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CASE 44/94

Members:
BH Pascoe M

Tribunal:
Administrative Appeals Tribunal

Decision date: 11 August 1994

BH Pascoe (Member)

This is an application for review of a decision of the Commissioner of Taxation to disallow an objection lodged by the applicant against an assessment of income tax based on income for the year ended 30 June 1992.

2. At the hearing the parties provided a statement of agreed facts and no witnesses were called. Mr C. Depasquale, for the Respondent and Mr F. Bamford, for the Applicant made submissions to the Tribunal on their respective contentions as to the tax consequences arising from those facts.

3. The dispute related to whether an amount received by the applicant during the relevant year was an eligible termination payment and entitled to concessional tax treatment under Sections 26AC, 26AD or 27C of the Income Tax Assessment Act 1936 as amended (``the Act'').

4. The facts surrounding the payment and taken from the statement agreed by the parties were:

On 25 November 1991 A Ltd (``the employer'') wrote to the Australian Taxation Office (``ATO'') requesting approval under section 27E of the Income

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Tax Assessment Act (``ITAA'') of the early retirement scheme for certain employees of the employer.

On 26 November 1991 the Australian Taxation Office wrote to the employer advising approval of the proposed early retirement scheme.

On 6 January 1992 accountants for the employer wrote to the ATO in reference to the early retirement scheme. The letter stated that ``... employees who terminate employment with the employer prior to attaining 55 years of age are substantially disadvantaged in terms of their entitlement to superannuation''. The letter also advised that ``... employees in this age category [between 50 and 54 years of age] will take leave of absence from 28 February, 1992 until their 55th birthday''. The letter sought information as to the taxation treatment of the severance payment where that payment is made on 28 February 1992, and where the payment is made ``on the date the employee attains 55 years of age and terminates his leave of absence from, and his employment with,...''.

On 15 January 1992 the ATO wrote to the accountant advising, among other things, that where the payment was made on 28 February 1992 the payment would be fully assessable under the general provisions of the Income Tax Assessment Act, but that where it was paid when the employee attains 55 years of age and terminates his leave of absence from, and employment with, the employer, the lump sum payment would be assessed as an eligible termination payment in terms of Section 27A of the Act.

The Applicant, who was born on 30 September 1939, had been employed by the employer for more than 13 years, when he took up an offer of an early retirement package. The package provided for payment in a lump sum of accrued unused leave and long service leave, and a voluntary separation program payment comprising 13 weeks' pay plus one week's pay for each complete six months of service.

In order to qualify for the maximum available benefits under the A Ltd Retirement Plan, it was necessary for the applicant to retire no earlier than the date of his 55th birthday, viz. 30 September 1994. To facilitate this, the applicant and the employer entered into a written agreement, called a Retirement Leave of Absence Agreement (``RLOA''), requiring the applicant to retire at age 55. Under the terms of the agreement, the applicant would be on leave and long service leave from the date of the agreement until 2 July 1992, and would then be on unpaid leave of absence until his retirement date of 30 September 1994. Long Service Leave would continue to accrue to the applicant while on Leave of Absence.

As part of the RLOA agreement, the applicant was given the option to receive his lump sum payment on the first working day after:

  • (a) signing the agreement;
  • (b) 1 July 1992; or
  • (c) his retirement date (30 September 1994).

The Applicant chose the first option.

On 28 February 1992 he received a payment from his employer including an amount of $10,675 for unused accrued leave, $17,277 for unused accrued long service leave, and $54,466, being 13 weeks' pay plus one week's pay for each year of service, under a Voluntary Separation Program.

The applicant returned the lump sum payment as ordinary income in his return for the year ended 30 June 1992, and it was assessed accordingly. The notice of assessment for the year ended 30 June 1992 reflected this treatment of the income.

Subsequently, by letter dated 12 May 1993, the assessment was objected to on the grounds that the lump sum payment should have been treated as a lump sum payment and an eligible termination payment. Concessional tax treatment of the payment was sought to the following extent:

  • $10,459 to be assessed under section 26AC of the ITAA and a rebate of $1,778.03 be allowed under section 159SA of the ITAA;
  • $15,764 to be assessed under section 26AD of the ITAA, and a rebate of $2,679.88 be allowed under section 159SA of the ITAA; and
  • $57,270 to be assessed under section 27A(1) of the ITAA to the extent that only $2,863, representing 5% of $57,270,

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    be brought to account as assessable income.

Subsequently, it was agreed that the amounts claimed in the objection were imprecise, and that the correct amounts are as set out earlier.

The objection was disallowed on 10 November 1993.

5. For the Applicant, it was contended that his employment ceased on 28 February 1992 and the amount received was in consequence of the termination of his employment. For the respondent, it was contended that the applicant's employment was not terminated until 30 September 1993 and the payment was not in consequence of termination of employment and fell to be taxed as normal income.

