Case S42

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 14 June 1985.

---

M.B. Hogan (Chairman), Drs P. Gerber and G.W. Beck (Members)

The question underlying this reference concerns the amount of the separate net income of the taxpayer's spouse for the year ended 30 June 1981. The lady in question did not appear to give evidence and the hearing proceeded by way of agreed facts.

2. The evidence given by the taxpayer, with which the Commissioner agreed, was to the

---

ATC 341

effect that his wife during the relevant year of, income had earned a salary of $4 before retiring from her employment as a public servant, had net business income of $612 and received interest of $900. She also received on retirement as a public servant, a lump sum payment of $6,949 in respect of unused annual leave at date of retirement and unused long service leave at that date.

3. In his own income tax return the taxpayer showed the separate net income of his wife as amounting to $1,516 and claimed an amount of $489 as a rebate under sec. 159J in respect of his spouse. The taxpayer's return did not disclose the fact that his wife had in addition to the amount shown as separate net income also received the lump sum payment of $6,949.

4. A notice of assessment issued on 7 October 1981 allowing amongst other amounts of rebate, a rebate of $489 as claimed by the taxpayer.

5. Subsequently on 22 June 1982 a notice of amended assessment issued which effectively disallowed the whole of the $489 rebate in respect of the taxpayer's spouse and called for payment of the amount of $489.

6. The taxpayer objected claiming that the lump sum payment received by his wife was a capital receipt and not of an income nature. A further ground of objection was advanced under sec. 170 of the Act but that ground was withdrawn by the taxpayer at the hearing. What then the Board has to determine is whether the amount of $6,949 received in a lump sum by the taxpayer's wife constituted a receipt of a capital nature. The payment incorporated two separate sums, viz. the sum of $2,051 representing payments in lieu of unused recreation leave available to the wife on her retirement and the sum of $4,898 representing a payment based on the long service leave credit available to her at that date.

7. The lump sum payment thus comprised payments arising under two Commonwealth Acts. The taxpayer's wife was a Commonwealth public servant and her entitlements arose under the Public Service Act 1922 and the Long Service Leave (Commonwealth Employees) Act 1976. Under sec. 68A of the Public Service Act 1922 as amended, payment in lieu of recreation leave for certain officers is provided for as under:

``68B(1) This section applies to an officer who ceases to be an officer otherwise than by death.

(2) The Chief Officer may authorize payment to an officer to whom this section applies of an amount equal to the amount of salary that would be payable, at the rate applicable to the officer immediately before he ceases to be an officer, for a period of service equal to the recreation leave credit of the officer in accordance with the last two preceding sections at the time when he ceases to be an officer.

(3) The Chief Officer may also authorize payment to an officer to whom this section applies, in such circumstances as are prescribed, of an amount, determined in accordance with the regulations, in relation to portion of a recreation leave credit that would next have accrued to the officer if he had continued to be an officer.''

The payment to the wife under the Long Service Leave Act arises under subsec. 4 of sec. 16 of that Act; which subsection, so far as it is relevant reads as under:

``(4) Subject to sub-sections (5) and (6), where an employee whose period of service is at least 10 years ceases to be an employee otherwise than by death, the approving authority shall authorize payment to him of an amount equal to -

• (a) in the case of a category A employee - the amount of salary that would be payable to him for a period of service equal to the period of his long service leave credit immediately before he ceases to be an employee if salary were payable to him in respect of that period at the rate that is, by virtue of section 21, the rate applicable to him in relation to his long service leave immediately before he ceases to be an employee;''

The recipient was a ``category A employee'' ``whose period of service - (was)... at least 10 years'' at the time she finished duty.

