CATCHWOPDS Income tax - capital amount of allowance, gratuity or compensation paid in lump sum - commutation of pension entitlement paid in two sums because of uncertainty as to amount of entitlement - amount of first payment not capital amount of allowance paid in lump sum. Income Tax Assessment Act 1936, para.26(d) THE COMMISSIONER OF TAXATION v. JOHN LANGFORD KNIGHT No. A.C.T. G15 of 1983 Coram: Bowen C.J., Blackburn and Sheppard JJ. 30 November, 1983 Canberra IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY ) ) ) ) No, A.C.T. G15 of 1983 ) ) ) GENERAL DIVISION On Appeal from the Supreme Court of the Australian Capital Territory THE COMMISSIONER OF TAXATION Appellant JOHN LANGFORD KNIGHT Respondent JUDGES MAKING ORDER: Bowen CJ, Blackburn and Sheppard Ju. WHERE MADE: Canberra DATE: 30 November, 1983 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The Commissioner of Taxation pay to John Langford Knight his costs of the appeal. IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY ) ) ) ) No. A.C.T. G15 of 1983 DISTRICT REGISTRY ) ) ) GENERAL DIVISION On Appeal from the Supreme Court of the Australian Capital Territory THE, COMMISSIONER OF TAXATION Appellant JOHN LANGFORD KNIGHT Respondent CORAM: Bowen C.d., Blackburn and Sheppard Jd. DATE: Bo Vevemben 1485 REASONS FOR JUDGMENT BOWEN C.J. and BLACKBURN J. John Langford Knight was a Commonwealth public servant who began to contribute to the superannuation scheme which was established by the Superannuation Act 1922. He contributed to superannuation from 5 May 1939 until he retired on grounds of invalidity on 4 March 1977. His final salary was $28,326.00 per annum. Mr. Knight was entitled to an invalidity pension under s.66 of the Suverannuation Act 1976. He elected under s.68 to take a lump sum benefit and pension instead of a higher pension. Under s.68(3), based on his 37 years of contributing his pension w was to be 51.75% of his final salary i.e. $14,657.71 per annum. If he had not elected under s.68 to take the lump sum and pension, his pension would have been 71.75% of his final salary. He received the first amount of his pension on 7 April 1977. By June 1977 he had received $4,752.03. The precise amount of the lump sum, to which he was entitled by virtue of his election, was not ascertainable at his retirement. Contributors to the fund under the 1922 Act who joined the fund under the 1976 Act were, when they retired, entitled to participate in the allocation of the 1922 fund as 1t stood at 30 June 1976. In Mr. Knight's case, the amount due to him as a lump sum payment was not finally calculated until December 1978. It was calculated to be $38,023.54. By s.158 of the Superannuation Act 1976 it was provided that where a person had become entitled to a benefit under the Act, but the payment of the benefit could not be made or commence to be made by reason that the rate or the amount of the benefit had not been ascertained, the Commissioner for Superannuation might direct that an interim payment or payments be made to the person at such rate or rates and in such amount or amounts as he determined and any interim payment so made should be deemed to be made in respect of that benefit. In exercise of this power under s.158 Mr. Knight was paid $27,707.69 on 13 April 1977. He was paid the remaining $10,315.85 on or about 15 December 1978. The Commissioner of Taxation assessed Mr. Knight under s.26(d) of the Income Tax Assessment Act 1936 on $1,385.00 being 5% of $27,707.69. The Commissioner of Taxation informed the Commissioner of Superannuation that no tax would be payable on the balance. Mr. Knight objected to the assessment on the $1,385.00. His objection was disallowed. He requested reference to the Board of Review which upheld his objection." The Commissioner of Taxation appealed to the Supreme Court of the Australian Capital Territory which dismissed the appeal. The Commissioner of Taxation obtained leave to appeal from that decision to the Federal Court upon undertaking to pay Mr. Knight's reasonable costs on a party and party basis of the appeal irrespective of the result. The question before us 1s whether the $27,707.69 paid to Mr. Knight on 13 April 1977 falls within s.26(d). Section 26(d) so far as is material at the relevant time was as follows: "26. The assessable income of a taxpayer shail include - (d) 5% of the capital amount of any allowance, -4- gratulty or compensation where that amount is paid....in a lump sum in consequence of retirement from, or the termination of, any office or employment..... " The first matter to be identified in the present case 15 what was "the capital amount of any allowance" to which Mr. Knight was entitled. The second matter to be determined is whether it was paid in a lump sum. It is common ground that either or both of the