PITCHER v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 218

Decision date: 2 March 2004

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BH Pascoe (Senior Member)

This is an application to review a decision of the respondent to disallow objection against an assessment of income tax for the year ended 30 June 2001. The objection was against the inclusion in assessable income of $35,405 being a lump sum payment received pursuant to s 30 of the Safety, Rehabilitation and Compensation Act 1988 (the SRC Act) in redemption of the applicant's ongoing entitlement to weekly payments of compensation.

2. At the hearing the applicant, Mr B. Pitcher, was represented by Mr M. Flynn, of counsel, and the respondent by Mr P. Sest, of counsel. Mr Pitcher gave evidence. It is relevant to note that, prior to the hearing of this application, the respondent's offer of test case funding was accepted by Mr Pitcher to enable him to be represented by counsel. The provision of test case funding was said to be the result of conflicting earlier decisions of the Tribunal in relation to the issue in this matter. The Tribunal received into evidence the documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975.

3. The objection lodged by Mr Pitcher was on the grounds that the lump sum payment, received on 17 August 2000, was an eligible termination payment (ETP) under s 27A of the Income Tax Assessment Act 1936 (the Assessment Act). Further, it was exempt from tax under s 27G of the Assessment Act. At the commencement of the hearing, Mr Flynn requested that the Tribunal exercise its discretion under s 14ZZK of the Taxation Administration Act 1953 to allow a further ground of objection that the amount in dispute was of a capital nature and not income. The Tribunal so ordered.

4. The factual background to this application was not in dispute. Mr Pitcher joined the Australian Army (the army) in 1985. After ceasing in 1992, he re-enlisted in January 1996. In July 1998, he suffered an injury to his legs, diagnosed as bilateral compartment syndrome. By notice of 7 December 1998, Mr Pitcher was advised that it was proposed that he be discharged from the army as being medically unfit for service. He was discharged on 15 February 1999 and commenced to receive weekly compensation payments under s 19 of the SRC Act. During 1999, Mr Pitcher completed an information technology course and, in January 2000, commenced employment as a network administrator in Stawell. He ceased this employment in January 2001. In July 2001, he commenced new full-time employment and continues in that employment. The amounts of gross weekly compensation to which Mr Pitcher was entitled were:

        

                                             $
   18 June 1999 to 10 November 1999        541.05
   11 November 1999 to 27 December 1999    562.13
   28 December 1999 to 30 January 2000     371.68
   31 January 2000 to 30 June 2000          82.90
   1 July 2000 to 7 July 2000               47.61
   8 July --                                35.87
      

The progressive reductions in the gross weekly entitlements were the result of his entitlement to benefits under the Military Superannuation and Benefits Scheme and a reduction for the amount that he was able to earn in suitable employment.

5. As a result of the entitlement to weekly compensation being less than $72.82 and Comcare being satisfied that Mr Pitcher's degree of incapacity was unlikely to change, s 30 of the SRC Act applied and Comcare, by letter of 21 July 2000, determined that he was entitled to a lump sum of $34,439.29. Section 30(1) provides:

``(1) Where:

• (a) Comcare is liable to make weekly payments under section 19, 20, 21 or 21A to an employee in respect of an injury resulting in an incapacity;
• (b) the amount of those payments is $50 per week or less; and
• (c) Comcare is satisfied that the degree of the employee's incapacity is unlikely to change;

Comcare shall make a determination that its liability to make further payments to the employee under that section be redeemed by the payment to the employee of a lump sum.''

The section proceeds to set out a formula for the calculation of the lump sum which, effectively, arrives at the net present value of the right to future weekly compensation until age 65. The amount under s 30(1)(b) is indexed and, at July 2000, was $72.82 per week.

6. It is noted that Mr Pitcher's objection was to the inclusion of $35,405 in assessable income. This was the amount shown on the relevant group certificate and included in his income tax return for the year ended 30 June 2001. However, it is clear that this amount was the total amount received from the compensation authority in the year and included $34,439.29 as the lump sum with the balance being weekly compensation payments to the date of redemption. Consequently, it is that amount of $34,439 which is in dispute.

