FALK v FC of T

Members:
Kerr P
SE Frost DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2015] AATA 392

Decision date: 4 June 2015

Kerr (President) and SE Frost (Deputy President)

THE CENTRAL ISSUE

1. The principal issue in this review is whether a payment of $500,350.33 made during the 2009 income year to the applicant, Dr Falk, by the Australian Capital Territory[1] The body politic having legal personality in the name of the Australian Capital Territory pursuant to the Australian Capital Territory (Self-Government) Act 1988 (Cth). (ACT) on behalf of ACT Health was, as the respondent, the Commissioner of Taxation (the Commissioner) contends, an assessable recoupment because it was received by him 'by way of insurance or indemnity' within the meaning of s 20-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

2. Dr Falk challenges the Commissioner's position. Dr Falk's counsel, Mr Raphael, submits that, while the amount of that payment may have been calculated having regard to certain legal costs Dr Falk had incurred, the amount was not received by him 'by way of insurance or indemnity' but rather as an ex gratia, or "act of grace", payment.

3. Mr Raphael submits that the character of the amount paid to Dr Falk as an act of grace payment is evidenced by the terms of the Instrument by which it was authorised by the ACT Treasurer and the provisions of s 130(1) of the Financial Management Act 1996 (ACT) (FMA) pursuant to which it was made. Mr Raphael submits that because it was an act of grace payment, the payment was not a payment 'by way of insurance or indemnity'. Because it was not a payment 'by way of insurance or indemnity' it was not received by Dr Falk as an assessable recoupment of an outgoing the amount of which he could deduct over two or more financial years. That precludes it being statutory income under s 20-40 of the ITAA 1997 in his hands and requires the conclusion in this Tribunal that the amount was incorrectly included in Dr Falk's assessable income by the Commissioner purportedly pursuant to s 6-10(4) of the ITAA 1997.

4. On the authority of the considered dicta of the plurality (Edmonds and Pagone JJ) in
Batchelor v Commissioner of Taxation (2014) 219 FCR 453 (Batchelor) at [13], counsel for the Commissioner, Mr O'Meara, accepts that an ex gratia payment is necessarily excluded from the notion of a payment 'by way of insurance or indemnity'. However, the Commissioner submits that, in the context in which it occurred, the payment received by Dr Falk was not of that character.

5. The applicant bears the burden of proving that the Commissioner's assessment is excessive.[2] Taxation Administration Act 1953 (Cth), s 14ZZK .

CONCLUSION IN SUMMARY

6. For the reasons set out below, the Tribunal is not satisfied that Dr Falk has discharged that burden.

7.

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That conclusion is sufficient to dispose of this review; but as against the possibility that we are in error in that regard, we have positively concluded, notwithstanding that the payment was structured as an act of grace payment, that the (limited) evidence before the Tribunal supports a factual finding that the payment of $500,350.33 in issue was received by Dr Falk not as an ex gratia payment but rather by way of indemnity in respect of certain legal costs that he had incurred.

8. The Tribunal is satisfied that the other (not seriously in dispute) requirements for the payment to be brought to tax by the provisions of the ITAA 1997 have been met. Accordingly the Commissioner's objection decision must be affirmed.

9. However, if as a matter of law, we are mistaken in our conclusion that the payment which the ACT Treasurer authorised was made ex gratia as that term is ordinarily understood, we do not think that the consequential requirement for Dr Falk to provide a release consistent with the conditions the Treasurer imposed pursuant to s 130(3) of the FMA would have altered the payment's character in Dr Falk's hands to that of an indemnity for a loss or outgoing merely because a deed effecting the release conferred a right for Dr Falk to sue for the amount.

FACTS

10. The evidence before the Tribunal on review was limited to the relatively small number of documents lodged by the Commissioner pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (T document(s)) and an affidavit sworn by Dr Falk on 19 March 2013. The Commissioner did not seek to cross-examine Dr Falk. Dr Falk's affidavit is Exhibit 1 in these proceedings. The basic facts are not in dispute.

