Determination
127 Whether a payment is an ETP is to be determined by the application of s 82-130 of the ITAA97. The relevant parts of that section are set out above, but sub-s (1) can be repeated here for convenience, as follows:
82-130 What is an employment termination payment?
(1) A payment is an employment termination payment if:
(a) it is received by you:
(i) in consequence of the termination of your employment; or
(ii) after another person's death, in consequence of the termination of the other person's employment; and
(b) it is received no later than 12 months after that termination (but see subsection (4)); and
(c) it is not a payment mentioned in section 82-135.
128 In determining whether the $505,500 payment in this case was received "in consequence of" the termination of Mr Stark's employment, the Tribunal relied upon the decision of Goldberg J in Le Grand, as explained above. The Commissioner also relied on that decision in refuting the second ground of appeal. Given the reliance placed on it, it is useful to address that case in some detail here.
129 Le Grand concerned the application of s 8 of the Termination Payments Tax (Assessment and Collection) Act 1997 (Cth), which provided that termination payments surcharge was payable on any termination payment made to a taxpayer. The term "termination payment" was defined in s 7(2) of that Act by reference to the concept of an "eligible termination payment" under the ITAA36. Section 27A(1) of the ITAA36 defined "eligible termination payment" to mean, relevantly, "any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer". This statutory language is, on its face, similar to that now appearing in s 82-130(1)(a)(i) of the ITAA97.
130 Mr Le Grand accepted an offer of compromise of $547,959.54 in respect of claims brought by him against his former employer, Business Computers of Australia Pty Ltd (BCA), and its chairman, in relation to the termination of his employment. The question before the Court was whether the amount received by Mr Le Grand was, either in whole or in part, an "eligible termination payment" under the applicable legislation.
131 Mr Le Grand claimed that his employment, which was to be for a minimum period of two years, had wrongly been terminated. He claimed a large sum in damages, comprising base remuneration, a share in profits due to him under his employment agreement with BCA, and compensation for distress, humiliation and loss of reputation. He commenced proceedings in the Supreme Court of Victoria, where he raised a further cause of action to the effect that he had been induced to cease his prior employment and enter into the employment agreement with BCA and not pursue the opportunity for alternative employment on the basis of representations made by the chairman of BCA, which were untrue. In connection with these matters, he sought damages for misleading or deceptive conduct pursuant to s 52 of the Trade Practices Act 1974 (Cth) or s 11 of the Fair Trading Act 1985 (Vic). He alleged that he had suffered loss and damage as a result of such conduct, comprising the loss of the benefit of his employment with BCA or, alternatively, the loss of expected earnings from continued employment with his former employer, or the loss of expected earnings from the alternative employment which he had not pursued.
132 After filing their defence, the defendants made an offer of compromise to Mr Le Grand - being $547,959.54 inclusive of interest plus costs. The offer did not indicate how the amount was calculated. Mr Le Grand subsequently accepted the offer, and the amount of $547,959.54 was paid to him on 8 July 1998. In his income tax return for the year ended 30 June 1999, he disclosed the payment (rounded to the nearest whole dollar, $547,960) as income on the basis that $105,588 was an eligible termination payment and the remaining $442,372 was an "excessive component". On 15 August 2000, the Commissioner issued a termination payments tax assessment notice in which he assessed termination payments of $82,194, calculated at a rate of 15 percent on $547,960. Mr Le Grand accepted that he was liable to pay income tax on the excessive component of $442,372, but lodged a notice of objection against the notice of assessment of termination payments tax. The objection contended that the amount of $442,372 did not meet the definition of a termination payment liable to surcharge and that the $547,960 payment was not made in consequence of the termination of his employment and was not an eligible termination payment.
133 The central issue before Goldberg J was whether the $547,960 payment was made "in consequence of the termination of" Mr Le Grand's employment either in whole or in part.