7. The first issue to be dealt with here is whether it can be said that the lump sum was a receipt of capital or of a capital nature. Mr Flynn sought to argue that it was, although he accepted that, if it can be said that the payment was simply a substitution for income, the argument could not succeed. It was submitted that the payment was similar, in effect, to a lump sum for the disposal or surrender of a right to an annuity which was said by the High Court in
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199 to be a capital sum (at ATC 4372; CLR 219). Mr Sest went into considerable detail in his submission that the lump sum was income.

8. It is with no disrespect to counsel that I do not reiterate the full detail of the submission made on this issue. It is clear that any ongoing receipt of weekly compensation would have been of an income character. There are numerous authorities for the proposition that a lump sum in lieu of the right to receive future weekly payments of income is itself income. These were fully canvassed in the decision of Matthews J, sitting as President of this Tribunal, in
Coward v FC of T 99 ATC 2166; (1999) 54 ALD 83. This decision was followed by the Tribunal in
Gillespie v FC of T 2002 ATC 2006 and
Brackenreg v FC of T 2003 ATC 2196. The facts of those cases and this case are similar involving, as they do, the redemption for a lump sum of future weekly compensation entitlements.

9. The more difficult question is whether the lump sum can be properly included as an ETP. Section 27A of the Assessment Act defines an ETP as meaning ``any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer...''. The definition then proceeds to exclude

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certain payments and include other payments, none of which are relevant here. The phrase ``in consequence of'' has been the subject of judicial and Tribunal consideration going back to a decision of the High Court in
Reseck v FC of T 75 ATC 4213. The latest Tribunal decision was that in Re Brackenreg. However, a useful summary of the views of the Courts is to be found in a recent decision of Goldberg J in
Le Grand v FC of T 2002 ATC 4907.

10. In Reseck's case, Gibbs J was considering the virtually identical words of s 27A used in s 26(d), and said (at 4216-4217):

``... The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It is not, in my opinion, necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that `purpose' in sec 26(a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of sec 26(d). For example, a retiring allowance is plainly intended to be within sec 26(d), but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause predominated over the latter. Moreover, in many cases allowances, gratuities or compensation are paid in consequence of the provisions of an industrial agreement or of the industrial law but the words appearing immediately before the proviso to para (d) of sec 26 show that the paragraph will nevertheless be applicable. In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer's employment.''

In that same case, Jacobs J said (at 4219):

``...

I have no doubt that the amounts were allowances to the appellant, that they were paid in lump sums and that they were paid in consequence of the termination of his employment. It was submitted that the words `in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a `following on'.''

11. In
McIntosh v FC of T 79 ATC 4325, the Full Court of the Federal Court considered payments out of a provident fund, established by a bank for the payment of benefits to bank officers on their retirement. Toohey J said (at 4330-4331):

``...

In the present case it may be true to say that the immediate cause of the payment to the taxpayer of the sum of $27,006.84 was the exercise by him of the right to commute a percentage of the pension to which he was entitled. To say that is not to exclude the notion that the payment was in consequence of the taxpayer's retirement or that it followed on his retirement. In my view, the payment followed on the taxpayer's retirement, the only intervening event being the exercise of the option to commute. The connection was not simply temporal; retirement was a prerequisite to payment and in that sense there was a `following on' as I understand the language of Jacobs J.''

In the same case, Lockhart J, in responding to a submission that there was a difference in the construction of the phrase between Gibbs J and Jacobs J in Reseck's case, concluded (at 4913-4914):

``... In other words a payment that is caused by the act of retirement from or termination of employment would fall within the test of a `following on', but so would other payments that do not have such causal connexion, provided there is a link or connexion between the termination of or retirement from employment and the making of the payments. In my opinion Gibbs J and Jacobs J were not construing the phrase `in consequence of' differently.

In my opinion, although the phrase is sufficiently wide to include a payment

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caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connexion between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment. The phrase used in s 26(d) is not `caused by' but `in consequence of'. It has a wider connotation than causation and assumes a connexion between the circumstances of retirement and the act of payment such that the payment can be said to be a `following on' of the retirement.

Sometimes the relevant connexion may be that the retirement is a condition precedent to the right to payment of the sum in question.''

