FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Pitcher [2005] FCA 1154 TAXATION – payment made in redemption of weekly payments of compensation payable to serviceman after discharge from Army – whether an eligible termination payment within s 27A of Income Tax Assessment Act 1935 ("the ITAA") – whether payment an invalidity payment as defined in s 27G of the ITAA – whether certificates by medical practitioners under s 27G(b)(i)(B) have to be in existence before, or concurrently, with the making of the payment – what medical practitioners must certify for certificates to be conclusive. Safety, Rehabilitation and Compensation Act 1988 (Cth) ss 19, 20 and 30 Income Tax Assessment Act 1936 (Cth) ss 27A, 27CB and 27G Sales Tax (Exemptions and Classifications) Act 1992 (Cth) Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45 McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557 LeGrand v Federal Commissioner of Taxation (2002) 124 FCR 53 Totalizator Agency Board v Commissioner of Taxation (1996) 69 FCR 311 Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 Tinkler v Federal Commissioner of Taxation (1979) 40 FLR 116 (29 ALR 663) Federal Commissioner of Taxation v Inkster (1989) 24 FCR 53 Federal Commissioner of Taxation v Slaven (1984) 1 FCR 11 SP Investments Pty Ltd v Federal Commissioner of Taxation (1993) 41 FCR 282 Coward v Federal Commissioner of Taxation (1999) 54 ALD 83 Dibb v Commissioner of Taxation 136 FCR 388 Burt v Federal Commission of Taxation (1912) 15 CLR 469 Diethelm Manufacturing Pty Ltd v Federal Commission of Taxation (1993) 116 ALR 420 Dibb v Federal Commissioner of Taxation [2003] FCA 673 Meroka v Minister for Immigration and Multicultural Affairs (2002) 117 FCR 251 Re Gillespie v Federal Commissioner of Taxation (2001) 49 ATR 112 COMMISSIONER OF TAXATION v BRETT ANTHONY PITCHER V410 of 2004 RYAN J 23 AUGUST 2005 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V410 of 2004 On appeal from the Administrative Appeals Tribunal BETWEEN: COMMISSIONER OF TAXATION Applicant AND: BRETT ANTHONY PITCHER Respondent JUDGE: RYAN J DATE OF ORDER: 23 AUGUST 2005 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The applicant's appeal be dismissed. 2. The respondent's cross-appeal be upheld. 3. The matter be remitted to the Tribunal for it to hear and determine according to law the question of whether the payment of $34,439.29 to the respondent in or about July 2000 was an invalidity payment within the meaning of s 27G of the Income Tax Assessment Act 1936 (Cth). 4. The applicant pay the respondent's costs of the appeal and the cross-appeal, including any reserved costs, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V410 of 2004 On appeal from the Administrative Appeals Tribunal BETWEEN: COMMISSIONER OF TAXATION Applicant AND: BRETT ANTHONY PITCHER Respondent JUDGE: RYAN J DATE: 23 AUGUST 2005 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This is an application by way of appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") whereby the Tribunal set aside an objection decision of the applicant Commissioner of Taxation ("the Commissioner") and allowed the objection in part. The application raises the question of law whether a sum of $34,439.29 ("the redemption payment") paid to the respondent, Mr Pitcher, pursuant to s 30 of the Safety, Rehabilitation and Compensation Act 1988 (Cth) ("the SR Act") was an eligible termination payment ("ETP") within the meaning of s 27A of the Income Tax Assessment Act 1936 (Cth) ("the ITAA"). The background facts 2 The respondent enlisted in the Australian Army in 1985 and was discharged in 1992. After successive civilian employment as a landscape gardener and car salesman, he re-enlisted in the Army in January 1996 and was assigned to the Military Police. In July 1998 he sustained an injury to his legs and was diagnosed as suffering from bilateral compartment syndrome. The relevant facts which occurred thereafter have been recited as follows by the Tribunal in its reasons for decision; 'By notice of 7 December 1998, Mr Pitcher was advised that it was proposed that he be discharged from the army as being medically unfit for service. He was discharged on 15 February 1999 and commenced to receive weekly compensation payments under s 19 of the SRC Act. During 1999, Mr Pitcher completed an information technology course and, in January 2000, commenced employment as a network administrator in Stawell. He ceased this employment in January 2001. In July 2001, he commenced new full-time employment and continues in that employment. The amounts of gross weekly compensation to which Mr Pitcher was entitled were: 18 June 1999 to 10 November 1999 541.05 11 November 1999 to 27 December 1999 562.13 28 December 1999 to 30 January 2000 371.68 31 January 2000 to 30 June 2000 82.90 1 July 2000 to 7 July 2000 47.61 8 July - 35.87 The progressive reductions in the gross weekly entitlements were the result of his entitlement to benefits under the Military Superannuation and Benefits Scheme and a reduction for the amount that he was able to earn in suitable employment.' 3 As a result of the diminution in his entitlement to weekly payments of compensation, a delegate of the Military Compensation and Rehabilitation Service ("the MCRS") advised the respondent by letter dated 21 July 2000 as follows; 'SAFETY, REHABILITATION & COMPENSATION ACT 1988 (SRCA) I refer to your claim for compensation for a bilateral compartment syndrome condition. I have assessed your entitlement because of the increase, in your Military Salary and Able to Earn with Dulkeith Computer Solutions PtyLtd. I therefore must amend our Determination dated 19 June 2000 by deleting $78.37 gross per week from I July 2000 to a date to be determined and inserting $47.61 from 1 July 2000 to 7 July 2000. I further determine that you are entitled to payment of the following amount(s) for the time you have been unfit for work: Section Period Gross Weekly Amount 20 8/7/00 to 2/8/00 $35.87 Your Normal Weekly Earnings have been base [sic] on your rank at discharge, Corporal Pay Group 3, less