Case V128

Members:
Hartigan J

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 August 1988.

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Hartigan J. (President)

The question for decision in this application is whether a rebate is allowable to the taxpayer under sec. 160AA of the Income Tax Assessment Act 1936 (the Act). This question in turn depends upon whether there has been an effective retirement from or termination of an office or employment under sec. 26AC of the Act.

The relevant provisions of sec. 160AA and sec. 26AC are as follows:

``160AA(1) Where -

• (a) an amount is included in the assessable income of the taxpayer of the year of income under section 26AC or sub-section (2), (3) or (4) of section 26AD;
• (b) the taxable income of the taxpayer of the year of income exceeds $16,608;
• (c) the relevant tax amount in relation to the taxpayer in relation to the year of income exceeds the notional tax amount in relation to the taxpayer in relation to the year of income; and
• (d) the additional tax amount in relation to the taxpayer in relation to the year of income exceeds 32% of the relevant income amount in relation to the year of income.

the taxpayer shall be entitled in his assessment to a rebate of tax of an amount equal to the excess referred to in paragraph (d).''

``26AC(1) This section applies to any amount paid after 15 August 1978 (whether voluntarily, by agreement or by compulsion of law) to a taxpayer in a lump sum in consequence of the retirement of the taxpayer after that date from any office or employment or in consequence of the termination after that date of any office or employment of the taxpayer, being an amount that is paid in respect of unused annual leave or in respect of unused annual leave and a bonus, loading or other additional payment relating to that leave.

(2) Where an amount to which this section applies is paid to a taxpayer in a year of income, that amount shall be included in the assessable income of the taxpayer of the year of income.''

The taxpayer returned an amount of $7,032 in his tax return to 30 June 1980 and claimed that he was entitled to a rebate on this sum pursuant to sec. 160AA of the Act.

Before the Tribunal it was common ground, in terms of sec. 26AC, that the relevant payment was made after 15 August 1978, that it was paid in a lump sum and that the payment represented unused annual leave. The point of contention between the parties is one that has often arisen in the past, namely, whether the payment was made in consequence of the retirement of the taxpayer from any office or employment or in consequence of the termination of any office or employment. If it was not made in consequence, or as a result of one or other, or both, of these events then no rebate could be claimed under sec. 160AA.

The taxpayer was the only person to give evidence before the Tribunal. In 1979 he was employed as the regional director of a certain company in New South Wales. However, he had become dissatisfied with his remuneration and with the position generally with the result that he considered other employment. When he was offered a State Government posting as a statutory office holder he accepted it. He subsequently commenced his duties overseas on 14 January 1981. He told a senior executive of his employer-company (hereafter referred to as ``the company'') of his decision to leave and to take up the overseas post. In evidence he said that when the managing director of the company learnt of this the managing director telephoned and said he would not like to cut ties completely with the taxpayer. The taxpayer

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said, and this is borne out by the second paragraph of Exhibit 4, that as an inducement to return to the company at the expiry of his appointment with the New South Wales Government his superannuation entitlements would be maintained as would his long service leave entitlements, ``in exactly the same degree as if he remained continuously in the company's employment''. He was told that a position would be available on his return if he wanted it. (See Exhibit 1.) The taxpayer was also told by the managing director that he could return to a position of no less status than that which he left. The taxpayer said that he left his options open in respect of this offer. The thrust of his evidence was that an offer of a position to be taken up on his return was made. It was not the continuation of his old employment.

The taxpayer claimed that others in senior management levels of the company were not so enthusiastic about the idea of him returning to the company. As I have said the taxpayer's evidence was that at the time he left the company the taxpayer intended to keep his options open. He considered that the company had made him an offer which he would perhaps consider at a later time. His appointment overseas was for three years, at the end of which he hoped for a reappointment for a further three years. By this time he would have attained the age of 65 years which, so far as the company was concerned, was the retiring age. The taxpayer said that even if he was not reappointed to the post overseas he would be in a position, as a result of the experience he gained, in which many other employment prospects would probably open up.

By July 1981 the taxpayer's wife's health problems convinced the taxpayer that he would have to resign from his post and return to Australia. He wrote a letter (Exhibit 3) to seek clarification of his prospects of returning to the company. He said in evidence that after the initial offer was made by the company the offer had seemed to fade away. Indeed some feelers he put out to the company in 1981 as to whether a position was available brought the response or feeling in him that no position might be available.

As events turned out, he resigned his post overseas in August 1982. He said that by chance his old job became vacant at about the same time and so he returned to that position. The Commissioner's case was that the taxpayer always had an intention of returning to the company, but this was denied by the taxpayer, However, the Commissioner's representative raised the following matters to support this contention.