amounts received by Mr. Knight were paid in consequence of retirement from or the determination of his employment. It appears to us that the capital amount of the allowance paid to Mr. Knight in consequence of his retirement was $38,023.54. This was the capital amount of the allowance to which he became entitled when he made the election provided for by s.68 of the Superannuation Act 1976 (cf. s.66(1)(b)). The capital amount of the allowance payable in consequence of his retirement or termination of employment was fixed from that time forward. It was certain in the sense that it was capable of being rendered certain, although due to the fact that he left the service shortly after the changeover to superannuation under the 1976 Act, it would take time to determine that amount. It was in consequence of the time required to calculate the capital amount of his allowance that he received a preliminary or interim payment of $27,707.69 and later a final adjusting payment of $10,315.85. When the 1976 scheme was introduced it was recognized that due to delays in calculation caused by the changeover of the superannuation fund, some provision should in fairness be made for interim payments in respect of the benefits the calculation of which would cause delay. Such a provision is found in s.158) detailed referencce to which has already been made. It is clear that an interim payment under s.158, such as the amount of $27,707.69 paid to Mr. Knight, 1s a payment made on account of his superannuation allowance. It would not be straining language to say that it was part of'that allowance. It is equally clear that the payment of $27,707.69 was not itself a separate and distinct allowance to which he was entitled or which was paid to him in consequence of retirement or termination of employment. The requirement that to fall within s.26(d), and thereby qualify to be taxed on 5% only, the capital amount of the allowance must be "paid in a lump sum} is a requirement which has been in the income tax legislation for a long time. The phrase "lump sum" may be used to refer to a composite total sum comprising different parts. In this sense "lump sum" refers to the nature of the sum. It may also be used in the phrase "paid in a lump sum" in order to distinguish an amount paid by instalments or successive payments. In this sense "lump sum" refers not to the nature of the sum but to the manner of payment. Using the words in the former sense it would be appropriate to speak of "a lump sum payable by instalments"; using the words in the latter sense it would be inappropriate to do so. In s.26(d) the phrase is used in the latter sense as referring to the manner of payment. In the case of persons who are transferred from the superannuation fund under the 1922 Act to the superannuation fund under the 1976 Act and who have to enjoy the benefits of s.158, the result may be capricious. It 1s not clear to us that some of such cases if they do not fall within s.26(d) will not fall within s.26(e) and be wholly taxable although, we should add, that the Commissioner of Taxation disclaims any such result in the present case. But this may be said to produce a capricious result so far as the Commissioner of Taxation is concerned. Nevertheless, s.26(d) prescribes that the capital amount of the allowance be paid in a lump sum. If it is not so paid, 1t does not fall within s.26(d). One cannot simply disregard the words "paid in a lump sum." It was argued that the Acts Interpretation Act 1901 would enable one to read lump sum in the plural as well as the singular. But this would largely reverse the operation of 3.26(d) which is so specific as to exhibit a contrary intention. In our opinion this is not an acceptable interpretation of s.26(d). In the result, we are of opinion the appeal should be dismissed with costs. EQauGts ror J peer, Let OP Ras Be cur Ter : = 202 "a Chie? dude... tis Wie. Powea ane | he Ho enowe- bla me Joshea Rlacte seen Ue flieg AS lu, .4te | Dated: BO Vevomben 988 IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY } No. A.C.T. G15 of 1983 GENERAL DIVISION ) On Appeal from the Supreme Court of the Australian Capital Territory THE COMMISSIONER OF TAXATION Appellant JOHN LANGFORD KNIGHT Respondent CORAM: Bowen C.J., Blackburn and Sheppard JJ. SHEPPARD J. Bo Wovewmbe i983 REASONS FOR JUDGMENT Thais is an appeal from a judgment of the Supreme Court of the Australian Capital Territory. The judgment dismissed an appeal brought by the Commissioner from the decision of a Board of Review. The Board had upheld an appeal against the disallowance by the Commissioner of an objection made by the respondent to the inclusion in his assessable ancome for the year ended 30 June, 1977, of five per cent of a payment received by the respondent from his employer in consequence