6. The relevant provisions of the Act which relate to this matter are found in Sections 26AC, 26AD, 27A, 27C, 27E, 27F, 159S and 159SA of the Act. Given the length and complexity of these provisions it is not appropriate to set them out in detail. Sections 26AC and 26AD include in assessable income of a taxpayer any amounts paid in consequence of the retirement of the taxpayer from any office or employment or in consequence of the termination of any office or employment of the taxpayer, being amounts paid in respect of unused annual leave or unused long service leave, respectively. Where such amounts are included, Section 159SA provides for a rebate of income tax to limit the rate of tax payable or the amounts to 30%. Section 27C includes 5% of the retained amount of the concessional component of an eligible termination payment made to a taxpayer in a year of income. Section 27A is a definitional section and defines concessional component as ``so much of the eligible termination payment as consists or is attributable to a bona fide redundancy payment, an approved early retirement scheme or an invalidity payment''. Section 27E sets out the requirements for an approved early retirement scheme and Section 27F defines a bona fide redundancy payment. The definition of ``eligible termination payment'' is found in Section 27A(1) and is in the following terms:

```eligible termination payment', in relation to a taxpayer, means:

  • (a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than a payment:
    • (i) made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund;
    • (ii) of an annuity, or supplement, to which section 27H applies;
    • (iii) from a fund in relation to which section 121DA, as in force at any time before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1989, has applied in relation to the year of income commencing on 1 July 1984 or any subsequent year of income;
    • (iiia) from a fund that is or has been a non-complying superannuation fund in relation to any year of income;
    • (iv) of an amount to which section 26AC or 26AD applies; or
    • (v) of an amount that, under any provision of this Act, is deemed to be a dividend paid to the taxpayer;''

7. As indicated earlier there are now many long and complicated provisions covering payment on termination of employment primarily included in sub-division AA of Division 2 of Part III of the Act which was inserted in 1984 and amended on several subsequent occasions. It was of interest that neither advocate referred to Section 27C in his submission but referred to the $54,466 as being assessable or not under Section 27A(1). As indicated 27A is purely a definitional section. The taxing section, if found applicable, is Section 27C.

8. The common feature of the three taxing sections involved here is whether or not the payments were ``in consequence of the termination of any employment'' of the applicant. For the respondent, it was argued that the applicant did not retire from employment at the time of receipt of the relevant payments but remains as an employee of the employer until 30 September 1994 pursuant to the Retirement Leave of Absence Agreement. Under the terms of that agreement the applicant was to receive a voluntary separation payment and some continuing benefits such as the accrual of long service leave during leave of absence, continuation of health insurance and other

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benefits available to company retirees. Pursuant to that agreement the Applicant agreed:

``a. To take Annual Leave from 02/03/1992 until 08/04/1992 inclusive,

b. To take Long Service Leave from 09/04/1992 until 02/07/1992 inclusive, and

c. To take unpaid leave of absence until your `Retirement Date' on 30/09/1994. This Retirement Date should not be earlier than the last calendar day of the month in which you attain the age of 55 years.

d. To accept the VSP Payment either, (please select ONE option)

  • 1) × on the 28th of February, 1992, or such earlier dates, as agreed, as a leave of absence under a, b, or c (above) commences, or
  • 2) on the 1st of July, 1992, or
  • 3) upon your Retirement Date.

e. That this agreement constitutes your retirement notice, to be effective at 5.00pm on the Retirement Date. A Ltd accepts your retirement notice and it is therefore final.

f. To return to employment with A Ltd on the Retirement Date. If you are unable to return due to reasons beyond your control, you agree to contact A Ltd as soon as practicable to arrange an alternative day to return to work. In which case you request and agree that your retirement benefit will be calculated to the agreed Retirement Date.''

From 28 February 1992 the Applicant ceased to be entitled to any benefit from the employers' Medical Disability Plan, Sickness and Accident Plan and Car Plan. He was required to return his company car, keys, equipment etc, enjoyed a retirement lunch and, subsequently, sought and found part-time employment elsewhere. The requirement under the RLOA agreement for the Applicant to return to employment on the Retirement Date was explained by Clause 11.2 of the Rules of A Ltd Retirement Plan. This clause states:-

``11.2 Leaves of Absence A Regular Employee who has been granted a leave of absence under A Ltd practices then in effect and who resumes the status of Regular Employee upon fulfilling the conditions for which the leave was granted, will be deemed, for all Plan purposes, as having been a Regular Employee throughout the leave of absence. If status as a Regular Employee is not resumed, the employee will be considered as having terminated his service with the Employer on the date on which the leave of absence began.''

It was argued for the applicant that the requirement in the RLOA agreement was solely a device to satisfy the specifics of Clause 11.2 to be ``deemed'' as an employee during leave of absence. No duties were to be performed on that day.

