FEDERAL COURT OF AUSTRALIA

TAXATION & REVENUE - assessment of income - whether payment is an “eligible termination payment” (‘ETP’) for the purposes of s 27A(1) of the Income Tax Assessment Act 1936 (Cth) (‘the ITAA’) - sum paid to member of superannuation fund for total and permanent disablement brought about by one of a number of possible causes - whether payment falls within the “non-inclusion” paragraph of s 27A(1)(n) so as to preclude the payment from being an ETP - meaning of “consideration” in s 27A(1)(n) of the ITAA - payment not “for, or in respect of, personal injury” to the taxpayer - appeal dismissed.

WORDS & PHRASES - “eligible termination payment” - “consideration” of a capital nature “for, or in respect of, personal injury”.

Income Tax Assessment Act 1936 (Cth), s 27A(1)(b), 27A(1)(n), 27G

Minister for Resources v Dover Fisheries (1993) 116 ALR 54

Lock v Westpac Banking Corporation (1991) 25 NSWLR 593

Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589

Workers’ Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642

LYNETTE C SCULLY v THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA

VG 760 OF 1995

SPENDER J

MELBOURNE

22 SEPTEMBER 1997

THE COURT ORDERS THAT:

The application be dismissed with costs, to be taxed if not agreed.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

This is an application by Lynette Scully under the Taxation Administration Act 1953 (Cth), being an appeal by her against the appealable objection decision constituted by the disallowance on 10 July 1995 of her objection dated 9 May 1995 to an assessment which issued on 27 October 1994.  At issue is whether the sum of $19,897.00 should be excised from the assessable income of the applicant.  The Commissioner of Taxation (‘the Commissioner’) included that sum as an eligible termination payment for the purposes of the Income Tax Assessment Act 1936 (Cth) (‘the ITAA’).

On 25 September 1989 the applicant commenced employment with the Royal Automobile Club of Victoria (‘RACV’) and became a member of the RACV Superannuation Fund (‘the Fund’).

The RACV Superannuation Fund Deed (‘the deed’) gave an entitlement to the applicant to receive a payment out of the fund in the event of total and permanent disablement caused, inter alia, by personal injury.

On 10 July 1992 the applicant was involved in a serious car accident.  She suffered a head injury sustaining severe structural injury to her brain with diffuse axonal injury of moderate severity and frontal lobe damage.  The injury rendered the applicant permanently incapable of undertaking any form of remunerative work.  In about August 1993, a total and permanent disablement claim was lodged on behalf of the applicant with the trustees of the Fund.  The trustees approved the applicant’s claim on 4 November 1993, subject to the applicant resigning from her employment with the RACV.

On or about 6 December 1993 the trustees of the Fund paid the applicant the sum of $164,957.91, which comprised $161,990.36 calculated in accordance with cl 2.4.1 of the trust deed and $2,967.55 calculated in accordance with cl 3.5.1(c)(i) of the deed.

The relevant clauses of the deed provided as follows:

“2.4.1  Total and Permanent Disablement.  Subject to Clauses 2.4.2 and 2.4.3 in the event of the termination of Employment of a Member on the grounds of Total and Permanent Disablement, the Trustees shall pay to the Member a lump sum equal to seven (7) times the Member’s Final Average Salary reduced in the proportion that his Potential Benefit Period bears to thirty (30) years.

2.4.2    Pension Option.  A Member may elect, as at the termination of his Employment on the grounds of Total and Permanent Disablement to receive in lieu of the whole or part of the lump [sum] to which he would have been entitled pursuant to Clause 2.4.1 -

(a)        where the Member elects to receive the whole of the lump sum as a Pension, a Pension equal to 75% of the Member’s Final Average Salary reduced in the proportion that his Potential Benefit Period bears to thirty years; or

(b)        where the Member elects to receive part of the lump sum as a Pension, a Pension equal to a pro-rated amount of the Pension described in paragraph (a) above.

2.4.3    Alternative Pension.  With the agreement of the Trustees a person entitled to receive a Pension pursuant to Clause 2.4.2 may elect to receive an alternative Pension of equivalent value as determined by the Trustees with the advice of the Actuary.

…

3.5.1    Retirement, Death or Total and Permanent Disablement.    If a Member -

(a)        retires from the employ of the Employer and from all other Gainful Work on or after attaining age 55;

(b)        dies while in the employ of the Employer; or

(c)        becomes Totally and Permanently Disabled while in the employ of the Employer,

            there shall be payable to or in respect of the Member from the Fund a lump sum benefit equal to the sum of -

(i)         the Member’s Total Account Balance as at the date the Member leaves the employ of the Employer; and

(ii)        the proceeds of any Part 3 Insurance effected in respect of the Member and payable in the event of death or Total and Permanent Disablement (as the case may be),

            PROVIDED THAT, in the case of Total and Permanent Disablement, if the Member has not retired from all Gainful Work because of permanent incapacity or permanent invalidity in terms of any applicable requirement of a Relevant Law regarding preservation of benefits, then that part of the benefit payable hereunder which must be preserved in order to comply with such a requirement shall, unless transferred out of the Fund pursuant to the Deed, be retained in the Member’s Preserved Account until the Deferral Date.”