your weekly superannuation pension, less your actual able to earn with Dulkeith Computer Solutions Pty Ltd. Please note that due to your increase in your actual able to earn, you have sustained a $98.75 gross overpayment in your weekly compensation entitlement. Under Section 30 of the Act, if the amount of your payments is $72.82 gross per week or less, and the degree of your incapacity is unlikely to change, the Department is obligated to redeem these payments by paying a lump sum. This will cut out the need to make any more fortnightly payments. I have enclosed a copy of Section 30. As your weekly entitlement is $35.87 you meet all of the conditions specified in Section 30. The Department will stop paying fortnightly amounts, and will instead pay you a gross lump sum of $34,439.29. Taxation of $4,368.00 has been deducted, so the nett amount payable to you is $30,071.29 less $98.75 overpayment. A copy of the sheet used to calculate your redemption entitlement under Section 30 of the Act is enclosed.' 4 Section 30 of the SR Act provides, so far as is relevant; '(1) Where: (a) Comcare is liable to make weekly payments under section 19, 20, 21 or 21A or 21A to an employee in respect of an injury resulting in an incapacity; (b) the amount of those payments is $50 per week or less; and (c) Comcare is satisfied that the degree of the employee's incapacity is unlikely to change; Comcare shall make a determination that its liability to make further payments to the employee under that section be redeemed by the payment to the employee of a lump sum. (2) The amount of the lump sum is the amount worked out using the formula: 52 x Amount per week x [(Specified number + 1)n – 1] Specified number x [(Specified number + 1)n ] (3) For the purposes of subsection (2): amount per week means the amount per week payable to the employee under section 19, 20, 21 or 21A, as the case may be, at the date of the determination. specified number means the number specified by the Minister. n means the number worked out using the formula: Number of days 365 where: number of days means the number of days in the period beginning on the day after the day on which the determination is made and ending: (a) if the employee is injured before reaching 63 years of age—on the day immediately before the day on which the employee reaches 65 years of age; and (b) if the employee is injured on or after reaching 63 years of age -on the day immediately before the employee would cease to be entitled to receive compensation under section 19, 20, 21 or 21A of this Act.' 5 Section 19 of the SR Act is expressed by subs (1) of that section to apply "to an employee who is incapacitated for work as a result of an injury, other than an employee to whom section 20, 21, 21A or 22 applies." 6 Subsection (2) of s 19 of the SR Act imposes on Comcare a liability to pay to the employee, in respect of the injury, compensation in an amount calculated in accordance with a formula expressed in that subsection for each of the first 45 weeks (whether consecutive or otherwise) during which the employee is incapacitated. Subsection (3) of s 19 of the SR Act imposes on Comcare a liability to pay compensation for each week after the forty-fifth week during which the employee is incapacitated. That liability is to be calculated on a sliding scale according to the percentage of normal weekly hours for which the employee is employed whilst incapacitated. The operation of subs (3) is illustrated by these extracts; 'Subject to this Part, Comcare is liable to pay compensation to the employee, in respect of the injury, for each week during which the employee is incapacitated, other than a week referred to in subsection (2), of an amount calculated using the formula: (Adjustment percentage x NWE) - AE where: adjustment percentage is a percentage equal to: (a) if the employee is not employed during that week—75%; or (b) if the employee is employed for 25% or less of his or her normal weekly hours during that week—80%; or (c) if the employee is employed for more than 25% but not more than 50% of his or her normal weekly hours during that week—85%; or (d) if the employee is employed for more than 50% but not more than 75% of his or her normal weekly hours during that week—90%; or (e) if the employee is employed for more than 75% but less than 100% of his or her normal weekly hours during that week—95%; or (f) if the employee is employed for 100% of his or her normal weekly hours during that week—100%.' 7 Section 20 of the SR Act provides, in respect of an employee who, being incapacitated for work as a result of injury, retires voluntarily or is compulsorily retired from his or her employment; '(1) This section applies to an employee who, being incapacitated for work as a result of an injury, retires voluntarily, or is compulsorily retired, from his or her employment at any time after the commencement of this section and, as a result of the retirement, receives a pension under a superannuation scheme. (2) Comcare is liable to pay compensation to the employee, in respect of the injury, in accordance with this section for each week after the date of the retirement during which the employee is incapacitated. (3) The amount of compensation is an amount calculated under the formula: AC – (SA + SC) where: AC is the amount of compensation that would have been payable to the employee for a week if: (a) section 19, other than subsection 19(6), had applied to the employee; and (b) in the case of an employee who was not a member of the Defence Force immediately before retirement—the week were a week referred to in subsection 19 (3); SA is the superannuation amount; and SC is the amount of superannuation contributions that would have been required to be paid by the employee in that week if he or she were still contributing to the superannuation scheme.' 