134 In considering that issue, his Honour referred to the decision of the High Court in Reseck v Commissioner of Taxation (Cth) (1975) 133 CLR 45 (Reseck), which concerned the application of s 26(d) of the ITAA36. That section, as it was at the time, relevantly read:
26. The assessable income of a taxpayer shall include -
…
(d) five per centum of the capital amount of any allowance, gratuity or compensation where that amount is paid in a lump sum in consequence of retirement from, or the termination of, any office or employment, and whether so paid voluntarily, by agreement or by compulsion of law …
135 In construing this provision, Gibbs J (with whom Stephen J agreed in separate reasons) observed (at 51) that "a sum is paid in consequence of the termination of employment when the payment follows as an effect or result of the termination". His Honour further observed that it is not necessary that the termination of the taxpayer's services should be the dominant cause of the payment. Accordingly, if a payment was made in consequence of a number of circumstances, only one of which was the termination of the taxpayer's employment, then it would nonetheless fall within the scope of the section. The reasons of Jacobs J were generally to the same effect, except that his Honour also stated (at 56) that "[a] consequence in this context is not the same as a result" because a consequence "does not import causation but rather a 'following on'".
136 Justice Goldberg then examined the judgments delivered by the members of the Full Court in McIntosh v Federal Commissioner of Taxation (1979) 25 ALR 557 (McIntosh), which concerned whether payments made from a provident fund established by a bank for the payment of benefits to its officers upon their retirement were termination payments. The relevant statutory provision was once again s 26(d) of the ITAA36. Justice Brennan commenced his substantive reasons by discussing the judgment of Gibbs J in Reseck. After setting out a passage from that judgment, he said (at 560) that "[t]o say that a payment 'follows as an effect or result of the termination' imports causation as the relevant nexus between the termination and the payment, but it is clear that termination need not be the dominant cause of the payment". He then set out a passage from the judgment of Jacobs J in the same case and said:
His Honour denies the necessity to show that retirement is the dominant cause, but he does not allow a temporal sequence alone to suffice as the nexus. Though the language of causation often contains the seeds of confusion, I apprehend his Honour to hold the required nexus to be (at least) that the payment would not have been made but for the retirement.
137 Justice Toohey also considered the judgments of Gibbs and Jacobs JJ in Reseck. His Honour found (at 564) that, in the case before him, the connection between the taxpayer's retirement and the payment from the provident fund was "not simply temporal". Instead, "retirement was a prerequisite to payment and in that sense there was a 'following on'" in accordance with the reasons of Jacobs J.
138 Finally, Lockhart J explained that the judgments of Gibbs and Jacobs JJ did not involve different constructions of the phrase "in consequence of". His Honour stated (at 571) that he did not understand Gibbs J to be saying that the phrase necessarily spoke only of causation, but instead:
… his Honour was saying that the phrase includes the case where retirement or termination is a cause of the payment in question; but he was not excluding from the ambit of the phrase, payments which, although not following as a matter of causation from the termination of employment, nevertheless followed on the termination of employment and had connection therewith.
139 Likewise, in respect of the judgment of Jacobs J, he said:
In my opinion his Honour did not use the words "following on" as referring merely to a temporal progression of events. Rather his Honour had in mind a connection between the retirement from or the termination of employment and the payment in question as well as a temporal progression of events. I do not read the words of his Honour as excluding a connection that is causal in character; rather his Honour enunciated a wider test than one merely of causation and expressed it as a "following on"; a concept that may in an appropriate case include a relevant causal connection.
140 After reviewing these authorities, Goldberg J turned to consider Mr Le Grand's submission that the $547,960 payment was not made in consequence of the termination of his employment, but instead to compromise the proceeding brought against BCA and its chairman. His Honour rejected the approach suggested by this submission, observing (at 63 [33]) that the issue was not to be determined simply by identifying the "occasion" for the payment. The upshot of the judgments in Reseck and McIntosh was that a payment would be made "in consequence" of a particular circumstance when it followed on from, and was an effect or result, in a causal sense, of that circumstance. His Honour added (at 63 - 64 [35] - [36]):
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.