First, the taxpayer's tax return to June 1980 (Exhibit 9) says, ``I ceased employment with (the company) to take up duties on secondment for three years''. A letter from the company to the taxpayer (Exhibit 10) also speaks of the taxpayer's ``secondment''.

The taxpayer's explanation for the use of the term ``secondment'' was that this was a word he had used in an attempt to explain his employment history to the Japanese. He had fallen into the habit of using the word himself and that was how it came to appear in his tax return.

Secondly, in the 1980-1981 tax year the company allotted to the taxpayer 10,000 ordinary shares in the company. The taxpayer said that the shares came as a surprise to him, he thought they were more of a gift or a reward for past services. The taxpayer said that when he resigned from the company on 31 December 1979 he requested that the company pay out then and there all benefits accruing to him. However, the company refused to comply with this request.

Thirdly, after the taxpayer's retirement he arranged the managing director's travel schedule when the managing director travelled overseas. The taxpayer was also the alternate director of a local golf and country club. However, the taxpayer pointed out that this was at the wish of the managing director (see Exhibit 1). This exhibit also speaks of the task overseas being in return for the maintenance by the company of long service and superannuation entitlements.

The taxpayer's representative submitted that his client had retired from employment. He referred to Case C103
(1953) 3 T.B.R.D. 602 where Mr Nimmo (as he then was) said, at p. 606, that to establish that a man has retired from an office or employment it must be proved that (a) a taxpayer has relinquished, in fact, his office or employment, and (b) at the time he relinquished it he had no intention of ever returning to it or resuming it.

Reference was made to Case P3,
82 ATC 5 at p. 12 where it was said, with respect to test (b), that ``... a taxpayer may retire from his

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employment with A with the clear intention that if A at some time in the future ever offered him re-employment... he would accept the offer... those facts alone are not sufficient to put the matter outside sec. 26(d)''. However, the board member who made this statement was in dissent.

The taxpayer's representative cited Case D46
(1953) 4 T.B.R.D. 252 and said this was a case where a man retired but at the time he did so there was a possibility of re-employment. Mr Nimmo, with whom the other board members agreed, held that there was a retirement from employment. In this case a possibility of re-employment was discussed but Mr Nimmo said only the Public Service Commissioner could make a firm offer - all that was being done was to find out if the man was interested. Mr Nimmo held there was a retirement because the man was given a present from the staff, he removed his belongings from the office, returned the keys to the office, was thanked in writing by his superior and sought and found other employment.

In my view to determine whether the taxpayer here had a genuine intention to retire, all the relevant surrounding circumstances have to be considered. This is what Mr Nimmo did in Case D46 (supra).

It was then submitted that the taxpayer, even if he did not retire from employment, retired from ``an office''. ``Office'' and ``employment'' are used disjunctively but even so Mr Nimmo's test in Case 84 (supra) was laid down with regard both to retirement from an office and from employment.

It was submitted that the taxpayer was an office holder. His position appeared in Exhibit 6 - ``the annual report''. It was said that the fact that the title of the taxpayer's job appeared in the annual report indicated that the job was of a permanent nature and so was the office. Reference was made to Case U163,
87 ATC 948 where Mr Beddoe, Senior Member, at p. 952, applied
Edwards v. Clinch (1982) A.C. 845, a House of Lords decision, and said:

``... an office involved a degree of continuance and an independent existence in the nature of a position to which a person could be appointed and which did not depend for its existence on the appointment of the person for the time being occupying the position. In other words if the position disappeared upon the resignation of the occupant then the position was personal to the occupant and did not constitute an office.''

At this point I note the observations made in
F.C. of T. v. Sealy 87 ATC 5076 at p. 5080; (1987) 78 A.L.R. 387 by Pincus J. at p. 392. His Honour said he doubted if the term ``office'' was confined to cases in which the position involved was that of a public character or one involving any high degree of permanency.

In his submissions the Commissioner's representative said Exhibit 1 showed that the company was prepared to accept the taxpayer back after three years. This was evidence of a continuing relationship. In July of 1981 the managing director, in Exhibit 2, expressed his happiness at the connection the taxpayer had opened up for the company in Japan. The Commissioner cited Case U163 (supra) and urged the Tribunal to follow Senior Member Beddoe's approach. The Senior Member observed, at p. 951, that the taxpayer in that case was re-employed under the same conditions as prevailed before his first employment ended. He applied Mr Nimmo's test and said ``the applicant did at all times intend to continue employment with the college...'' Mr Beddoe agreed, expressly, with the approach of a member of the majority in Case P3 (supra); the case cited by the taxpayer drawing on a dissentient's comments. He concluded that no retirement from an office was involved either.