12. In Le Grand, Goldberg J was considering whether a payment in compromise of a claim of wrongful termination of employment and misleading and deceptive conduct was in consequence of termination of employment and an ETP. After reviewing the decisions in Reseck and McIntosh, his Honour said (at 4914):

``I do not consider that the issue can simply be determined by seeking to identify the `occasion' for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that a payment is made `in consequence' of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of that circumstance. The passages in the judgments to which I referred earlier make this clear. They also make it clear that there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made `in consequence' of that circumstance. The passages to which I have referred make it clear that it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows, in the causal sense referred to in those judgments, as an effect or result of the termination.''

Later (at 4915), he said:

``... I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages pursuant to the provisions of the Trade Practices Act and the Fair Trading Act in respect of the claims for misleading and deceptive conduct. But, as is pointed out in the judgments to which I have referred, it is not necessary for the termination of the employment to be the dominant cause of the payment.''

13. In
Seabright v FC of T 99 ATC 2011, the taxpayer elected to commute to a lump sum a pension payable under a State superannuation act. The pension was payable as a result of the taxpayer's employment being terminated on the grounds of being medically unfit for normal duties. The commutation of the pension occurred some 11 years after retirement from employment. The Tribunal found that the lump sum was simply a change from one form of payment, a pension, to another, a lump sum, and that both arose as a consequence of termination of employment. It was considered that the time gap between termination and receipt of the lump sum did not destroy the connection between termination of employment and the lump sum payment.

14. In Gillespie, the taxpayer retired from employment in 1986 on the grounds of total incapacity for work as the result of a workplace injury. He received weekly compensation payments initially under the Compensation (Commonwealth Government employees) Act 1971 and then the SRC Act. In 1998, he applied to have his weekly compensation payments redeemed as a lump sum under s 137 of the SRC Act. This section is in almost identical terms to s 30 but applies when the former employee makes a written request for redemption. It has the same level of maximum weekly payments and requires the compensation authority to be satisfied that the degree of the former employee's incapacity is unlikely to change. The only discernible difference between s 30 and s 137 of the SRC Act is that the latter section applies only to ``former employees''. In this case, the Tribunal found that it was the total incapacity which caused retirement from employment and

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resulted in the entitlement to weekly compensation payments. The Tribunal considered it relevant that s 137 applied to ``former employees''. Applying the same reasoning as in Seabright, the Tribunal found that the lump sum redemption was received ``following on and as a consequence of retirement from employment''.

15. In Brackenreg, the taxpayer was injured in a motor vehicle accident on her way to work in 1984. She was retired from employment on the grounds of invalidity and inability to discharge her duties as an employee in 1987. She received a superannuation pension and weekly compensation. The compensation was redeemed under s 137 of the SRC Act in 1995. The Tribunal found that the redemption of weekly payments below a certain level is available to current employees (s 30) or to persons who have ceased to be employees (s 30 or s 137). It was said that there is no pre- condition to the receipt of the lump sum redemption payment that the recipient's employment be terminated and there was no connection at all between the lump sum redemption payment and the termination of employment. Consequently, the Tribunal found that the payment was not an ETP. With respect to Deputy President Muller, it is not clear from his decision in this case whether the objection by Ms Brackenreg, the decision on which was the subject of Tribunal review, included the ground that the payment was an ETP or whether such a ground was argued in the hearing. It should be noted that the taxpayer was not represented and s 14ZZK of the Taxation Administration Act 1988 places an onus of proof on the taxpayer. Deputy President Muller did not refer to any authorities in arriving at his conclusion on that question. However, it is the apparent conflict between that decision and the decision in Gillespie which has led to the uncertainty.

16. In Brackenreg, the learned Deputy President dealt with the question of whether the lump sum was an ETP in one relatively short paragraph. His finding that it was not was based on the view that termination of employment was not a ``pre-condition to the receipt of a lump sum redemption payment'' and ``There is no connection at all between the lump sum redemption payment to Ms Brackenreg in the 1996 financial year and the termination of her employment in 1987''. However, with the greatest respect, the relevant pre-condition to the receipt of a lump sum redemption is the entitlement to weekly compensation and the satisfaction of the requirements of s 30 or s 137 that the entitlement is less than $72.82 per week and the degree of incapacity is unlikely to change. The question to be then considered is whether, in the words of Goldberg J, the payment of such weekly compensation redeemed by the lump sum ``followed as an affect or result of the termination'' of employment. Given the earlier finding that the lump sum redemption is income in that it is received in lieu of the otherwise ongoing weekly payments of compensation, it is clear that the lump sum has the same character as such weekly payments. Consequently, it is necessary to consider whether those weekly payments can be said to have been received as a consequence of the termination of employment.

