COWLING v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2006] AATA 646

Decision date: 21 July 2006

ATC 2396

J Block (Deputy President):

Part A - introduction and background

1. The objection decision under review is the disallowance (on 22 June 2005) of an objection dated 26 May 2004 by the Applicant in respect of an assessment for the year ended 30 June 2003 (the "relevant year"). The assessment in question was made on the basis that:

2. Mr J Lombardo of Cossoff Cudmor Knox, solicitors appeared for the Applicant while Ms Marita Wall of counsel instructed by the Australian Government Solicitor appeared for the Respondent.

3. The central issue in respect of this matter is whether on 8 April 2003 ("the termination date") the Applicant's position as Chief Executive Officer ("CEO") of Rail Infrastructure Corporation ("RIC") was terminated in consequence of redundancy.

4. The Tribunal had before it the T documents and also Additional T Documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975. The Additional Documents are numbered sequentially after the T documents and so that a reference to the page number preceded by T suffices for this purpose. The Tribunal also accepted into evidence as Exhibits A1 and A2 affidavits by the Applicant dated 28 February 2006 and 9 March 2006 respectively and as Exhibit R1 a witness statement by Mr Rod Sims dated 4 April 2006.

5. In clause 1 of Exhibit A1 the Applicant noted that, save only as set out in clause 2 of Exhibit A1, the facts set out by the Respondent in paragraphs 5 to 33 (inclusive) of his Statement of Facts and Contentions dated 14 February 2006 are correct. It is convenient at this early stage and for this reason to set out those paragraphs which in effect (and save as aforesaid and as regards one aspect only) constitute agreed facts as follows:

"…

PART II FACTS

  • 5. On 1 July 1996 the Applicant commenced employment with the Rail Access Corporation (' RAC ') as a director.
  • 6. On 5 July 1999 the Applicant was appointed under a separate contract as the Chief Executive Officer (' CEO ') of RAC.
  • 7. On 1 October 1999 the Applicant entered into a three year written employment contract with RAC in respect of his position as CEO.
  • 8. On 1 January 2001 RAC and Rail Services Australia joined to form Rail Infrastructure Corporation (' RIC '). The Applicant was appointed as CEO of RIC. RIC owned all NSW State rail infrastructure facilities. Another Government Authority (the State Rail Authority (' SRA ')) was responsible for passenger functions and other transport-related functions.
  • 9. On 1 October 2002 the Applicant entered into a three year written contract (commencing on this day) with RIC in relation to his position as CEO (the ' Contract ').
  • 10. On 6 and 11 March 2003 RIC received two reports from Professor Michael West recommending immediate closure of the Menangle bridge (' Bridge ').
  • 11. On 22 March 2003 the New South Wales State election was held.
  • 12. On 27 March 2003 the Bridge was closed after the Director-General of the Department of Transport intervened to require that it be closed.
  • 13. During March and April 2003, an enquiry was conducted by the Independent Commission Against Corruption. The investigation focused on allegations that RIC had not closed the

    ATC 2397

    Bridge (despite Professor West's recommendations) so as to avoid any political embarrassment to it so close to the State election and that RIC covered up the reports to avoid any implications that it failed to maintain a safe rail system.

  • Termination of Employment

  • 14. On 8 April 2003 the Applicant claims that Mr Rod Sims, Chairman of RIC, phoned the Applicant to inform him that his position as CEO was terminated. He was 55 years old.
  • 15. On the same day (8 April 2003), the Applicant received:
    • (a) $353,500.00, being an eligible termination payment (' ETP ') equivalent to one year's salary in accordance with the Contract. This was for the period of service from 5 July 1999 to 8 April 2003; and
    • (b) $51,606.00, being the Applicant's accumulated annual leave entitlement.
  • 16. Also on 8 April 2003, Michael Costa (the then Minister for Transport Services) published a Press Release that announced:
    • (a) stage one of the transport restructure, including the 'vacating of the two CEO positions' of RIC and SRA and the immediate appointment of Mr Gary Seabury as Acting Chief Executive Officer of RIC [Mr Seabury was employed at the same salary as the Applicant];
    • (b) future changes to RIC and SRA would be 'announced shortly'; and
    • (c) there would be a railway bridge safety audit, stating that he was 'concerned about the process leading up to the closure of the Menangle Bridge'.
  • 17. On 8 April 2003 Mr Costa also called a press conference. After announcing the appointment of an acting CEO for RIC and three other appointments, he stated:

    These are significant changes to transport. They go to the heart of questions of conflicts of interest, issues that are of concern to the public, certainly of concern to me. This will make a much clearer, transparent rail structure. In addition, concerns have, of course, been raised about the safety of wrought iron bridges. I've asked Vince Graham, who's already looking at issues related to the Menangle, to conduct a safety audit of all of our wrought iron bridges.

  • 18. In response to a question about how the new structure will impact on 'cover-ups', Mr Costa acknowledged that he had heard allegations of a cover up in relation to the Bridge and considered that, on his current information, the process was 'grossly unsatisfactory'. A number of further questions and answers related to independence and transparency. In the press conference Mr Costa subsequently stated in relation to the Bridge - 'prima facie, it appears inexcusable'.
  • 19. However, Mr Costa denied that the Applicant had been sacked because of the Bridge. He stated that the position had been 'vacated as a result of the restructure'.
  • 20. When asked whether RIC and SRA would merge, Mr Costa responded that 'at this stage we're considering a number of options'. He also commented that 'We're working on a number of proposals'.
  • 21. On 30 April 2003 Mr Costa announced stage two of the transport restructure, including the merger of the metropolitan functions of RIC and SRA.
  • 22. On 4 September 2003 the findings into matters relating to the Bridge by the Independent Commission Against Corruption were handed down. No findings were made that any person engaged in corrupt conduct and it found no evidence on which to base any recommendation that consideration be given to the taking of any criminal or disciplinary action against any person.

  • Restructure

  • 23. On 1 January 2004 Rail Corporation NSW (' RailCorp ') was formed. The metropolitan functions of RIC and all the functions of SRA were transferred to RailCorp.

    ATC 2398

  • 24. On 5 September 2004 RIC entered into a 60 year lease with the Commonwealth's Australian Rail Track Corporation (' ARTC '). This lease covered the interstate and Hunter Valley rail corridors and track and included dedicated metropolitan freight lines to Sydney ports.
  • 25. RIC also entered into a 60-year Country Regional Network Management Agreement (' Control Agreement ') with ARTC on 5 September 2004 for managing and maintaining the remaining country rail corridors.
  • 26. RIC's role is currently that of owner of the NSW country rail network and manager of the ARTC lease and Control Arrangement. RIC also manages various engineering and operational facilities throughout country NSW and provides a number of business services to RailCorp.

  • Facts relating to the Commissioner's Assessment

  • 27. On 23 April 2004 the Applicant's income tax return for the year ended 30 June 2003 (the ' relevant year ') was received by the Commissioner. The return showed:
    • (a) an ETP of $353,500.00; and
    • (b) salary and wages of $286,017.00.
  • 28. On 4 May 2004 the Commissioner issued a Notice of Income Tax Assessment based on the Applicant's income tax return for the relevant year, which stated the Applicant's taxable income as $701,210.00 and at label G of the Notice of Assessment included a tax offset and other credit amount of $77,069.80 (of which $113 was a franking tax offset).

    The Commissioner calculated the remaining tax offset (ie $77,069.80 less $113) as follows:

    Total Tax Assessed on ETP at ordinary tax rates:  
    $353,500 at 47% $166,145
    Less: Tax assessed on rebatable ETP:  
      $112,405 at 15% $16,860.75  
      $241,095 at 30% $72,328.50 $89,189.25
      ETP rebate   $76,956.00

  • 29. On 26 May 2004 the Applicant lodged with the Commissioner a Notice of Objection against the Notice of Assessment for the relevant year.
  • 30. The following are the figures included in the Applicant's assessment for the relevant year and the amounts that the Applicant claimed should have been shown:

    Assessed by Commissioner Applicant's claimed amounts
    Salary Item 1BoxC $83,263 $31,657
    Lump sum Payment Item 3 Box R Nil $51,606
    ETP Item 4 Box I $353,500 $331,005
    Total Income $704,502 $682,007
    Taxable income $701,210 $678,715
  • 31. On 22 June 2005 the Commissioner made a decision to disallow the objection.
  • 32. On 19 August 2005 an Application for review of the decision was made to the Administrative Appeals Tribunal.