11. Between March 1999 and 10 May 2006 Dr Falk was employed as Director of Renal Medicine and Senior Staff Specialist in Nephrology at the Canberra Hospital (operated by ACT Health under the auspices of the ACT).[3] The Canberra Hospital and ACT Health do not have separate legal personality. They are each emanations of the body politic having legal personality in the name of the Australian Capital Territory. On 10 May 2006, following protracted investigations into allegations of his misconduct, Dr Falk's employment at the Canberra Hospital was summarily terminated.

12. Dr Falk responded by commencing proceedings in the Australian Industrial Relations Commission (AIRC).[4] As then in existence: The Australian Industrial Relations Commission ceased operations on 31 December 2009. He sought reinstatement. His application was vigorously contested.

13. On 30 November 2007 the AIRC ordered Dr Falk's reinstatement with continuity of employment and payment of lost salary.

14. Senior Deputy President Drake's decision in the AIRC was scathing of the Canberra Hospital's management. The AIRC concluded that there had been no valid reason for Dr Falk's termination and that Dr Falk had been the victim of false complaints and deliberate acts of insubordination and destabilisation.

15. Unsurprisingly, before and during the AIRC proceedings, Dr Falk had incurred substantial legal costs.

16. On 12 December 2007, within time, Dr Falk applied for his costs in the AIRC.[5] Exhibit 1 at 131–133. Parties in the AIRC ordinarily met their own costs but the AIRC had power in special cases to make orders for costs occasioned by their opponent's unreasonable conduct. It is common ground between the parties that the highly critical observations made by Senior Deputy President Drake about the conduct of the Canberra Hospital made it plausible to anticipate, albeit without any certainty, that an order for costs in favour of Dr Falk might in due course have be made.

17. However the actual events followed a quite different course.

18. The ACT sought a meeting with Dr Falk.[6] Exhibit 1 at 140. Negotiations between Dr Falk and representatives of the ACT government then took place. There is no formal record of what was decided in evidence before the Tribunal but on 20 December 2007 Dr Falk's solicitors, KJB Law, wrote to Mr Peter Garrisson, Chief Solicitor, ACT Government Solicitor (the Chief Solicitor) seeking to confirm their understanding of the agreements reached between their respective clients.[7] Exhibit 1 at 135–136. [8] KJB Law also wrote to the Chief Solicitor (Exhibit 1, 138) regarding a possible ex gratia payment by the ACT for Dr Falk’s loss of reputation, stress and humiliation. However, it is common ground that, whatever the outcome of those negotiations; they have no relevance to these proceedings. Their letter stated that it was their understanding that the ACT had agreed to reinstate Dr Falk's annual leave, sick leave, conference leave, long service leave, superannuation entitlements and all other entitlements 'under the relevant Industrial Instrument.' In so far as KJB

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Law's letter of 20 December referred to Dr Falk's legal costs it was in the following seemingly unambiguous terms:

Legal Costs

We confirm that your client will pay our client's legal costs. As discussed should you have any queries about the makeup of these legal costs, please contact the writer.[9] Exhibit 1 at 136.

19. However what appears to have been an unanticipated issue, from Dr Falk's perspective, then arose with respect to the payment of those legal costs.

20. On 29 January 2008 Dr Falk's lawyers wrote to the Chief Solicitor[10] Exhibit 1, 140–142. complaining that they had now been asked '… to make a submission that consideration be given to [their] client's legal costs being paid by way of an ex-gratia payment'.[11] Exhibit 1 at 140.

21. KJB Law forcefully reiterated that Dr Falk had been advised on 18 December 2007 that his costs would be met. They said:

At no time, either during the meeting on 18 December 2007, or at any time before 25 January 2008, did you or your client suggest that we should … make a submission to the Treasurer for an ex gratia payment in relation to our client's legal costs. Indeed, quite the contrary.[12] Exhibit 1 at 141.

22. They demanded to know why the Chief Solicitor's 'client's position … [had] changed so significantly between 18 December 2007 and 25 January 2008'.[13] Exhibit 1 at 141. Their letter asked the Chief Solicitor to honour his commitment to recommend to his client that it pay Dr Falk's reasonable legal costs.

