7, . r™ CATCHWORDS Income Tax - Assessable income - Retirement benefit - Election to commute part of pension to lump sum shortly after retirement - Whether an allowance gratuity or compensation - Whether paid in consequence of retirement - Income Tax Assessment Act, s.26(d). Charles McIntosh v. The Commissioner of Taxation No. G15 of 1978 Coram : Brennan, Toohey & Lockhart JJ. " Date : 29 June 1979, Canberra. ta Wan me IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY No. GL5 of 1978 GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN : CHARLES McINTOSH Appellant AND : THE COMMISSIONER OF TAXATION . Respondent ORDER JUDGES MAKING ORDER : Brennan, Toohey & Lockhart JJ. DATE OF ORDER 3 29 June 1979, WHERE MADE : Canberra, THE COURT ORDERS THAT: : 1. The appeal be dismissed. 2. The appellant pay to the respondent his costs of the appeal to be taxed. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY No, G15 of 1978 GENERAL DIVISION eee ee ON APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN : CHARLES MCINTOSH Appellant AND THE COMMISSIONER OF TAXATION Respondent CORAM : BRENNAN, TOOHEY & LOCKHART JJ. the 29th day of June 1979 BRENNAN J. The National Bank of Australasia Limited established an Officers' Provident Fund out of which benefits are paid to officers of the Bank on their retirement from its service. The control and management of the Fund is vested in administrators, under the Rules which govern the administration of the Fund. The appellant taxpayer had been an officer of the Bank and a contributor to the Fund until his retirement on 24 March 1976. oe f2 He then became entitled to a pension which, in his case, was payable at the rate of $5,511.72 per annum from 25 March 1976. He elected to commute half of this pension for a lump sum payment, as he was entitled to do by virtue of Rule 22, It provides: "On the application of any contributor or pensioner, either before but not later than one calendar month after his retirement, the administrators shail commute for a lump sum payment that part he elects to commute which is either twenty-five per centum or fifty per centum of the total pension payable at retirement to him or such lesser amount only as may be permitted by the restrictions of the appropriate taxation and revenue authorities for a lump sum payment...That part of the pension which has not been commuted will be payable as a pension. " The Rule also sets out the means of calculating the amount of the lump sum to be paid. In the taxpayer's case that sum was $27,006.84 and he was paid it in the income year ended 30 June 1976. His pension entitlement was accordingly reduced to $2,755.92 per annum, The respondent Commissioner in reliance upon s.26(d) of the Income Tax Assessment Act 1936 included in the taxpayer's assessable income 5% of the sum received by the taxpayer, rounded out to $27,007.00. The taxpayer objected to his assessment, claiming:- "that an amount of $27,007.00 representing a commutation of my pension entitlement under The National Bank of Australasia Limited Officers Provident Fund should not have been assessed in whole or in part as income. " and setting out the grounds of his claim. His objection was 2/3 owe ————————————— disallowed. He appealed against the disallowance to the Supreme Court of Queensland where Andrews J. dismissed his appeal with costs. He now appeals from the judgment of the Supreme Court. Section 26(d), omitting an irrelevant proviso, reads: "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: " The conditions of application of s.26(d) include three which relate to the "amount", five per centum of which is brought to charge. First, the amount must be paid ina lump sum; second, the amount must be the capital amount of an allowance, gratuity or compensation; and third, the payment of the amount must be "in consequence of" retirement from or termination of an office or employment. The first of those conditions was clearly fulfilled by the payment of $27,006.84. It was paid but once, not as an instalment or part payment of some larger sum, but in full discharge of the obligation which made it payable, The second condition requires that the amount be the capitalized or total value of the relevant allowance, gratuity or compensation. Gibbs J. in Reseck v. Federal Commissioner of Taxation (1975) 133 C.L.R. 45 said at p.49: 0/4 "...it is apparent from the grammatical arrangement of s.26(d) that the words 'of the capital amount' are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that 1s to be included in the assessable income. The allowance, although it must be paid in a lump sum to come within s.26(d), may have been fixed at a rate payable in respect of a specified period - for example, at so much for every week worked. The words 'of the capital amount' are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalized or total value. " The $27,006.84 was the total value of the pension entitlement which was commuted, calculated in accordance with the Rules which conferred the right to require a proportion of the pension entitlement to be commuted. It was argued that the amount paid to the taxpayer was not itself an "allowance, gratuity or compensation", but that argument does not distinguish between the allowance etc, and the amount which represents its capitalized or total value. When the payment in question is the allowance etc. the distinction is immaterial; but when an amount iS paid which represents the capitalized or total value of