Case U75

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 26 March 1987.

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P.M. Roach (Senior Member)

The applicant presented his income tax return for the year of income ended 30 June 1984 and in doing so disclosed having received salary from an Australian company ("Austgoods") to 6 July 1984 of $1,884 and "lump sum payments on termination of employment" of $100,000 which, according to the group certificate provided by Austgoods, was "5% assessable".

2. Despite that statement in the group certificate A submitted himself to tax on the basis that the $100,000 constituted an "eligible termination payment" within the meaning of sec. 27A of the Income Tax Assessment Act ("the Act"). It is common ground between the parties that if the lump sum did constitute an eligible termination payment then A correctly returned all his taxable income. However, on assessment the Commissioner treated the entirety of the sum as constituting income and increased taxable income as returned by $47,500. A objected, reasserting his contention that the money received constituted an "eligible termination payment", but further proposing that if it was not, the moneys were received as capital rather than as assessable income. During the hearing presentation of the latter argument brought the realisation that, should both arguments prove to be sound, then it would be appropriate to order that taxable income assessed at $101,884 should be reduced to $1,884 rather than $54,384. When the significance of the argument was realised, counsel for the applicant was instructed not to seek a reduction in taxable income below the sum of $54,384 even though not abandoning the contention that, if the retiring allowance was not assessable as an eligible termination payment, it was not assessable at all as income.

3. A is an Englishman who, prior to September 1982, was a group director with an English organisation which engaged internationally in trade and commerce. The responsibilities of A included the oversight of all operations of the organisation "East of Suez". That gave him a concern for the operations of the group in Australia and brought with it an appointment as a director of the principal company within the Australian organisation. Upon a visit to Australia in June 1982 he found the affairs of the group in Australia to be in a situation which was "very bad indeed". Before he returned to England the chief executive of the Australian organisation

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had left its service and interim arrangements were in place. Those arrangements were not to last long. Upon the return of A to the United Kingdom and presentation of his report, he was asked to take over as chief executive of the organisation in Australia. He returned to Australia and commenced duties on or about 2 September 1982, his predecessor in office having by that date "severed his connection with the company".

4. Before accepting the "invitation" to assume those responsibilities he had discussed his appointment with the chief executive (United Kingdom). His evidence was that the discussions were "vague and imprecise" particularly because, as he recalled it, there were many Australian tax considerations which differed from those in England. His recollection was that they extended to matters such as motor cars; "hostess" allowance; living-away-from-home allowance; resettlement grants; petrol; and retiring allowances. As to the latter, he had only one discussion with the chief executive which was to the effect that Australian taxation laws "allowed" such a thing as a "retiring allowance" and that, subject to the quality of his performance in Australia, he could expect such an allowance to be paid. Even aside from any consideration as to retiring allowance, A's view at the time was that the "Australian package" compared very favourably with his English remuneration, particularly as he was to continue to have the benefit of some ongoing support in England, such as education subsidies for his children at school. It was not suggested that the terms of his remuneration package were the subject of any hard fought negotiations with the chief executive (United Kingdom). Rather, the evidence persuades me to the view that the applicant was at all times confident that he would be well provided for in the event of continued faithful service and generously provided for if he could succeed in restoring the fortunes of the organisation in Australia. He was to be proved correct in both respects. In the first full year of service he received a salary of just under $59,000 together with representation allowance of $2,500 and living-away-from-home allowance of nearly $3,000; and in the year of income ended 30 June 1984 he received a salary of just over $91,000; board and quarters to the value of $3,500; and a representation allowance of $3,000. At the time he took up the appointment it was expected that he would be on assignment in Australia for approximately two years.

5. From his arrival in Australia he became chief executive of the entire Australian organisation - the person in day-to-day control of the organisation and its officers and affairs. He was subject to the direction of a local board of directors under the chairmanship of a local director, but under the overall supervision of the principal board of directors in the United Kingdom.

6. His endeavours were quickly successful. By January 1984 the chief executive (United Kingdom) was able to make a public announcement referring to "the measure of (A's) achievement during his relatively brief secondment to Australia": a public statement which coincided with the release of a report to the stock exchange. He also announced that A would return to the United Kingdom in July.

7. Early in 1984, the local deputy chairman, who as chief executive had initially built up the organisation in Australia, told the applicant that it would be a disgrace if he was paid a retiring allowance less than $100,000. Knowing that any retiring allowance would need the agreement of directors in the United Kingdom, the applicant responded by advising that he thought that the proposal would be unacceptable. Then in March 1984, during a visit from the chief executive (United Kingdom) to Australia, he told the applicant that the deputy chairman (Australia) proposed recommending a sum of $100,000 to the Australian Remuneration Committee. Prior to the matter being considered at the meeting of the Remuneration Committee the chief executive (United Kingdom), in March 1984, wrote on a "Strictly Private and Confidential" basis to the company secretary-treasurer in Australia and advised:

"Following conversations with Mr... and others, I understand that your Salaries Committee is to discuss a proposal to award a retirement allowance to (A).

The U.K. directors regard this as an acceptable proposition but, should there be an intention for the sum to exceed A$100,000, we would prefer the matter to come back to us for further consideration."