PART III THE CONTRACT

  • 33. The Contract included the following relevant clauses:
    • 5.0 SALARY AND BENEFITS
      • 5.1 RIC shall pay to the Chief Executive a total remuneration package per annum, being a total cost to RAC, inclusive of tax, of $353,500 per annum, or such greater amount as may be determined by the RIC Board from time to time which shall be divided between salary and such specific benefits as may be agreed

        ATC 2399

        in writing. The salary component of the Package shall be payable in equal monthly instalments half in arrears, half in advance, commencing on the 1st day of October 2002.
    • 8.0 TERMINATION
      • 8.1 RIC may immediately terminate this agreement by notice to the Chief Executive in writing if the Chief Executive at any time:
        • 8.1.1 Commits to any serious or persistent breach of this contract including, without limitation, intentional disobedience, dishonesty, serious or persistent breach of duty or serious or persistent neglect;
        • 8.1.2 Materially breaches this agreement and does not remedy that breach within twenty-one (21) days after receiving notice from RIC specifying the breach;
        • 8.1.3 Has grossly neglected to administer as manager the affairs of RIC;
        • 8.1.4 Becomes insolvent, or becomes unable to meet his debts as they fall due, or makes any arrangement or composition with his creditors;
        • 8.1.5 Becomes of unsound mind or a person whose person or estate is liable to be dealt within any way under laws relating to mental health; or
        • 8.1.6 Is convicted of a criminal offence which, in the reasonable opinion of the Board of RIC, will detrimentally affect it.
      • 8.2 Notwithstanding clause 3, RIC may at any time terminate the employment of the Chief Executive Officer by giving him twelve months' notice of its intention to do so, provided that the Chief Executive shall not receive more than he would have been entitled to receive had the Contract been performed up to 30 September 2005.
      • 8.3 Any obligation by RIC to give notice under the terms of this Contract may be satisfied by RIC paying the Chief Executive as a lump sum the net amount if his total remuneration package in respect of the period of notice required.
      • 8.4 Should the Chief Executive, by reason of permanent incapacity by accident or ill health, be prevented from performing his duties under this contract, his employment may be terminated on three (3) months' notice. For the purposes of this sub clause incapacity for three consecutive months or incapacity for a total of one hundred and forty (140) days in any year due to accident or ill health shall be deemed to be a permanent incapacity.
    • 9.0 FUNDAMENTAL CHANGE
      • If during the term of this contract a Fundamental Change shall occur, then the Chief Executive shall be entitled to resign the office and terminate employment with RIC by notice in writing given to RIC within one month after the occurrence of that Fundamental Change.
      • Fundamental Change shall be deemed to have occurred if:
      • A substantial reorganisation of the Corporation shall take place involving:
        • (a)the sale or abolition of the Corporation; or
        • (b)major reduction in the trading of the Corporation
      • and involving a substantial change in the responsibilities and authority of the Chief Executive.
      • In the event of a Fundamental Change occurring as a result the Chief Executive ceasing employment under these

        ATC 2400

        provisions the Chief Executive shall be entitled (without the giving of any further notice but in substitution for all other rights conferred by this contract) to receive immediately upon ceasing employment the sum equal to one year's gross remuneration at the rate prevailing at the time of Fundamental Change occurring together with any payments due under clause 5.2 hereof provided that the Chief Executive shall not receive more that he would have been entitled to receive had the Contract been performed up to 30 September 2005.
    • 10.0 RE-ORGANISATION OF STAFF
      • RIC may amend or re-organise the staff structure of the company and/or may include redesignation of the Chief Executive.
      • If, as a result of re-organisation with RIC, the position of the Chief Executive is made redundant and the employment of the Chief Executive is terminated, a severance payment shall be made to the Chief Executive in the amount of twelve months' gross remuneration at the rate prevailing at the date of termination provided that the Chief Executive shall not receive more than he would have been entitled to receive had the Contract been performed up to 30 September 2005."

6. In clause 2 of Exhibit A1, the Applicant noted that he took up the role of CEO of RIC on 5 February 1999 but that he was formally appointed later. That statement is not, on a careful consideration, in fact inconsistent with paragraphs 6 and 7 of the Respondent's Statement of Facts and Contentions. The Applicant's appointment as CEO of Rail Access Corporation ("RAC") commenced on 5 July 1999 upon terms which had been agreed, but which were recorded in writing in a written contract on 1 October 1999.

7. Paragraphs 5 to 33 of the Respondent's Statement of Facts and Contentions contain a number of definitions. I intend, in these reasons, and in addition to the definition of "termination date" (as referred to in clause 2) to use the defined terms contained in those paragraphs of the Respondent's Statement of Facts and Contentions.

8. It is also convenient at this early stage to set out those sections of the Act which are relevant; ss.26AC, 27F and 159S of the Act read as follows:

" Section 26AC

Amounts received on retirement or termination of employment in lieu of annual leave

  • (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.
  • (3) The reference in subsection (1) to the payment to a taxpayer 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 of a lump sum in respect of unused annual leave shall be read as including a reference to the payment to the taxpayer in consequence of that retirement or termination, as the case may be, of an amount in respect of, or an amount calculated directly or indirectly by reference to, annual leave, or annual leave and a bonus, loading or other additional payment relating to annual leave, to which the taxpayer was not entitled immediately before that retirement or termination, as the case

    ATC 2401

    may be, but to which the taxpayer would have become entitled, or that would ordinarily have been granted to the taxpayer, at a later time if the taxpayer had continued in that office or employment for a period after the time of the retirement or termination, as the case may be.
  • (4) In this section, annual leave means:
    • (a) leave described as annual leave, recreation leave or annual holidays, being leave to which a person has an entitlement by virtue of a law of the Commonwealth or of a State or Territory, an award, determination or industrial agreement in force under any such law, a contract of employment or the terms of appointment to an office;
    • (b) leave described otherwise than as annual leave, recreation leave or annual holidays, being leave to which a person has an entitlement by virtue of such a law, award, determination, industrial agreement or contract or by virtue of the terms of appointment to an office and the entitlement to which is determined by reference to matters similar to matters by reference to which entitlement to leave referred to in paragraph (a) is ordinarily determined; or
    • (c) leave that may be made available to a person as a privilege, being leave the availability of which is ordinarily determined by reference to matters similar to matters by reference to which entitlement to leave referred to in paragraph (a) or (b) is ordinarily determined.

Section 27F

Bona fide redundancy payments

  • (1) Where:
    • (a) an eligible termination payment is made in relation to a taxpayer in consequence of the dismissal of the taxpayer from any employment at any time (in this section referred to as the termination time ) by reason of the bona fide redundancy of the taxpayer;
      • (aa) if the eligible termination payment is made on or after 1 July 1994-the payment was not made to the taxpayer from an eligible superannuation fund;
    • (b) the termination time was before:
      • (i) if there was a date before the sixty-fifth anniversary of the birth of the taxpayer on which the termination of the employment of the taxpayer would necessarily have occurred by reason of the taxpayer attaining a particular age or completing a particular period of service-that date; or
      • (ii) in any other case-the sixty-fifth anniversary of the birth of the taxpayer;
    • (c) if the Commissioner, having regard to any connection between the employer and the taxpayer and to any other relevant circumstances, is satisfied that the employer and the taxpayer were not dealing with each other at arm's length in relation to the termination of the employment of the taxpayer-the amount of the eligible termination payment does not exceed the amount of an eligible termination payment that could reasonably be expected to have been made in relation to the taxpayer if the employer and the taxpayer had been dealing with each other at arm's length in relation to the termination of the employment of the taxpayer; and
    • (d) there was, at the termination time, no agreement between the taxpayer and the employer, or the employer and another person, to employ the taxpayer after the termination time;

  • so much of the eligible termination payment as exceeds the amount (in this section referred to as the termination amount ) of an eligible termination payment that could reasonably be expected to have been made in relation to the taxpayer had he voluntarily retired from that employment at the termination time is a bona fide redundancy payment in relation to the taxpayer.

