives an advantage in cases which conform to conditions established positivi juris. One of the conditions is that there must be an ascertained or ascertainable price.''
I find myself in a similar position in respect of Mr. Knight's claim under sec. 26AA of the Act. Since the onus is upon him to establish what represents the undeducted purchase price, and since, in my opinion, he has failed to establish it the cross-appeal must be dismissed.
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THE COURT ORDERS THAT:
1. The appeal be dismissed so that the respondent's objection to the inclusion by the Commissioner of Taxation of an amount of $1,385 as assessable income of the respondent for the year 1976-1977 pursuant to the provisions of sec. 26(d) of the Income Tax Assessment Act 1936 is upheld.
2. The cross-appeal be dismissed so that the Commissioner's decision in respect of the exclusion claimed by the respondent under sec. 26AA of the Income Tax Assessment Act 1936 as to the sum now agreed at $309 for the year 1976-1977 is confirmed.
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