other sums, it is not the amount paid but the other sums which must answer the description of allowance, etc. if s.26(d) is to apply. Tice pension to which the taxpayer was entitled under the Rules of the Fund was an allowance: it was a stipend payable to one whose wages had ceased on retirement, and the $27,006.84 which he received in lieu of half of that stipend 22/5 bleh aa MLE was the capital amount of half of that stipend. Where the payment in question is the capital amount of an allowance, as the present payment is, the opening words of s.26(d) are satisfied. It is immaterial that the payment was not made by the employer. That is not an element of s.26(d). The character of allowance, etc. is not necessarily determined by the identity of the person liable to pay it. In the present case, if the pension which the administrators of the Fund were liable to pay had been payable by the Bank on the retirement of the taxpayer, the pension would clearly be an allowance by an employer in partial replacement of the income from employment lost by the taxpayer on his retirement. It was nonetheless an "allowance" in the statutory sense when it was payable by the administrators of the Fund which the employer established. The third condition of the application of s.26(d) requires that the payment of the relevant amount be "in consequence of" retirement from, or the termination of, an office or employment. The quoted phrase was referred to by Gibbs and Jacobs JJ in Reseck's case, supra. Gibbs J. said (at p.51): 22/6 share elem ee NS I "Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It 1s not in my opinion necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that 'purpose' in s.26(a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of 8.26(d). For example, a retiring allowance is plainly intended to be within s.26(d) but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause Of the payment or that the former cause predominated over the latter. " To say that a payment "follows as an effect or result of the termination" imports causation as the relevant nexus between the termination and the payment, but 1t is clear that termination need not be the dominant cause of the payment. Though Jacobs J. speaks in different terms, his meaning may not be significantly different from the meaning of Gibbs J. Jacobs J. said (at p.56): "It was submitted that the words 'in consequence of' import a concept that the termination of the employment was the dominant cause of the payment. Thais cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a "following on'. " 2/7 a J ere aitesae ae er ee er cn His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement. In the Supreme Court Andrews J. said: "I think 1t clear that the statement of Jacobs J. refers to something more than the occurrence of events in a purely temporal progression and that it connotes a relationship between events or states of things and the payment in question to which some persons might apply the adjective causal, while others would see the link in that one or more of such events or states of things must necessarily exist or occur as precedent to the payment, so as to constitute a condition or conditions precedent both meaning the same thing. " It may not be appropriate to speak of conditions if a payment 1s made voluntarily, but if a payment is made to satisfy a payee's entitlement, the phrase "in consequence of retirement" requires that the retirement be the occasion of, and a condition of, entitlement to the payment. A sufficient causal nexus between the payment and the retirement is thus established. Was the taxpayer's retirement the occasion of and a condition of entitlement to the payment of $27,006.84? On and by reason of his retirement, and at the time when he retired, he acquired an entitlement to a pension (Rule 17a). »--/8 NE ale Th eT 8. One half of that pension was commutable and the taxpayer then had a month in which to exercise his right to require commutation (Rule 22). Prior to retirement, the taxpayer might have elected to require commutation of the pension presumptively payable, but until retirement there was no entitlement to a pension upon which the right to require commutation might operate. On and by reason of retirement, a contributor who has earlier elected to require commutation is entitled to paynient of a lump sum; on and by reason of" retirement, a contributor who has not elected to require commutation, acquires the right to become entitled to payment of a lump sum. In either case retirement is the occasion of and a necessary condition of becoming so entitled, anda Payment made to satisfy the entitlement is made in consequence of retirement. The taxpayer's retirement was the occasion and a necessary condition of his becoming entitled to $27,006.84. Though entitlement awaited the exercise of the taxpayer's election to require commutation his entitlement to payment did not depend upon the occurrence of any other event or upon the act or consent of any other person. When the payment was made in discharge of the entitlement, it was made "in consequence of" his retirement, and the payment thus falls within the statute. The appeal should be dismissed with costs. I certify that this and the ArLoen preceding pages are & true copy of the Reasons for Judgment herein of his Honour Mr. Justice Asso pated: 29 Tun (979 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION No. G15 of 1978 ON APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN: CHARLES McINTIOSH Appellant AND: THE COMMISSIONER OF TAXATION Respondent CORAM: BRENNAN, TOOHEY & LOCKHART JJ. 29 June 1979. REASONS FOR JUDGMENT TOOHEY J. : The point for determination is whether payment from a provident fund to a retired bank officer of a sum of $27,006.84 fell within s.26(d) of the Income Tax Assessment Act 1936. The Commissioner brought to tax 5% of that sum; the taxpayer objected, his objection was disallowed and the assessment was confirmed by the Supreme Court, 2. The point turns very much upon an analysis of the language of s.26(d) but some :eference to the facts is necessary. First, it may be as well to say that the argument before this Court proceeded on the assumption that if the taxpayer were not assessable as to 5% of the sum, he was not otherwise liable to tax in respect of the payment. On 24 March 1976 the taxpayer retired from the National Bank of Australasia Limited, having reached the age of 62. He had been a permanent officer of the bank for many years and a member of a provident fund, called at the time of his retirement the officers' provident fund. It was made up primarily of contributions by the bank and by bank officers. The taxpayer having completed 15 years service, having attained the age of 62 and having thereupon retired from the bank, became entitled to "a normal pension calculated in accordance with Appendix 2" (Rule 17). Appendix 2 contains a formula which it is unnecessary to set out here except to say that, in the taxpayer's case, it produced an entitlement to $5,491.44 a year. Rule 22 of the rules of the fund provides that on the application of a contributor (which the 3. taxpayer was), "but not later than one calendar month after his retirement", the administrators of the fund shall commute "for a lump sum payment" a percentage of the total pension payable at retirement, calculated in accordance with Appendix 5. Again, there is no need to refer to the appendix in detail. It is enough to say that within a month of retirement the taxpayer applied to commute 50% of his pension entitlement, as a result of which he was paid $27,006.84 in cash (the sum already mentioned) and a yearly sum of $2,755.92 as from 25 March 1976, the day after his retirement. Section 26(d) includes in the assessable income of a taxpayer ~ "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:" é There is a proviso that has no relevance in the present case. Counsel for the taxpayer put as his basic submission that for s.26(d) to apply there must be a lump sum payment, capable of description as an allowance, gratuity or compensation paid in consequence of retirement from employment, and that where a person who has retired and who in consequence is entitled to a pension gives up that entitlement in exchange for a lump 4. sum payment, the sum is not capable of description as an allowance, gratuity or pension paid in consequence of retirement. During the course of argument I was inclined to think that the proper approach to s.26(d) was first to identify that which was said to be an "allowance gratuity or compensation", ask whether in respect of that allowance, gratuity or compensation a capital amount had been paid in a lump sum and then enquire whether that amount had been paid in consequence of retirement from employment. There are, however, difficulties in that approach. And the main difficulty, I think, lies in trying to give meaning to the words "allowance, gratuity ox compensation", except by reference to the context in which they appear. In Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 C.L.R. 389 at p.402, Dixon J., speaking of the Pay-roll Tax Act 1941 which imposed a tax on wages and defined wages to include allowances, said: "allowance" is one of the many words which " take their meaning from a context rather that affecting or controlling the meaning of other words of the context in which they occur. For, considered alone and at rest rather than at work with other words, it means the allowing of a thing or a thing allowed. It is only by its application that you discover the kind of thing in mind". Much the same may be said of a word like gratuity which in its ordinary sense simply means a favour, a kindness or a gift in return for favours or services, and also compensation, which literally refers to the action of compensating or the condition of being compensated. Divorced from their context, these words may be so imprecise as to be devoid of content; alternatively they may be so wide as to draw in an almost unlimited range of payments. Section 26 finds its place in Division 2 of Part III of the Income Tax Assessment Act, "Income". The division begins with a' statement that the assessable income of a taxpayer shall include the gross income derived (s.25) and then proceeds in s.26 to enumerate classes of receipts, some of which are of an income mature and therefore already within's.25(1), and others of a capital nature. See Reseck v. Federal Commissioner reo of Taxation (1975) 133 C.L.R. 45 per Gibbs J. at pp.47-48 and Stephen J. at pp.52-53. Allowance, gratuity and compensation appear in their plural forms in s.26(e) which has a proviso exempting from the operation of that paragraph any allowance, gratuity or compensation already included in s.26(d). This of itself suggests that those words 6. in s.26(d) have a limited application. Furthermore the whole tenor of s.26(d) indicates that it is designed to draw in particular payments, of a capital as