    ATC 2402

  • (2) For the purposes of subsection (1), where:
    • (a) in the opinion of the Commissioner, it is appropriate to regard a part (in this subsection referred to as the forgone benefit part ) of an eligible termination payment made in relation to a taxpayer as having been made in lieu of superannuation benefits to which the taxpayer may have become entitled at the termination time or a later time; and
    • (b) the forgone benefit part would not, but for this subsection, be included in the termination amount;

  • the termination amount shall include the forgone benefit part.

  • (3) For the purposes of this section, it is to be assumed that paragraph (ja) of the definition of eligible termination payment in subsection 27A(1) had not been enacted.

Section 159S

Interpretation

In this Subdivision, unless the contrary intention appears:

age 55 ETP , in relation to a taxpayer, means an ETP made in relation to the taxpayer on or after the taxpayer's 55th birthday.

'annual leave' has the same meaning as in section 26AC.

'bona fide redundancy amount' means a payment made (whether voluntarily, by agreement or by compulsion of law) to a person in a lump sum because of the dismissal of the person from any employment, where:

  • (a) the dismissal was because of the bona fide redundancy of the person; and
  • (b) the dismissal took place before the last retirement date (within the meaning of section 27A) in relation to the employment; and
  • (c) there was, at the time of the dismissal, no agreement in force between the person and the employer, or between the employer and another person, to employ the person after that time.

'current year' means the year of income for which the rebate under this Subdivision is being calculated.

'early retirement scheme amount' means a payment made (whether voluntarily, by agreement or by compulsion of law) to a person in a lump sum because of the person's retirement from any employment or because of the termination of any employment of the person, where:

  • (a) the retirement or termination was in accordance with an approved early retirement scheme (within the meaning of section 27E); and
  • (b) the retirement or termination took place before the last retirement date (within the meaning of section 27A) in relation to the employment; and
  • (c) there was, at the time of the retirement or termination, no agreement in force between the person and the employer, or between the employer and another person, to employ the person after that time.

'eligible assessable income' means the total of the amounts included in the assessable income of the taxpayer of the current year under the following provisions:

  • (a) section 26AC, in respect of:
    • (i) unused annual leave, or unused annual leave and a bonus, loading or other additional payment relating to that leave, that accrued to the taxpayer in respect of service before 18 August 1993; or
    • (ii) bona fide redundancy amounts, early retirement scheme amounts and invalidity amounts, paid on or after 18 August 1993;
  • (b) subsections 26AD(2), (3) and (4):
    • (i) in respect of a bona fide redundancy amount, an early retirement scheme amount or an invalidity amount; or
    • (ii) if subparagraph (i) does not apply to the amount and the eligible service period mentioned in subsection 26AD(2), (3) or (4) began on or before 17 August 1993-to the extent that the amount exceeds the post 1993

      ATC 2403

      Budget component (if any) of the amount;
  • (c) subsection 27B(1) or (1A).

'employment' includes holding an office.

'ETP' has the same meaning as in Subdivision AA of Division 2.

'invalidity amount' means a payment made (whether voluntarily, by agreement or by compulsion of law) to a person in a lump sum because of the person's retirement from any employment or because of the termination of any employment of the person, where:

  • (a) either of the following applies:
    • (i) the payment was made to the person before 1 July 1994 and the retirement or termination was because of the person's physical or mental incapacity to engage in the employment;
    • (ii) the payment was made on or after 1 July 1994 and the retirement or termination was because of the disability of the person, where 2 legally qualified medical practitioners have certified that the disability was likely to result in the person being unable ever to be employed in a capacity for which the person is reasonably qualified because of education, training or experience; and
  • (b) the retirement or termination took place before the last retirement date (within the meaning of section 27A) in relation to the employment.

non-age 55 ETP means an ETP other than an age 55 ETP.

post 1993 Budget component , in relation to an amount included in the taxpayer's assessable income under subsection 26AD(2), (3) or (4), means so much of the lump sum payment concerned (that is, the amount mentioned in subsection 26AD(1)) as would be included in the taxpayer's assessable income under subsection 26AD(3) or (4) if references in those subsections to 15 August 1978 (disregarding any application of subsection 26AD(12) or (13)) were instead references to 17 August 1993.

'resident taxpayer' means a person who is a resident taxpayer for the current year of income within the meaning of subsection 3(1) of the Income Tax Rates Act 1986.

s. 27B(1)(a) amount means an amount included in assessable income under paragraph 27B(1)(a).

s. 27B(1)(b) amount means an amount included in assessable income under paragraph 27B(1)(b).

s. 27B(1A)(a) amount means an amount included in assessable income under paragraph 27B(1A)(a).

s. 27B(1A)(b) amount means an amount included in assessable income under paragraph 27B(1A)(b).

'taxable part of the taxable income' means:

  • (a) if the taxpayer is a resident taxpayer in relation to the current year and neither Division 16 of this Part (Averaging of incomes) nor Division 392 (Long-term averaging of primary producers' tax liability) of the Income Tax Assessment Act 1997 applies to the taxpayer's assessment for the current year-so much of the taxable income of the taxpayer of the current year as exceeds the tax threshold; and
  • (b) in any other case-the whole of the taxable income.

'tax threshold' means:

  • (a) the lower of the amounts specified in item 1 of the table in Part I of Schedule 7 to the Income Tax Rates Act 1986; or
  • (b) if, because of section 20 of the Income Tax Rates Act 1986, that Act applies to the taxpayer as if the reference in the table in Part I of Schedule 7 to that Act to the amount referred to in paragraph (a) were a reference to a different amount-that different amount.

'upper limit' has the meaning given by section 159SG."

9. 

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It is also convenient at this stage to note that the documentation to which I have referred includes a dispute of fact as to whether in relation to the termination payment, and assuming that it was indeed a bona fide redundancy payment in accordance with s 27F of the Act, the total number of years of service utilised to calculate the tax-free amount is three years or six years. Mr Lombardo said that the Applicant was prepared to accept that the correct period for this purpose is three years.

Part B - the evidence of the Applicant; evidence in chief

10. The evidence-in-chief of the Applicant was confined, to a considerable extent, to the content of Exhibits A1 and A2. It is for this reason that the content of Exhibits A1 and A2 are included in full in these reasons as follows:

"On 28 February 2006, I John Cowling, of … make oath and say as follows:

  • 1. Apart from the exception noted in paragraph 2 below, the applicant agrees with the facts presented by the respondent, the Commissioner of taxation, in paragraphs 5 to 33 of the respondent's Statement of Facts Issues and contentions of the Commissioner dated 14 February 2006.
  • 2. Referring to paragraph 6 of the Commissioner's Statement of Facts, the applicant contends that the applicant took up the role of Chief Executive Officer ('CEO') on 5 July 1999 but was formally appointed later.
  • 3. 3 Prior to 8 April 2003, the applicant was the CEO of a standalone business that reported to a board which had a mission to grow the business.
  • 4. Referring to paragraph 16 of the Commissioner's Statement of Facts, the applicant notes that the Press Release published by Michael Costa ('the Minister') is an example of the shift in the governance of Rail Infrastructure Corporation ('RIC') away from RIC's board and management to Michael Costa as Minister for Transport Services and his delegates that were not employees or directors of RIC.
  • 5. Further to the last point the actions of the Minister is an example of why the role of CEO abruptly changed after the termination of the applicant away from a CEO of a standalone business aiming to grow to a vastly different business involving merely holding assets so that some other entity could build a business.
  • 6. Referring to paragraph 19 of the Commissioner's Statement of Facts, the applicant notes the Minister's statement that the applicant's position had been vacated as a result of a restructure however that statement does not expressly set out the substantial changes that were made to the RIC's business and governance and therefore it is necessary to have regard to published accounts and other documents (that have already been provided to the respondent) that show the substantial changes that were made to RIC thus significantly diminishing the role of RIC's CEO role.
  • 7. The applicant wishes to provide verbal evidence is support of the above points.