of his retirement. The payment was said to fall within para. 26(d) of the Income Tax Assessment Act 1936. The primary judge also dismissed an appeal against the decision of the Board in respect of another and aundependent matter. A cross appeal was brought by the respondent against that part of his judgment but the cross appeal was not pursued. The respondent was born on 25 August, 1912. He commenced employment with the Department of Defence in October, 1936. He retired on 4 March, 1977; on grounds of anvalidity. He had become a permanent public servant in October 1938 and in May 1939 had begun to contribute to the superannuation acheme provided for in the Superannuation Act 1922. That Act was replaced by the Superannuation Act 1976 which came into force on 1 July, 1976, about eight months before the respondent's retire- ment. Section 66 of the 1976 Act provides that, subject to certain qualifications which are not material in this case, where a person ceases to be an eligible employee by reason of retirement on the ground of invalidity before attaining his maximum retiring age, he may make an election under s.68 to an invalidity pension and a lump sum benefit an accordance with that section. Section 68 provides for the election which, 1f made, entitles the person so electing to the lump sum and the pension mentioned in s.66. The respondent made an election under the section. Because the bulk of his entitlement arose under the 1922 Act there was difficulty in calculating the precise amount of lump sum benefit to which he was entitled. The calculation was a complex one and could not be carried out in the period which immediately followed the respon- dent's retirement. The manner of calculation is provided for in s.177 of the 1976 Act but it 1s unnecessary to refer to the detail of 1ts provisions. Section 158 of the 1976 Act is as follows: "Where a person has become entitled to a benefit under this Act, but the payment of the benefit cannot be made or commence to be made by reason that the rate or the amount of that benefit has not been ascer- tained, the Commissioner may, upon application in writing being made to him, direct that an interim pay- ment or interim payments be made to the person, at such rate or rates, or 1n such amount or amounts, as he determines, and any interim payment so made shall be deemed to be a payment made in respect of that benefit." Pursuant to that provision the respondent was paid $27,707.69 1an April 1977. This was a payment on account of his entitlement to lump sum benefit. On 15 December, 1978, the Commissioner for Superannuation sent to the respondent a cheque for $10,315.85, the balance of the lump sum benefit due to him pursuant to s.68 of the 1976 Act. In January 1979 he received a notice explain-~ ing how the amount was made up. The Commissioner of Taxation has included in the respondent's assessable income for the year ended 30 June, 1977, five per cent of the sum of $27,/07.69 received by the respondent in April 1977. The question which this appeal raises for determination is whether the Commissioner was correct in so doing. As mentioned the Commissioner claims the receipt to be within para.26(d) of the Income Tax Assessment Act 1936-1976. That, so far as is material, was as follows: "The assessable income of a taxpayer shall include - (dad) five per centum of the capital amount of any allowance, gratuity or compensation where that amount 1s 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 paragraph has undergone subsequent amendment to which 1t is unnecessary to refer. With para.26(d) needs to be considered para.26(e) which was as follows: "The assessable income of a taxpayer shall include - oe ee (e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him 1n respect of, or for or in relation directly or indirectly to, any employment of or services renderea by him, whether so allowed, given or granted 1n money, goods, land, meals, sustenance, the use of premises or quarters or otherwise: Provided that this paragraph shall not apply to any allowance, gratuity or compensation which 1s included in the last preceding paragraph or which under any provision of this Act is deemed to be a dividend paid to the recipient; " The paragraph has also undergone amendment which 1s immaterial for the purpose of this appeal. In the submission of counsel for the respondent the payment in question is not within para.26(d) because it 1s not the capital amount of any relevant allowance. In his submission the capital amount of the allowance to which the respondent was entitled was the total of the two sums he received in April 1977 and December 1978, i.e. $38,023.54, Although what the respondent received in April 1977 was a lump sum, it was not the capital amount of an allowance within the meaning of that expression