8 The Commissioner assessed the lump sum of $34,439.29 to be part of Mr Pitcher's taxable income for the year ended 30 June 2001. By notice dated 24 May 2002, the respondent objected to that assessment contending that the lump sum received in redemption of Comcare's liability to make weekly payments of compensation should have been taxed as an ETP pursuant to s 27A(1) of the ITAA and that a portion of the lump sum was an invalidity payment within the meaning of s 27G of the ITAA. That objection was disallowed and the respondent taxpayer applied to the Tribunal for review of the objection decision. By its decision of 2 March 2004, the Tribunal allowed the respondent's objection to the extent of finding that the lump sum paid to the respondent was an ETP within the meaning of s 27A(1) of the ITAA. However, the Tribunal declined to find that any part of that sum was an invalidity payment as defined in s 27G. The reasons of the Tribunal 9 The Tribunal referred to the definition of ETP in s 27A(1) of the ITAA which, so far as is relevant, provides; '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: (i) made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund; (ii) of an annuity, or supplement, to which section 27H applies; (iii) from a fund in relation to which section 121DA, as in force at any time before the commencement of section 1 of the Taxation Laws Amendment Act (No. 2) 1989, has applied in relation to the year of income commencing on 1 July 1984 or any subsequent year of income; (iiia) from a fund that is or has been a non-complying superannuation fund in relation to any year of income; (iv) of an amount to which section 26AC or 26AD applies; or (v) of an amount that, under any provision of this Act, is deemed to be a dividend, or non-share dividend, paid to the taxpayer;' 10 Reference was then made to several authorities in which the phrase "any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer" has been considered. They included Reseck v Federal Commissioner of Taxation (1975) 133 CLR 45, McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557 and LeGrand v Federal Commissioner of Taxation (2002) 124 FCR 53. The Tribunal in its reasons then continued; '17. It is clear that it can be said that the entitlement to compensation arose as a result of the injury suffered by Mr Pitcher during his employment with the army. However, the question is whether the payments followed, in a causal sense, as an effect or result of the termination of his employment. It is relevant to note the provisions of the SRC Act which governed the payment of the weekly compensation. Section 19 applies where an employee is incapacitated for work as a result of an injury and provides for payment for each week during which the employee is incapacitated of an amount equal to the employee's normal weekly earnings less the amount per week that the employee is able to earn in suitable employment. Section 20 applies to an employee who, being incapacitated for work as a result of any injury, retires voluntarily, or is compulsory retired from his employment and, as a result of the retirement, receives a pension under a superannuation scheme. If this section applies, the amount of weekly compensation otherwise payable under s 19 is reduced by the amount of such superannuation pension. Mr Pitcher was classified by the Military Superannuation and Benefits Incapacity Classification Committee as having a Class B incapacity for civilian employment and was entitled to a superannuation pension. Consequently, s 20 of the SRC Act applied to him. 18. In my view, it is relevant to this matter that Mr Pitcher's employment was with the army. In most forms of employment, a work-related injury, particularly one such as suffered by Mr Pitcher, does not result in the employee being able to be discharged from the employment. However, in his case, he was so discharged under the provisions of Australian Military Regulations 176(1)(h) as "being Medically Unfit". The notice of intent to order discharge of 7 December 1998 stated: 1. As you may be aware, your medical examination conducted on 5 Nov 98, resulted in a finding that your PES was Class Four. As a consequence of this finding, it is proposed to discharge you because you are considered to be medically unfit for further service in the Army. As a consequence of this finding, Mr Pitcher was compulsory retired from his employment. Following on the decision that he be discharged, Mr Pitcher lodged a claim for compensation which resulted in his entitlement to the weekly payments following on from that termination of employment. As a consequence of a subsequent employment and his entitlement to superannuation pension, the compensation entitlement was reduced by a combination of s 19 and s 20 of the SRC Act to an amount which allowed the lump sum redemption under s 30 of that Act. 19. In light of the foregoing, 1 am of the view that it can be said that the weekly compensation payments were, in the words of Goldberg J, "an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment" of compensation and the redemption by a lump sum of future entitlements. For the same reasons as were set out in the decisions in Seabright and Gillespie, I consider that the time gap of 18 months between the date of discharge and the redemption of his entitlement did not destroy the connection between termination of employment and receipt of the lump sum. Consequently, I find that the amount of $34,439 was in consequence of termination of employment and an ETP. 20. While not necessarily determinative of the issue in this case, it is appropriate to recognise that one of the reasons for the reduction in weekly entitlements to compensation was the entitlement to a superannuation pension which caused s 20 of the SRC Act to apply. This section only applies to an employee who has retired from employment and as a result of that retirement receives a superannuation pension. Consequently, the retirement from employment is a significant factor in the calculation of the entitlement to compensation and, as in the case of Gillespie, the application of s 20 can be the trigger to bring s 30 or s 137 of the SRC Act into play to produce the lump sum redemption.' 