17. It is clear that it can be said that the entitlement to compensation arose as a result of the injury suffered by Mr Pitcher during his employment with the army. However, the question is whether the payments followed, in a causal sense, as an effect or result of the termination of his employment. It is relevant to note the provisions of the SRC Act which governed the payment of the weekly compensation. Section 19 applies where an employee is incapacitated for work as a result of an injury and provides for payment for each week during which the employee is incapacitated of an amount equal to the employee's normal weekly earnings less the amount per week that the employee is able to earn in suitable employment. Section 20 applies to an employee who, being incapacitated for work as a result of any injury, retires voluntarily, or is compulsory retired from his employment and, as a result of the retirement, receives a pension under a superannuation scheme. If this section applies, the amount of weekly compensation otherwise payable under s 19 is reduced by the amount of such superannuation pension. Mr Pitcher was classified by the Military Superannuation and Benefits Incapacity Classification Committee as having a Class B incapacity for civilian employment and was entitled to a superannuation pension. Consequently, s 20 of the SRC Act applied to him.

18. In my view, it is relevant to this matter that Mr Pitcher's employment was with the

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army. In most forms of employment, a work- related injury, particularly one such as suffered by Mr Pitcher, does not result in the employee being able to be discharged from the employment. However, in his case, he was so discharged under the provisions of Australian Military Regulations 176(1)(h) as ``being Medically Unfit''. The notice of intent to order discharge of 7 December 1998 stated:

``...

1. As you may be aware, your medical examination conducted on 5 Nov 98, resulted in a finding that your PES was Class Four. As a consequence of this finding, it is proposed to discharge you because you are considered to be medically unfit for further service in the Army.''

As a consequence of this finding, Mr Pitcher was compulsory retired from his employment. Following on the decision that he be discharged, Mr Pitcher lodged a claim for compensation which resulted in his entitlement to the weekly payments following on from that termination of employment. As a consequence of a subsequent employment and his entitlement to superannuation pension, the compensation entitlement was reduced by a combination of s 19 and s 20 of the SRC Act to an amount which allowed the lump sum redemption under s 30 of that Act.

19. In light of the foregoing, I am of the view that it can be said that the weekly compensation payments were, in the words of Goldberg J, ``an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment'' of compensation and the redemption by a lump sum of future entitlements. For the same reasons as were set out in the decisions in Seabright and Gillespie, I consider that the time gap of 18 months between the date of discharge and the redemption of his entitlement did not destroy the connection between termination of employment and receipt of the lump sum. Consequently, I find that the amount of $34,439 was in consequence of termination of employment and an ETP.

20. While not necessarily determinative of the issue in this case, it is appropriate to recognise that one of the reasons for the reduction in weekly entitlements to compensation was the entitlement to a superannuation pension which caused s 20 of the SRC Act to apply. This section only applies to an employee who has retired from employment and as a result of that retirement receives a superannuation pension. Consequently, the retirement from employment is a significant factor in the calculation of the entitlement to compensation and, as in the case of Gillespie, the application of s 20 can be the trigger to bring s 30 or s 137 of the SRC Act into play to produce the lump sum redemption.

21. While the issue in this case is primarily one of statutory interpretation, it is appropriate, perhaps, to note a significant reason why taxpayers such as Mr Gillespie and Mr Pitcher seek to have the lump sum redemption of future compensation payments accepted as an ETP. Given the progressive rates of tax levied on taxable incomes, the inclusion of a substantial lump sum in one year as normal assessable income will generally attract a larger income tax burden by higher marginal rates of tax than would be met if the weekly payments had continued. Other than the concessional tax treatment of an ETP, there is no other basis for alleviating this additional burden on a one-off receipt of an unusually high amount of income other than the provisions applying to certain classes of taxpayers such as authors, inventors, performing artists, production associates and sportsperson (Division 405 of Income Tax Assessment Act 1997).