23. Perhaps because of its barely concealed suggestion of want of good faith, Dr Falk's solicitors' correspondence prompted an immediate response from the Chief Solicitor. He replied the next day as follows:

The content of your letter dated 29 January 2008 was disappointing.

There is presently no legal obligation to pay any amount towards your client's legal costs. In the absence of a legal obligation to pay costs, the only lawful source of authority to make a payment is under the provisions of the Financial Management Act 1996 pertaining to "Act of Grace" payments. I do not resile from the statement at our meeting on 18 December 2007 that I would recommend a contribution towards your client's reasonable legal costs and ACT Health does not resile from its endorsement of this recommendation.

In my discussion with you on Friday, 25 January 2008, I asked that you include a section in your submission for an Act of Grace payment for compensation setting out the legal costs incurred. I expressly stated that no significant detail was required and my request was merely an expedient to assist in the resolution of the question of costs.

Perhaps you would now be so kind as to provide me with a copy of the bills of cost provided to your client. I do not anticipate requiring any further detail in order to enable a proposal to be formulated for your client's consideration.[14] Exhibit 1, 144–148 at 147 and 148.

24. What then transpired were further negotiations between the parties. The Tribunal finds that the outcome of those negotiations is reflected in the terms of the e-mail sent by the Chief Solicitor to Dr Falk's legal representatives on 28 May 2008. He wrote:

I … confirm my instructions to agree in principle to your proposal. Namely, ACT Health resolves the costs of the IR proceedings and related matters by paying $500,350.33 in return for your client withdrawing his application to the AIRC for costs and providing a release of the Territory in relation to the AIRC and associated costs. … As I have previously advised, however, since there is presently no legal liability to pay the costs of the IR proceedings, this payment will need to be treated as an act of grace payment and in this regard the Treasurer's approval is required. This process is, I believe, in train and needs to wend its way through the system.[15] Exhibit 1 at 150.

25. That is what occurred.

26. On 12 August 2008 the then ACT Treasurer, Jon Stanhope, exercised his authority under subs 130(1) of the FMA. He approved an act of grace payment to Dr Falk on behalf of ACT Health in the sum of $500,350.33 subject to two conditions: (a) that Dr Falk withdraw his

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application to the AIRC for costs and (b) that he provide a release in relation to the costs of the AIRC and associated costs.[16] Exhibit 1 at 154.

27. On 16 August 2008 the Chief Solicitor advised Dr Falk's lawyers that the payment of Dr Falk's costs had been approved. He wrote by e-mail as follows:

The act of grace payment for $500,350.33 has been approved by the Treasurer and I attach a copy of the instrument. I will forward a release to you early next week, and look forward to your notification that the costs application to the AIRC has been withdrawn. …[17] Exhibit 1 at 152.

28. On 10 September 2008 Dr Falk entered into a deed.[18] T documents, T14, 132–136. The deed refers to Dr Falk as 'the Releasor.' In it Dr Falk undertakes to immediately withdraw his application to the AIRC for costs and to release the ACT from all actions and claims arising from the AIRC proceeding.

29. In these circumstances the Tribunal has no doubt, and finds, that the deed Dr Falk entered into on 10 September 2008 was the 'release' foreshadowed in the Chief Solicitor's correspondence of 28 May 2008 and 16 August 2008.

30. The deed states that if Dr Falk provides an executed copy of the same accompanied by advice to confirm he has withdrawn his application for costs in the AIRC, the ACT will pay him the sum of $500,350.33 within 14 days.

31. Although the counter-part of the deed signed by the ACT binding itself to those arrangements is not in evidence there is no dispute that that obligation was entered into by it. Nor is it in dispute that the amount authorised by the Treasurer was paid to Dr Falk upon his providing an executed copy of the deed and proof of his having withdrawn his application for costs in the AIRC.

32. Dr Falk included the amount of $500,350.33 he had received in his 2009 tax return.[19] T documents, T14, 97–104 at 109. The Commissioner included that amount in Dr Falk's assessable income for that year. Dr Falk objected to the Commissioner's assessment.[20] T documents, T14, 97–104 at 100.

