FEDERAL COURT OF AUSTRALIA Raymond Joseph Dibb v Commissioner of Taxation [2003] FCA 673 TAXATION – appeal from objection decision on review of Private Ruling of Commissioner of Taxation – termination of employment – payment on settlement of litigation in Federal Court – whether an eligible termination payment (ETP) – whether in part consideration for personal injury or bona fide redundancy WORDS AND PHRASES – "eligible termination payment" – "bona fide redundancy" – "consideration for personal injury" Income Tax Assessment Act 1936 (Cth) ss 27A(1), 27A(19), 27CB(1)(b)(ii), 27F Taxation Administration Act 1953 (Cth) s 14ZZ Federal Commissioner of Taxation v Scully (2000) 201 CLR 148 - applied Graham v Robinson [1992] VR 279 - cited Le Grand v Commissioner of Taxation (2002) 195 ALR 194 – applied McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557 – cited McLaurin v Federal Commissioner of Taxation (1960-1961) 184 CLR 391 - applied Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45 - cited RAYMOND JOSEPH DIBB v COMMISSIONER OF TAXATION Q42 of 2003 HEEREY J 8 JULY 2003 MELBOURNE (HEARD IN BRISBANE) IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q42 OF 2003 BETWEEN: RAYMOND JOSEPH DIBB APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE OF ORDER: 8 JULY 2003 WHERE MADE: MELBOURNE (HEARD IN BRISBANE) THE COURT ORDERS THAT: 1. The appeal is dismissed. 2. The objection decision is affirmed. 3. The applicant pay the respondent's costs, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q42 OF 2003 BETWEEN: RAYMOND JOSEPH DIBB APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE: 8 JULY 2003 PLACE: MELBOURNE (HEARD IN BRISBANE) REASONS FOR JUDGMENT 1 The applicant Mr Raymond Dibb was formerly employed by AVCO Financial Services Ltd (AVCO) as a District Manager. His employment with that company was terminated on 12 August 1996. Following a settlement of litigation in the Federal Court the applicant received a payment from AVCO. Being concerned as to whether that payment or any part thereof was an Eligible Termination Payment (ETP) within the meaning of s 27A(1) of the Income Tax Assessment Act 1936 (Cth) (the Act) the applicant sought a Private Ruling, which was duly given on 28 November 2001. The applicant objected to that Ruling. On 18 March 2003 the Commissioner gave an objection decision which varied the Private Ruling in some comparatively minor respects but otherwise affirmed it. The applicant now appeals to this Court pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth). Termination 2 On 12 August 1996 AVCO terminated the applicant's employment. By a letter of that day AVCO advised the applicant he would receive a "termination payment" totalling $118,860.21. This amount included salary, annual leave and accrued long service and also $88,296.00 described as "Compensation Payment (10 months)". It was said that his 1996 bonus would be paid in March the following year on a pro rata basis. 3 On 11 September 1996 solicitors Allen Allen and Hemsley on behalf of the applicant wrote to the solicitors for AVCO protesting at the termination and complaining that the conduct of AVCO was unlawful, harsh, unjust and wholly unreasonable. Thereafter in this matter the applicant has not had legal representation. The magnitude of the settlement he finally obtained suggests that the applicant has been an effective advocate in his own interests. Queensland Industrial Relations Commission proceeding 4 The applicant brought a claim in the Queensland Industrial Relations Commission (the Commission) seeking reinstatement under s 295 of the Industrial Relations Act 1990 (Qld). On 6 June 1997 Commissioner Bechley handed down a decision refusing that application. He referred the question of compensation back to the parties. Commissioner Bechley noted that, "somewhat unusually", AVCO at the commencement of the hearing of the matter acknowledged that the process of the termination contravened s 291(2)(A) in that the dismissal was harsh, unjust or unreasonable and that, contrary to s 292(1), the applicant did not have a "reasonable opportunity to defend". 5 On 26 February 1999 Commissioner Bechley handed down a further decision ordering AVCO to pay the applicant the sum of $44,837 within thirty days. That sum was apparently calculated on the basis of six months base salary and superannuation benefits. On 16 March 1999 AVCO forwarded to the applicant the amount ordered to be paid by the Commission together with $8972.84 being annual leave and long service entitlements. However the applicant refused to accept these amounts and returned the cheques. Federal Court proceeding 6 On 12 July 1999 the applicant commenced a proceeding against AVCO in the New South Wales Registry of the Federal Court. A third amended statement of claim was filed on 9 June 2000. According to a document entitled "Extracts of Statement of Claim for Private Tax Ruling" submitted by the applicant for the purpose of the Ruling, the statement of claim made the following allegations. 