Clause 1.1 defines “Disablement” as follows:

“‘Disablement’ means in respect of a Member his disablement caused through bodily injury, physical or mental illness, disease, infirmity or accident (none of which has been incurred or inflicted for the purposes of obtaining a benefit from the Fund) which the Trustees, after obtaining the advice of a legally qualified and registered medical practitioner, determine will render the Member temporarily or permanently incapable of performing his duties to his Employer, and occasions the termination of his Employment prior to the Normal Retirement Age.”

Clause 1.1 defines “Total and Permanent Disablement” as follows:

“‘Total and Permanent Disablement’ means in respect of a Member his Disablement to a degree that, in the opinion of the Trustees, after obtaining the advice of a legally qualified and registered medical practitioner, the Member is unlikely ever to be able to undertake any form of remunerative work.”

The question on this application is whether the payment of the sum of $164,957.91 is an “eligible termination payment” as defined in s 27A of the ITAA.

Section 27A(1) then relevantly provided:

“‘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;

...

(b)        any payment made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund, not being a payment -

(i)         that is income of the taxpayer;

(ii)        to which paragraph (d), (da), (e) or (ga) applies; or

(iii)       that is a benefit to which subsection 26AF(1), 26AFA(1) or 26AFB(2) or (3) applies,

            reduced by any amount that has been or will be included in the assessable income of the taxpayer … in respect of the transfer by the taxpayer of a right to receive the payment or any part of the payment;

...

but does not include -

...

(n)        consideration of a capital nature for, or in respect of, personal injury to the taxpayer, to the extent to which the amount or value of the consideration is, in the opinion of the Commissioner, reasonable having regard to the nature of the personal injury and its likely effect on the capacity of the taxpayer to derive income from personal exertion;”

The distinction drawn, in paragraphs (a) and (b) of s 27A, between payments made other than from a superannuation fund and payments made from a superannuation fund has its justification in that different rates of taxation apply to each of those categories of eligible termination payments.

Section 27G is headed “INVALIDITY PAYMENTS” and provided:

“Where -

(a)       an eligible termination payment is made in relation to a taxpayer in consequence of the termination of any employment of the taxpayer; and

(b)       the termination of the employment of the taxpayer occurred -

(i)         by reason of the taxpayer’s physical or mental incapacity to engage in that employment; 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 AB, where -

                                                                                    C

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.”

It is not in dispute that the payment in question falls within the description of (b) of the definition of “eligible termination payment”, in s 27A.  Further, it is not disputed that the payment is not a payment to which (i), (ii) or (iii) of paragraph (b) of that definition apply.

The applicant contends that notwithstanding that the payment would fall within the definition (b) of “eligible termination payment”, it is not an eligible termination payment because it falls within the exclusion contained in paragraph (n) of the definition.

It is accepted by the Commissioner that if the payment satisfies the description that it was “consideration of a capital nature for, or in respect of, personal injury to the taxpayer”, then the remainder of paragraph (n) is satisfied.

The drafting of the definition of “eligible termination payment” is quixotic.  The applicant accepts that the payment is within (b), but says it is also comprehended by the definition in (n).  The Commissioner says that if a payment is within (b), then it is irrelevant if the payment is also comprehended by (n).  In any event, it is submitted by the Commissioner that the payment does not fall within paragraph (n).

The proper approach to resolving the drafting difficulties in the present case is given by the observations of Gummow J (in a quite different statutory context) in Minister for Resources v Dover Fisheries (1993) 116 ALR 54 at 63:

“In dealing with an apparent conundrum such as that presented by paras (a) in O 79 and O 80, the court should strive to avoid a capricious or irrational result and seek to give each provision a field of operation.  In AMP Inc v Utilux Pty Ltd [1972] RPC 103 at 109, Lord Reid said that, it being improbable that the framers of legislation could have intended to insert a provision which has virtually no practical effect, one should look to see whether any other meaning produces a more reasonable result.  See also Cooper Brookes (Wollongong) Pty Ltd v FCT (1981) 147 CLR 297 at 321; 35 ALR 151, per Mason and Wilson JJ, and Occidental Life Insurance Co of Australia Ltd v Life Style Planners Pty Ltd (1992) 38 FCR 444 at 449-450; 111 ALR 261, per Lockhart J.”