33. On 18 April 2012 the Commissioner disallowed Dr Falk's objection.[21] T documents, T2, 7–17. The Commissioner accepted Dr Falk's contention that the amount was not ordinary income. However the Commissioner determined, as set out in the notice of objection decision[22] T documents, T2, 7–17. (objection decision), that the payment was statutory income under s 20-40 of the ITAA 1997 and has been correctly included in Dr Falk's assessable income for 2009 under subs 6-10(4) of the ITAA 1997 because it had been received as an assessable recoupment of an outgoing for which Dr Falk could deduct amounts over two or more financial years.[23] T documents, T2 at 14.

34. On 15 June 2012 Dr Falk sought review of the Commissioner's objection decision in the Administrative Appeals Tribunal (the Tribunal).

TEST CASE FUNDING

35. At the commencement of the hearing counsel for the Commissioner informed the Tribunal that the Commissioner had decided to grant funding to Dr Falk under the Australian Taxation Office's test case litigation programme.

ADDITONAL AGREED FACTS

36. Because the submissions of both the Commissioner and Dr Falk focussed attention on whether the payment of $500,350.33 made to Dr Falk, on behalf of ACT Health had been received by him 'by way of insurance or indemnity' within the meaning of subs 20-20(2) of the ITAA 1997, the Tribunal raised with counsel its concern that the evidence before the Tribunal was far from clear as to whether (a) the whole of the amount received by Dr Falk had been calculated by reference to any matters other than his legal costs and (b) whether his legal costs had been previously deducted, or were deductible, in at least that amount, by him over two or more income years.

37. The Tribunal adjourned for a short period to permit the parties to consider their respective positions. When the Tribunal reconvened counsel tendered a jointly signed statement of agreed facts which the Tribunal received as Exhibit 2. It stated the following:

THE RELEVANT LEGISLATION

38. Subsection 20-20(2) of the ITAA 1997 provides:

Insurance or indemnity

  • (2) An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if:
    • (a) you received the amount by way of insurance or indemnity; and
    • (b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

39. Subection 20-25(1) explains that a recoupment of a loss or outgoing includes:

40. Subclause 20-40(1)(a) then provides that an amount is included in your assessable income if:

you receive in the *current year an *assessable recoupment of a loss or outgoing for which you can deduct amounts over 2 or more income years.

DISPOSITION OF LESS CONTENTIOUS ISSUES

41. There is no general principle that an amount received as compensation for, or reimbursement of, a deductible expense is assessable income. The proposition that a general principle of that kind exists was rejected by the High Court in
Commissioner of Taxation v Rowe (1997) 187 CLR 266.

42. The parties are agreed, and the Tribunal finds that the payment to Dr Falk was not 'ordinary income'. It follows then that the payment will only be assessable if it comes within a particular category of 'statutory income'. Here the Commissioner fixes upon Division 20 of the ITAA 1997, contending that the receipt is an 'assessable recoupment'.

43. That gives rise to a preliminary question whether the amount Dr Falk received can be properly characterised as a 'recoupment of a loss or outgoing'. His counsel, Mr Raphael submitted that an ex gratia receipt cannot be a recoupment.

44. However, there is no dispute that the payments Dr Falk made to his lawyers on account of costs represented an outgoing on his account. The additional agreed statement of facts[24] Exhibit 2. confirms that the amount of $500,350.33 received by him in the 2009 income year related solely to those legal costs.

45. In the face of the terms of the extended statutory definition of 'recoupment' set out in s 20-25(1) of the ITAA 1997, Mr Raphael's widest submission is implausible and cannot be sustained.

46. However that does not require the conclusion that what Dr Falk received was an 'assessable recoupment'. An amount received as recoupment of a loss or outgoing is assessable as statutory income if it is received by way of insurance or indemnity and can be properly deducted over one or more years.[25] Subsection 20-20(2)) ITAA 1997. The agreed facts are that the whole amount was 'properly deducted' in the 2006-2009 income years. The Tribunal is satisfied that it can proceed on the basis that the provisions of s 20-20(2)(b) were met - such deductions are allowable under s 8-1(1)(a) of the ITAA 1997.

