FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Boyn [2013] FCA 232 Citation: Commissioner of Taxation v Boyn [2013] FCA 232 Appeal from: [2012] AATA 660 Parties: COMMISSIONER OF TAXATION v SIEGFRIED BOYN File number: NSD 1651 of 2012 Judge: EDMONDS J Date of judgment: 20 March 2013 Catchwords: INCOME TAX – employee termination payment ("ETP") – tax payable on taxable component where taxable component exceeds ETP cap amount giving rise to an employment termination remainder ("ETR") – calculation of ETR where excess exceeds taxable income by reason of allowable deductions exceeding the sum of the ETP cap amount and other classes of assessable income other than the excess Legislation: Administrative Appeals Tribunal Act 1975 (Cth) s 44 Income Tax Assessment Act 1997 (Cth) ss 4, 82, 960 Income Tax Assessment Act 1936 (Cth) s 6 Income Tax Rates Act 1986 (Cth) s 3, 4, 12, Sch 7 Pt I Cases cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27 referred to Commissioner of Taxation v Consolidated Media Ltd (2012) 293 ALR 257 referred to MacCormick v Commissioner of Taxation (1984) 158 CLR 622 referred to Date of hearing: 25 February 2013 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 28 Counsel for the Applicant: Mr SB Lloyd SC Solicitor for the Applicant: Australian Taxation Office, Legal Services Branch Respondent: The respondent appeared in person IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1651 of 2012 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: COMMISSIONER OF TAXATION Applicant AND: SIEGFRIED BOYN Respondent JUDGE: EDMONDS J DATE OF ORDER: 20 MARCH 2013 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The decision of the Administrative Appeals Tribunal made on 28 September 2012 be set aside. 3. The applicant's objection decision given by notice dated 30 March 2012 be affirmed. 4. The applicant pay the respondent's costs of the appeal as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1651 of 2012 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: COMMISSIONER OF TAXATION Applicant AND: SIEGFRIED BOYN Respondent JUDGE: EDMONDS J DATE: 20 MARCH 2013 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This is an application pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ("AAT Act") by way of appeal from a decision of the Administrative Appeals Tribunal ("Tribunal") ([2012] AATA 660) setting aside the objection decision of the applicant ("Commissioner") which disallowed the objection of the respondent ("taxpayer") to his amended assessment of income tax for the year ended 30 June 2010 ("year of income"). Background 2 The facts as found by the Tribunal fall within a brief compass. 3 On 30 July 2009, the taxpayer received an employment termination payment ("ETP") from his employer. 4 The taxpayer, at all times during the year of income, was a resident for Australian income tax purposes. 5 The taxpayer had reached his preservation age for superannuation purposes. 6 According to the relevant PAYG payment summary, the item referred to as ETP comprised both a taxable component of $250,880; and a tax-free component of $144,120. Issue 7 The issue for determination before the Tribunal, and on the appeal in this Court, concerns the correct method of calculating the tax payable by the taxpayer in respect of the taxable component of the ETP. Statutory Context 8 In the year of income: (1) Subsection 4-10(3) of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") provided: Work out your income tax for the *financial year as follows: Income Tax = (Taxable income x Rate) – Tax offsets (2) Subsection 4-15(1) of the ITAA 1997 relevantly provided: Work our your taxable income for the income year like this: Taxable income = Assessable income – Deductions (3) Section 82-10 of the ITAA 1997 provided: Tax free component (1) The *tax free component of a *life benefit termination payment you receive is not assessable income and is not *exempt income. Taxable component (2) The *taxable component of the payment is assessable income. (3) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (4) does not exceed: a. if you are your *preservation age or older on the last day of the income year in which you received the payment—15%; or b. otherwise—30% Note: The remainder of the taxable component is taxed at the top marginal rate in accordance with the Income Tax Rates Act 1986. (4) The amount is so much of the *taxable component of the payment as does not exceed the lesser of: a. the *ETP cap amount, reduced (but not below zero) by the amount worked out under this subsection for each *life benefit termination payment you have received earlier in the income year; and b. the ETP cap amount, reduced (but not below zero) by the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination, whether in the income year or an earlier income year. Note 1: For the ETP cap amount, see section 82-160. (4) Section 82-160 of the ITAA 1997 provided: The ETP cap amount for the 2007-2008 income year is $140,000. This amount is indexed annually. (5) Indexation of the ETP cap amount going forward was provided for by s 960-265 of the ITAA 