The Commissioner's representative submitted that the taxpayer did not retire from an office, rather he gained the company's approval to be re-employed later. He was still accruing employee benefits. If a retirement had in fact occurred benefits such as long service leave should have been terminated. Reference was made to Case N11
(1962) 13 T.B.R.D. 33 which was relied on as authority for the view that termination of all employee benefits should occur in order for there to be a retirement.

I should refer to Mr Trebilco's comments in Case D46 (supra) at p. 254:

``... where other facts exist to justify the application of s. 26(d) to a lump sum payment, the mere fact that there has not been a complete, final and irrevocable dissociation, lasting for all time, of the

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employee from the employer in every capacity is not necessarily fatal.''

So far as the question of having no intention ever to resume employment is concerned, the Commissioner agreed one could not say a man can never foresee a possibility of resumption of employment. However, here the taxpayer had a tentative plan to resume employment with the company.

The conclusion one comes to in this case depends very much on whether one considers there has been a genuine retirement from an office or termination of employment. I say this because it is probably too broad a comment to say that one can never have an intention to return to his former employer. In fact such a comment really cannot be made in the light of the decision in Case D46 (supra).

Turning to the facts of this case, I find that I accept the evidence of the taxpayer. I also find that the evidence of the arrangement (for want of a better word) between the taxpayer and the managing director is confirmed by letter from the company to the taxpayer dated 11 December 1979 and 4 February 1988 and admitted as Exhibits 1 and 4 respectively. Though passages in Exhibit 1 suggest some form of release of the taxpayer by the company, the letter in para. 4 is consistent with the taxpayer's evidence that, even though he was taking up an appointment with the State Government the company paid his long service leave and superannuation as an inducement to the taxpayer, with the attractions of his overseas experience, to return to the company rather than to a competitor on completion of the taxpayer's term of appointment. I do not consider that it was an expression of an agreement that the taxpayer was being given leave of absence to take up the government position. I find that the taxpayer did not remain in the employ of the company when he took up his overseas post. An offer was made to the taxpayer of some position of equal status to that which he had occupied should he relinquish his overseas position. The taxpayer's evidence that he intended to stay in that position until beyond his retiring age with the company is relevant here. In return for maintaining long service leave and superannuation benefits the company required some consideration. That was that the taxpayer fill the role of an alternate director on the board of the golf and country club. This does suggest a continuing relationship. The relationship, in my view, is that which I find to be the case here - of a man, who having sought and obtained new employment, still has attractions as an employee to his old employer who wishes to have a good chance of securing the services of the ex-employee in the future - rather than a continuing employer-employee relationship or that of a man continuing to be an office holder and the taxpayer for his part was keen to keep all his options open.

The second letter referred to, in my view, makes this plain. The company in that letter (Exhibit 4) signed by the chairman, who had written Exhibit 1, sets out a position which, in my view, accords generally with the evidence of the taxpayer on the issue. I consider that the inquiry contained in Exhibit 3 as to the taxpayer's future again shows that no continuing employment existed and indeed the employment link had been severed. As I have said I accept the evidence of the taxpayer and I base my findings of fact on his evidence.

On the evidence that I accept I find that the taxpayer resigned from his employment on or about 31 December 1979 in order that he be appointed to a State Government post overseas. I also find that the taxpayer resigned from his office of regional director of the company in New South Wales on 31 December 1979 so that he might take up his new employment. That is, in the phraseology used by Mr Nimmo in Case D46 (supra), the taxpayer relinquished, in fact, his office or employment. The company, however, in order to give itself the best opportunity to secure the taxpayer's services at the conclusion of his appointment, should he wish to return to the company, maintained his superannuation and his long service leave as an inducement to the taxpayer to return to the company rather than he find future employment with some other employer in competition with the company. I find that when the taxpayer returned to the company it was as an employee commencing a fresh employment after an effective earlier resignation from employment and after an earlier retirement from office. It was not the fulfilment of a continuing employment or holding of office which had continued during a period of secondment. I find that the taxpayer and the company had, from time to time, used the term ``secondment'' as referring to the taxpayer's employment with the State Government as a word which described the circumstances which I have found above to

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exist between those parties and not in any sense of a temporary transfer of the company's employee to the government post. As I have said the taxpayer alone was called to give evidence and I have accepted his account of the extent of any arrangements between himself and the company. No other person was called to give evidence to the contrary.

Accordingly, I order that the objection determination under review be set aside and the matter be remitted for reconsideration in accordance with my finding that the taxpayer had retired from an office or employment.