well as of an income nature. In my view the identification of an allowance, gratuity or compensation in s.26(d) cannot be made without reference to retirement from or the termination of, an office or employment, the enquiry being whether there was payment in a lump sum of an allowance, gratuity or compensation in consequence of that retirment or termination. In Reseck's Case Gibbs J. commented: "... it is apparent from the grammatical arrangement of s.26(d) that the words "of the capital amount" are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in the assessable income" (at p.49). ' There may be situations in which no "capitalisation' is involved. Reseck's Case appears to have been one, there being a lump sum payable to the taxpayer at the end of each of two periods of employment. On the other hand there may be situations in which there is an entitlement to periodic payments, capable of being converted into a lump sum. The present case is such a one. 7. Section 26(d) speaks of a situation in which the capital amount of an allowance, gratuity or compensation is paid in a lump sum in consequence of retirement from or the termination of, an office or employment. The grammatical construction of the paragraph demands a relationship between the payment of an amount in a lump sum and (as in this case) the retirement from employment. The question to be answered here is whether the $27,006.84 paid to the taxpayer can be properly described (it being clearly enough a lump sum) as an allowance, gratuity or compensation paid in consequence of retirement from employment. Put that way, the words "allowance, gratuity or compensation" take their meaning from the reference to retirement. The taxpayer's submission was that the sum paid -was neither an allowance, gratuity or compensation nor an amount paid in consequence of retirement. It was, said the taxpayer, money paid in exchange for the taxpayer's surrender of an entitlement to periodic payments and a sum paid by reason of the taxpayer's exercise of a contractual right offered by the rules of the provident fund. 8. In asserting the need for a causal relationship between payment and retirement, the taxpayer relied upon the remarks of Gibbs J. in Reseck's Case, accepting his Honour's qualification that it is not necessary that the termination of employment be the dominant cause of the payment. In the view of Gibbs J.: ",.. a sum is paid in consequnece of the termination of employment when the payment follows as an effector result of the termination" (at p.51). Likewise Jacobs J. rejected the notion that the termination of employment must be the dominant cause of the payment. "A consequence in this context is not the same as a result. It does not import causation but rather a "following on"." (at p.56). In the present case it may be true to say that the immediate cause of the pdyment 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 9. 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. The payment of the $27,006.84 did not come about as a result of independent bargaining between the taxpayer and the administrators of the fund. Rule 22 obliged the administrators, if called upon to do so, to commute a percentage "of the total pension payable at retirement". When a pension is payable under rule 17a (as in the present case), the amount of the lump sum payment must be calculated in accordance with Appendix 5. In other words, retirement produced to the taxpayer an entitlement to a pension, payable annually or, at his option, by a combination of lump sum and annual payments. a The option to commute was simply a right to change one form of payment inlo 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 10. that connection; indeed the prescription of such a short period as one month might be thought to strengthen it. Furthermore, the payment constituted an allowance paid in consequence of retirement from employment. "Allowance" cannot simply stand on its own; it takes its meaning from the whole of the paragraph, _the intent of which is to tie the payment to the retirement from employment of the taxpayer. In the present case the rules of the fund make it clear that the retirement benefits are payable by reason of the - years of service with the bank completed by a contributor. The entitlement is referred to as a pension and that is what it is, a payment based upon services rendered to the employer. "Tt was an additional reward allowed to . rr the taxpayer for the services that he had 22 performed" (Reseck's Case, per Gibbs J. at p.51). > a ; ° : hd : ge 2 In the circumstances, the amount paid to the Le) "ys ut . ° ~ no 3 © taxpayer was a capital amount and the capital amount 2 O'C mw ee & Boe OR 3 of an allowance paid to the taxpayer in a lump sum go 5 << g 3 es <— 2 in consequence of his retirement from employment. So yn oO 2 = aw s ° age : . . * 5 ou 3° - iclassified, it answered the description in s.26(d), ~ er oO x 2» a 3/9 & . . . g bm 3(- — frendering 5% of it part of the assessable income of the PRE Oo 3 mee 4 taxpayer. doi Ou best a> & The appeal should be dismissed with costs. wv 3 wae IN THE FEDERAL COURT OF AUSTRALIA No. G 15 of 1978 QUEENSLAND DISTRICT REGISTRY we eww Sw GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN : CHARLES McINTOSH - Appellant AND: THE COMMISSIONER OF TAXATION Respondent 29 June 1979 REASONS FOR JUDGMENT LOCKTIART J: This is an appeal by the taxpayer from an order of the Supreme Court of Queensland dismissing the taxpayer's appeal to that court against an assessment to income tax for the year of income ended 30 June 1976. The appeal concerns the question whether 5% of a sum paid to the taxpayer after he had retired from his employment, by the administrators of a superannuation fund, following the taxpayer's election to commute 50% of his pension entitlement for a lump sum payment, forms part of his assessable income under s. 26 (d) of the Income Tax Assessment Act 1936 ("the Act"). The facts are agreed between the parties and may be stated briefly. 