in para.26(d). Counsel's submission was based in part De on dicta in Reseck v. Commissioner of Taxation (1975) 133 C.L.R. 45 and in McIntosh v. Federal Commissioner of Taxation (1979) 25 A.L.R. 557. In the former case Gibbs J. (as he was) said (p.49): "Tt is therefore clear that s.26(d) intludes some receipts that would not be income accord- ing to ordinary concepts but the Commissioner goes further and submits that the paragraph includes only receipts of a capital nature; the use of the words tof the capital amount? is said to bring about that result. However, the words fany allowance, gratuity or compensation... in consequence of retirement from, or the termination of, any office or employment? are apt to include receipts that constitute iuncome within- ordinary usages and concepts, and it is apparent from the grammatical arrangement of s.26(d) that the words tof the capital amount? are used not to describe the nature of the allowance, gratuity or compen- sation, 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 tof 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 ats capit- alized or total value. The words of s.26(d), given their ordinary meaning, include all allowances of the kind thereby described whether they are of an auncome or of a capital nature." Particular reliance was placed on his Honour's statement that the words "of the capital amount" are used not to describe the nature of the allowance, gratuity or compen- sation, but to fix the amount that is to be included in the assessable income. In McIntoshis case Brennan J., when a judge of this Court, said (pp.558-559): "The conditions of application of s.26(a) include three which relate to the tamount!?, of which 5% 1s brought to charge. First, the amount must be paid in a lump sum; second, the amount must be the capital amount of an allowance, gratuity or com- pensation; and third, the payment of the amount must be tian consequence of? retirement from or termination of an office or employment. The first of those conditions was clearly ful- filled 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." His Honour went on to quote part of what Gibbs J. had said in Reseck*ts case (supra). His Honour continued (p.559): "It was argued that the amount paid to the taxpayer was not itself an "tallowance, gratuity or compen- sation?, 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 1s not the amount paid but the other sums which must answer the description of allowance, etc, if s.26(d) is to apply. The 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 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 unnecessary to consider his Honour's elaboration of the third condition of application of para.26(d) which was that the payment must be in consequence of retirement. That is not a question which is in issue in this case. In considering these dicta 1t 1s necessary to have regard to the facts of the cases 1n question and to the matters which there arose for decision. Those are matters to which I shall return, In support of his contention that the receipt was within para.26(d), counsel for the Commissioner made three alternative submissions. They were:- (a) The amount was itself an allowance within the meaning of the paragraph paid in a lump sum. (b) The allowance was the total of the two sums, i.e. $38,023.54 paid 1n two lump sums, one in April 1977 and the other in December 1978. The Acts Interp- retation Act 1901 para.23(b) operated to pluralise the words "lump sum", There was no rule of con- struction which operated against a selective application of the Acts Interpretation Act in this respect and there was no contrary intention to be found militating against its application. (c) There was one lump sum. The fact that it was paid as to a substantial part of it with a subsequent adjustment did not mean that it was not paid as a lump sum. In the course of his submissions counsel for the appellant contended for a purposive construction of the paragraph and relied on s.15AA of the Acts Interpretation Act. The construction contended for by counsel for the respondent would lead, in my opinion, to a very capricious result. It denies any operation to the paragraph unless the whole of the entitlement is paid in one lump sum payment. There are numerous examples which demonstrate how unsatisfactory and unfair this would be. I mention three. Suppose a case where an amount is paid in discharge of an obligation under a retirement scheme. The payment is accepted. Subsequently it is discovered that the payment was insufficient; a miscalculation has been made in arriving at the figure. The mistake 1s corrected and the balance paid. The respondent's sub-~ mission would anvolve neither payment being within the paragraph. Then suppose a dispute as to the amount of an entitlement