11 As to the application of s 27G of the ITAA, that section provided; '27G Where: (a) an eligible termination payment is made in relation to a taxpayer in consequence of the termination of any employment of the taxpayer; (b) the termination of the employment of the taxpayer occurred: (i) because of: (A) if the eligible termination payment is made before 1 July 1994-the taxpayer's physical or mental incapacity to engage in that employment; or (B) if the eligible termination payment is made on or after 1 July 1994-the disability of the taxpayer, where 2 legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience; and (ii) before the last retirement date in relation to the employment; so much of the eligible termination payment as is equal to the amount ascertained in accordance with the formula A B C where A is the amount of the eligible termination payment. B is the number of whole days in the period from the date on which the termination occurred to the last retirement date; and C is the aggregate of the number of whole days in the eligible service period in relation to the eligible termination payment and the number of whole days represented by component B; is an invalidity payment in relation to the taxpayer.' 12 After noting that the effect of the lump sum payment to the respondent coming within s 27G is that the payment would be exempt from income tax under s 27CB of the ITAA, the Tribunal referred to the documents from the two medical practitioners which were relied on as constituting the certificates required by par (b)(i)(B) of s 27G. The first was dated 4 January 2001 by Dr Philip Wood a general practitioner connected with the Stawell Medical Centre who reported; 'I am writing with respect to Mr Brett Anthony Pitcher. Mr Pitcher was, as you know, discharged medically from the army an the 15 February 1999. I regretfully am writing to inform you that Mr Brett Pitcher can no longer cope with the stresses of driving. He is required to drive to Nhill in the course of his duties of his job. This is 140km each way. As such, Mr Pitcher experiences the stresses and pain in his lower leg from his compartment and scarring syndrome, such that he can't cope with driving with excesses of 700km per week. The pain is becoming more constant and severe and is. in fact keeping him awake at night. As such it would be expected that Mr Brett Pitcher would need to once again become a recipient of his compensible and compensatory payments. I believe Mr Pitcher is not currently fit for any type of duties. He has enjoyed being gainfully employed for the past few months as a computer technician and I believe has continued, employment available to him, but of course he cannot cope with his pain. I also believe Mr Pitcher will never be fit for employment.' 13 The second report was that of Mr Roger Warne a surgeon also connected with the Stawell Medical Centre. On 25 June 2003, Mr Warne wrote; 'This man was discharged medically unfit from the Army in a permanent position in 1999 and at that stage he had severe shin pain and the consequences of this were that there was extreme difficulty in any type of work. I did not see him at this stage but I have perused all of his notes and I have been managing his case for the last few months. I note that because of the pain and despite the rehabilitation that he had, that this resulted in a permanent incapacity and therefore because of this disability he will never be able to be employed in a capacity for which he is reasonably qualified. He has worked very diligently at rehabilitation but despite this he is unable to return to this pre-discharge situation. I therefore strongly feel that he meets all the criteria in that he will be unable to be employed in a capacity that he was reasonably qualified for. He has had training in IT but his ability to perform physical activity and any prolonged driving, walking, lifting or any other physical measure is severely limited.' 14 The Tribunal's conclusion that the reports from Dr Wood and Mr Warne were incapable of attracting the operation of s 27G((b)(i)(B) of the ITAA was expressed as follows at [25] of its reasons for decision; 'There are two problems in relying on these medical reports. The first is that the lump sum payment was some 18 months after termination of employment and Dr Wood's report was nearly 5 months after the date of receipt of the relevant payment with Mr Warne's almost 3 years after the payment. The words of the section require the termination of the employment to have occurred because of the disability of the taxpayer "where 2 legally qualified medical practitioners have certified that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity...". This wording would appear to require the certification to be prior to or, at least, concurrently with the termination of employment. Even if it can be said that a subsequent certification can be accepted, it is difficult to accept that such certification, some 2 years and 4 years later, can be seen as satisfying the requirements of s 27G. This is particularly so when the certification is provided after the years of income in which the payment is to be assessed. The second problem with the reports is that both were provided after Mr Pitcher had already been in full-time employment. Dr Wood stated that Mr Pitcher "will never be fit for employment" after he had been employed for 1 year with him undertaking full-time employment some 6 months after the report. At the time of Mr Warne's report, Mr Pitcher was in full-time employment and had been in that same employment for 2 years. While the words of the section do not require the Commissioner of Taxation or a tribunal to be satisfied as to the capacity for employment, it being sufficient that 2 medical practitioners so certify, the question of the validity of the retrospective certification is placed more clearly in focus. On balance, I do not accept that payment in question was an invalidity payment under s 27G of the Assessment Act.' Applicant's submissions Eligible termination payment 15 The Commissioner submitted that the redemption payment had not been paid to the respondent "in consequence of the termination of any employment" within the meaning of those words in the definition of ETP in s 27A(1) of the ITAA which is reproduced at [9] above. 