SEABRIGHT v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 8 December 1998

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BH Pascoe (Senior Member)

This is an application to review a decision of the respondent to disallow an objection to an assessment of income tax based on the applicant's income for the year ended 30 June 1996. The objection related the inclusion in assessable income of an eligible termination payment from the Victorian Superannuation Board.

2. At the hearing the applicant, Mrs Seabright, was represented by Mr Berkovic and the respondent by an officer of the respondent. The parties provided a statement of agreed facts and no further evidence was called.

3. The agreed facts of this case were:

``1. The Applicant commenced service with the Department of Health and Community Services, Victoria on 10 February 1976.

2. The Applicant's employment was terminated on 16 October 1984.

3. The termination occurred due to an injury which the Government Medical Officer determined rendered the Applicant medically unfit for normal duties.

4. Appropriate medical certification has been provided by the applicant in accordance with section 27G of the Income Tax Assessment Act 1936 confirming that her disability is likely to result in her being unable ever to be employed in a capacity for which she is reasonably qualified because of education training or experience.

5. The Applicant commenced to receive a pension at the time of the termination under the III Health Provision of the State Superannuation Act 1988.

6. The Applicant commuted this pension to a lump sum payment on 9 May 1996.

7. The lump sum totalling $119,523.99 was treated as an eligible termination payment by the Victorian Superannuation Board.

8. The payment received was a once only payment with no further entitlement to the Applicant or her dependants.

9. The Notice of Assessment for the 1996 tax year issued on 26 May 1997.

10. The lump sum payment was divided into components of pre-July 1983 ($16,438.39) and post-June 1983 taxed element ($103,085.60).''

4. In the objection lodged against the assessment the applicant argued that the lump sum payment included an invalidity payment under section 27G of the Income Tax Assessment Act 1936 (``the Act'') and such amount was exempt under section 27CB of the Act. Alternatively, it was submitted that the whole of the lump sum was a capital receipt which was not an eligible termination payment by virtue of paragraph (n) of the definition of eligible termination payment in section 27A(1) of the Act. At the hearing this alternative argument was not pursued and the dispute revolved around the provisions of section 27G.

5. There was no dispute that the payment was an ``eligible termination payment'' as defined by section 27A(1). This definition states:

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

• ...
• (d) any payment made in respect of the taxpayer in relation to the commutation, in whole or in part, of a superannuation pension that was payable to the taxpayer;''

Section 27G provides:

``Where:

• (a) an eligible termination payment is made in relation to a taxpayer in

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  consequence of the termination of any employment of the taxpayer; and
• (b) the termination of the employment of the taxpayer occurred:
  • (i) because of:
    • (A) if the eligible termination payment is made before 1 July 1994 - the taxpayer's physical or mental incapacity to engage in that employment; or
    • (B) if the eligible termination payment is made on or after 1 July 1994 - the disability of the taxpayer, where 2 legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience; and
  • (ii) before the last retirement date in relation to the employment; so much of the eligible termination payment as is equal to the amount ascertained in accordance with the formula

      AB
      --,
      C
          

where:

A is the amount of the eligible termination payment;

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

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

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

Section 27CB exempts from tax ``a post-June 1994 invalidity component'' included in an eligible termination payment (``ETP'') made on or after 1 July 1994. Under section 27A(1) a post-June 1994 invalidity component, in relation to an ETP, means so much of the ETP as consists of, or is attributable to, an invalidity payment made on or after 1 July 1994.

6. It was submitted for the applicant that the lump sum payment received by Mrs Seabright as the commutation of her pension included an invalidity component pursuant to section 27G. It was said that she was injured at work, that injury resulted in termination of employment which entitled her to a superannuation pension, the fund rules entitled her to commute the pension to a lump sum and she did so. As a consequence, it was argued, the lump sum was an ETP ``in consequence of the termination of employment''. Reliance for this view was placed on the decisions in
McIntosh v FC of T 79 ATC 4325,
Reseck v FC of T 75 ATC 4213 and Case M24,
80 ATC 169.

7. For the respondent it was submitted that the provisions of section 27G did not apply as the ETP was not made in consequence of the termination of any employment of Mrs Seabright but as a result of the commutation of a superannuation pension. It was said that the receipt of the lump sum was a consequence of her accepting the Victorian Superannuation Board's offer to commute the entitlement to a pension into such lump sum payment. The respondent considered that the time between termination of any employment on 16 October 1984 and the offer to commute the pension on 17 May 1995 did not allow it to be said that the commutation followed on from the termination of such employment. The respondent did not accept that the decisions in the cases relied upon by the applicant provided authority for a connection between these two events. It was accepted by the respondent that certificates provided by two legally qualified medical practitioners in 1995 complied with the requirements of section 27G(b)(i)(B) although noted that no evidence of such disability was produced in relation to the date of termination of employment in 1984.