47. It is not suggested that the payment was received by way of insurance and that may be put aside.

48. What remains for consideration is the concept of indemnity. If the recoupment of $500,350.33 was not received by Dr Falk 'by way of indemnity' it is not an assessable recoupment for the purposes of s 20-20(2) of the ITAA 1997.

'INDEMNITY'

49. The word 'indemnity' is not defined in the ITAA 1997 and so it must take its ordinary meaning.

50. Payments do not have to be made under a contract of indemnity to fall within the description; the expression can also include payments made under a statutory scheme. In
Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 (Wade) a payment to a farmer to compensate him for the compulsory destruction, under the Milk Act 1946 (WA), of

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some of his cattle was held to be an amount received by way of indemnity since the purpose and effect of the receipt was 'to save the taxpayer harmless …'[26] (1951) 84 CLR 105 , Kitto J at 116 . from the loss he had incurred.

51. Despite the seeming conclusiveness of the position following Wade subsequent cases dealing with s 26(j) of the Income Tax Assessment Act 1936 (Cth)[27] The predecessor to subs 20-20(2) of the ITAA 1997. have exhibited some conflict as to the reach of the word 'indemnity' in respect of losses already incurred. In
Goldsbrough Mort & Co Ltd (1976) 14 SASR 591 (Goldsbrough Mort) at 598, Walters J in the Supreme Court of South Australia said:

In my view, the language of s 26(j) may be treated as contemplating an indemnification in respect of loss already incurred.

52. However in
Commercial Banking Company of Sydney Ltd v Federal Commissioner of Taxation (1983) 70 FLR 433 (Commercial Banking), David Hunt J in the Supreme Court of New South Wales expressly declined to follow the decision of Walters J in Goldsbrough Mort, saying at 444 and 445:

It is indeed difficult to comprehend the notion of an indemnity in respect of a loss which has already been incurred. It does not, with respect, seem to me to be a normal use of the word "indemnify", which in my view contemplates an obligation to make good, or to compensate for, a loss which may happen in the future, whether by contract or otherwise.

53. In
Re Batchelor and Commissioner of Taxation [2013] AATA 93, Deputy President Deutsch was confronted by this disagreement. He applied dictionary definitions[28] [2013] AATA 93 at [66] and [67]. indicating that 'indemnity' means protection against hurt, damage or loss; or compensation for loss or damage sustained and gave thoughtful reasons for applying the reasoning of Walters J in Goldsbrough Mort in preference to that of David Hunt J in Commercial Banking.

54. In Batchelor an appeal by the taxpayer from the decision of Deputy President Deutsch resulted in the proceeding being remitted to the Tribunal for redetermination. However the error identified by the Full Court related to other grounds. No member of the Full Court expressed criticism of Deputy President Deutsch's reasoning in relation to the issue of loss already incurred. Wigney J expressly stated that there was no error in the Tribunal 'construing the word indemnity as capable of encompassing compensation for loss or damage, including compensation for loss incurred in the past'.[29] (2014) 219 FCR 453 at [80]. Finally, in relation to the ordinary meaning of 'indemnity' reaching to indemnification in respect of losses already incurred in the context of legal costs, we note the following statement of the High Court (Mason CJ, Brennan, Deane, Dawson and McHugh JJ) in
Cachia v Hanes (1994) 179 CLR 403 at 410:

It has not been doubted since 1278, when the Statute of Gloucester (6 Edw.I c.1.) introduced the notion of costs to the common law, that costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation.

55. For those reasons the Tribunal will proceed on the basis that the views of Walters J in Goldsbrough Mort correctly state the law. That however is the beginning of the required analysis, not its end. In Batchelor, Edmonds and Pagone JJ stated that it is the character of a receipt which determines whether what the taxpayer has received may relevantly bear the description as being 'by way of insurance or indemnity'.[30] (2014) 219 FCR 453 at [15]. An ex gratia payment does not fit that language. What their Honours stated in this regard was strictly obiter, but we do not doubt its correctness.