8. The question is - are the amounts paid under these enactments payments of a capital nature? It appears to me that the payments arise as part of the bundle of rights accruing to the taxpayer's wife as part and parcel of her employment as a public servant. They accrued to her in her capacity as an employee of the

---

ATC 342

Commonwealth Government and became payable to her in virtue of her performance of her duties as an employee. They are therefore payments of an income nature, being an agreed reward for services rendered as an employee. In
Reseck v. F.C. of T. 75 ATC 4213 at p. 4220, Jacobs J. stated in a passage which, though the question at issue there was the application of sec. 26(d) to certain payments made to that taxpayer in consequence of retirement, is particularly apt for application to the circumstances of this reference:

``The question to be determined is whether the purpose of sec. 26(d) was to include to the extent of 5% thereof in the assessable income of a taxpayer amounts received in a lump sum by a taxpayer in the stated circumstances only when they were not amounts of income in the ordinary sense of that word but were amounts or payments of capital under the general law.

It will be observed from the decisions to which I have referred that the test whether or not a lump sum payment of the kind being considered is capital or income depends upon whether it is a price for services to be rendered. Therefore, if the paragraph referred only to amounts paid voluntarily it would be permissible to give the word `capital' a sense which distinguished the amount so described from an amount of income. But sec. 26(d) refers not only to amounts paid voluntarily but also to amounts paid by agreement. Since an amount paid by agreement is income if the agreement precedes the service in the office or employment it is not possible to give the word `capital' a sense which is in contradistinction to income.''

(our emphasis)

He then went on to state in relation to the payments there made by agreement, that:

``The payments in the present case would fall within sec. 25(1) if it were not for the express provision in sec. 26(d).''

We might add that Stephen J. in his decision in Reseck, found himself ``... unable to regard the payments received by the present appellant otherwise than as forming part of his assessable income within sec. 25(1)''.

9. The payments to the taxpayer's wife in this reference, arose out of the agreed terms of employment which she accepted on taking up appointment as a public servant. The amount then was income in her hands which, in part, escaped the operation of sec. 25(1) by reason of the application of sec. 26(d) to that part of the payment which represented long service leave benefits which accrued to her before 15 August 1978. On this view, it follows that this taxpayer should have shown the full amount of the lump sum payment paid to his wife as ``separate net income'' of the wife for the relevant year of income.

10. That would be sufficient to determine this reference, but, as the matter is one which has wide application, for the sake of completeness, we will deal with the argument on which the taxpayer strongly relied. A copy of his wife's income tax return for the year ended 30 June 1981, and of the notice of assessment relevant thereto, had been tendered. The Taxation Office had assessed the wife under sec. 26(d), only on 5% ``of the capital amount'' of so much of the payment as represented the rights which had accrued to her under the Long Service Leave Act before 15 August 1978. From this the taxpayer sought to characterise the whole of the lump sum as being a payment in the nature of capital. Certainly Gibbs J. (as he then was) pointed out in Reseck at p. 4215:

``... a lump sum paid as compensation for the termination of the taxpayer's employment will, generally speaking, be of a capital nature (
Bennett v. F.C. of T. (1947) 75 C.L.R. 480, at p. 485;
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215, at pp. 219-220)...''

but there is no suggestion here that the payment in question constituted payment by way of compensation for termination of employment. In Reseck, Gibbs J. went on at p. 4216 to adopt the view that the use in sec. 26(d) of the words ``of the capital amount'' was not conclusive as to the nature of a payment falling for assessment under that subsection; he stated there that:

``The words `of the capital amount' are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalized or total value. The words of sec. 26(d), given their ordinary meaning, include all allowances of

---

ATC 343

the kind thereby described whether they are of an income or capital nature.''

He later went on to ``adopt as correct'' at p. 4216:

``... the statement as to the effect of sec. 26(d) made by Professor Ryan in his Manual of the Law of Income Tax in Australia, 3rd ed., at p. 54: `It [sec. 26(d)] thus has both a charging and a liberating effect; it brings into charge a percentage of the amount paid though it would otherwise not be taxable at all, and it includes only a fractional amount of a sum which would otherwise be assessable in full'.''

It is quite clear therefore, vide also the earlier quote in para. 8 from Jacobs J. in Reseck, that payment of an amount in a lump sum so that it satisfies the description of ``the capital amount'' in terms of sec. 26(d) does not, of itself, characterise that payment as being of a capital nature.

11. We would confirm the Commissioner's assessment in this reference.

Claim disallowed