Reseck v Commissioner of Taxation

Reseck v Commissioner of Taxation - [1975] HCA 38 - HCA 1975 case summary — Zoe

[15]

The view has been expressed that s. 26(e) does not bring into charge any receipt which is not income according to general concepts: Hayes v. Federal Commissioner of Taxation [1] ; Scott v. Federal Commissioner of Taxation [2] . Whether or not such a statement is correct in relation to s. 26(e) it would not be true in respect of s. 26(d). That paragraph includes some receipts which would otherwise be capital. For example, a lump sum paid as compensation for the termination of the taxpayer's employment will, generally speaking, be of a capital nature (Bennett v. Federal Commissioner of Taxation [3] ; Scott v. Federal Commissioner of Taxation [4] ) but such a sum will fall within s. 26(d). It is therefore clear that s. 26(d) includes some receipts that would not be income according 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 "of the capital amount" is said to bring about that result. However, the words "any allowance, gratuity or compensation in consequence of retirement from, or the termination of, any office or employment" are apt to include receipts that constitute income within ordinary usages and concepts, and it is apparent from the grammatical arrangement of s. 26(d) that the words "of the capital amount" are used not to describe the nature of the allowance, gratuity or compensation, but to fix the amount that is to be included in the assessable income. The allowance, although it must be paid in a lump sum to come within s. 26(d), may have been fixed at a rate payable in respect of a specified period - for example, at so much for every week worked. The words "of the capital amount" are in my opinion intended to make it clear that the percentage is to be calculated not according to the rate of the allowance, but according to its capitalized 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 income or of a capital nature. The legislative history of the provision, to which we were referred, throws no light on its meaning and for that reason I do not think it necessary to discuss it in detail.

[17]

Where a receipt answers the description contained in s. 26(d) only five per cent of the capital amount is included in the assessable income; the whole amount is not so included, notwithstanding that the receipt is of an income nature. If s. 25(1) continued to apply to a receipt which, although ordinarily regarded as income, fell within s. 26(d), the result would be that the whole of the amount would be brought into the assessable income by s. 25(1), and in addition five per cent of the amount would be included by 26(d). The legislature cannot possibly have intended such a result. Where the same receipt would come within the descriptions contained in both sections the specific provisions of the later section must have been intended to prevail over the general provisions of the earlier. This view is supported by the terms of the proviso to s. 26(e). Any receipt that comes within s. 26(d) would also have come within s. 26(e) were it not for the proviso to the latter paragraph. The full amount of a receipt coming within s. 26(e) is included in the assessable income and the proviso must have been designed to ensure that only five per cent of the amount of any receipt coming within s. 26(d) should be so included. I would therefore adopt as correct the statement as to the effect of s. 26(d) made by Professor Ryan in his Manual of the Law of Income Tax in Australia, 3rd ed. (1972), at p. 54: "It [s. 26(d)] thus has both a charging and a liberating effect; it brings into charge a percentage of the amount paid though it would otherwise not be taxable at all, and it includes only a fractional amount of a sum which would otherwise be assessable in full." For practical purposes it is unnecessary to consider whether a particular receipt which answers the description contained in s. 26(d) is income in accordance with ordinary concepts. Since the receipt falls within s. 26(d) only five per cent of it is included in the assessable income whether or not such receipt would in accordance with ordinary concepts be regarded as of an income nature.

[19]

Each of the two amounts in question in the present case was paid in a lump sum. In my opinion each of those amounts was an allowance within the meaning of s. 26(d). It was an additional reward allowed to the taxpayer for the services that he had performed (cf. Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation [5] ). The question that then arises is whether the allowance was paid in consequence of the termination of the employment of the taxpayer. Within the ordinary meaning of the words a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination. In the present case the payment did follow as a result of the termination of the taxpayer's services. It is not in my opinion necessary that the termination of the services should be the dominant cause of the payment. The reasons for holding that purpose in s. 26(a) refers to the main or dominant purpose actuating the acquisition of the property have no place in the different context of s. 26(d). For example, a retiring allowance is plainly intended to be within s. 26(d) but such an allowance is made in consequence of the employee's past service as well as in consequence of his retirement and in many cases it could not be said that the retirement rather than the service was the substantial cause of the payment or that the former cause predominated over the latter. Moreover, in many cases allowances, gratuities or compensation are paid in consequence of the provisions of an industrial agreement or of the industrial law but the words appearing immediately before the proviso to par. (d) of s. 26 show that the paragraph will nevertheless be applicable. In the present case the allowance was paid in consequence of a number of circumstances, including the fact that the taxpayer's service had been satisfactory and that the industrial agreements provided for the payment, but it was none the less paid in consequence of the termination of the taxpayer's employment. It follows that the receipts in the present case (except $73 as to which the appellant did not desire to submit an argument) came within the provisions of s. 26(d), with the result that five per cent of the amount only should have been included in the assessable income.

[39]

I have no doubt that the amounts were allowances to the appellant, that they were paid in lump sums and that they were paid in consequence of the termination of his employment. It was submitted that the words "in consequence of" import a concept that the termination of the employment was the dominant cause of the payment. This cannot be so. A consequence in this context is not the same as a result. It does not import causation but rather a "following on". In the Supreme Court the view was taken that the amounts, computed as they were on a weekly basis, were not allowances because they were paid under a binding agreement so to pay them. I do not think that the word "allowance" can be given a meaning which excludes payments by agreement, particularly when s. 26(d) refers specifically to payments of this kind. The substantial question is whether they were capital amounts within the meaning of s. 26(d). It is clear that the amounts were income in the ordinary sense and would fall within s. 25(1) unless they were excluded from the operation of s. 25 by the express provisions of s. 26. It has been submitted that s. 26(d) does not apply to every amount which is paid in a lump sum in consequence of retirement from or termination of an office or employment but only to such amounts as can be described as capital and not income amounts. It is well established that an amount paid in a lump sum in consequence of retirement from or termination of an office or employment is income of that office or employment if it is deferred remuneration: Henry v. Foster [10] ; Dewhurst v. Hunter [11] . In the latter case, the decision of the Court of Appeal was reversed by the House of Lords on one of the three cases before the Court of Appeal in the former case. But the principle as I have stated it was unaffected. The test applied in those decisions was in substance whether the amount received in a lump sum was part of the consideration for the services rendered in the office or employment. If it was, then it was income although payment was deferred. If it was not, then it was a capital amount.

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