Case U46

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 20 February 1987.

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P.M. Roach (Senior Member)

This reference by the applicant relates to the year of income ended 30 June 1980 and arises out of an objection lodged with the Commissioner by the applicant in September 1981 and referred for review in October 1985.

2. The applicant had held a statutory office in the service of the State of New South Wales until he retired from that office in January 1980. His remuneration had been for many years in accordance with the Statutory and Other Officers Remuneration Act 1975. He was entitled to benefits under the New South Wales Superannuation Act 1916 and his eligible service had extended for a period of over 14 years.

3. The Superannuation Act provided for entitlement to a pension. That entitlement could be in part commuted upon the superannuant electing for a "lump sum" - a term used in

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the Superannuation Act. The applicant made such an election, as he was entitled to do, before his appointment terminated. Having so elected, the applicant became entitled to (inter alia) a lump sum of $197,330.77, but that entitlement was subject to the entitlement of the State Superannuation Board to claim $37,772.87 for outstanding contributions, contributions which he had been able to defer during his service. In February 1980, 24 days after leaving office, the State Superannuation Board paid to bankers to the credit of the applicant the sum of $159,557.90 representing a gross lump sum entitlement less deductions for outstanding contributions.

4. In computing the taxable income of the applicant the Commissioner increased taxable income as returned by $9,866 (5% of $197,330). The applicant contends that no portion of the lump sum so paid constitutes assessable income and, alternatively, only some lesser portion thereof than $9,866 constitutes assessable income. The Commissioner contends that the amount so included does constitute assessable income by reason of sec. 26 of the Income Tax Assessment Act which at the relevant time provided (so far as is material):

"26 The assessable income of a taxpayer shall include -

• ...
• (d) 5% of the capital amount of any allowance, gratuity or compensation where that amount is paid (whether voluntarily, by agreement or by compulsion of law) in a lump sum in consequence of retirement from, or the termination of, any office or employment,..."

5. In my view the question can be answered shortly. Many persons on ceasing employment or on ceasing to hold an office receive moneys where the occasion for the payment is to be found in the employment previously engaged in or in the office formerly held. The payment may arise following voluntary early retirement, or compulsory retirement by reason of age or disability, or upon the termination of an office occasioned by breach or effected by agreement. Such payments can be in the form of a recurrent series (as with a pension or annuity); or by a single lump sum; or by a fixed amount payable by two or more instalments; or by a combination of any one or more of them. The payments so received can have the character of capital or of assessable income (within the meaning of that term as used in sec. 25 of the Act).

6. From the time the Commonwealth first legislated for the assessment of income tax in 1915, the scope of the concept of assessable income was extended by specific statutory provisions to include something of what would otherwise have been capital. The 1915 Act provided:

"Section 14 - The income of any person shall include -

• ...
• (f) 5 per centum of the capital amount of a retiring allowance or gratuity, which is paid in a lump sum"

7. For the year of income ended 30 June 1980 sec. 26(d) was the provision then operative in succession to the original sec. 14(d). It had the effect of making lump sums falling within its terms taxable as to 5% even though, but for the section, the lump sum would be capital and therefore not something to be included in assessable income (
Reseck v. F.C. of T. 75 ATC 4213; (1975) 133 C.L.R. 45). To that extent the provision imposes liability to tax. However, the section also had the effect of limiting what otherwise might be assessable income to 5% of the lump sum if the conditions of sec. 26(d) were satisfied (Reseck - ante). That being so, there is a risk for the applicant that an argument which would persuade the Tribunal to hold that he is not taxable to 5% might sustain an assessment against him that he is assessable in relation to 100% of the moneys received. The applicant seeks to avoid that consequence by proposing that he is outside the operation of sec. 26(d) because, not only was the amount not received by way of "gratuity or compensation", but it was not paid as an "allowance". He contends that he became entitled to moneys received in exchange for his surrender in part of entitlements to periodic payments by way of pension, a right arising in the exercise of entitlements conferred by statute. I must reject the contention. That contention has already been considered and rejected by a Full Bench of the Federal Court of Australia in
McIntosh v. F.C. of T. 79 ATC 4325. On that authority I am satisfied that what was received was received

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"in a lump sum"; that it was received by way of "allowance, gratuity or compensation"; and that it was received "in consequence of retirement from, or the termination of, (an) office or employment..." and that it was "paid", at least as to the sum of $159,557.

8. That leaves for consideration the alternative argument of the applicant, namely, that if he is taxable at all it should only be on the net amount received and that the deduction for outstanding contributions claimed by the Superannuation Board should be excluded from account. I approach that question by adopting the test used by Bowen C.J. and Blackburn J. in
F.C. of T. v. Knight (83 ATC 4789 at p. 4790) where their Honours said:

"The first matter to be identified in the present case is what was `the capital amount of any allowance' to which (the applicant) was entitled. The second matter to be determined is whether it was paid in a lump sum."

9. So considered the answer in my view is quite clear. The capital amount of the allowance to which the applicant was entitled was the gross figure. His entitlement to that amount was conditioned upon him paying outstanding contributions to the Board. That payment was effected when the outstanding contributions were set off against the capital amount, i.e. the gross figure; and that resulted in a situation whereby the capital amount was paid to him by a single payment, rather than by two or more payments, even though the amount to be actually received on the occasion that the single payment was made was, by reason of liability for outstanding contribution, less than the capital amount of the allowance. As Bowen C.J. and Blackburn J. said (ibid. p. 4791):

"It may also be used in the phrase `paid in a lump sum' in order to distinguish an amount paid by instalments or successive payments. In this sense `lump sum' refers not to the nature of the sum but to the manner of payment."

10. In summary, I am satisfied that by reason of the election he had made, the applicant became entitled to an aggregate amount, conveniently and commonly referred to as a lump sum; and that it was paid by a once-only payment as "a lump sum"; and that the applicant was "paid" the lump sum to which he was entitled on the one occasion notwithstanding that the Superannuation Board set off an amount due to it by the applicant for outstanding contributions; and notwithstanding the fact that the amount was paid to bankers to be held to the credit of the applicant. In doing what they did the Superannuation Board in one transaction of payment wholly discharged their obligations in relation to the capital amount of the allowances.

11. In my view the determination of the Commissioner upon the objection is to be affirmed.