22. The final issue in this case is whether the amount of $34,439 falls within the provisions of s 27G of the Assessment Act. This section provides:

``27G Where:

• (a) an eligible termination payment is made in relation to a taxpayer in consequence of the termination of any employment of the taxpayer;
• (b) the termination of the employment of the taxpayer occurred:
  • (i) because of:
    • (A) if the eligible termination payment is made before 1 July 1994 - the taxpayer's physical or mental incapacity to engage in that employment; or
    • (B) if the eligible termination payment is made on or after 1 July 1994 - the disability of the

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      ATC 2049

      taxpayer, where 2 legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience; and
  • (ii) before the last retirement date in relation to the employment;

so much of the eligible termination payment as is equal to the amount ascertained in accordance with the formula

          AB
          --,
          C
          

where:

A is the amount of the eligible termination payment.

B is the number of whole days in the period from the date on which the termination occurred to the last retirement date; and

C is the aggregate of the number of whole days in the eligible service period in relation to the eligible termination payment and the number of whole days represented by component B ;

is an invalidity payment in relation to the taxpayer.''

The effect of the payment to Mr Pitcher coming within s 27G is that the payment would be exempt from income tax under s 27CB of the Assessment Act.

23. Having found that the payment of the lump sum under s 30 of the SRC Act was an ETP, paragraph (a) of s 27G is satisfied. It was submitted for the respondent that Mr Pitcher did not satisfy paragraph (b)(i)(B) as a result of his subsequent gainful employment and the lack of required certification from two medical practitioners. For the applicant, it was argued that he did satisfy the requirements of the section, and reports by Dr P. Wood, a general practitioner, and Mr R. Warne, a surgeon, were relied upon.

24. The report of Dr Wood was dated 4 January 2001 when Mr Pitcher ceased his employment at Stawell. Dr Wood advised that Mr Pitcher could no longer cope with the difficulties of driving 140km each way to that employment. Dr Wood concluded that:

``...

I believe Mr Pitcher is not currently fit for any type of duties. He has enjoyed being gainfully employed for the past few months as a computer technician and I believe has continued employment available to him, but of course he cannot cope with his pain. I also believe Mr Pitcher will never be fit for employment.''

The report of Mr Warne was dated 25 June 2003 and stated that Mr Warne had been managing Mr Pitcher's case ``for the last few months''. The report then stated:

``... I note that because of the pain and despite the rehabilitation that he had, that this resulted in a permanent incapacity and therefore because of this disability he will never be able to be employed in a capacity for which he is reasonably qualified. He has worked very diligently at rehabilitation but despite this he is unable to return to this pre- discharge situation. I therefore strongly feel that he meets all the criteria in that he will be unable to be employed in a capacity that he was reasonably qualified for. He has had training in IT but his ability to perform physical activity and any prolonged driving, walking, lifting or any other physical measure is severely limited.''

25. There are two problems in relying on these medical reports. The first is that the lump sum payment was some 18 months after termination of employment and Dr Wood's report was nearly 5 months after the date of receipt of the relevant payment with Mr Warne's almost 3 years after the payment. The words of the section require the termination of the employment to have occurred because of the disability of the taxpayer ``where 2 legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity...''. This wording would appear to require the certification to be prior to or, at least, concurrently with the termination of employment. Even if it can be said that a subsequent certification can be accepted, it is difficult to accept that such certification, some 2 years and 4 years later, can be seen as satisfying the requirements of s 27G. This is particularly so when the certification is provided after the

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years of income in which the payment is to be assessed. The second problem with the reports is that both were provided after Mr Pitcher had already been in full-time employment. Dr Wood stated that Mr Pitcher ``will never be fit for employment'' after he had been employed for 1 year with him undertaking full-time employment some 6 months after the report. At the time of Mr Warne's report, Mr Pitcher was in full-time employment and had been in that same employment for 2 years. While the words of the section do not require the Commissioner of Taxation or a tribunal to be satisfied as to the capacity for employment, it being sufficient that 2 medical practitioners so certify, the question of the validity of the retrospective certification is placed more clearly in focus. On balance, I do not accept that payment in question was an invalidity payment under s 27G of the Assessment Act.

26. It follows from the foregoing that the objection decision under review should be set aside and, in its stead, the objection allowed to the extent that $34,439 received by the applicant in the year ended 30 June 2001 was an ETP under s 27A of the Assessment Act.