7 The applicant was employed by AVCO between 10 May 1977 and 12 August 1996, having been a District Manager since 19 May 1987. On 10 May 1977 the applicant and AVCO entered into a "service agreement". The agreement included AVCO's Operations Manual which contained detailed descriptions of termination, discipline, grievance, promotion and benefit policies, all of which were terms of the agreement. Further it was a "custom of the finance and banking industry" that such agreements could not be brought to an end by an employer without cause and/or in a harsh, unjust or unconscionable manner. On 12 August 1996 AVCO acted in repudiatory breach of the terms of the service agreement in purporting to terminate the applicant's employment. From about 22 July 1996 officers of AVCO and lawyers employed by them conspired with the purpose of injuring the applicant by unlawful means by having planned to terminate the applicant without proper cause or warning. AVCO set out and put into effect a plan designed to damage, devalue or destroy the applicant's employment reputation and to deny him his legal and equitable rights with manifest disregard to his physical, emotional and social welfare. AVCO knew or should reasonably have known that by planning and putting into effect the promotion of the applicant's termination he would suffer humiliation, ridicule and loss of self-esteem and diminution of the respect and confidence held in him by his fellow employees and be held to a lower opinion in the estimation of his fellow employees by making them think the less of him and be shunned and avoided by his fellow employees. AVCO knew or should reasonably have known that in implementing its covert plan in the manner that it did represented a reckless disregard to the physical and mental consequences the applicant was forced to deal with. 8 Also AVCO breached a fiduciary duty of trust and confidence. This duty arose because a named officer on behalf of AVCO undertook at a certain meeting to represent the interests of the applicant and also because AVCO transferred the applicant to Newcastle and subsequently Brisbane and placed him in a position where he and his family could not relocate to Sydney without its financial and/or employment support. Further, if the policies referred to were not terms of the agreement then AVCO, in trade or commerce, misled or deceived the applicant into believing that they were. 9 Further, if AVCO did not act in breach of terms of the service agreement or in breach of the Trade Practices Act 1974 (Cth) then it could still only terminate the service agreement upon the giving of reasonable notice. 10 By reason of AVCO's conduct the applicant was deprived of the opportunity to continue his employment which he potentially would have enjoyed until the year 2020. Because of AFCO's knowledge of the applicant and his personal and financial circumstances it should have foreseen that it would have caused him detriment by summarily terminating his employment, "showcasing the termination to his peers", and depriving him of his status and interfering with his right to work. The detriment to the applicant that was foreseeable comprised of negative, emotional and mental impact, embarrassment, a lowering of self esteem, vexation, distress, disappointment and frustration, negative effect to his family, social, recreational and business interests, serious injury and handicap to his future prospects for suitable alternative employment, aggravated damage to his employment reputation by being forced to pursue and persist with legal remedies to vindicate his rights and severe financial hardship and embarrassment. 11 As a "direct and natural flow" of the conduct of AVCO the applicant has suffered personal injury, loss and damage. Since termination the applicant has continually suffered from anxiety and depression, periods of mood swings, irritability, shortness of temper, insomnia, increased dosage of anti-depressant medication for which he has now formed a dependency, extreme physical pain, discomfort, fatigue, abdominal disorders and fluctuations of body weight, a progressive decline in his self-esteem amongst his family, relatives and friends, destruction of his employment reputation, withdrawn from participating in taking an interest in activities that he previously enjoyed and severe financial hardship and embarrassment. 12 The applicant claimed amounts due under the service agreement to the date of termination but unpaid at the date of judgment and also "future economic damage for being deprived from continuing his career for the prospective period from the date of judgment to 11 March 2020 (his 65th birthday), with reasonable consideration of promotions during that period". The applicant also claimed damages for physical and mental injury and diminution of amenities, damages for the injury to his employment reputation, exemplary damages for AVCO's deliberate and contemptuous behaviour, interest and costs. 13 Neither the statement of claim, nor any other document submitted to the Commissioner of Taxation by the applicant or AVCO, put any dollar figure on the applicant's various claims. Settlement of Federal Court proceeding 14 The applicant's claim was settled as a result of mediation. AVCO submitted a statement of issues for the purpose of mediation. In its statement AVCO said that its position was that the policies contained in its Operations Manual were never expressed or implied terms of the contract of employment. The contract was terminable as summarily for misconduct or at will upon the giving of reasonable notice or payment in lieu thereof. It stated "The real issue from AVCO's point of view is whether in all the circumstances of Mr Dibb's employment and having regard to the well established principles, 10 months total remuneration was a reasonable payment in lieu of notice, and if not what is reasonable notice in the circumstances." 