Sworn at Sydney

On 9 March 2006, I John Cowling, of … make oath and say as follows:

  • 1. I note paragraph 2 of the respondent's Statement of Facts Issues and Contentions of the Commissioner dated 14 February 2006 wherein I am advised that, save for any facts expressly agreed or admitted in writing, I have the burden of proof of all facts that I wish to rely on to establish that the assessment the subject of this proceeding is excessive. I wish to record that through my agent I have expressly agreed and admitted in writing the facts presented by the respondent, the Commissioner of Taxation, in paragraphs 5 to 33 of the respondent's Statement of Facts Issues and Contentions of the Commissioner dated 14 February 2006.
  • 2. It appears to me that the basis of the respondent's decision to reject my objection regarding the treatment of my redundancy payment is based on the respondent's interpretation of the role performed by Mr Seabury as Acting CEO (ie that my CEO role was not abolished).
  • 3. I refer to the Explanatory Memorandum to the Income Tax.

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    Assessment Act (No.3) 1984 (at T2-6) which explains that a redundancy occurs when a role is 'expected to cease or diminish'. At no point in time has the respondent, or in fact any other person, told me that my former CEO role has remained the same.
  • 4. I contend as a result of the decision by the NSW government to restructure the Railways, as explained during a press conference by Michael Costa, the then NSW Transport Minister) the role of RIC CEO would cease during the restructure, and was diminished for the period of the restructure.
  • 5. In this regard I refer to the explanation of my termination provided by Mr Costa during the press conference on 8 April 2003 (at T14-66):

    'Reporter: "did you sack John (indistinct) because of Menangle?"

    Costa: "No, the position has been vacated as a result of the restructure."'

  • 6. And further, Mr Costa set out the reason for my CEO position being vacated under the restructure (at T14-66 to T14-67):

    'Costa: "Look, I'm not satisfied with the operation of all our rail bureaucracies, I think that there's been confusion in information flows, there's been confusion in roles. That's why we're undertaking this restructure. This is Stage One; we'll have to wait for Stage Two - which will be forth coming - and also Stage Three."'

  • 7. Furthermore, Mr Costa added and reported at T14-68:

    'Costa: "Look, it's time for a change. I've asked that both CEO's of RIC and SRA look towards alternative courses of employment, as we move forward with change. I think there is a need for change; it makes sense to do it, when you've got a new structure."'

  • 8. It is clear from Mr Costa's statement that my termination was due to the beginning of a massive reorganisation of the NSW Railways. This reorganisation saw SRA and RIC combined into a new organisation, RailCorp.
  • 9. I have provided as an appendix a diagram outlining the changes to the organisation structures as a result of the organisation.
  • 10. Mr Seabury was appointed Acting CEO for the transition period being the period from 8
  • 11. April 2003 to 29 September 2003. Mr Seabury was not provided with a new CEO contract nor was he confirmed in the role which subsequently fell to Mr Graham as explained in the 20o3 Annual Reports for RIC. A copy of the 2003 Annual Reports for RIC is appended and submitted into evidence.
  • 12. 1 refer to T8-34 being a letter from Rail Infrastructure Corporation to respondent, wherein the company secretary, Ms Margot Measakkers, in relation to the Acting CEO role stated 'The role was to assist with the transition of the metropolitan infrastructure to a new Entity, the transition of the Country Network to the ARTC and to oversight of a number of working groups for the amalgamation of the metropolitan infrastructure with State Rail.
  • 13. Referring to the last paragraph, my CEO role did not include as part of my role the duties named [by] Ms Measakkers as extracted in the last paragraph.

Sworn at Sydney

…

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ATC 2407

…

11. The Applicant said that Exhibits A1 and A2 are true and correct to the best of his knowledge. He indicated in this context, that he was not altogether sure of one aspect only. Exhibit A2 includes a diagram as to the structure of RIC both before and after the termination date. The Applicant indicated that he was not sure as to the structure of RIC after the termination date.

12. The Applicant said that as the CEO of RIC he was responsible to its board of directors ("the Board") and also to its shareholder ministers. His role was that of a normal CEO and included responsibility for the preparation of budgets and the operation of RIC in accordance with agreed plans and budgets. As CEO he was also responsible for the preparation of accounts in respect of RIC.

13. The Applicant referred in particular to the annual report of RIC for 2003 which appears at T p150 and following pages. That report was prepared by his staff under his supervision and then sent out to the chairman of the Board for review. The Board consisted of seven and including Mr Rod Sims (Exhibit R1) as chairman. Mr Sims is referred to in these reasons as "the Chairman" or as "Mr Sims".

14. The Applicant said that on the termination date he received a call from the Chairman in which he was informed that there was to be an announcement by Mr Costa (then Minister for Transport Services) as to the reorganisation of the railways and that he would be asked to leave the employ of RIC. Mr Costa is referred to in these reasons as "the Minister". The Chairman said also that Mr Lacey, then managing director of State Rail, would also be asked to leave. The Applicant said that the termination of his employment was not related to his performance; (he said furthermore that four years with the railways is in the nature of things quite a lengthy period). The Chairman then asked the Applicant to connect him, the Chairman, to the secretary of RIC who would prepare the necessary Board approvals. The Applicant was told that he was to leave the premises by midday that day.

15. The Applicant said that he had no idea as to what changes were proposed by the Minister who had been appointed to this particular portfolio some eight months previously. He handed the phone to Ms C While, the secretary of RIC. She arranged for the necessary documentation and he received the payment due to him on that day. He duly left RIC by midday taking his personal papers and possessions with him; at his specific request, he was allowed to use the car provided to him by RIC for a period of about one week after the termination date.

16. The Applicant noted that when the Contract was renewed not very long before the termination date, it was suggested that the period of 12 months referred to in clause 8.2 of the Contract (and see in particular paragraph 33 of the Respondent's Statement of Facts and Contentions, and which includes clauses 5, 8, 9 and 10 of the Contract), be reduced to three months. The Applicant refused to agree to that amendment and so that clause 8.2 was retained in its original form.

17. The Applicant said that he was told that Mr Gary Seabury ("Mr Seabury") who was then in charge of the metropolitan division of RIC would become the acting CEO of RIC. The Applicant noted that that appointment required Board approval.

Part C - the evidence of the Applicant; cross-examination

18. The Applicant said that he was totally surprised by the termination of his employment. It was put to him that in the period of 12 months before the termination date members of the Board had become concerned with his performance and that by way of one example Mr Sims had expressed concern as to a substantial budget blow-out. The Applicant said that he had no recollection of any such concerns. He agreed that he and Mr Sims had had disagreements as to the direction which RIC should take. He noted in particular that the Contract was renewed in October 2002 (prior to the termination date) and when it could have been terminated.

19. It was put to the Applicant that Mr Sims had communicated with him on a number of occasions as to a number of different issues; he denied that there were in fact any issues. When it was put to him that there were concerns his answer was that there were no significant concerns. The Applicant admitted that he had told Mr Sims that if the Board wanted him to go he would do so.

20. 

ATC 2408

The Applicant was referred to two reports by Professor West ("the Professor") of Wollongong University dated 6 March 2003 and 11 March 2003 in which the Professor recommended the closure of the Bridge on the basis that it was too dangerous to be used. The Applicant said that the Professor had communicated by email… However he said that he did not immediately take any action as regards the Bridge. He did, however together with engineers on the staff of RIC, inspect the Bridge but made no report to the Board, and so that the Board first heard about possible problems as regards the Bridge from another source on 26 March 2003.

21. It was put to the Applicant that the proposed closure of the Bridge was clearly significant and that it affected his relationship with the Board. He agreed that it did affect his relationship with the Board; he said also that he suspected that a suggestion that the report had been suppressed made the Board unhappy.

22. The Applicant said that so far as he was concerned, the report was a "crank" report although he agreed that the Professor is well-respected. He said also, in the context of a media program referable to the Bridge, that he did not think that the Professor fully understood the position. The Applicant acknowledged that the Bridge was subsequently closed.

23. The Applicant said that the Chairman in notifying him of his dismissal specifically said that it was not performance-related. This was significant he said because if this were the case he would have "liked to have my day in court".