1997. (6) Section 3(1) of the Income Tax Rates Act 1986 (Cth) ("ITRA") provided: Assessment Act means the Income Tax Assessment Act 1936 employment termination remainder of taxable income means so much of the taxable income as: (a) is included in assessable income under a maximum tax rate provision in Division 82 of the Income Tax Assessment Act 1997 or Division 82 of the Income Tax (Transitional Provisions) Act 1997; and (b) does not give rise to an entitlement to tax offset under that maximum tax rate provision. ordinary taxable income means the taxable income, reduced by the superannuation remainder of the taxable income and by the employment termination remainder of taxable income. (6) Section 4 of the ITRA provided: The Assessment Act is incorporated, and shall be read as one, with this Act. (7) Subsection 12(1) of the ITRA provided: Except as otherwise provided by this Division, the rates of tax are as set out in Schedule 7. (8) Schedule 7 Part I of the ITRA relevantly provided: 1. Subject to clauses 2 and 3, the rates of tax on the taxable income of a resident taxpayer are as follows: (a) … (aa) 45% for the employment termination remainder (if any) of the taxable income; (b) for each part of the ordinary taxable income specified in the table—the rate applicable under the table. Tax rates for resident taxpayers Item For the part of the ordinary taxable income The rate is: of the taxpayer that: 1 exceeds $6,000 but does not exceed $35,000 15% 2 exceeds $35,000 but does not exceed $80,000 30% 3 exceeds $80,000 but does not exceed $180,000 38% 4 exceeds $180,000 45% (9) Section 6(1) of the Income Tax Assessment Act 1936 (Cth) relevantly provided: this Act includes: (a) the Income Tax Assessment Act 1997; and… The Tribunal's Decision 9 Before the Tribunal, it was common ground that the taxable component of the taxpayer's ETP ($250,880) was assessable income, pursuant to s 82-10(2) of ITAA 1997 and it was to be divided into two further parts: The ETP cap amount: being $150,000 in the year of income (pursuant to ss 82-10(3), (4), 82-160 and 960-265 of ITAA 1997). The remainder of the taxable component – the employment termination remainder ("ETR") – being an amount of $100,880 (derived from subtracting the ETP cap of $150,000 from the taxable component of the ETP of $250,880). 10 It was also common ground that the taxpayer's amended taxable income for the year of income was comprised of the following classes of assessable income and was calculated after the allowance of the following deductions: Assessable Income (2010 Income Year) $ ETP Taxable Component 250,880.00 Gross Interest 3,252.00 Net Foreign Pension or Annuity less UPP 1,862.00 Deductions (2010 Income Year) Work related car expenses (592.00) Work related travel expenses (339.00) Other work related expenses (5,134.00) Cost of managing tax affairs (1,223.00) Non-primary production losses (carried forward from earlier years) (173,445.00) Taxable income $75,261.00 11 The taxpayer recorded tax offsets for the year of income of: Spouse, child housekeeper offset 1,501.00 Medical expenses offset available 509.00 12 The taxpayer calculated his tax liability as follows: ETP Interest Supplementary ETR Cap Amount Income Assessable Income $ 150,000 3,252 1,862 100,880 Deductions $ 79,853 - - 100,880 Taxable income $ 70,147 3,252 1,862 Nil According to the taxpayer, the amount of $70,147.00, while ordinary income, was subject to the maximum tax rate of 15%, pursuant to s 82-10(3) of ITAA 1997. The $5,114 (comprising the interest income and supplementary income) was to be taxed at the relevant marginal tax rates; as this was below the $6,000 tax free threshold, he should not incur tax on this amount. Therefore the ETP cap amount should incur a total tax liability of $10,522.05 (15% of $70,147). By then allowing the tax offsets at [11] above, the total tax liability of the taxpayer (excluding the Medicare Levy) was $8,512.05. 13 The Commissioner calculated the taxpayer's liability as follows: ETP Interest Supplementary ETR Cap Amount Income Assessable Income $ 150,000 3,252 1,862 100,880 Deductions $ 150,000 3,252 1,862 25,619 Taxable income $ Nil Nil Nil 75,261 The Commissioner contended that the extent of any losses were to be determined first by setting all deductions against all income other than the ETR. Once that was completed, a taxable loss could be used to reduce the ETR before the 45% rate mandated by ITRA Sch 7 Pt I, 1(aa) was to be applied. The Commissioner's calculations resulted in a tax liability (before tax offsets) of $33,867.45 (being $75,261 x 45%) and a total tax liability (excluding the Medicare Levy) of $31,857.45. 14 The Tribunal took the view that the Commissioner's approach led to a "perverse outcome which does not seem to be supported by the legislation" (Reasons ("R") [34]) and therefore favoured the taxpayer's approach of first setting deductions against the ETR, with any remaining deductions then to be set off against all other classes of assessable income. 