15 The parties agreed to settle the claim for $788,544 "less tax calculated on the said sum as an eligible termination payment". The parties entered into a deed of release dated 9 March 2001 (the Deed). The Deed also recited the employment, the termination, and the institution by the applicant of proceedings in the Commission and in the Federal Court alleging breach of contract, repudiation of the contract, breach of s 52 of the Trade Practices Act and involvement in a conspiracy to injure the applicant in his employment by terminating it. It was further recited that the applicant had claimed damages "under a variety of heads of damage and interest" and that AVCO denied the allegations and had defended the proceeding. 16 Clause 1 in the deed records the settlement for the figure mentioned. By cl 2 the parties agreed that, other than the tax referred to in cl 1, no sum would be deducted from the settlement sum, that no sum would be owing from AVCO to the applicant and that the settlement sum "includes all payments due to the Employee howsoever arising from the employment including all statutory and other entitlements, and the Termination, including the compensation order to be paid by the Employer in the Queensland Proceedings". 17 By cl 3 the parties agreed that the Federal Court proceedings would be discontinued with each party paying his or its own costs. By cl 4 the applicant released AVCO from all complaints, actions etc. in respect of or in connection with the Queensland proceedings, the employment, the termination, the allegations, the claims and any other matters referred to in the recitals "other than any claim arising out of or applicable workers compensation legislation". Further provisions of the Deed contained covenants for confidentiality and mutual non-disparagement. Private Ruling 18 The Commissioner in his Private Ruling dated 27 November 2001 gave the following rulings: "1. Is the payment received pursuant to a Deed of Release subsequent to dismissal from employment an eligible termination payment (ETP)? Yes. 2. Does s 27F of the Income Tax Assessment Act 1936 (ITAA 36) apply to any part of this payment? No. 3. Is any part of the payment excluded from being an ETP under paragraph (n) of the definition as consideration for personal injury? No." Objection Decision 19 On 17 January 2002 the applicant lodged an objection to the Private Ruling. In the Commissioner's objection decision dated 18 March 2003 the same answer was given to the first three questions as in the initial Ruling. However the Commissioner varied the Ruling by deciding that the following amounts were excluded from being an ETP: $1,222.00 salary and wages $9,064.00 unused annual leave $25,472.00 unused long service leave Legislation 20 An ETP is defined in s 27A(1) of the Act in these terms: "'Eligible termination payment' in relation to a taxpayer, means - (a) Any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than a payment –… (iv) of an amount to which s 26AC or 26AD applies; … but does not include – … (ja) the tax free amount of a bona fide reducancy payment or of an approved early retirement scheme payment, made on or after 1 July 1994 … (n) consideration of a capital nature for, or in respect of personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive ……." 21 A bona fide redundancy payment is ascertained under s 27F of the Act. That section operates where 'an eligible termination payment is made in relation to a taxpayer in consequence of a dismissal of the taxpayer from any employment at any time (in the section referred to as the termination time) by reason of the bona fide redundancy of the taxpayer. The tax-free bona fide redundancy payment is then calculated by reference to s 27A(19) of the Act and excluded from tax by virtue of s 27CB(1)(b)(ii). The term "bona fide redundancy payment" is not defined in the Act. Was the payment under the Deed an ETP? 22 The concept of a payment "in consequence of the termination of any employment" was expounded by the High Court in Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45 and by the Full Court of the Federal Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557. These authorities are analysed by Goldberg J in Le Grand v Commissioner of Taxation (2002) 195 ALR 194 at [25] to [30] and [33] to [34]. I adopt his Honour's analysis. 23 In my opinion the Commissioner was correct in ruling that the payment under the Deed was made "in consequence of the termination" of the applicant's employment with AVCO. True it is there was a substantial lapse in time between the termination and the commencement of Federal Court proceeding and a further period of time until settlement. However the reason for that delay was the time taken up with the litigation first in the Commission and then in the Federal Court itself. The subject matter of the litigation in the Federal Court was clearly the termination, the allegedly wrongful way AVCO effected it and its financial and other consequences for the applicant. The various causes of action, whether breach of contract, conspiracy, breach of fiduciary duty or contravention of the Trade Practices Act were, as Goldberg J would say (Le Grand at [36]), "interwoven and intertwined" with the termination. The payment was a consequence of the settlement, which was a consequence of the Federal Court proceeding, which in turn was a consequence of the termination. Was any part of the payment a bona fide redundancy payment? 