00/2 ' The appellant was an officer of the National Bank of Australasia Limited ("the bank") from 15 May 1930 until he retired on 24 March 1976, when he attained the age of 62 years. He was first employed by the bank as a temporary officer, but soon became a permanent officer. His service was continuous until retirement except for immaterial periods of absence due to war service and sickness. When he became a permanent officer of the bank he joined a fund then known as the Officers' Guarantee and Provident Fund which is now known as the Officers' Provident Fund ("the fund"). He remained a member of the fund until his retirement. The fund consists of moneys and investments vested in the administrators representing grants, contributions and subsidies from the bank to the fund, contributions of officers to the fund, income and accretions from investments of the fund and other moneys or investments from time to time donated to the fund: Rule 2 of the fund's rules. The general control and management of the fund and the administration of the rules is vested in the administrators of the fund: rule 4. Contributions to the fund come from two sources: contributors and the bank. A contributor pays contributions to the fund during the period of his membership of the fund at the rate of 6% of his "rated salary" which, so far as material, means his annual salary: rule 15. The bank contributes to the fund in two ways, 22/3 namely an amount equal to 8 per centum of the "rated salary" of each contributor and voluntary contributions to the fund of an amount equal to 4% of the "rated salary" of each contributor up to a period of 20 years from 13 September 1973: rule 16. A contributor who has completed 15 years' service and attains the age of 62 years and retires from service becomes entitled to a normal pension calculated in accordance with appendix 2: rule 17. It is not necessary ' to set out the appendix. Rule 22, the critical rule in the present case, provides:- "On the application of any contributor or pensioner, either before but not later than one calendar month after his retirement, the administrators shall commute for a lump sum payment that part he elects to commute which is either twenty-five per centum or fifty per centum of the total pension payable at retirement to him or such lesser amount only '«aS May be permitted by the restrictions of the appropriate taxation and revenue authorities for a lump sum payment. Where a pension is payable under Rule }7a or 17c the amount of any lump sum payment will be calculated in accordance with Appendix 5. Where a pension is payable under Rule 17b or Rule 23 the amount of any lump sum payment will be assessed by the actuary as being the cash value of the pension so commuted. That part of the pension which has not been commuted will be payable as a pension." The taxpayer became entitled to a pension payable under rule 17a, so that the amount of any lump sum payment is calculated in accordance with appendix 5. It is not necessary to set out the terms of that appendix. During his period of membership of the fund, the wee J4 taxpayer contributed to it a total of $5,784.96. Before his retirement on 24 March 1976 the taxpayer had arranged with the administrators of the fund for the payment of a pension to him from the fund. On 31 March 1976, within the period of one month permitted by rule 22, the taxpayer applied to the administrators to commute 50% of the total pension payable to him at retirement. -- The administrators dealt with the taxpayer's application at their meeting on 8 April 1976 whereupon his pension was reduced by half, namely from an annual payment of $5,511.72 to $2,755.92 as from 25 March 1976, and he received from the fund the sum of $27,007.00 being the cash value of 50% of his pension entitlement commuted under rule 22. The Commissioner included in the taxpayer's assessable income for the year ended 30 June 1976, 5% of the sum of $27,007.00 namely $1,350.00. The taxpayer objected to the assessment, the objection was disallowed and the taxpayer appealed to the Supreme Court of Queensland. — -— + The-learned trial judge held that the payment of $27,007.00 answered the description, within s. 26 (d) of the capital amount of an allowance paid in a lump sum in conseguence of retirement from an office or employment and that 5% of that amount was correctly included in the taxpayer's assessable income. Section 26 (dad) appears in division 2 of Part III of the Act and, so far as relevant, provides:- 22/5 ww rd "26. The assessable income of a taxpayer shall include - (ad) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid 1n 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:..." Section 26 (d) includes some receipts that would not be income according to ordinary concepts under " s. 25 and some receipts which otherwise would be capital: see Reseck v. F. C. of T. (1975) 133 C.L.R. 45. It was decided in Reseck's Case (Gibbs and Jacobs