9. In essence, the applicant's contention was for the application of substance over form. It was argued that he ceased being an employee on 28 February 1992, there was no requirement for the provision of any future services nor were any provided and the master-servant relationship ceased to exist on that date. The formal nomination of 30 September 1994 as the ``retirement date'' and the continuing accrual of long service leave and any other minor benefits were simply part of the package to encourage him to terminate employment on 28 February whilst retaining full benefits under the Retirement Plan. The respondent, on the other hand, took the view that the RLOA agreement constituted a contractual obligation to retain the Applicant as an employee and the continuing accrual of long service leave whilst on ``unpaid leave of absence'' strengthened the characterisation of the relationship as employer- employee. In any event, it was said, the provisions of Section 27E(4)(d), which have the effect of excluding a payment from being an ``approved early retirement scheme payment'' unless ``there was, at the termination time, no agreement in force between the Taxpayer and the employer, or the employer and another person, to employ the taxpayer after the termination time'' were brought into play because of the specific requirements in the RLOA agreement.

10. In ascertaining the appropriate treatment under the Act to the relevant payments it is firstly necessary to determine whether the amounts were paid ``in consequence of the termination of any employment''. If the answer is in the affirmative it is then necessary to determine whether any part represents a concessional component under Sections 27E or 27F.

11. The majority of cases referred to by the parties related to the former Section 26(d) of the

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Act. Prior to being deleted in 1984 this section included in assessable income ``5% 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''. As can be seen, the wording is very similar to that in the current legislation and cases involving that section involved a question of fact of whether or not an amount was paid ``in consequence of retirement from, or termination of employment''. In a decision of the Board of Review, Case C103
(1953) 3 TBRD 602, Mr Nimmo (as he then was) said (at pp. 605-606):-

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

In that case a holder of a statutory life appointment purported to resign on 10 April 1949 and to be reappointed to his former position two days later. His formal ``retirement'' was to enable a payment in lieu of long service leave to be made. The Board decided that the taxpayer had not retired from his office. The test provided by Mr Nimmo in that case was used with approval by Hartigan J acting as President of this Tribunal in Case V128,
88 ATC 812 which concerned a taxpayer who accepted a three-year government appointment and resigned from his then current employment. As an inducement to return to his former employer at the expiration of the contract, the taxpayer was told that a position would be available on his return if he wanted it and superannuation and long service leave entitlements would be maintained in the interim. It was held that the taxpayer had retired from employment and the payment was in consequence of that retirement. The superannuation and long service leave entitlements were maintained as an inducement to the taxpayer to return to the company rather than a competitor on completion of his term of appointment. His Honour also quoted with approval (at pp. 815-816) the comments of Mr Trebilco in Case D46
(1953) 4 TBRD 252 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 employee from the employer in every capacity is not necessarily fatal.''

After agreeing with Mr Nimmo's test, His Honour said (at p. 815)-

``In my view to determine whether the taxpayer here had a genuine intention to retire, all the relevant surrounding circumstances have to be considered.''

12. In considering all the relevant surrounding circumstances in this case, there is no doubt in my mind that, if it were not for the desire of the applicant and his employer to maximise the entitlement under the Retirement Plan, he would have simply finished work on 25 February 1992, received his lump sum and have had no further connection with the employer than any other retired employee of the company. In the absence of the RLOA agreement no argument would have arisen about the taxation treatment of the lump sum receipts. But the agreement was entered into and the question to be answered firstly is whether the agreement changes the character of the lump sum payments from being ``in consequence of retirement from, or termination of, employment'' to bring income arising from continuing employment. In my view it does not. I find that the payments were solely in consequence of termination of employment. There was no other reason for the payment. Whilst, in my view the applicant ceased employment on 28 February 1992 it is not necessary for a taxpayer to terminate employment contemporaneously with the lump sum payment to regard a payment as an ``eligible termination payment''.

It can still retain that character even where the actual date of ceasing the employment is later than the date of payment. Clearly, an excessive and inexplicable delay between payment and cessation of employment may lead to a conclusion that the two are not sufficiently related so as to regard the former as being ``consequent'' on the latter. Here, I am satisfied that the applicant effectively terminated his employment on the 28 February 1992, was not required to provide any further services after that date to A Ltd and the benefits provided to him made under the RLOA agreement were

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simply an inducement to him to accept an offer to take early retirement. Notwithstanding the form of the RLOA agreement which purported to require the applicant to ``return to employment with A Ltd on the retirement date'', I am satisfied that this did not constitute, in fact, an agreement to employ the applicant after the termination time so as to disqualify the voluntary separation payment from being attributable to an approved early retirement scheme pursuant to Section 27E. However, even if I am incorrect in that view, sub-section (4) of Section 27E provides:

``Where:

  • (a) an eligible termination payment is made in relation to a taxpayer in consequence of the termination of any employment of the taxpayer at a particular time (in this section referred to as the `termination time') in accordance with an approved early retirement scheme;''

Given the particular facts in this case, even if the termination time is regarded as 30 September 1994 the termination payment was made as a consequence of the termination of the employment of the applicant at the particular time in accordance with an approved early retirement scheme. The nineteen month gap may be unusual but does not necessarily change the reason for payment.

13. The respondent contended that, if it can be argued that termination of employment occurred prior to 30 September 1994 then it occurred on or about 2 July 1992 at the cessation of the annual leave and long service leave period. Case J33,
77 ATC 324 was cited as support for this view. The facts of this case, taken from the headnote were as follows:

``For the period 24 August 1970 to 21 March 1973, the taxpayer was employed as a second steward on the passenger vessel `X'. The vessel was decommissioned on 17 May 1973 and `sold off the coast' to a Singapore purchaser and ceased to operate in the Australian coastal shipping industry. Upon the decision to decommission the vessel, the taxpayer's position became redundant and he was given notice to cease duty on 21 March 1973. From 22 March to 4 April 1973, he was employed on a casual basis as `workby' steward on `X' to assist in the preparation of the vessel for sale. Arrangement of this casual employment was made prior to the taxpayer signing off the `X' on 21 March 1973. On 27 April 1973, the taxpayer went `on roster' and remained on roster until 8 June 1973 when he was appointed to the position of assistant steward with another company. Upon his position becoming redundant, the taxpayer became eligible to an accrued leave payment of $817.46 and severance pay of $569.35.

Following a ruling made by the Commonwealth Conciliation and Arbitration Commission, the practice arose of making severance payments to the crew of any vessel decommissioned and sold off the coast. The payments were calculated by reference to the crew member's period of service on the decommissioned vessel. Under an agreement between shipowners and the Marine Stewards Association, leave accrued at the rate of 20 weeks per year of service.

The accrued leave payment was made in cash to the taxpayer on 21 March 1973 and the severance payment was made by cheque posted on the same day. The taxpayer claimed that the two payments were made in consequence of termination of his employment on 21 March 1973 and were accordingly assessable as to 5% only under the provisions of sec. 26(d).''

This case, in my view, can be distinguished from the facts in the present matter. Clearly, in Case J33, there was a continuation of full employment after 21 March 1973 and it was held that there was no termination of employment at that date and the payment could not be seen as an effect or result of the termination. Here, the applicant terminated, in fact, his employment on 28 February 1992.

14. Both parties sought some comfort for their respective propositions from the decision in
Reseck v FC of T 75 ATC 4213. This decision is of limited value for application to this matter when it is recognised that the High Court was bound by a finding of fact by the Board of Review that there had been a termination of employment. As stated by Gibbs J. (at p. 4216):-

``The question in the present case is whether the amounts received by the taxpayer were allowances of the kind described in sec. 26(d). This matter was referred to the Supreme Court of Queensland by way of a

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case stated by a Board of Review and according to the facts so stated the employment of the taxpayer was terminated by his employer on 24th September 1971, he recommenced work for the same employer (although in a different district) on 27th September 1971 and his employment was again terminated on 11th February 1972. In most cases in which a workman ceased his employment on a Friday and commenced employment again with the same employer on the following Monday it would be impossible to say that his employment had ever been terminated. If there were a contract agreement or arrangement whereby the employment of the workman was terminated and recommenced it would no doubt be possible to invoke the provisions of sec. 260 of the Act, but even without the aid of that section in many cases when all the facts had been regarded the proper conclusion to be drawn would be that there had been no termination of the workman's employment at all. I of course do not cast any doubt on the correctness of the finding of the Board of Review in the present case, but I do think it necessary to emphasize that we have before us an unchallenged finding by the Board and that it is not open to us to hold that the services of the taxpayer were not terminated. Accordingly, our decision cannot be regarded as authority for holding in similar circumstances that there was a termination of the employment of the taxpayer.''

15. It follows that I find that the three amounts in dispute were paid in consequence of the retirement of the applicant from employment with A Ltd. The amount of $10,675 is to be included in assessable income under Section 26AC, the amount of $17,277 under Section 26AD and the amount of $54,466 is an amount to which Section 27E applies, is attributable to an approved early retirement scheme, is, therefore, a concessional component of an eligible termination payment and Section 27C includes 5% of such amount in assessable income.

16. The decision under review is set aside and remitted to the respondent for reconsideration in accordance with the direction that the amount of $10,675 is assessable under Section 26AC, $17,277 is assessable under Section 26AD and $2,723 is assessable under Section 27C of the Act.


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