24 The applicant contended that of the settlement amount $53,810 was "non taxable as it represents the repayment of a liquidated amount owing to the applicant that included already taxed statutory entitlements and $44,837 compensation for loss of income processed as a redundancy payments, which was held in trust for the applicant since March 1999." 25 The reference to trust is apparently based on the applicant's return of the payments sent to him by AVCO in compliance with the order of the Commission. However no question of trust arises. The money remained owing as a debt due to the applicant and was specifically included in the subsequent settlement. 26 It appears from the reasons of Commissioner Bechley on 6 June 1997 that AVCO had been reviewing its present operations and future directions and "having determined a strategy to meet the future nature of the business (had) decided that (the applicant) did not fit the role determined as being necessary for a district manager". 27 There was evidence that a senior group of executives had "cast about for an alternative position suited to the applicant's talents but, short of creating an unnecessary role, were unable to find such a position." 28 AVCO had through acquisition of other business activities a variety of staff in excess of its business requirements and was reducing its workforce. Commissioner Bechley considered that he could not "supplant the beliefs of a senior management team with (his) own beliefs as to (the applicant's) capability of filling the new role developed for District Managers". 29 It would seem therefore that the reason for the applicant's termination was not that his position as District Manager became redundant but that its role changed and he was not considered suitable for that new role. The amount awarded to him was not based on any redundancy entitlement but by way of statutory compensation for a termination where the process had been harsh, unjust or unreasonable and without giving him a reasonable opportunity to defend. The amount awarded was the maximum fixed by the Queensland Act, namely the remuneration the employer would have been liable to pay for six months immediately following the dismissal. 30 Redundancy formed no part of the complaints made in the subsequent statement of claim in the Federal Court, nor is it mentioned in the Deed. 31 I therefore conclude that the sum referred to by the applicant was not in respect of a bona fide redundancy. Personal injury 32 Before the Commissioner on the objection hearing were two medical certificates dated respectively 21 July 1997 and 19 December 2002 from Dr Jim Ryan of Wishart, Queensland. In the first of these reports Dr Ryan stated: "This is to certify that I have been treating Mr Dibb for Anxiety/Depression since September 1996. This I believe has come about I believe as a result of loosing his job. Currently he takes anti depressant medication with a gradually increasing dosage. He received a medical certificate excusing him from Jury Duty partly because of his serious condition." 33 In the second certificate Dr Ryan stated: "This is to certify that I am treating this (patient/man) for dermatitis, hypertension, gastrointestinal disorder and depression." 34 Counsel for the Commissioner accepted that, in an appropriate case, a single payment made in consequence of the termination of employment of a taxpayer may be apportioned amongst several heads to which it relates. One of those heads could be consideration in respect to personal injury within the meaning of s 27A(1)(n). To that extent the payment may be treated as not being an ETP. 35 "Personal injury" encompasses injury or disease of a physical or psychological nature. However it would not extend to anguish, distress or embarrassment of the kind traditionally taken into account in assessing damages for defamation: Federal Commissioner of Taxation v Scully (2000) 201 CLR 148 at [28], Graham v Robinson [1992] VR 279. However, even accepting that some of the complaints of damage the applicant raised in the Federal Court proceeding consisted of anxiety and depression and thus "personal injury", the Commissioner was correct in concluding there was no way of dissecting the total settlement sum to include an amount for such a payment: McLaurin v Federal Commissioner of Taxation (1960-1961) 184 CLR 391. Surcharge legislation 36 The applicant made some submissions relating to the applicability of the surcharge legislation, see Termination Payments Tax (Assessment and Collection) Act 1997 (Cth). However the application of that legislation did not form any part of the Private Ruling. Orders 37 The appeal will be dismissed and the objection decision affirmed. There will be an order that the applicant pay the cost of the appeal, including reserved costs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey . Associate: Dated: 8 July 2003 Counsel for the Applicant: The applicant appeared in person Counsel for the Respondent: M Brennan Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 24 June 2003 Date of Judgment: 8 July 2003