24. It was put to the Applicant that Mr Sims had spoken to him several times during the past period and specifically in relation to the Bridge. He said that "I didn't see it that way". He said the he thought that the Bridge was an important engineering asset. The Applicant agreed that there may have been some tension in respect of the Bridge on the part of some members of the Board.

25. Reference was made at this point of the evidence to negative media reports as to the Bridge and to certain commissions of inquiry. Reference was made in particular to an Independent Commission against Corruption held in late March and early April 2003. That inquiry considered whether there was corruption on the part of officers of RIC, and including the Applicant. There were allegations that the Bridge was not closed despite recommendations by the Professor so as to avoid potential embarrassment.

26. The Applicant said that he was told by Mr Sims that his position was being terminated because of a reorganisation. He noted that the Minister made an announcement on the termination date referring to the railway industry generally and in which the Minister said that he, the Applicant, and Mr Lacey would be leaving.

27. The Applicant said that the reorganisation occurred in stages; the first stage occurred on the termination date and the others followed later. However he agreed that on the termination date the only change in relation to RIC was that he was dismissed as CEO and Mr Seabury was appointed as (acting) CEO of RIC in his place.

28. The Applicant was next referred to a letter (referred to as the "termination letter") written to him by the Chairman on the termination date which appears at T p114 and which reads as follows:

"Dear John

I write to advise that the Board has passed the following resolutions in relation to your employment.

The Board resolves that:

  • 1. Following consultation with the voting shareholders and the Minister, and pursuant to Clause 8.2 of the Contract of Employment between Rail Infrastructure Corporation and John Cowling, the Board hereby terminates the employment of the Chief Executive Officer, by giving him 12 months notice, effecting 12 noon Tuesday 8 April 2003.
  • 2. Pursuant to Clause 8.3 of the Contract, the Board determines that this notice is satisfied by the payment to the Chief Executive Officer of a lump sum representing the net amount of his Total Remuneration Package in respect of the period of notice referred above, and authorises payment accordingly.
  • 3. Following consultation with the voting shareholders and the Minister, the Board further appoints Mr Gary Seabury as

    ATC 2409

    Acting Chief Executive Officer pursuant to Section 19S of the Transport Administration Act 1988, effective 12 noon Tuesday 8 April 2003 and until further notice.
  • 4. The Chairman is instructed to do all things necessary to effect resolutions 1, 2 and 3 above.

As indicated above, your employment is terminated effective Tuesday 8 April 2003.

Yours faithfully

…"

29. The Applicant said that he could not recall the content of the termination letter.

30. It was put to the Applicant that he had left the employ of RIC because his position had been terminated under clause 8.2 of the Contract and even though the Contract included a specific and different provision as to redundancy. The Applicant said that he believed that he was leaving because of the reorganisation; at a subsequent time and when considering what had occurred he decided that his departure arose through redundancy. The termination letter was received later that day (the termination date) or on the next day; he could not remember exactly when it was received. However, the Applicant said that the paper-work related to the payment did not correctly reflect the fact that his termination was in fact a redundancy. (I understood him, in referring to paper-work in this context to be indicating both the termination letter and also the accounting information referable to the payment to him and which did not in its terms refer to redundancy.)

31. The Applicant was referred to a statement made by the Minister to a reporter which appears at T pp66 (part of the report of a press conference) as follows:

"…

COSTA:

No, the position has been vacated as a result of the restructure. Look, I'm not satisfied with the operation of all our rail bureaucracies, I think that there's been confusion in information flows, there's been confusion in roles. That's why we're undertaking this restructure. This is stage one, we'll have to wait for stage two - which will be forthcoming - and also stage three.

…"

The Applicant said that he did not think that the restructure arose because of his (and Mr Lacey's) performance in their respective positions.

32. It was put to the Applicant that on the termination date there was only one restructure in respect of RIC and that was his dismissal with Mr Seabury replacing him. The Applicant said that he did not know what the Minister had in mind. He agreed that he had admitted that there was no restructure on that date (the termination date) but that a proposal for restructure was contemplated.

33. The Applicant agreed that Mr Seabury was appointed to take his place with the same powers and privileges as he had; moreover Mr Seabury received the same remuneration. The Applicant said that Mr Seabury "did the same things". He said that because Mr Seabury was appointed in an "acting" capacity it was not the same job. He agreed that the appointment was made "acting" because there were procedures to be gone through before the appointment could be other than an acting appointment.

34. The Applicant was asked whether if he had not been dismissed he would have invoked clause 9 of his contract. His answer was that he did not know what he would have done. However, a letter by Peter Larish & Co Pty Limited dated 26 May 2004 (and thus more than a year after the termination date) contains as an attachment a memorandum dated 18 March 2004 by the Applicant; clause 12 (T p43) of that memorandum reads as follows:

"…

Performance issues

  • 12. I did not have the opportunity to apply nor did I use the 'fundamental change' clause (Clause 9) of my employment contract."

Clauses 15 and 16 of the same memorandum (T pp43-44) read as follows:

ATC 2410

"…

Conclusion

  • 15. The termination payment made to me on 8 April 2003 related to my retrenchment as a result of restructure plans commenced on that day by the NSW Government under specific direction by Mr Costa, Minister for Transport, whereby the position of CEO of RIC was abolished. The payment was made in haste with no opportunity for me or RIC's payroll department to check the accuracy of the deduction for income tax. Consequently, I believe that the Group Certificate issued to me by RIC's payroll department for the year ended 30 June 2003 contained the same error as did the payment advice I received on 8 April 2003. I seek amendment to my tax return for the error contained in the Group Certificate and refund for the overpayment of tax.
  • 16. The Group Certificate issued to me treats my annual leave payment of $51,607 as ordinary income. The ETP statement does not give the benefit of the six years tax-free redundancy amount."

35. The Applicant said in conclusion that he did not think he would in any event have stayed at RIC.

Part D - the evidence of Mr Sims

36. Mr Sims commenced by confirming that his witness statement Exhibit R1 was true and correct; omitting its annexures, his statement reads as follows:

"…

On 4 April 2006, I, Rod Sims of … Director, being duly sworn, make oath and say:

My Background

  • 1. I am a Director of Port Jackson Partners Limited ACN 052 145 392 ('PJPL'), a corporate advisory firm. I have been a director of PJPL since February 1994. My role with PJPL is to advise Chief Executive Officers and other senior managers on issues of commercial strategy and organisation.
  • 2. Rail Access Corporation ('RAC') was formed in July 1996. RAC owned, maintained and operated the NSW rail tracks. On inception I was appointed Chairman of the Board of RAC.
  • 3. On 1 January 2001, RAC merged with Rail Services Australia to form the Rail Infrastructure Corporation ('RIC'), which was incorporated as a statutory State owned corporation. I was Chairman of the Board of RIC from its inception until 8 May 2003.
  • 4. On 9 May 2003 I was appointed Chairman of StateRail Authority of New South Wales ('StateRail'). I resigned as Chairman of StateRail on 20 August 2003.

John Cowling's Appointments

  • 5. On 1 July 1996 John Cowling commenced employment with RAC as a director.
  • 6. By a separate agreement, John Cowling was appointed as Chief Executive Officer ('CEO') of RAC on 5 July 1999. This agreement was oral until 1 October 1999, when he entered into a three year agreement with RAC in respect of his appointment as CEO.
  • 7. On 1 January 2001 (when RIC was established), John Cowling was appointed as CEO of RIC.
  • 8. On 1 October 2002 John Cowling entered into a further three year agreement with RIC in relation to his position as CEO.
  • 9. I was involved in the negotiation of the terms of both contracts entered into by John Cowling when he was appointed as CEO (ie the contracts dated 1 October 1999 and 1 October 2002) and I signed the agreement which commenced on 1 October 2002 on behalf of RIC. I was at all relevant times during John Cowling's appointment aware of the clauses and conditions contained in the agreements with John Cowling. Annexed hereto and marked with the letter ' A ' is a copy of the 1 October 2002 agreement.

John Cowling's Performance

  • 10. Although some members of the Board were pleased with Mr Cowling's performance as CEO, others expressed concerns.