JJ;- Stephen J. dissenting) that where an amount paid to a taxpayer answers the description of the capital amount of an allowance etc. in s. 26 (d) and also answers the description of income «according to ordinary concepts, so as ordinarily to be assessable as income under s. 25, only 5% of the capital amount is included in the assessable income. Tt: was riot asserted by the Commissioner that any provision of the Act save s. 26 (d) could operate to bring to tax in the taxpayer's hands any part of the sum of $27,007.00. - - Nor does the Commissioner assert that such sum could be a gratuity within the meaning of s. 26 (d). Two questions arise for determination, the first being whether there was an allowance or compensation within the meaning of s. 26 (ad); the second being whether the payment of the capital amount thereof in a lump sum was made in consequence of the taxpayer's retirement from his employment. As to the first question, the words "5% of the capital amount..." do not describe the nature or character ---/6 of the allowance or compensation: See Reseck's Case (supra) per Gibbs J. at p. 49 where his Honour said:- "However, the words 'any allowance, gratuity or compensation...in consequence of retirement from, or the termination of, any office or employment' are apt to include receipts that constitute income within the ordinary usages and concepts, and it is apparent from the grammatical arrangement of s. 26 (d) that the words 'of the capital amount' are used not - . to. describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in ' the assessable income. The allowance, although it must be paid in a lump sum to come within s. 26 (d), may have been fixed at a rate payable in respect of a specified period -- for example, at so much for every week worked. The words 'of . the capital amount' are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalised or total value." What then is an allowance or compensation within the meaning of the paragraph? First, the word "allowance". It is contended by Mr. Jackson, senior counsel for the taxpayer, that the word "allowance" is inappropriate 11> . 1 sito describe the nature of the taxpayer's entitlement under the fund. He contends that neither the bank nor the administrators of the fund "allowed" the taxpayer anything. All he did was to exercise his right to commute 50% of his pension entitlement and thus gave up one right for another; in effect a sale of the right. "Allowance" is defined in the Shorter Oxford English Dictionary, so far as relevant, as meaning "the action of allowing; a thing allowed." wee/7 Jordan C. In Scott v. C. of T. (1935) S.R. (N.S.W.) 215, J. said at p. 221:- "The first question which arises is, whether the sum in question can be regarded as an allowance or gratuity in the sense in which these words are used in clauses (i) and (j). An allowance is a definite portion or amount allotted or granted to meet requirements: Buckingham v. Federal Commissioner (3 Australian Tax Decisions 37 and 38). A gratuity is something given -- generally without obligation and in return for services. Now, when one person ceases to be in''the employment of another, there are two different characters in which money may be paid to him by his ex-employer in relation to such cessation. It may be paid to him as a recognition of, or as further remuneration for, his past services; or it may be paid to him as compensation for his being deprived of a right, or an opportunity, to continue in the service and earn further emoluments therein. In either case, the payment may be made ex gratia or in discharge of an obligation to make it. In every case it is a question of fact in which character it is made. If it paid in the former character, 'allowance' or 'gratuity' may be an apt word to describe it, according to the circumstances. But if it is paid in the latter character, and is paid in discharge of an obligation imposed by law, it is certainly not a 'gratuity,'' ner is it an 'allowance' in any ordinary sense of either of those words." "-~Tar Mutual Acceptance Co. Limited v. F. C. of T. (1944) 69 C.L.R. 389 the High Court considered whether certain payments paid to employees of a company were allowances and therefore "wages" within the meaning of the Pay-roll Tax Assessment Act 1941-1942 (N.S.W.). Section 3 of that Act defined wages" as:~ ™ 'twages' means any wages, salary, commission, bonuses or allowances paid or payable... to any employee as such..." Latham C. J. said at pp. 396 - 397:- «2 +/8 Butiws on! ccocr "When the word is used in connection with the relation of employer and employee it means in my opinion a grant of something additional to ordinary wages for the purpose of meeting some particular requirement connected with the service rendered by the employee or as comPensation for unusual conditions of that service. Expense allowances, travelling allowances, and entertainment allowances are payment additional to ordinary wages made for the purpose of meeting certain requirements of a service. Tropical allowances, overtime allowances, and extra pay by way of 'dirt money' are allowances as compensation : for unusual conditions of service." Dixon J. said at pp. 402 - 403:- " "Allowance' is one of the many words which take their meaning from a context rather than affecting or controlling the meaning of other words of the context in which they occur. For, considered alone and at rest rather than at work with other words, it means the allowing of a thing or a thing allowed. It is only by its application that you discover the kind of thing in mind. In the present case I think that the whole context and subject matter shows that the definition of wages is dealing with the emoluments of employment paid in money or made over in kind to an employee by an employer. The figure of speech 'pay-roll' used to describe the tax and supply a title to the Acts gives some indication of the subject taxed. In the definition of 'wages' the two first words 'wages' and 'salary' refer to ordinary forms of remuneration for work done. 