8. At the outset it should be said that there is some problem in logic in treating an amount which is clearly defined as an eligible termination payment as not being a payment in consequence of termination of employment. On the surface the terms appear to be synonymous. However, logic is not necessarily something which governs the construction of the provisions of this Act. The initial requirement of section 27G is that an eligible termination payment is made in relation to a taxpayer in

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consequence of the termination of any employment of the taxpayer. It may well be that the inclusion of the words ``in consequence of the termination of any employment'' was made to tie in with paragraph (b) of the section which requires disability as a cause of termination of employment. Alternatively, these words were considered necessary in view of the wide definition of eligible termination payment which includes payments consequential on termination of any employment of another person after the death of the other person.

9. In McIntosh (supra) the Full Federal Court was concerned with the former section 26(d) and whether it applied to the taxpayer who, one week after his retirement from a bank, elected to commute one-half of his superannuation pension to a lump sum in accordance with the rules of the fund which allowed for such election within one month of retirement. The Court found that the lump sum was ``in consequence of'' retirement and fell within the terms of section 26(d). The relevant words of the section were:

``The assessable income of a taxpayer shall include-

• ...
• (d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law:''

Toohey J (at pages 4330 and 4331) said:

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

...

The option to commute was simply a right to change one form of payment into another. It was not suggested that entitlement to a pension was not an effect or result of retirement from employment. Equally the payment of a lump sum produced by commutation was such an effect or result. The fact that the election might be exercised after retirement did not destroy that connection; indeed the prescription of such a short period as one month might be thought to strengthen it.''

In discussing the judgment of Jacobs J in Reseck's case where his Honour had said (at page 4219) ``A consequence in this context is not the same as result. It does not import causation but rather a `following on'...'', Lockhart J said (at page 4336):

``In my opinion his Honour did not use the words `following on' as referring merely to a temporal progression of events. Rather his Honour had in mind a connection between the retirement from or the termination of employment and the payment in question as well as a temporal progression of events. I do not read the words of his Honour as excluding a connection that is causal in character; rather his Honour enunciated a wider test than one merely of causation and expressed it as a `following on'; a concept that may in an appropriate case include a relevant causal connection. In other words a payment that is caused by the act of retirement from or termination of employment would fall within the test of a `following on', but so would other payments that do not have such causal connection, provided there is a link or connection between the termination of or retirement from employment and the making of the payments. In my opinion Gibbs J. and Jacobs J. were not construing the phrase `in consequence of' differently.

In my opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, it is not confined to such a payment. The phrase requires that there be a connection between the payment and the retirement of the taxpayer, the act of retirement being either a cause or an antecedent of the payment. The phrase used in sec. 26(d) is

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not `caused by' but `in consequence of'. It has a wider connotation than causation and assumes a connection between the circumstance of retirement and the act of payment such that the payment can be said to be a `following on' of the retirement.''

The respondent sought to distinguish the decision in McIntosh. It was submitted that, in this case, the applicant had not established that she had an option of electing a lump sum or pension and the payment in question was a consequence of accepting an offer from the Victorian Superannuation Board to commute her pension entitlement. It was said that a gap of more than ten years from termination of employment to receipt of the payment made it difficult to describe one as ``following on'' from the other. As a further distinction, it was said that McIntosh was concerned with former section 26(d) which has now been replaced by Subdivision AA of Division 2 of Part III of the Act with more exhaustive provisions.

10. The third point by the respondent is easily dealt with. The significant words with which we are concerned in section 27G ``in consequence of the termination of any employment'' are virtually identical with those in section 26(d). Section 27A(11) provides only that a reference to the termination of any employment of a person includes a reference to the retirement of the person from that employment and the cessation of employment by reason of the death of the person. In my view McIntosh remains authority for the interpretation of section 27G.

11. The question of whether the applicant had an option at any time to commute her pension entitlement to a lump sum or could only accept an offer of commutation from the trustees is, in my view, irrelevant. The question is whether the payment, however it came about, could be said to have followed on termination of the applicant's employment with the Department of Health and Community Services in 1984. In my view it could. The payment of the commuted amount was simply to change one form of payment, a pension, into another, a lump sum. The entitlement to the pension arose as a consequence of termination of employment in 1984. Termination was a prerequisite to payment of the pension which, in turn, was a prerequisite to the right to receive a lump sum in lieu of the pension. The gap of more than ten years between the two events does not, in my view, destroy the connection between termination of employment and the payment. They remain inextricably linked. The statement by Toohey J in McIntosh's case that ``a short period of one month might be thought to strengthen'' the connection does not, in my view, necessarily suggest that the longer the period the weaker the connection. If the termination of employment can be seen as either a cause or an antecedent of the payment of the lump sum it can be said that the payment is made ``in consequence'' of that termination.

12. Notwithstanding a gentle comment from the respondent that no medical evidence of disability at the date of termination of employment had been provided, there did not appear to be any real dispute that the termination of employment occurred because of disability and I am satisfied that the requirements of section 27G(b) have been met.

13. As a consequence of the foregoing findings, the decision under review should be varied and the matter remitted to the respondent with a direction to amend the assessment based on the applicant's income for the relevant year on the basis that the amount of $119,523.99 represented an eligible termination payment to which section 27G of the Act applied.