The submissions by the parties indicate the first difficulty with the interpretation of the definition of  “eligible termination payment”:  namely, if a particular payment is within (b) of the definition and also within (n) of the definition, what is the consequence of an “eligible termination payment” being defined as “meaning” a particular category of payments, but then continues to say “but does not include” a particular category of payment.  Of course, if a payment in category (n) is not a payment under category (b), then no difficulty arises:  the two payments are in discrete categories and the “non-inclusion” character of the payment means that it is not an “eligible termination payment”.  Similarly, if the payment is not within (n), but is within (b), it is an “eligible termination payment”.

The matter is unnecessarily complicated by the manner of drafting adopted, but it seems to me that where an eligible termination payment is defined to mean one of a number of specified categories but it is then provided that “it does not include” another category of payments, the manner of drafting is sensibly to be interpreted as if the words “but it does not include” were “other than”, so that if a particular payment was both a payment within (b), and a payment within (n) of the definition, it would not be an “eligible termination payment”.

In the circumstances of the present case, that interpretation gives rise to the question of whether the payment made to the applicant is “a consideration of a capital nature for, or in respect of, personal injury to the taxpayer”.

As to the first part of that definition, in my opinion, the payment presently in question is “consideration of a capital nature” as is contemplated by paragraph (n) of the definition of “eligible termination payment”.  There is no dispute that the payment is of a capital nature.

It was submitted on behalf of the Commissioner that the word “consideration” had a contractual connotation, and that a payment out of a superannuation fund to a member as an entitlement under the terms of the superannuation deed did not constitute “consideration” for the purposes of paragraph (n) of the definition of “eligible termination payment”. 

As to the submission that the rights of a member of a fund are contractual in nature, Waddell CJ in Equity said in Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 601:

“...pension plans are different in nature from traditional trusts. They are based upon a contract between the employer, the trustee, and employees pursuant to which both the employer and the employees contribute to the fund for the purpose of providing defined benefits in defined circumstances to employees.  The usual form of trusts involve the creation of a benefit by the settlor for which the beneficiary gives no consideration.  Pension schemes are created in the context of the employer / employee relationship and are part of the terms of engagement.”

His Honour referred to the comments of Warner J in Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 at 1610 and in particular to the distinction between a beneficiary to a trust who has given no consideration and members of a pension scheme.

Warner J in that case said at 1610:

“... the beneficiaries under a pension scheme such as this are not volunteers.  Their rights have contractual and commercial origins.  They are derived from the contracts of employment of the members.  The benefits provided under the scheme have been earned by the service of the members under those contracts and, where the scheme is contributory, pro tanto by their contributions.”

Browne-Wilkinson V-C in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589 at 597 said:

“As the Court of Appeal have pointed out in Mihlenstedt v Barclays Bank International Ltd [1989] IRLR 522 a pension scheme is quite different [that is, from a traditional trust].  Pension benefits are part of the consideration which an employee receives in return for the rendering of his services.”

It was submitted that the use of the word “consideration” required a link between the payment and responsibility to compensate for the injury and so would encompass a payment in settlement of a negligence action or a payment under a workers’ compensation claim.

I agree that the word “consideration” in paragraph (n) of the definition of “eligible termination payment” is apt to refer to, for instance, an award of damages for personal injury awarded by a court or a figure agreed in settlement of such a claim or for payments made pursuant to a policy of insurance against the risk of personal injury to the taxpayer.

If the payment made to the applicant is properly to be characterised as a payment “for, or in respect of personal injury...”, that payment would be no less a “consideration of a capital nature” than would the payments referred to in those examples just referred to:  the link between the payment and an obligation to compensate for the injury, (being the necessary nexus urged on behalf of the Commissioner), would equally apply.

However, in my opinion, the payment made to the applicant pursuant to the superannuation deed is not a payment “for, or in respect of, personal injury” to the applicant.  It is clear that it is not a payment for personal injury to the applicant, because the payment is for total and permanent incapacity, as defined by the superannuation deed.  The question then is, is it a payment “in respect of” personal injury to the applicant?

It has been said the words “in respect of” have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer:  Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110, at 111 per Mann CJ.  While it may be accepted that the connection connoted by the words “in respect of” is a wide one, that early description has been politely categorised as “perhaps somewhat extravagant” by Wilson and Gaudron JJ in Workers’ Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642, where their Honours said, at 646 - 647:

“It has been said, perhaps somewhat extravagantly, that the words ‘in respect of’ ‘have the widest possible meaning of any expression intended to convey some connexion or relation between the two subject matters to which the words refer’:  Trustees Executors & Agency Co Ltd v Reilly  [1941] VLR 110 at 111, cited in State Government Insurance Office (Qld) v Crittenden (1966) 117 CLR 412 at 416.  The words were cited again by Gibbs J in McDowell (1979) 144 CLR at 419, and by Mason J in State Government Insurance Office (Qld) v Rees (1979) 144 CLR 549 at 561, when his Honour added the comment:  ‘But, as with other words and expressions, the meaning to be ascribed to “in respect of” depends very much on the context in which it is found’.”