56. In a passage the Tribunal adopts, their Honours said at [13]:

It may be accepted that the words "by way of insurance or indemnity" are, and are intended to be, wide, but they must be applied as intended. Generally speaking a payment will not be regarded as an indemnity (whether the word is taken alone or in combination in the composite phrase "by way of insurance or indemnity") unless the entitlement to its receipt precedes the event in respect of which it is paid. An ex gratia payment, for example, is not apt to be regarded as indemnification of a loss or outgoing notwithstanding that its receipt may be said, from the point of view of

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economic equivalence, to compensate the recipient for a loss which had been suffered or an outgoing which had been incurred. Similarly, a refund would not ordinarily be regarded as an indemnification notwithstanding that its receipt may be said to have rendered a taxpayer harmless, from an economic point of view, for an antecedent loss or outgoing.

57. Accordingly, if the amount Dr Falk received should properly be characterised as an ex gratia payment it is 'not apt to be regarded as an indemnification of a loss or outgoing'.

58. The reasoning of the plurality in Batchelor therefore requires the Tribunal to determine the character of the receipt Dr Falk received. Neither its form nor its economic equivalence can be determinative of its character , although as Mr O'Meara, counsel for the Commissioner, conceded, in the absence of any countervailing considerations, the Tribunal may rely on the fact that a payment is expressed to be an act of grace payment as prima facie evidence that its receipt was an ex gratia payment in the hands of Dr Falk. But, he correctly submits, circumstances may require that a payment, appearing to have been made by a payer ex gratia or as a refund, be found not to have that character as a receipt in the hands of a taxpayer.

59. However, before turning to our duty to form a view as to the character of the receipt in the hands of Dr Falk, the Tribunal must express its view as to what the plurality in Batchelor meant by their reference to an ex gratia payment in paragraph [13] of their reasons.

60. The expression ex gratia is sometimes used as being synonymous with 'without admission of liability'.

61. Thus in
Edwards v Skyways Ltd [1964] 1 All ER 494 at 500, Megaw J said:

It is, I think, common experience amongst practitioners of the law that litigation or threatened litigation is frequently compromised on the terms that one party shall make to the other a payment described in express terms as "ex gratia" or "without admission of liability". The two phrases are, I think, synonymous. No one would imagine that a settlement, so made is unenforceable at law. The words "ex gratia" or "without admission of liability" are used simply to indicate - it may be as a matter of amour propre or it may be to avoid a precedent in subsequent cases - that the party agreeing to pay does not admit any pre-existing liability on his part; but he is certainly not seeking to preclude the legal enforceability of the settlement itself by describing the contemplated payments as "ex gratia".

62. We do not think it plausible that Edmonds and Pagone JJ used the words in that sense.

63. Nor do we understand that to be Mr Raphael's submission to the Tribunal.

64. Mr Raphael referred the Tribunal to the definition of an 'act of grace payment' in Butterworths Australian Legal Dictionary:

Strictly speaking, there is no legal liability on the part of the government to make payment, but if a person has been unfairly disadvantaged by some act of the government, recompense is considered appropriate. The relevant circumstances may arise where a public servant has given incorrect advice which has caused loss to a person, or when the application of relevant legislation would have anomalous, unjust, or otherwise unacceptable consequences. Also known as an 'ex gratia payment'.[31] Nygh, PE and Butt, P (eds), Butterworths Australian Legal Dictionary (2007 reprint, LexisNexis, 1997) at 19.

65. We take it to be common ground between the Commissioner and Dr Falk that, had the facts been that the receipt of $500,350.33 by Dr Falk was simply in settlement of his claim for costs in the AIRC, then the payment would be assessable as statutory income because it would have been a payment made by way of indemnity.

66. In any event we would so conclude. Reading the passage in its context, the Tribunal is satisfied that Edmonds and Pagone JJ were referring to an ex gratia payment only in the sense conveyed by the Butterworths' definition:[32] Nygh, PE and Butt, P (eds), Butterworths Australian Legal Dictionary (2007 reprint, LexisNexis, 1997) at 19. that is a payment made for reasons otherwise than on account of a legal liability.

DID DR FALK RECEIVE THE PAYMENT BY WAY OF INDEMNITY?