36. Although the claims in the proceeding for misleading and deceptive conduct related to representations which had occurred prior to the termination of the employment and, indeed, prior to the making of the employment agreement and are conceptually separate causes of action, the claim that the representations were untrue was, in part, based upon the fact that the applicant's employment was terminated on 23 February 1998 and that by reason of that termination he was unable to receive his remuneration package and had suffered loss and damage. Thus the fact of the termination of the applicant's employment was interwoven, and intertwined, with the claims for misleading and deceptive conduct. I do not consider that the claims for misleading and deceptive conduct and the settlement of those claims insofar as they were settled by the acceptance of the offer of compromise broke the causal relationship which existed between the termination of the applicant's employment and the payment of the offer of the compromised amount. The fact that the offer was made by both defendants in the proceeding and not just the employer does not detract from the characterisation of the payment that it was related to, and was an effect or follow on from, the termination of the applicant's employment.
141 Thereafter, his Honour indicated (at 64 [38]) his satisfaction that the $547,960 payment made as a consequence of the acceptance of the offer of compromise was a payment made "in consequence of" the termination of Mr Le Grand's employment and was therefore an eligible termination payment.
142 Parts of the paragraphs from Le Grand quoted above were referred to and adopted by the primary judge in Dibb v Federal Commissioner of Taxation (2003) 53 ATR 290 at 295 - 296 [22] - [23]. Those passages of the primary judgment were, in turn, approved by the Full Court in Dibb at 397 [16]. The approach in Le Grand can accordingly be said to have received the imprimatur of the Full Court. It has otherwise been cited and applied on multiple occasions in subsequent decisions of this Court: see, eg, Commissioner of Taxation v Pitcher (2005) 146 FCR 344, 356 - 357 [40] - [45]; Romanin v Federal Commissioner of Taxation (2008) 73 ATR 760, 768 [43]; Bond v Federal Commissioner of Taxation (2015) 101 ATR 85, 95 - 96 [36] - [37].
143 A similar approach must necessarily be taken here, such that the $505,500 payment received by Mr Stark is properly described as "following on" from, and representing an effect or result of, the termination of his employment with IBA. As the Tribunal recognised, there are several factors that justify this conclusion.
144 First, Mr Stark commenced proceedings in the Supreme Court of Queensland seeking relief for, inter alia, breach of the terms of his employment agreement. It is evident that he claimed that his contract was for longer than an initial period of two years, and part of his relief was founded upon the allegation that his employment was wrongfully terminated before the expiration of two years, such that he had lost the benefit of the further indefinite employment. The $505,500 payment was made under the Deed for the purpose of (amongst other things) resolving that claim, which arose as an immediate result of the termination of his employment. It follows that the payment was made "in consequence of" the termination of his employment. The authorities make abundantly clear that the termination of his employment need not be the dominant cause of the payment.
145 Secondly, the claim for damages for misleading or deceptive conduct also arose as a consequence of the termination of Mr Stark's employment. But for the termination, Mr Stark would not have sustained any damage as a result of the allegedly deceptive statements, and no statutory claim would have arisen. In this way, the termination was the reason for the crystallisation of the claim. Indeed, the termination could be said to be interwoven with the claim insofar as it represented a fundamental reason for which the representations in question could even be described as misleading or deceptive. It follows that this part of Mr Stark's claim also arose "in consequence of" the termination of his employment: without the termination, the claim would not have arisen and, in that sense, the payment "followed on" from the termination.
146 There is no factual feature of this case that renders inapplicable the reasoning of Goldberg J in Le Grand, the Full Court in McIntosh, and the High Court in Reseck. Necessarily, the conclusions reached in those cases are pertinent to the present.
147 Mr Stark nevertheless sought to escape the effect of Le Grand, and the applicability of s 82-130(1)(a)(i), in a number of ways.
148 First, he repeated the submission that he had made before the Tribunal, to the effect that his case was distinguishable from Le Grand because, there, "the only settlement offer was calculated in relation to the employee's earnings" whereas, here, there had been "9 increasing offers, each a rounded amount, none of which related to [his] earnings". That submission was rejected by the Tribunal on multiple grounds, as set out above, and no good reason has been offered to doubt the correctness of the Tribunal's conclusion. The fact that the offers in this case were rounded amounts, without any discernible mathematical relationship to Mr Stark's earnings, is strictly irrelevant. What matters is that:
(a) Mr Stark commenced proceedings in the Supreme Court of Queensland, wherein he made a number of claims that he could not have made but for the termination of his employment with IBA;
(b) those claims were released by the Deed of Settlement, which was executed at the conclusion of the mediation between Mr Stark and IBA, in exchange for the payment of $505,500 (as part of a larger settlement amount);
(c) in that way, there was a discernible link between the termination of his employment, his claims, the settlement of his claims, and the payment of $505,500; and
(d) that link was sufficiently clear as to permit it now to be said that the payment of $505,500 "followed on" from the termination.