    ATC 2411

  • 11. I had a number of discussions with John Cowling where I informed him of the range of views concerning his performance. John Cowling said to me on a number of occasions 'if they [the Board] want me to go, I'll go'.
  • 12. The Board as a whole then became very concerned with the lack of information provided by John Cowling to the Board concerning the Menangle Bridge ('Bridge'). In early March 2003 RIC received reports from Professor West recommending the immediate closure of the Bridge to avoid any 'catastrophic events' or the 'impending catastrophic failure threatened through the continued use of this structure in it's badly deteriorating state'. John Cowling did not immediately advise the Board of Professor West's report and of the situation concerning the Bridge.

Termination of John Cowling's Appointment

  • 13. On 8 April 2003 a proposed circular resolution was distributed to all members of the Board. The purpose of the resolution was to effect the termination of John Cowling as CEO and the appointment of an Acting CEO. Annexed hereto and marked with the letter ' B ' is a copy of the proposed circular resolution.
  • 14. On 8 April 2003, the Board passed a resolution terminating the employment of John Cowling pursuant to clause 8.2 of the Contract and appointing Mr Gary Seabury as Acting CEO of RIC. I was familiar with the termination clause in John Cowling's contract (ie clause 8.2) because I had negotiated the terms of the contract.
  • 15. On 8 April 2003, I telephoned John Cowling to advise him that his employment with RIC had been terminated.
  • 16. Later that day I wrote to John Cowling confirming that his employment was terminated. Annexed hereto and marked with the letter ' C ' is a copy of that letter.
  • 17. In accordance with the Transport Administration Act 1988 (NSW), the CEO of RIC was (and still is) appointed by the Board, following concurrence of the Voting Shareholders (the Premier of NSW and the Treasurer of NSW) and the Portfolio Minister (being at that time the Minister for Transport Services, the Hon M Costa MLC). I consulted Mr Costa and he approved of the decision to terminate John Cowling's employment with RIC and to appoint Gary Seabury as Acting CEO.

Acting CEO

  • 18. Gary Seabury was appointed Acting CEO of RIC on 8 April 2003 to fill the position vacated by John Cowling. The position was an acting one, as a permanent CEO could not be appointed without the proper selection process being undertaken.
  • 19. On 9 April 2003, a Special Board Meeting of RIC was held where it was resolved to approve that the Acting CEO have all the authorities previously given to John Cowling as CEO. Annexed hereto and marked with the letter ' D ' is a copy of the Minutes of the Special Board Meeting dated 9 April 2003.
  • 20. Under the Transport Administration Act 1988 (NSW), the Board has no power to appoint a CEO or acting CEO with powers and authorities other than those specified in that Act. Although it transpired that Gary Seabury's responsibilities included those involved in the restructure, after his appointment as Acting CEO, he still performed the same functions and had the same delegations as John Cowling had previously and he performed the same role and tasks as John Cowling had prior to his termination.

Date: 4 April 2006

Sworn at Sydney

…"

37. Mr Sims said that he was on the termination date the Chairman of RIC; he had previously and since 1996 been the Chairman of RAC.

38. The Applicant became CEO of RIC in 1999 under the Contract which was executed in 1999 and renewed in 2002. Mr Sims said that, with assistance, he negotiated the Contract with

ATC 2412

the Applicant. The Applicant was responsible to the Board and the then responsible Minister.

39. Mr Sims said that he communicated with the Applicant at monthly Board meetings and also in the course of communications which took place on a weekly basis and sometimes more frequently.

40. Mr Sims said that over a period there were differing views among members of the Board as to the Applicant's capability. There were members of the Board who had particular concerns about the Applicant and as to the manner in which he handled a number of issues. He gave as one example the fact that the Board in 2001, expecting a budget of $800,000,000 received a budget which was approximately double that amount.

41. There were, so Mr Sims said, many issues. Some of the Board members put their views forcefully at meetings of the Board. The Applicant as CEO attended Board meetings excluding some held in camera.

42. When the Applicant's contract came up for renewal in 2002 there were members of Board both for and against renewal. By majority the Board approved renewal. The Applicant would, he said, have known that there were reservations about him.

43. In March 2003 the Board became aware of the fact that there were reports by the Professor as to the Bridge and in particular that it was in so dangerous a state of disrepair that it would have to be closed. The Board was concerned in particular because there was no paper dealing with the issue presented to it and that it was in fact raised after "a journalist got hold of the story". The Board was concerned about the fact that it was not informed at an earlier stage.

44. Mr Sims described the Bridge as the "straw which broke the camel's back". Those members of the Board who had concerns about the Applicant were extremely upset and those members of the Board who had previously supported his renewal, thought that the Applicant had gone too far.

45. Mr Sims referred to a media report (T pp251-252) and in particular to its content under the head of "The Sunday program" and "Events of 24 March" as follows:

"…

The Sunday Program

Mr Vickery was sent a fax by Mr Christopher Zinn, a producer with the Nine Network's Sunday program at 10:24am on 21 March. The fax sets out eight questions, the first of which seeks advice as to whether the RIC has been told at any time in the previous 24 months that there is a risk to public safety if any rail bridge remains open to traffic. There is no specific reference to Menangle Bridge.

After receiving the fax Mr Vickery rang Mr Zinn from whom he ascertained that there was no need to respond to the questions that day and that the Sunday program would not be doing anything that weekend. He said he did not give Mr Zinn any information concerning Menangle Bridge.

He also told Mr Vane-Tempest about the fax. Although he agreed it was clear from the contents of the fax that Professor West's recommendations for closure had been drawn to the program's attention, Mr Vickery did not consider disseminating those recommendations to the Minister's office. This was because he understood '… that Professor West had agreed that speed restrictions would manage the situation and that there was work ongoing in the form of independent assessments and that there was a further technical review taking place on 25 March'. Mr Vane-Tempest remained unaware that Professor West had said anything about the possibility of a catastrophic failure of the bridge.

Events of 24 March

Mr Vickery was again contacted by the Sunday program on Monday 24 March and asked when a response to its fax of 21 March would be available. Mr Vickery said he then drafted answers to the questions and sent them to Mr Vane-Tempest in the Minister's office for approval and comment. The draft response notes that:

In light of the heightened state of security observed in New South Wales, it is not appropriate to provide structural and/or engineering information on any of our key assets including bridges. Given the threat of terrorism, the release of detailed information on the structure of

ATC 2413

possible targets will only serve to undermine security measures implemented as a means of protecting public assets.

Mr Vane-Tempest could not recall discussing the draft with Mr Vickery but was of the view that it was 'an unsatisfactory answer' in response to the issues raised by the Sunday program.

When, after 24 March, the draft response was seen by Mr Scully, he was not impressed by the invoking of a threat of terrorism as a basis for not disclosing information concerning bridge safety.

Mr Vane-Tempest was contacted by Mr Ross Coulthart from the Sunday program on 24 March, some time between 12:30pm and 1:00pm. According to Mr Vane-Tempest, Mr Coulthart asked him whether he was aware that the RIC had a report from Professor West which advised that Menangle Bridge was in danger of a catastrophic failure. This was the first occasion Mr Vane-Tempest had heard Professor West had advised the bridge was in danger of catastrophic failure. Mr Vane-Tempest said he rang Mr Scully to advise him of what Mr Coulthart had told him.

Mr Vane-Tempest said this was the first occasion in which he had discussed Menangle Bridge with the Minister. He said Mr Scully's response was to tell him to obtain a copy of Professor West's report. Mr Scully also asked him to fax a copy of the report to Mr Michael Deegan, the then Director-General of the Department of Transport. He asked Mr Vickery for a copy of Professor West's report and later faxed a copy to Mr Deegan.

The Nine Network's Sunday program sent a fax to Mr Scully, marked to the attention of Mr Vane-Tempest, at 3:28pm on 24 March. It referred to the fax forwarded to the RIC and noted that it was of extreme concern that efforts to check allegations about a serious threat to public safety had not yet received any kind of response. The fax went on to advise that:

We are aware that several weeks ago Professor West of the Faculty of Engineering at the University of Wollongong, working as an independent assessor for the RIC, warned the RIC that the Menangle Bridge must be closed immediately to avoid any catastrophic events. We want to know what the RIC has done in response to Professor West's stated concerns.