It is, I think, directly relevant to note that in Trustees Executors & Agency Co Ltd v Reilly (supra)Mann CJ held that the proceedings by a mortgagee to recover possession of a mortgaged property were proceedings “in respect of” a debt.  His Honour analysed the factual position in this way: the complainant mortgagee had to prove first, that the defendant mortgagor was his tenant, and then that the tenancy created by the mortgage and the attornment clause in the mortgage had been duly determined for non-payment of the interest due under the mortgage, (being a breach of covenant authorising the mortgagee to bring the tenancy to an end) before it could be properly said that the proceedings were “in respect of” a debt.  Mann CJ said at 111:

“... but for proof of that breach of covenant, or in other words, of non-payment of a debt due, the whole proceedings must have failed because the complainant would have failed to show that the tenancy had been duly determined by a notice to quit.  Those facts are sufficient to justify the use of the language of section 5(1) [of the Farmers Protection Act 1940], and to make it a case which could rightly be said to be a proceeding ‘in respect of a debt’ of the defendant.” 

In other words, Mann CJ held that the proceedings depended on proof of non-payment of a debt; a debt was therefore a necessary ingredient of the cause of action with the consequence that the proceeding would rightly be characterised as a proceeding “in respect of a debt” owed by the defendant mortgagor.

It is true that, in the particular circumstances of this case, the applicant suffered personal injury.  It is true further, that the personal injury resulted in injuries of such a serious consequence that she was prevented from working in any remunerative work and it is true that, as a consequence of the extent of her injuries, she became entitled to the payment for total and permanent disability under the superannuation deed.

Nonetheless in my opinion, the payment is not a payment “in respect of personal injury”.  Personal injury is simply one of a number of causes which might result in total and permanent incapacity within the terms of the superannuation deed.

The distinction I am seeking to draw is the distinction between a payment for total and permanent disability that has, in fact, been caused by personal injury but which may have been caused by any one of a number of enumerated causes, and a payment which has some necessary relationship with personal injury.  The relevant nexus in (n), namely, “consideration ... in respect of personal injury”, is necessarily one of payment and personal injury, not one which only might have had its origin in personal injury.  Payment is not necessarily linked to personal injury.

Had it been the case that payment under the superannuation deed was confined to total and permanent disability, brought about by personal injury, the payment would properly be characterised in my opinion, as a payment “in respect of personal injury” because there is a nexus between the payment and personal injury, (albeit with the further requirement that the personal injury be so serious a kind that it would prevent the person suffering the injury from engaging in any form of remunerative work).  Where however, as is the case here, the payment is made for total and permanent disablement howsoever caused, (or more precisely, suffered either through bodily injury, physical or mental illness, disease, infirmity or accident), it is not a payment in respect of personal injury and so, does not fall within paragraph (n) of the definition of  “eligible termination payment”.

There is no necessary connection between the payment and personal injury, although such a connection is a possible one.  In those circumstances, in my opinion, the payment is not a payment “ in respect of” personal injury.

The payment in question in the present case is a payment for total and permanent disability or in respect of total and permanent disability; total and permanent disability has, in fact, been brought about by a personal injury which, in fact, was of a sufficient extent as to result in the total and permanent inability to engage in remunerative work. 

In an attempt to illustrate the distinction I am making, were the applicant to have been a successful plaintiff in a Supreme Court action for damages as a result of the accident which led to her serious personal injuries, it seems to me that any damages she recovered in Supreme Court proceedings would satisfy the definition of “consideration of a capital nature for, or in respect of, personal injury” within paragraph (n) of the definition of “eligible termination payment”.  The damages claim probably, in my view, is not “for” personal injury because a large measure of it might be in respect of loss of earning capacity.  In those circumstances, there can be no doubt, however, that the damages awarded by the Supreme Court would be “in respect of” personal injury.  If, in addition to receiving an award for damages from a court in respect of the personal injury sustained in the accident, the applicant received from the trustees of this superannuation deed of which fund she was a member, the payment out of the fund for her total and permanent disability (which admittedly were caused by a personal injury to her), that payment in my opinion is not a “consideration of a capital nature for, or in respect of, personal injury” to the applicant.

My conclusion is that the payment in question is not within the “non-inclusion” contained in paragraph (n) of the definition.  It follows that, it being agreed that the payment is comprehended by paragraph (b) of the definition of “eligible termination payment”, the appeal by the applicant against the appealable objection decision should be dismissed, with costs to be taxed if not agreed.

Associate:                                                                     Dated:  22 September 1997