under a scheme. The employee sues. The employer admits liability for part of the claim and brings it in to court. The employee is in difficult financial circumstances and takes the money out. Ultamately he succeeds in establishing his claim for the balance. On the respondent*s argument neither payment is within the paragraph. Yet if the employer had paid the employeé his due entitlement in one lump sum as was his obligation, the payment would have been within the paragraph. Thirdly, suppose two employers each anxious to provide for an employee who has no entitlement to any retiring allowance or benefit. One resolves to pay its employee the sum of $20,000 in one sum payable on 30 June, 1982. The other also wishes to pay its employee the sum of $20,000, but because of liquidity problems pays the amount in two equal payments of $10,000, the first on 30 June, 1982, and the second on 31 December,1982. On the respondent's argument the first employee's payment as caught by the paragraph; neither payment to the second employee 1s within it. 10. It 1s to be observed that the full ramifications of this capriciousness and unfairness are not understood unless one takes into account, 1n relation to each of the examples I have supposed, the possible operation of para.26(e) earlier set out. That paragraph excludes from its operation any allowance, gratuity or compensation which is within para.26(d). In Reseck's case (supra) Jacobs J. said (p.57) that the effect of para.26(d) "read together with the succeeding para.(e) 1s to cover the whole subject matter of allowances. gratuities and compensation". I refer also to Scott v. Commissioner of Taxation (N.S.W.) (1935) 35 S.R.(N.S.W.) 215 at p.222, a decision on the comparable provisions of the Income Tax (Management) Act 1928 (N.S.W.). This will not always be so; I refer to Scott's case itself and to Constable v. Federal Commissioner of Taxation (1952) 86 C.L.R. 402. That case hinged on the words "allowed, given or granted" un para.26(e); see p.418. In the circumstances of that case the payment had not been allowed, given or granted. It was not therefore within the paragraph. There was no suggestion that the payment fell within para.(d), no doubt because the employee was not retiring. 11. There may be questions as to whether the payments in my first and second examples resulted from the allowing, giving or granting of the benefits there involved. It may be said that they resulted from the operation of the schemes so that nothing was allowed, given or granted. Tentatively I am against that view. I think that if the payments are not within para.(d), they must be within para.(e) and thus fully taxable. Be that as it may, there can be no doubt that the employee in the third example who received his entitlement in two payments, assuming them not to be within para.(d), is assessable for the whole of the amounts received. Undoubtedly they were amounts allowed, given or granted within para.(e). In my opinion one should avoid a construction which leads to results such as arise from the various examples I have supposed. But one 1s not gustified in that course, S.15AA of the Acts Interpretation Act notwith- standing, unless the words of the paragraph are apt to permit it. le. I think that the key to the solution of the problem lies in the proper construction and application of the words in the paragraph, "the capital amount", What is their purpose and place in the provision? Reseck's case (supra) obliges me to accept that the words are there to fix the amount that is to be included in the assessable income. They require the fixing of the amount which is to be so included as a capital amount. In cases such as the present where there is a commutation of an entitlement under a periodical pension scheme there may be difficulty in ascertaining the amount. In cases where the entitlement was always to be a capital amount, as in my third example, the capital amount will be the amount of that entitlement. In my view the difficulties in this case arise because there has been an over concentration on what is payable to an employee under a pension or superannuation scheme rather than upon what is in fact paid to him. I shall endeavour to illustrate what I mean by yet a further example. Suppose a pension scheme had a provision entatling an employee to elect to take a capital amount. Suppose an election by him and that 13. the employer takes the view that the sum is inadequate because of his long years of loyal sefvice. It decides an consequence to give him a substantially increased sum. Assume that sum is $100,000 made up of $25,000 entitlement under the scheme and $75,000 as a gesture of good will. The whole sum is paid in one lump sum payment upon the employee's retirement. Plainly it is within para.