'Commission' covers percentage rewards and 'bonuses' occasional or periodical additions whether contracted for or voluntary. The next word 'allowances' seems to me naturally to follow as an attempt to make sure that any other kind of gain or reward allowed or conceded by the employer to the employee for his work is brought within the definition. In language borrowed from Lord Esher, it is intended to cover any payment beyond the agreed salary of the employee for services or additional services rendered by him (Burgess v. Clark (1884) 14 Q.B.D. 735 at p. 738). That remuneration for work is the subject is further shown by the four specified cases I mentioned above as included in the definition." rw A) It is true that the taxpayer, by his act of commutation, in a sense gave up one right for another; but he did so pursuant to the rules of the fund, in particular rule 22. The rules constitute the agreement to which the taxpayer is a party as contributor. That an "allowance" may be payable pursuant to an agreement is expressly recognised by s. 26 (d) itself. In Reseck's Case (supra) Jacobs J. said at p. 56:- "I do not think that the word ''allowance' can be given a meaning which excludes payments by agreement, particularly when s. 26 (da) refers specifically to payments of this kind." It is not permissible to characterise the entitlement of the taxpayer under the fund merely by reference to the act of commutation as the taxpayer seeks to do. The right to commute is but one of a number of rights arising under the rules of the fund. A contributor who has completed 15 years' service and retires at the age of 62 is entitled to a pension. It is a reward for having completed 15 years' service, a payment for services rendered, notwith- standing that it is not paid by the employer but by the administrators of the fund. It is perhaps a somewhat unfelicitous use of language to describe the amount in question as an "allowance". Nevertheless, in my opinion, the context and subject matter in which the word "allowance" appears in s. 26 (d) show that it is included in that description. The next question is whether the word "compensation" is apposite to describe the amount. ..-/10 at fee -10- Mr. McPherson, senior counsel for the Commissioner, submitted that, by the act of commutation, the taxpayer elected to surrender 50% of his pension entitlement, and to receive in exchange therefor, a lump sum or compensation, He contended that the lump sum payment compensated him in the sense that it was given in exchange for his surrender, or loss, of the amount of 50% of his annuity rights. The Shorter Oxford English Dictionary defines "compensation", so far as relevant, as "the action of compensating, or condition of being compensated; counter- balance, requital, recompense." Sir Frederick Jordan used the word "compensation" at p. 221 of his reasons for judgment in Scott v. F. C. of T. (supra)., in the passage which I have already cited, in the sense of compensation for deprivation of a right or of an opportunity to continue in employment. In my opinion, the word "compensation" as used in s. 26 (d) connotes something more than a mere exchange of rights at the election of the' taxpayer, such as occurred here, where the taxpayer exercised his right of commutation under rule 22. "Compensation" involves something being paid to the taxpayer to recompense him for some loss or damage he has suffered or would suffer, such as for his being deprived the xight or opportunity to continue in his employer's service. Accordingly, in my opinion the amount in question does not answer the description of "compensation" in Ss. 26 (d). I turn to the question whether the payment of the sum of $27,007.00 was a payment "in consequence of" the retirement of the taxpayer from his employment. ---/11 nabunnatee mentite 2G bY prea ee F -11- The word "consequence" is defined in the Shorter Oxford English Dictionary as "l. a thing or circumstance which follows as an effect or result from something preceding. 2. The action, or condition, of so following; the relation of a result to its cause or antecedent". The word "antecedent" is defined in the same dictionary as "a thing or circumstance which goes before in time or order; often also implying causal relation with its consequent." ' Senior counsel for the taxpayer contended that the expression "in consequence of" is used in s. 26 (d) in the sense of causation only, so that it must be the act of retirement that is the cause of the payment to the taxpayer. " He contended that in the present case the cause of that payment was not the act of retirement of the taxpayer but the ; exercise by him of the right of election to commute his pension entitlement as to 50% to a lump sum payment pursuant to rule ° 22. Having exercised his right of election, the administrators were bound to make the lump sum payment to him; that was the cause of the payment and nothing else. Considerable reliance was placed by senior counsel for the taxpayer on the reasons for judgment of Gibbs J. in Reseck's Case. It was contended that his Honour construed the phrase "in consequence of" so as to necessarily require a causal connection between the circumstance of retirement and the payment to the taxpayer. I shall set out the relevant passages from Gibbs J's reasons for judgment in full. At p- 51 his Honour said:- | e+ -/12 : -12- "The question that then arises is whether the allowance was paid in consequence of the termin- ation of the employment of the taxpayer. Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's . services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that "purpose" in s. 26 (a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different arcs - context of s. 26 (d). For example, a retiring ' allowance is plainly intended to be within s. 26 (d) but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause . predominated over the latter. Moreover, in . Many cases allowances, gratuities or compensation are paid in consequence of the provisions of an industrial agreement or of the industrial law but the words appearing immediately before the proviso to par, (d) of s. 26 show that the paragraph will nevertheless be applicable. In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been Satisfactory and that the industrial agreements provide for the payment, but it was none the less paid in ' consequence of the termination of the taxpayer's employment." ' His Honour was rejecting the test propounded by the learned trial judge that it is necessary for the termination of the services of the employee to be the dominant cause of the payment. His Honour said that payment to an employee may be due to more than one cause. In saying that the allowance in Reseck's Case was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements gcovided for the payment, but that the allowance was -+-/13 -13- nevertheless paid in consequence of the termination of the taxpayer's employment, I do not myself understand his Honour to be saying that the phrase "in consequence of" is necessarily speaking only of causation. It is difficult to see how the fact that a taxpayer's services had been satisfactory could be said to be a cause of the payment to him upon his employment being terminated; but it would be a condition precedent to payment and a circumstance providing a link or connection between termination of his * employment and the payment. In my opinion his Honour was saying that the phrase includes the case where retirement or termination is a cause of the payment in question; but he was not excluding. from the ambit of the phrase, payments which, although not following as a matter of causation from the termination of employment, nevertheless followed on the termination of employment and had connection therewith. Senior counsel for the taxpayer contended that the phrase was construed by Jacobs Jd. in Reseck's Case fundamentally differently from the construction preferred by Gibbs J. Jacobs J. said at p. 56:- "A consequence in this context is not the same as a result. It does not import causation but rather a "following on' ". 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 ../14 -14- 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. tes In' my' opinion, although the phrase is sufficiently wide to include a payment caused by the retirement of the taxpayer, 1t 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 s. 26 (d) is 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. Sometimes the relevant connection may be that the retirement is a condition precedent to the right to payment of the sum in question. If the phrase "in consequence of" were to necessarily import causation, in my opinion the payment 22/15 -15- made to the taxpayer in the present case would not be a consequence of his retirement. The cause would be the exercise by him of his right to commute 50% of his pension entitlement to a lump sum which, upon its being exercised, required the administrators to pay the lump sum to him. That would be not merely a cause, but the cause of the payment. It is true that the payment would not have been made unless the taxpayer had completed 15 years of service with the bank and had retired from his employment at the age of 62; but these " are conditions precedent to his right to receive a pension and, therefore to his right to commute his pension entitlement in part to a lump sum payment, provided the right was exercised within one month after his retirement. In the present case in my opinion there is a relevant connection between the retirement of the taxpayer ot pute men and the payment of the sum of $27,006.84. He served the bank for 15. years and retired at the age of 62. He became entitled to a pension under the rules of the fund. Within the period of one month he exércised his right to commute 50% of. his pension entitlement to a lump sum. The administrators of the fund became bound to pay it to him t weer mine and payment was made. In my opinion the payment was made i "ln consequence of" the retirement of the taxpayer from his employment. The amount of $27,006.84 paid to the taxpayer was the capital amount of an allowance paid to him in a lump sum in consequence of his retirement from employment. 5% of that sum falls for tax under s. 26 (d). ' -.-/16 Bugs -16- For these reasons in my opinion the appeal should be dismissed with costs. wayne et ted ee ee oS et 4 tom