67. As has been made clear previously, Dr Falk contends the payment of $500,350.33 made to him by the ACT was received by him as an ex gratia payment.

68.

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The facts found by the Tribunal relating to the receipt in dispute have been set out above.[33] [10]–[37] . They need not be repeated.

69. Mr Raphael submits that the receipt of $500,350.33 by Dr Falk falls within what the plurality in Batchelor would exclude from the notion of indemnification of a loss or outgoing because it was received as an ex gratia payment.

70. The Tribunal accepts on the facts as disclosed to it, that this is a possible understanding of the character of the receipt in the hands of Dr Falk.

71. It is not inherently implausible that, having become acquainted with the highly adverse conclusions reached by Senior Deputy President Drake in the AIRC, the ACT government decided to make its own voluntary reparation to Dr Falk beyond that ordered by the AIRC in order to atone for the unacceptable way in which Dr Falk had been treated by one of its agencies. It is not inherently implausible that all of this might have occurred without the ACT having the least regard to the question of the ACT's legal liability.

72. It would not be an objection to the Tribunal reaching such a conclusion that payment received by Dr Falk had been calculated by the ACT having regard to the legal costs he had earlier incurred. A government motivated solely by a desire to compensate an employee it had unfairly disadvantaged would still want to quantify the ex gratia payment it would make. A calculation taking into account an amount actually incurred by the employee as legal costs is not of itself inconsistent with the payment being ex gratia in the relevant sense.

73. However, Dr Falk called no evidence from the ACT to establish the correctness of that possible understanding of the character of the receipt.

74. In the absence of other evidence it seems to the Tribunal to be at least equally plausible on the face of the documentary evidence, that, notwithstanding the amount of $500,350.33 had been authorised by the ACT Treasurer as an act of grace payment, its character as a receipt in Dr Falk's hands was as consideration for him to compromise the application for costs that he had submitted to the AIRC.

75. It may be recalled that the first mention of an act of grace payment occurred only after : (a) Dr Falk had filed his application for costs which both parties accept had had strong, but not inevitable, prospects of success; (b) initial negotiations between the parties had taken place; and (c) KJB Law had written to the ACT to confirm their understanding that "your client will pay our client's legal costs".[34] Exhibit 1, 135–136 at 136.

76. Further, on 29 January 2008, KJB Law forcefully reiterated that Dr Falk had been advised on 18 December 2007 that his costs would be met. They wrote:

At no time, either during the meeting on 18 December 2007,or at any time before 25 January 2008, did you or your client suggest that we should … make a submission to the Treasurer for an ex gratia payment in relation to our client's legal costs. Indeed, quite the contrary.[35] Exhibit 1, 140–142 at 141.

77. It will also be recalled that the Chief Solicitor replied by e-mail on 28 May 2008:

I … confirm my instructions to agree in principle to your proposal. Namely, ACT Health resolves the costs of the IR proceedings and related matters by paying $500,350.33 in return for your client withdrawing his application to the AIRC for costs and providing a release of the Territory in relation to the AIRC and associated costs… As I have previously advised, however, since there is presently no legal liability to pay the costs of the IR proceedings, this payment will need to be treated as an act of grace payment and in this regard the Treasurer's approval is required. This process is, I believe, in train and needs to wend its way through the system.[36] Exhibit 1 at 150.

78. The Chief Solicitor's reply appears wholly consistent with the transaction properly being characterised as no more than the routine compromise of Dr Falk's claim for costs in the AIRC. The device of an act of grace payment on this view was required to comply with ACT internal procedures only because of the lack of any present legal liability for it to meet those costs because the application was still pending in the AIRC.

79.

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As the applicant bears the burden of proof that the Commissioner's assessment is excessive[37] Taxation Administration Act 1953 (Cth), s 14ZZK. it is sufficient that the Tribunal record its view that it is unpersuaded that the first scenario[38] [69]–[72] above. is more plausible than the second.[39] [74]–[78] above.