(d). The capital amount of the allowance and/or gratuity is $100,000. The calculation which showed that $25,000 was the employee's entitlement under the pension scheme is of little relevance. What is relevant is that in consequence of his retirement the employee was paid in one lump sum an allowance or gratuity of $100,000, the capital amount of which was $100,000. These considerations lead me to take what to some will be an over-simplified approach to this case. The payment here 1n question was made pursuant to s.158 of the Superannuation Act 1976 earlier set out. It may have borne little relationship to the respondent's entitlement to benefit ultimately to be determined. It was an interim payment only. But in my opinion it was 14. itself an allowance, and perhaps also a gratuity, for the purposes of para.26(d). The capital amount of it was-$27,707.69. It was paid in consequence of the respondent's retirement. That he was entitled eventually to be paid more is not to the point. The paragraph is concerned with what is paid, not what 1s payable. Such an approach avoids gaving to the word "allow-— ance" or to the expression "the capital amount of any allowance", a meaning which obliges one to take into account an actual entitlement under a scheme. Often that is what will be done, but in many situations, as I believe my examples show, 1t will not. Also avoided are problems connected with the meaning of the expression "paid ...... in a lump sum", and the applac-— ation to those words of para.23(b) of the Acts Interpretation Act. The construction I favour gives the paragraph a sensible and practical operation. The capriciousness to which I have earlier referred disappears. In the result without any strain on the language of the para- graph, the apparent purpose of Parliament is give effect to. 15. It remains to consider whether Reseck's case or McIntosh's case earlier referred to requires any different conclusion. So far as the former 1s con- cerned, I do not believe that I have given the words "capital amount" any different meaning from that attributed to them by Gibbs J. Furthermore, 1n considering what he said, 1t should be kept in mind that on the facts of that case 1t was necessary to demonstrate that the severance payments there in question were lump sums paid in consequence of the termination of the employment, notwithstanding that they were calculated by reference to work performed during the employment. His Honour's remarks were made with special reference to that question. Part of what Brennan J. said in McIntosh's case may be thought to run counter to the view I have expressed. Of the sum there in question he said that "(it) was pazd but once, not as an instalment or part payment of some larger sum, but in full discharge of the obligation which made it payable". But that was the fact in McIintosh's case. To the extent that his Honour appears to have expressed the view that for a payment con- stituting the capitalised value of an entitlement under 16. a per1odical pension scheme to be within the paragraph, it must be paid but once and not be an instalment or part payment of some larger sum, his statement is plainly obiter. There was not,so far as I can see from the report of the case, any 1ssue or argument about that matter. It seems to me that his Honour said what he did in the context of the case he had to decide in order to emphasise that compliance with his first condition was beyond question. I should mention another matter which was dealt with by Brennan J. in his judgment. He equated capital amount with capitalised or total value. Those are words which derive from the judgment of Gibbs J. 1n Reseck; see the passage earlier cited. I repeat that in my opinion the capitalised or total value to which Gibbs J. and Brennan J. referred will in many cases be the capital value of an entitlement under a pension scheme. But often it will not. Indeed in cases where what is given is a gratuity it is hard to see how it ever could be. But it will be, to use the words of the paragraph, "the capital amount" of the allowance, gratuity or compen- sation which is in question. For the reasons given I would allow the appeal and 17. oo set aside the order of the Supreme Court dismissing the Commissioner's appeal from the Board of Review. In lieu of that order I would order that that appeal be allowed and that the appeal to the Board of Review against the disallowance of the respondent's obgec- tion be dismissed. In accordance with the condition upon which leave to appeal was granted I would order the Commissioner to pay the respondent's costs of this appeal and of thé proceedings in the Supreme Court. poetic tha ar ito VP po sg pages ara 7 Yue "59 + rane rari. 36 0 Wden sat nevenvef tng orca 3 jedan cating —_ ie ustise Snepp2rd. < See Associate ening BO Worenern i985 18.