15 To determine the correct method for calculating the tax payable in respect of the taxable component of the ETP, the Tribunal undertook the task of construing what it described as the "confusingly drafted" and "largely incomprehensible" provisions: (R [33] and [34]). The Tribunal emphasised the benefit of the 15% maximum tax rate applicable to the ETP cap amount provided in s 82-10(3), which it observed would be largely eroded if the Commissioner's approach was adopted. The Tribunal also emphasised the necessity for taxation legislation to be "drafted carefully and with as much precision as is reasonably possible" (R [35]), to ensure that the application of a tax "does not involve the imposition of liability in an arbitrary or capricious manner" (R [36]: referring to the joint judgement in MacCormick v Commissioner of Taxation (1984) 158 CLR 622, 640). This allowed the Tribunal to conclude (R [34]): Had the legislature intended such an outcome they could have used more direct and unambiguous language to the effect that in circumstances where there is both an ETP cap amount and an ETR within assessable income, all deductions must first be taken against the ETP cap amount. The legislature chose not to use language of that nature. 16 In the Tribunal's view, if the words of the ITRA are to establish a priority rule for deductions, the legislation must be drafted in a "clearer, more direct way" to avoid arbitrary allocations by the Commissioner (R [37]). The Tribunal concluded that the Commissioner should, "in accordance with normal administrative practices adopted by [him], allow the most favourable allocation of deductions" (R [38]). The Tribunal remitted the matter to the Commissioner to recalculate the tax payable in accordance with the finding that the deductions are to be first set against the ETR with the balance of the deductions set against the ETP cap amount. Consideration and Analysis 17 An appeal to this Court from a decision of the Tribunal is limited by s 44(1) of the AAT Act to questions of law. The Commissioner's submissions in this Court were crafted around what were said to be five questions of law. The first four grounds of appeal concern the proper statutory construction and application of the relevant legislation. The fifth ground of appeal concerns whether or not there was any evidence from which the Tribunal could make its finding that there were "normal administrative practices" adopted by the Commissioner (R [38]). Grounds 1 – 4 18 The High Court has emphasised on a number of recent occasions the importance of commencing the "task of statutory construction…with a consideration of the text itself" (Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27, at [47] per Hayne, Heydon, Crennan and Kiefel JJ; see also Commissioner of Taxation v Consolidated Media Ltd (2012) 293 ALR 257 at [39]. According to the Court, where the text is clear, such an approach is "the surest guide to legislative intention" (Alcan (NT) Alumina at [47]). 19 The definition of ETR in s 3(1) of the ITRA has two quantitative limbs. The first quantitative limb is embodied in paras (a) and (b) of the definition: the amount that is included is assessable income under a maximum tax rate provision in Div 82 of the ITAA 1997 (para (a)) that does not give rise to an entitlement to tax offset under that maximum tax rate provision (para (b)). In the present case, para (a) is $250,880 and para (b) is $150,000 so that the excess is $100,880. 20 However, the second quantitative limb, embodied in the words "so much of the taxable income", places a cap or ceiling on the amount that can be ETR and that cap or ceiling is the taxable income. The ETR cannot be greater than the taxable income which, in the present case, is $75,261. 21 Thus, where as here, the excess of the amount of para (a) over the amount of para (b) ($100,880) is greater than the taxable income ($75,261), the ETR is the taxable income. 22 The allocation of deductions against different classes of assessable income does not enter into the equation because such deductions have already been taken into account in calculating taxable income. 23 Contrary to the taxpayer's calculations in [12] above, only if his taxable income was zero, would his ETR be zero. 24 The Tribunal's error was that while it referred to the definition of ETR in s 3(1) of the ITRA, it did not consider its text. In doing so, it failed to appreciate the second quantitative limb in the definition. 25 So construed, there is no lack of clarity in the language used in the provisions falling within the relevant statutory context. On the contrary, such provisions are clear and unambiguous. They certainly do not require some undefined allocation of deductions against different classes of assessable income; such deductions have already been taken into account in calculating the taxable income. Conclusion 26 It follows that the Commissioner's calculation of the tax payable by the taxpayer is correct and the appeal must be allowed. 27 In the circumstances, it is unnecessary to consider the fifth ground of appeal. 28 The Commissioner has agreed to pay the taxpayer's costs of the appeal. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 20 March 2013