16 In the Commissioner's submission, in order for such a payment to be an ETP, it must follow on from, and be an effect or result in a causal sense, of the termination; (see Reseck v Federal Commissioner of Taxation (supra) at 51 and 56; McIntosh v Federal Commissioner of Taxation (supra) at 560, 564 and 570-1; and LeGrand v Federal Commissioner of Taxation (supra) at 62-63.) 17 The Commissioner contended that the redemption payment had not been a result or effect of the termination of the respondent's employment in the required sense. It is not enough, so the argument went, that the redemption payment be paid after the termination of employment in a merely temporal sense. In a case like the present, the redemption payment, it was submitted, must be paid in consequence of the reduction of the former employee's weekly payment to an amount which attracts the application of s 30(1) of the SR Act so that MCRS is required to pay the redemption sum. Applicant's submissions on the respondent's cross-appeal Invalidity Payment 18 The Commissioner's primary submission was that the redemption payment was not an ETP. In the event that the redemption payment were held by this Court to be an ETP, the Commissioner submitted that the Tribunal had correctly held that the certification of two legally qualified medical practitioners is required before, or at least concurrently with, the termination of employment; (see s 27G(b)(i)(B) which is set out at [11] above). This was said to follow from the use of the perfect tense "… where 2 legally qualified medical practitioners have certified …" in par (b)(i)(B) of s 27G (emphasis added) and the requirement in that paragraph that the termination should have occurred because of the disability and incapacity so certified. 19 It was further contended for the Commissioner that the Tribunal had correctly rejected the retrospective certification on the basis that it did not comply with s 27G of the ITAA and the Tribunal was, accordingly, correct in finding that the redemption payment did not constitute an invalidity payment. 20 In reply to the respondent's written submissions, the Commissioner relied on a passage from Totalizator Agency Board v Commissioner of Taxation (1996) 69 FCR 311 as authority for the proposition that there is no general principle of construction which required items in the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) to be given a benevolent interpretation. It was submitted by analogy that this authority supported the Commissioner's contention that the words of par (b)(i)(B) of s 27G are clear and do not permit the interpretation which the respondent seeks to put on them. 21 The Commissioner disputed the respondent's written submission that termination of employment was, in the relevant sense, a "necessary prerequisite for" the respondent's entitlement to the payment under s 30 of the SR Act. The applicant submitted that only three prerequisites are specified in s 30 of the SR Act, namely that; (a) Comcare be liable to make weekly payments under one of ss 19, 20, 21 or 21A; (b) payments be equal to or less than the statutory amount; (c) Comcare be satisfied that the degree of the employee's incapacity is unlikely to change. 22 According to the Commissioner, termination of employment is not a necessary prerequisite for a redemption sum to be mandated by s 30. It was further submitted that the respondent, having been discharged from the Army as medically unfit for further service, had received a superannuation payment calculated in accordance with the formula in s 20 of the SR Act and it was his receipt of both a superannuation pension and earnings from his subsequent employment that reduced his weekly compensation to an amount which then attracted the application of s 30(1) of the SR Act. Income or Capital 23 The Commissioner contended that the weekly compensation to which the respondent was entitled under the SR Act was clearly income; (see Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 at 583; Tinkler v Federal Commissioner of Taxation (1979) 40 FLR 116 at 119 and 126; Federal Commissioner of Taxation v Inkster (1989) 24 FCR 53 at 74; and cf Federal Commissioner of Taxation v Slaven (1984) 1 FCR 11 at 20 and 21. 24 In the Commissioner's submission, although the redemption sum was not a result or effect of the termination of the respondent's employment, it was nonetheless income according to ordinary concepts as representing the present value of future income for which it was a substitute; see SP Investments Pty Ltd v Federal Commissioner of Taxation (1993) 41 FCR 282 at 296-7; cf Coward v Federal Commissioner of Taxation (1999) 54 ALD 83 at 91 per Mathews J. Respondent's submissions Eligible termination payment 25 Counsel for the respondent submitted that the expression "in consequence of" in the definition of ETP requires that termination of employment be a prerequisite for the payment in the sense that there is a "following on"; (McIntosh v Federal Commissioner of Taxation (supra) at 564 per Toohey J) or that it is a cause or antecedent of the payment; (McIntosh at 571 per Lockhart J). Although accepting that a mere temporal connection is insufficient, Counsel contended that "in consequence of" has a wider connotation than a purely causal link. The respondent further submitted that the expression does not require that termination of employment be the sole or dominant prerequisite for, cause of, or antecedent to, the payment; (See generally LeGrand v Federal Commissioner of Taxation (supra); Reseck v Federal Commissioner of Taxation (supra); Dibb v Commissioner of Taxation 136 FCR 388.). 