On receipt of this fax Mr Scully said he asked to see Professor West's report. This was provided to him later on 24 March.

Mr Sargent said the receipt of the Sunday program fax was the first occasion he first became aware that Professor West's report contained a recommendation for immediate closure of the bridge. Eh formed the view the Minister's office 'had been severely misled' by the RIC briefing note. He gave the following evidence:

[Mr Sargent]: Can I say this to you, that if this briefing note had contained the words that Professor West was recommending immediate closure due to possible stress failure of that bridge, however - you know, its been agreed to - for the bridge to remain open with speed restrictions, I - you know, I would have been down to the Minister's office like a shot. I mean, that would have concerned me greatly.

Mr Sargent did not subsequently discuss the inadequacies in the briefing note with anyone at RIC and does not appear to have had any further involvement in this matter.

…"

46. Mr Sims referred also to page 24 of Exhibit R1 which is a part of one of the annexures to Exhibit R1, which has not been included previously in these reasons, and which in paragraphs 13 and 14 reads as follows:

ATC 2414


"Matter Raised Action Responsibility Due Date
         
…        
26 March 2003 Board Meeting 13. Correspondence
Refer to the Audit & Risk Board Committee for discussion the letter from Coordinator General of Rail re change in Treasury Policy on asset valuation as at Attachment 2.4.3c, pg 9.		 Chief Financial Officer 14 May 2003 Audit & Risk Board Committee Meeting
  14. Operational Report
Provide a briefing paper to the Board and to the Minister that details the issues relating to Menangle Bridge by Friday 28 March 2003.		 Chief Executive Officer 28 March 2003
…"        

47. The Bridge was, as has been said, the "last straw". Mr Sims spoke to each Board member; it was agreed that there could not be a productive relationship with the Applicant and all members of the Board accepted that it would be necessary to terminate the Applicant's employment.

48. Mr Sims spoke to the Applicant a "couple of days" before the termination date. He told him that "things are not looking good for you". He did so, he said, in order to warn the Applicant. On the termination date Mr Sims phoned the Applicant in order to inform him, the Applicant, that his position had become untenable and that the Board intended to terminate his employment. He said also that the Minister was engaged in a review which might result in a range of possible results. He said furthermore that it was conceivable that the end result might be that the Applicant's job would at some future point in time disappear. Mr Sims said that he made the statement, after consultation with the Minister, in order "to soften the blow" to the Applicant. Mr Sims also spoke to RIC's secretary in order to give her instructions as to the preparation of the necessary termination documentation. In addition he spoke to Mr Seabury who would replace the Applicant as CEO of RIC.

49. Mr Sims was firm as to the fact that it was made clear to the Applicant that he was being dismissed and that the Bridge affair was the "last straw". Although Mr Sims could not remember what exact words were used he was sure that he would have alluded to the Bridge and the fact that the Applicant's position had become untenable.

50. Mr Sims then arranged for the termination letter dated on the termination date (referred to and quoted previously in these reasons) to be written to the Applicant and in which it was made clear that the Applicant's contract was terminated under clause 8.2. He described clause 8.2 as a usual clause. As Mr Sims put it, dismissal was possible for cause and also under clause 8.2 which required one years notice.

51. Mr Sims said that on the same day there was a press release by the Minister and when the Minister made reference to restructuring in stages. Mr Sims said that he informed the Minister that the Board intended to terminate the Applicant's employment but that the Minister in his press statement included references to other matters. However and on the termination date the only change in relation to RIC was that Mr Seabury became (acting) CEO in place of the Applicant as CEO of RIC.

52. Mr Sims said that Mr Seabury was the obvious choice as the replacement CEO. The executive staff in the railways could be regarded as consisting of two streams, one operational and one consisting of staff performing other functions. A CEO would

ATC 2415

always be appointed from the operational area. Of the two possible candidates Mr Seabury, head of the metropolitan stream, which was much larger than the rural stream, was the preferred choice, and more particularly because there were problems in relation to the rural operation.

53. Mr Sims said in conclusion that Mr Seabury was appointed as acting CEO with exactly the same salary and exactly the same responsibilities; excepting only that Mr Seabury was necessarily appointed at that time in an acting capacity there was no difference whatever between the two positions.

54. Mr Lombardo who appeared on behalf of the Applicant did not cross-examine Mr Sims at all.

Part E - analysis of the evidence

55. The T documents including the additional T documents run to some 400 pages. They include the accounts which were prepared by the Applicant in respect of the payment to him; those accounts (which need not be set out in detail) make no reference to redundancy.

56. Although the Applicant tended to make light of what might be referred to as the Bridge affair, it is plain that it was a matter of considerable significance. When a well-respected professor reports that a bridge is so dangerous that it cannot be used this must be a matter of considerable importance. Coming in the wake of the Waterfall disaster (about which there was also a commission of inquiry) the Bridge problem assumed an even greater significance.

57. The evidence of Mr Sims was given in a forthright and clear manner and must be accepted as entirely credible. That he was not cross-examined at all is significant.

58. That Mr Sims sought when communicating the impending dismissal to the Applicant to soften the blow, is entirely understandable. It is to be remembered that there had been a relationship of some duration between the two, and that Mr Sims would have wished to act in a fashion which was as conciliatory as possible in the circumstances, is altogether to be expected.

59. While I do not think that the Applicant's evidence should be regarded as untruthful it did at times sound very much as if there was a considerable degree of reconstruction after the event. The Applicant must have known that there were members of the Board who were against him. Nor can I accept that he had no intimations of any kind before being told on the termination date by Mr Sims that he was being dismissed. I accept that Mr Sims had warned him two days previously of the coming blow. The Applicant received the termination letter either on that date or on the following day; the accounting documentation in respect of the payment to him accompanied the payment which was received on the termination date. The Applicant did not then contest the correctness of the letter or the accounting documentation; he raised redundancy as an issue and the correctness of the letter and the accounting documentation after the lapse of a considerable period thereafter, all of which supports the view that "redundancy" was an afterthought on the part of the Applicant.

60. As regards both the Applicant's dismissal and the Bridge affair the evidence of Mr Sims must, in respect of all inconsistencies, be preferred. As to why the Applicant chose to disregard the Professor's views in respect of the Bridge was not clear. But even if he did think that the Professor was incorrect in his views or perhaps exaggerating the danger, his failure to inform the Board as to a matter which could have far-reaching consequences, was in all the circumstances most surprising. One would have thought that to advise the Board of the Professor's warnings (even if the Applicant did not agree with them) was desirable and even necessary if only as a matter of prudence.

61. Once I accept Mr Sims' evidence, and, having regard to the fact that he was not cross-examined at all, I can and must do so, there can be no doubt at all that the Applicant was dismissed in accordance with clause 8.2 and that redundancy was altogether irrelevant. As I have said, the termination letter was not at that time repudiated; this is so also in relation to the payment documentation. It is likely on the balance of probabilities that at a later stage and after he obtained professional advice, the Applicant came to realise that a termination caused by redundancy would confer tax advantages on him.

62. The major factor, and which to my mind determines the issue, is that the Applicant was replaced by Mr Seabury albeit in an acting

ATC 2416

capacity. An organisation such as RIC must have a CEO. It is also important to focus on what occurred on the termination date; what happened thereafter is of little relevance. On the termination date the Applicant was dismissed and a replacement was appointed; the fact that the replacement was at that time appointed in an acting capacity does not in my view detract from the view that he did in fact replace the Applicant…

63. The evidence before me contains numerous references to media reports, press conferences and the like; I do not consider it necessary to refer to them to any further extent.

Part F - the case law

64. In preparing this Part F, I acknowledge my indebtedness to written submissions prepared by the Respondent dated 11 July 2006 which were of considerable assistance to me.