8. The recommendation was duly made and, not surprisingly, found favour with the

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committee. In June at a meeting of the committee from which the applicant absented himself, it was proposed that in recognition of the applicant's "valuable period of service..." and "to provide him with the retirement entitlement he would normally have received under the (organisation's) worldwide policy" that, he should receive $100,000. That was substantially in excess of anything the applicant had expected. His evidence was - and I accept it - that no particular figure had been discussed prior to him taking up the appointment, but he was expecting something, and for some reason which he can no longer recall, he was thinking of a sum in the order of $30,000. He thought $100,000 would be considered excessive.

9. The proposal was then implemented. $100,000 was paid to the applicant, and he then returned to other duties with the organisation in the United Kingdom. Although he ceased to occupy the position of "Chief Executive" for the organisation in Australia, he continued as a director of the principal company in Australia and to be responsible for the oversight of operations "East of Suez".

10. The foregoing has been written so far as possible without reference to the legal status of persons and entities or to relationships at law between them. I now proceed to address those issues. The principal entity in the United Kingdom was a public liability company (PLC). Whether PLC was the only body corporate within the organisation incorporated in the United Kingdom or was merely one of a number was not disclosed. The Australian organisation was headed by a public company listed on the stock exchange (Austco) which controlled the activities of two subordinate companies (Austgoods - ante - and Austwine). With the exception of one area of activity controlled by Austwine, all trading operations of the organisation in Australia were conducted by Austgoods. Within its field of responsibility it employed all operators and personnel. It paid the salary and the retiring allowance received by A, but it is not clear whether it stood in a master-servant relationship with A. I am satisfied on the evidence that from September 1982 to July 1984 A was the chief executive of Austco and that, whether so titled or not within the subordinate companies, he was by virtue of or in consequence of that position, the person having control of and responsibility for the activities of all aspects of the organisation in Australia, whether conducted by Austco, Austgoods or Austwine. However, I am not persuaded by the evidence that A during his service in Australia was an employee of any particular company, whether incorporated in Australia or overseas.

11. If, in order to succeed, it was necessary for him to establish that he had retired from an employment with a particular employer, or from the service of the "organisation" - whether seen as international or as identified with England or Australia - he would fail. But those are not the issues. The applicant will succeed to the extent he seeks if he has established that the retirement allowance received constituted an "eligible termination payment". That question is to be determined by considering subdivision AA "Superannuation, termination of employment and kindred payments" of the Act, and in particular sec. 27A, which so far as is material provides:

"27A(1) In this Subdivision, unless the contrary intention appears -

• ...
• `eligible termination payment', in relation to taxpayer, means -
  • (a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer,...
• `employment' includes the holding of an office."

According to subsec. (3), the definition also includes "reference to a payment made (whether voluntarily, by agreement or by compulsion of law)..."

12. As I am unable to determine on the evidence placed before me by whom the applicant was employed during his period of service in Australia as chief executive, it is necessary to determine whether, in rendering service as chief executive in Australia, A was the holder of an "office".

13. Section 27A succeeds 26(d) which had as its subject amounts paid "in consequence of retirement from, or the termination of, any office or employment". I do not think a different meaning is to be attributed to the concept of "office" in sec. 27A. In the

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circumstances of the applicant I am satisfied that as chief executive of Austco the applicant did in fact hold an "office" in the relevant sense. I do not think that the concept of "office" in these times is to be confined to a "public employment regulated by law". In keeping with Blackstone's view, it is appropriately described as "a right to exercise a public or private employment, and to take the fees and emoluments thereunto belonging" (2 Bl. Com. 36 as quoted in Stroud's Judicial Dictionary) or as Rowlatt J. described it in
Great Western Rly Co. v. Bater (1922) 8 T.C. 231 at p. 235 (when considering whether an experienced clerk held an "office") it refers to:

"... a subsisting, permanent, substantive position, which had an existence independent from the person who filled it, which went on and was filled by successive holders; and if you merely had a man who was engaged on whatever terms, to do duties which were assigned to him, his employment to do those things did not create an office to which those duties were attached."

(cf. also Case 9
(1947) 15 C.T.B.R.)

14. In my view an appointee who discharges the responsibilities of chief executive in such an organisation is aptly referred to as the holder of an "office". Accordingly I conclude that, in the case of the applicant, he was appointed to an "office" and in due course he retired from it. His appointment and his retirement were no less so because he assumed the responsibilities and later shed them and the power and status attending them, in accordance with directions given by his employers, whoever they might have been; or by "the organisation".

15. I further hold that the payment made to him was made in consequence of "the termination of" that office as that phrase has been interpreted and applied by the High Court of Australia in
Reseck v. F.C. of T. ((1975) 133 C.L.R. 45). That being so, I am satisfied that the applicant is entitled to succeed to the extent of having the assessment of income tax reduced by $47,500.

16. Having regard to the action of the applicant in waiving any right to seek any further reduction I refrain from considering whether, in the circumstances of such a short-term appointment which ran its planned course, the payment of a retiring allowance which only exceeded the original expectations of payer and payee by its amount would have constituted a receipt of capital.

17. I will order that the assessment of taxable income for the year of income ended 30 June 1985 be reduced by $47,500.