26 In the present case, according to the respondent, both as a requirement of the statute and on the facts, termination of employment was a necessary prerequisite for, and cause of, the respondent's entitlement to the redemption payment under s 30 of the SR Act; but for the termination of the respondent's employment in the Army, the redemption payment would not have been authorised or permitted by s 30. The effect of s 30, Counsel contended, was to authorise a payment to be made by Comcare to redeem its liability to make payments to the respondent under s 20 of the SR Act. That liability to make payments under s 20 had arisen because of, amongst other things, the termination of the respondent's employment in the Army. It therefore followed, on the respondent's argument, that the payments under s 20 had been made in consequence of termination of employment and were ETPs. 27 It was submitted on behalf of he respondent that the redemption payment made under s 30 must bear the same characterisation as that of the payments made under s 20. As a matter of fact and law, so the argument went, the payment under s 30 was the final payment which Comcare made in consequence of the termination of the respondent's employment in the Army. It therefore followed that the Tribunal was correct to find that the redemption payment was an ETP pursuant to the ITAA. Respondent's cross-appeal Invalidity payment 28 The respondent contended that the redemption payment constituted an "invalidity payment" under s 27G of the ITAA. 29 It was submitted that the Tribunal had erred in law in holding that s 27G of the ITAA required that the medical certificates referred to therein be provided before, or concurrently with, the termination of employment. The purpose of s 27G was said to be to provide a concession to a taxpayer who has suffered a misfortune that has led to his or her discharge from employment as a result of invalidity. It was submitted that the orthodox approach to the interpretation of exemption and exception provisions like s 27G was that indicated by Barton J in Burt v Federal Commission of Taxation (1912) 15 CLR 469 at 482; 'The several deductions allowed by s 30 are exceptions to the general rule of taxation prescribed by the Act. Where the construction of such exceptions is seriously in doubt, the interpretation should favour those whose claims are based upon the exceptions.' 30 Counsel for the respondent also referred to a number of cases where the principle in Burt has been applied in support of a similar approach; see the authorities collected by D C Pearce and R S Geddes "Statutory Interpretation in Australia" (5th edition) at p 248 [9.41]. Reference was also made to the comparatively recent observation by French J in Diethelm Manufacturing Pty Ltd v Federal Commission of Taxation (1993) 116 ALR 420 at 426 that; 'On the other hand, an exemption which exists for the purpose of encouraging, rewarding or protecting some class of activity is not to be given a narrow application.' 31 The respondent submitted that to require the medical certificates to be provided before, or concurrently with, the termination of employment is an impermissible limitation on the operation of s 27G that is not compelled by the language of the section or by the purpose which can be imputed to the legislature in enacting it. 32 In the same context, it was submitted for the respondent that s 27G does not expressly require that the medical certificates be provided before or concurrently with the termination of employment. Nor does the limitation contended for by the Commissioner arise from the context or the legislative purpose. The Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Bill 1992, which introduced the requirement for medical certificates, states; 'To clarify the test for incapacity and to place the onus of determining invalidity on legally qualified medical practitioners, from 1 July 1994, the incapacity of a person will have to be certified by two medical practitioners.' 33 The respondent contended that the onus for determining incapacity which Parliament intended to be placed on medical practitioners could effectively be discharged without the further requirement that the medical certificates be provided before the termination of employment. 34 It was further submitted for the respondent that the limitation imported into s 27G by the Tribunal does not advance the achievement of the legislative purpose evinced by the section as a whole that concessional treatment should be afforded to persons who cease employment because of incapacity. Clearly, it was submitted, there will be cases where truly incapacitated persons fail to obtain the requisite medical certificates before their employment has been terminated. The Tribunal therefore misconstrued s 27G when it held that it requires that the medical certificates be provided before or concurrently with the termination of employment. 35 The respondent's case on the cross-appeal was that Mr Wood's letter dated 4 January 2001 reproduced at [12] above and Mr Warne's letter dated 25 June 2003 reproduced at [13] above satisfy the requirement for two medical certificates imposed by s 27G(b)(i)(B). 36 Counsel for the respondent further submitted that the Tribunal had erred in finding that the criteria in s 27G(b)(i)(B) could not be satisfied because the respondent had engaged in civilian employment after he ceased employment in the Army. It was urged in this context that the statutory test for incapacity is not that the taxpayer is unable ever to be employed again but that he or she is "unable ever to be employed in the capacity for which the taxpayer is reasonably qualified because of education, training or experience". 