149 Secondly, Mr Stark contended in his written submissions that another point of distinction was that he "might have sued IBA even if there was no offer from GPS". With respect, this does not make a great deal of sense, but it may be that Mr Stark has made an error in the phrasing of this contention. He elaborated upon it in another part of his written submissions as follows:
If after accepting IBA's 11 October 2000 offer of employment, and my 11 October 2000 consequential withdrawal from GPS's offer of employment, if IBA then withdrew its offer of employment before I started working for it, I would not have been employed by IBA, but would still have suffered destruction of my earning capacity, proved by me not being able to secure other employment before I was nearly 72 years old. IBA would still have been sued for the personal injury it caused me, despite not being employed by IBA. Under that hypothesis there would be no nexus to my employment by IBA, and the proceeds of such a claim against IBA would have still been tax-exempt under s.118-37(1)(a).
150 The point that he seemed to be making here is that there was no nexus between the termination of his employment and the $505,500 payment because he would have brought the misleading or deceptive conduct claim, and, presumably, received the same payment, even if IBA had withdrawn its offer of employment. In other words, because he could hypothetically have received the payment without his employment having been terminated, the payment was not made in consequence of the termination. If that is a fair summary of the submission, then it cannot be sustained. It improperly ignores the reality of the situation. The application of s 82-130(1)(a)(i) is not to be decided by hypotheticals of this nature; it operates, here, on the reality that Mr Stark's employment was terminated, his claims in the Supreme Court followed on from that termination, those claims were released in exchange for payment, and so that payment can be said to have been made "in consequence of" the termination.
151 Thirdly, Mr Stark contended that:
Starting at paragraph 28 Goldberg J quotes other judgements and concludes that "retirement was a prerequisite to payment" for the payment to be an ETP. In my case I did not retire, but rather my employment was terminated before conclusion of the initial two years …
152 The quote in this passage is from the judgment of Toohey J in McIntosh, which was extracted in the reasons of Goldberg J in Le Grand. It may be recalled that Toohey J was, in McIntosh, dealing with s 26(d) of the ITAA36, which operates where an amount is paid "in consequence of retirement from, or the termination of, any office or employment". It is for that reason that his Honour mentioned the concept of retirement. When the relevant part of Le Grand is read in context, it is clear that Goldberg J was not drawing from the judgment of Toohey J any proposition that a payment would only be an ETP if it resulted from retirement. The point raised by Mr Stark proceeds from a misreading of the relevant passage.
153 Finally, Mr Stark focused on the fact that his claim for misleading or deceptive conduct sought the money that he would have earned had he not been deceived. He also repeated the submission that he had made before the Tribunal, to the effect that he had already been "paid out" under his employment contract, such that the $505,500 payment could only be, in his own words, "to cause [him] to end my prosecution of IBA for its misleading and deceptive conduct". Those submissions do not detract from the conclusion that it was the termination of his employment that crystallised his cause of action for misleading or deceptive conduct - thereby establishing a causal nexus between the termination and the $505,500 payment. Quite simply, were it not for the fact that IBA terminated his employment, his claim would not have arisen and the payment would not have been made.
154 For the foregoing reasons, it is sufficiently clear that the $505,500 payment was made in consequence of the termination of his employment. The payment accordingly falls within the scope of s 82-130(1)(a)(i), and the Tribunal was correct so to conclude. The second ground of Mr Stark's appeal must fail. As previously stated, the second question of law appearing in the Notice of Appeal proceeds on an incorrect premise. It is unnecessary to answer.
155 As explained above, the requirement in s 82-130(1)(b) was waived by reason of the Commissioner's determination under s 82-130(5). Accordingly, the only requirement left to be satisfied in order for the payment to be characterised as an ETP is that appearing in s 82-130(1)(c). This final requirement is the subject of the third ground of appeal, addressed below.