80. Moreover, should it become relevant, the Tribunal is satisfied that the second scenario better reflects the true nature of what the limited documentary evidence points to as having occurred. It suggests that the device of an act of grace payment was required only to comply with ACT internal procedures. We would find that the payment was made (adopting the language of the Chief Solicitor) 'in return for [Dr Falk] withdrawing his application to the AIRC for costs and providing a release of the Territory in relation to the AIRC and associated costs'.[40] Exhibit 1 at 150.

81. The payment Dr Falk received therefore cannot properly be characterised as an ex gratia payment.

82. Those conclusions require the Tribunal to affirm the Commissioner's objection decision.

83. Finally, and against the possibility that the Tribunal's conclusion regarding the characterisation of the payment authorised by the ACT government may be in error, the Tribunal rejects the submission advanced on the Commissioner's behalf that when Dr Falk entered into the deed of release dated 10 September 2008 the character of the receipt in his hands altered. In our opinion Dr Falk's signing the deed was merely an aspect of the means adopted by the ACT (and ultimately by him) to facilitate a payment for the settlement of his costs using the mechanism provided for by s 130 of the FMA.

84. If, assuming counter-factually to our finding, the payment had been offered out of goodwill and without regard to the ACT's legal obligations it would have retained its character as an ex gratia receipt in the hands of Dr Falk notwithstanding that the Minister who approved the payment insisted as a condition of its receipt that Dr Falk agree to abandon other potential avenues for redress for the wrong the ACT accepted had been done to him. An ex gratia payment necessarily must be a payment made for reasons not compelled by law but that does not require its maker to be credulous or indifferent to his or her interests and a potential double recovery.

Footnotes

[1] The body politic having legal personality in the name of the Australian Capital Territory pursuant to the Australian Capital Territory (Self-Government) Act 1988 (Cth).
[2] Taxation Administration Act 1953 (Cth), s 14ZZK .
[3] The Canberra Hospital and ACT Health do not have separate legal personality. They are each emanations of the body politic having legal personality in the name of the Australian Capital Territory.
[4] As then in existence: The Australian Industrial Relations Commission ceased operations on 31 December 2009.
[5] Exhibit 1 at 131–133.
[6] Exhibit 1 at 140.
[7] Exhibit 1 at 135–136.
[8] KJB Law also wrote to the Chief Solicitor (Exhibit 1, 138) regarding a possible ex gratia payment by the ACT for Dr Falk’s loss of reputation, stress and humiliation. However, it is common ground that, whatever the outcome of those negotiations; they have no relevance to these proceedings.
[9] Exhibit 1 at 136.
[10] Exhibit 1, 140–142.
[11] Exhibit 1 at 140.
[12] Exhibit 1 at 141.
[13] Exhibit 1 at 141.
[14] Exhibit 1, 144–148 at 147 and 148.
[15] Exhibit 1 at 150.
[16] Exhibit 1 at 154.
[17] Exhibit 1 at 152.
[18] T documents, T14, 132–136.
[19] T documents, T14, 97–104 at 109.
[20] T documents, T14, 97–104 at 100.
[21] T documents, T2, 7–17.
[22] T documents, T2, 7–17.
[23] T documents, T2 at 14.
[24] Exhibit 2.
[25] Subsection 20-20(2)) ITAA 1997.
[26] (1951) 84 CLR 105 , Kitto J at 116 .
[27] The predecessor to subs 20-20(2) of the ITAA 1997.
[28] [2013] AATA 93 at [66] and [67].
[29] (2014) 219 FCR 453 at [80].
[30] (2014) 219 FCR 453 at [15].
[31] Nygh, PE and Butt, P (eds), Butterworths Australian Legal Dictionary (2007 reprint, LexisNexis, 1997) at 19.
[32] Nygh, PE and Butt, P (eds), Butterworths Australian Legal Dictionary (2007 reprint, LexisNexis, 1997) at 19.
[33] [10]–[37] .
[34] Exhibit 1, 135–136 at 136.
[35] Exhibit 1, 140–142 at 141.
[36] Exhibit 1 at 150.
[37] Taxation Administration Act 1953 (Cth), s 14ZZK.
[38] [69]–[72] above.
[39] [74]–[78] above.
[40] Exhibit 1 at 150.

 

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