37 It was further submitted that, in the present case, after the respondent's employment in the Army had been terminated, he undertook further education and training in order to commence subsequent employment. It was said to be s 27G(b)(i)(B) that prescribes the required medical certificates; in considering the application of that section, the Tribunal had erred in referring to and relying upon the respondent's subsequent employment. Income or Capital 38 The respondent's primary contention is that the redemption payment pursuant to s 30 of the SR Act bears the same character as the payments under s 20. It is an eligible termination payment. However, in the face of the contrary contention by the Commissioner, the respondent submitted that, if the Commissioner's argument were accepted, it must follow that the respondent has received a lump sum payment that has no connection with termination of employment or with compensation for loss of income as a result of termination of employment. In the absence of any relevant connection with compensation for loss of income as a result of termination of employment, it was submitted that the redemption payment cannot be income. Resolution of Issues Eligible termination payment 39 It is first necessary to consider whether the redemption payment was paid"in consequence of the termination of any employment" within the meaning of those words in the definition of ETP in s 27A(1) of the ITAA. 40 The expression "in consequence of the termination of any employment" was considered by the High Court in Reseck v Federal Commissioner of Taxation (supra) and by a Full Court of this Court in McIntosh v Federal Commissioner of Taxation (supra). These authorities have been analysed by Goldberg J in Le Grand v Commissioner of Taxation (supra) at [25] to [30] and [33] to [34]. 41 In LeGrand Goldberg J said at [33]; 'I do not consider that the issue can simply be determined by seeking to identify the "occasion" for the payment. The thrust of the judgments in Reseck and McIntosh is rather to the effect that a payment is made "in consequence" of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of that circumstance. The passages in the judgments to which I referred earlier make this clear. They also make it clear that there need not be identified only one circumstance which gives rise to a payment before it can be said that the payment is made "in consequence" of that circumstance. The passages to which I have referred make it clear that it can be said that a payment may be made in consequence of a number of circumstances and that, for present purposes, it is not necessary that the termination of the employment be the dominant cause of the payment so long as the payment follows, in the causal sense referred to in those judgments, as an effect or result of the termination.' 42 And at [35]; 'I am satisfied that there is a sufficient connection between the termination of the applicant's employment and the payment to warrant the finding that the payment was made "in consequence of the termination" of the applicant's employment. I am satisfied that the payment was an effect or result of that termination in the sense that there was a sequence of events following the termination of the employment which had a relationship and connection which ultimately led to the payment. True it is that the payment was made not only to settle the applicant's claim for common law damages for breach of the employment agreement but also for statutory damages pursuant to the provisions of the Trade Practices Act and the Fair Trading Act in respect of the claims for misleading and deceptive conduct. But, as is pointed out in the judgments to which I have referred, it is not necessary for the termination of the employment to be the dominant cause of the payment.' 43 His Honour's analysis was adopted by the primary Judge in Dibb v Federal Commissioner of Taxation [2003] FCA 673 and the same approach was endorsed by a Full Court of this Court in Dibb v Commissioner of Taxation (2004) 136 FCR 388. 44 At [15] of its reasons, the Full Court in Dibb quoted this passage from the primary Judge's reasons on the definition of ETP; '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.' 45 And at [16] the Full Court continued; 'We agree with the learned primary Judge's reasons. Although much happened between Mr Dibb's dismissal and the settlement of the Federal Court proceedings, those events and the passage of time all arose out of his complaints concerning his dismissal. Neither those events nor the passage of time altered the fact that payment of the lump sum settlement was in consequence of the termination.' 46 In the present case, the Commissioner has contended that there was no nexus between the payment of the redemption sum and the termination of the respondent's employment in the Army. In my opinion, however, the termination of employment was a necessary prerequisite for, and cause of, the respondent's entitlement to the redemption payment under s 30 of the SR Act. Section 30 authorised a payment to be made by Comcare to redeem its liability to make payments to the respondent under s 20 of the SR Act. Comcare's liability to make payments under s 20 arose, in part, because the respondent was compulsorily retired from his employment in the Army. 47 I consider that the Tribunal was correct to find that the weekly payments of compensation to the respondent were the result of a sequence of events that followed the termination of the respondent's employment and that they were connected with the lump sum paid by way of redemption. The redemption by a lump sum of future entitlements was the final payment made by Comcare to the respondent in consequence of the termination of his employment in the Army. It follows that the Tribunal made no error in determining that the amount of $34,439.29 was made in consequence of termination of employment and constituted an ETP. Respondent's cross-appeal Invalidity Payment 48 Having concluded that the Tribunal correctly determined that the redemption payment was an ETP, it is necessary to consider the respondent's cross-appeal which involves the contention that the redemption payment constituted an "invalidity payment" under s 27G of the ITAA. The respondent further claims that the Tribunal erred in its interpreting s 27G as requiring the two medical certificates to issue before, or, at least, concurrently with, the termination of employment and holding, as a consequence, that the redemption payment was not an invalidity payment. 49 Section 27G(b) is reproduced above at [11]. The expressions relevant to the respondent's cross appeal are that in par (b)(i)(B) "…where 2 legally qualified practitioners have certified…" and, arguably, that in par (ii) of s 27G(b) "before the last retirement date in relation to the employment". 