65. The terms "bona fide redundancy payment" is defined in s 27F of the Act which has been set out in full earlier in these reasons. "Dismissal" and "bona fide redundancy" are not defined terms and must be given their ordinary meanings. The meaning of "redundancy" was examined by the Full Court of the Supreme Court of South Australia in
The Queen v Industrial Commission of South Australia;
ex parte Adelaide Milk Supply Co-operative Limited (1977) 16 SASR 6 and which at pages 26 and 27 noted:

"… the question of redundancy of an employee is linked to the question of the continued utility of the job which he is performing. In other words it does not relate to the personal competence of the employee in the job which he is performing.

…"

And then at page 8 (quoted with approval in
Fosters Group Limited v Wing [2005] VSCA 322, [33]; and see also
Short v F W Hercus Pty Ltd (1993) 40 FCR 511, 520; and
Dibb v. Commissioner of Taxation [2004] FCAFC 126, [33]; and quoted in TR 94/12 paragraph 41):

"… a job becomes redundant when the employer no longer desires to have it performed by anyone. A dismissal for redundancy seems to be a dismissal, not on account of any personal act or default of the employee dismissed or any consideration peculiar to him but because the employer no longer wishes the job the employee has been doing to be done by anyone.

…"

66. Having regard to Adelaide Milk (supra) the Respondent noted in TR 94/12 at paragraph 12 that an employee's position will be redundant if:

67. It is clear enough that the concept of a redundancy applies to a position but not a person. See
Short v FW Hercus Pty Ltd (1993) 40 FCR 511 and quoted in TR 94/12 at paragraph 42 (cf:
Dibb v Commissioner of Taxation [2004] FCAFC 126, [43]).

68. The Respondent contends, correctly, that the facts in this case are similar to a remarkable extent to those in Fosters (supra) at [33]. I refer in this context to clauses 14 to 20 (inclusive) of the Respondent's submissions, with which I agree, as follows:

"…

Fosters' Case

  • 14. The facts in the case of
    Fosters' Group Limited v Wing [2005] VSCA 322 are strikingly similar to the current matter. The respondent, Mr Kou was the General Manager for Fosters in China from 1 July 2000. After various incidents, his manager, Mr Bett told the human resources manager in May 2002 that he had lost trust in Mr Kou and wanted him to be summarily dismissed. He was told that there was not sufficient basis on which to do so. It was agreed that Mr Kou's position would be terminated by giving him one month's notice and five months' payment in lieu of notice.
  • 15. On 2 July 2002, Mr Kou was told that his position was being terminated from 31 July 2002 in order to save costs.

    ATC 2417

    He was told it was not a redundancy. Fosters submitted that Mr Kou was not told the real reason for his termination because it was concerned about the company's reputation, it did not want to create bad blood with Mr Kou and it wanted him to be able to leave with dignity.
  • 16. This happened at the same time that Fosters was restructuring its operations in China. Mr Bett acted as General Manager for China after Mr Kou's departure pending finalisation of the restructure. The restructure resulted in a diminution of the role of General Manager for China. On 1 December 2003, Fosters' appointed a person as Managing Director, Greater China (ie including Hong Kong) on a higher salary than Mr Kou's. His position description was almost identical to Mr Kou's and he also reported to Mr Bett.
  • 17. Mr Kou claimed that he was entitled to a redundancy benefit from Fosters and the trial judge found in his favour on the basis that the termination of his employment was a redundancy. This was overturned by the Victorian Court of Appeal, who held that the trial judge applied the wrong test for redundancy. The trial judge had asked whether there was a change in the job, all its responsibilities and its rewards. The Court of Appeal determined that the correct test was whether there was a change in the duties of the role so that for all practical purposes the role no longer existed (at [46]).
  • 18. Similarly, the Court of Appeal considered that the trial judge had erred in deciding that any reorganisation or restructure coupled with a termination of employment meant that there was a redundancy (at [60]). Rather, the trial judge should have asked what changes were made to the previous role as a result of the restructure (at [47]).
  • 19. Further, Mr Kou argued that any fault on his part was irrelevant, as he was not told that this was the basis for the termination of his employment. The Court of Appeal rejected this argument, concluding that the nature of the termination of a person's position did not depend on what was communicated to the relevant individual.
  • 20. The following facts led the Court to the inescapable conclusion that Mr Kou's position was not made redundant:
    • • Mr Kou's position remained immediately after his departure, despite the fact that changes were made to the role and Mr Bett merely performed the role in an acting capacity (at [62]). This role involved taking the lead and being responsible for the day-to-day operations of the company and to make provision for forward planning within the objectives and strategies set out by the company (at [64]);
    • • after the changes, there still remained work to be carried out by the occupant of Mr Kou's former position. The degree to which the original role changed was not sufficient to conclude that "for all practical purposes it no longer existed" (at [65] to [67]); and
    • • it was not open to the trial judge to decide that Mr Kou had been made redundant because Fosters no longer wished to have performed the job which Mr Kou had been doing.

Reorganisation

…"

69. Clauses 64 and 65 of the judgment in Fosters (supra) are of particular relevance; they read as follows:

"…

  • 64. His Honour set out the argument put by Fosters that "a management position as senior as the one which Mr Kou was occupying would always be required in an organisation such as that in which he was working" to take the lead and be responsible for the "day-to-day operations of the brewing company" and to make "provision of forward planning within the objectives and strategies set out by the defendant." This consideration appeared to play no part, however, in his Honour's reasons for his

    ATC 2418

    decision. Yet, to my mind, this is a most compelling argument, which the respondent never satisfactorily answered.
  • 65. Second, although as I have said the evidence on this topic varied, there was no doubt that after the changes there still remained work to be carried out by the occupant of the position of "country manager" for China, whatever the title given to that role. Mr Kou agreed in cross-examination that he was still responsible for the production and marketing of the local beer, together with managing the human resources side and the accounting and finance side of the business in China. He had three senior people reporting directly to him. Further, there was no suggestion that Mr Kou had nothing to do in the month before he departed. In addition, the appellant submitted that even if Mr Kou's evidence that he had lost 80% of his workload was accepted, it had been his choice to devote so much time to products which - at the time he was appointed - represented only 4% of sales by volume and 10% by revenue and - at the time his employment was terminated - represented 7% of sales by volume and 22% by revenue.

…"

70. I do not think it necessary for me to refer in specific terms to case law dealing with changes in the relevant position made in consequence of a restructure. This is so in particular because on the termination date Mr Seabury's position, powers, duties, responsibilities and remuneration were exactly the same as those referable to the Applicant. However and in the interests of completeness I note that
Re Marriott and Federal Commissioner of Taxation (2004) AATA 806 is authority for the proposition that some changes will not have the effect that there is a bona fide redundancy. See in this regard Marriott (supra) at [47] as follows:

"…

Where an employer is introducing structural changes to their organisation, they may well need to change employees' duties of employment … Whether an employee's termination is by reason of redundancy will require an assessment of the changes to determine if they were beyond or beneath the employee's qualifications, skills or experience.

…"

71. It is important again to note that although RIC was subsequently reorganised, and so that it is no longer the organisation it was on the termination date, it is necessary to have regard to what occurred and the position as it was on the termination date. On that date the only relevant restructuring in relation to RIC was the termination of the Applicant's position and his replacement by Mr Seabury. This aspect is referred to in the Respondent's written submissions as Stage One. Stages Two and Three occurred thereafter.

72. The Applicant contended that he was terminated under clause 10 of his contract and which entitled him to one years' salary if his position was made redundant. In fact and as the letter dated on the termination date made clear, his termination was effected in accordance with clause 8.2 of the Contract which entitled RIC to terminate his employment on 12 months' notice; (it may be noted that as specified in the relevant letter and pursuant to clause 8.3 of the Contract, the Respondent was entitled to pay, and did in fact pay, a lump sum in lieu of notice).

Part G - conclusion

73. Having accepted the evidence of Mr Sims and to the extent necessary in preference to that of the Applicant, the Applicant cannot succeed. Putting it at its best for the Applicant, the Applicant has not been able to discharge the onus on him under s 14ZZK of the Taxation Administration Act 1953.

74. This being so the payment of one years' salary was not a bona fide redundancy payment. It follows also that as regards the leave pay amount, the Applicant is not entitled to relief under s 159S of the Act.

75. Accordingly, the objection decision under review is affirmed.

 

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