50 It has to be borne in mind that the requirement for certification by two legally qualified medical practitioners occurs in a taxing statute. It does not occur in a statute or other instrument governing the termination of the employment of the taxpayer or defining the disability in respect of which the termination payment is payable. What s 27G does is to characterise the payment as an invalidity payment, but par (b)(i)(B) does not make the characterisation depend on the certification by two legally qualified medical practitioners having occurred before the payment. It is readily conceivable that, as happened in this case, a termination might have occurred after 1 July 1994 in circumstances where the former employee was under a disability which precluded him or her from continuing in the relevant employment but no occasion arose for obtaining medical certificates to the effect stipulated in par (b)(i)(B) or such certificates could not have then been issued. 51 It is true, as Mr Bloom QC who appeared with Mr S Cole for the Commissioner pointed out, that the expression "have certified" in par (b)(i)(B) is in the perfect tense. However, on the construction which I prefer, the time at which the use of that tense signifies that the certificates must have issued is not when the termination payment was made but when it fell to be characterised as an invalidity payment in relation to the taxpayer. In the present case that was on 22 May 2002 when the Commissioner assessed the payment to tax at which times the certificate by Dr Wood was in existence but that by Mr Warne issued on 25 June 2003 was not. 52 This analysis gives rise to a secondary question which was not argued on the hearing of the application to this Court. That is whether a taxpayer who has not furnished the requisite certificates under s 27G(b)(i)(B) at the time of the Commissioner's assessment can supply the deficiency before the hearing by the Tribunal of a review of that assessment. If that question be answered in the affirmative, it would be necessary to consider whether the certificates by Dr Wood and Mr Warne were to the effect required by s 27G(b)(i)(B). 53 It was submitted on behalf of the respondent that the Tribunal had erred in referring to the fact that the respondent had been in full-time employment for two years at the time of Mr Warne's purported certificate. I accept that the statutory test erected by s 27G(b)(i)(B) is not whether the taxpayer will ever be fit for employment but whether he or she is likely to be unable ever to be employed in a capacity for which the taxpayer is reasonably qualified because of education, training or experience. In many cases the application of either test may not lead to a different result. However, because of the time which I have identified at [51] above when the certificates have to issue, the possibility can exist that the taxpayer has, at that time, by training or education undertaken after the former employment was terminated, qualified himself or herself for employment in a capacity in which such employment was not available when the earlier termination occurred. 54 I accept, as the Tribunal appeared also to accept, that s 27G reposes in the medical practitioners, not the Commissioner, the attainment of the requisite satisfaction that the taxpayer is unable to be likely ever to be employed in a relevant capacity. However, it remains a question of fact for the Commissioner or the Tribunal whether the two medical certificates on their face have properly answered the question posed by s 27G(b)(i)(B). On my reading of the two certificates in this case, I entertain considerable doubt whether that has occurred. For a discussion of the analogous circumstances in which a tribunal may examine a certificate required by statute to be issued by a "competent person", see Meroka v Minister for Immigration and Multicultural Affairs (2002) 117 FCR 251 at 262 [32]-[33]. Income or Capital 55 It was not in dispute that the weekly payments of compensation to the respondent pursuant to the SR Act were income; Federal Commissioner of Taxation v Smith (supra); Tinkler v Federal Commissioner of Taxation (supra); cf Federal Commissioner of Taxation v Slaven (supra). 56 The payment of the redemption payment followed on from the termination of the respondent's employment and was paid to the respondent pursuant to s 30 of the SR Act as a lump sum in substitution for the right to receive future weekly compensation payments. It therefore constituted income according to ordinary concepts as representing the present value of that future income and a substitute therefor; see Coward v Federal Commissioner of Taxation (supra) at 91 per Mathews J; and Re Gillespie v Federal Commissioner of Taxation (2001) 49 ATR 112. 57 The conclusion which I have reached that the redemption payment was an ETP makes it unnecessary to consider the arguments as to whether it should have been taxed as capital or income in the event that it were held not to have constituted an ETP. It therefore follows that the Commissioner's appeal must be dismissed. Conclusion 58 For the reasons which I have explained the Commissioner's appeal will be dismissed and the respondent's cross-appeal will be upheld. Because the matters discussed at [52] and [54] of these reasons have not been the subject of full argument before this Court nor, apparently, the Tribunal, the matter should be remitted to the Tribunal for it to hear and determine according to law the question of whether the redemption payment was an invalidity payment as defined in s 27G of the ITAA. The Commissioner must pay the respondent's costs of the appeal and the cross-appeal. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate: Dated: 23 August 2005 Counsel for the Applicant: Mr D H Bloom QC with Mr S C Cole Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr G J Davies QC with Mr M T Flynn Solicitor for the Respondent: Riordans Date of Hearing: 29 November 2004 Date of Judgment: 23 August 2005