The Federal Court has held that a lump sum payment made to an airline pilot who lost his pilot’s license for medical reasons was assessable as an eligible termination payment (ETP).
Facts – The taxpayer was employed as an airline pilot. Following the cancellation of his pilot’s licence for medical reasons the taxpayer received a “loss of licence” (LOL) payment from his employer. The payment was made as a result of a successful claim by the taxpayer under an insurance policy provided by his employer pursuant to an industrial agreement. Eligibility for the payment was dependent on the relevant employee being no longer able to work as a pilot.
Prior to receiving the payment the taxpayer signed a Deed of Release as per his employer’s policy, which stated that the payment represented all moneys owing to him pursuant to his employment and termination.
The Commissioner assessed the payment to the taxpayer as an ETP under s 82-130 of the ITAA 1997. The taxpayer’s objection to that assessment was unsuccessful and he sought a review by the AAT of that decision.
The AAT held that the payment was assessable income on the basis that it was an ETP, or if it did not have that character, because it was assessable under s 15-2 of ITAA 1997, or as a capital gain. It found that the connection between the payment and the termination of employment was not simply temporal, that the termination of employment as a pilot was a prerequisite to payment and in that sense payment followed on the termination of employment and had the necessary connection with it.
The taxpayer appealed to the Federal Court contending that the payment was not an ETP because:
- the AAT misconstrued s 82-130 of the ITAA 1997 by applying the wrong test for determining whether there was a relevant connection between the payment and the termination of his employment
- it fell within s 82-135(i) of the ITAA 1997, ie the payment was made for, or in respect of, personal injury to the taxpayer, and
- the payment was not a fringe benefit provided to the taxpayer by his employer in respect of his employment under s 136(1) of the Fringe Benefits Tax Assessment Act 1986.
Decision – The court rejected the contention that the AAT had misconstrued s82-130 and held that the payment was an ETP. It said the payment followed on from, and was an effect or result in a causal sense, of the termination of the taxpayer’s employment. It was a consequence of the termination of his employment, in the circumstances, because he was no longer able to work as a flight crew employee. It also said that the words “in consequence of” did not require that the termination of employment be the only or dominant cause of the relevant payment.
The court also held that the AAT did not err in concluding that the payment was not a capital payment (or consideration of a capital nature) for, or in respect of, personal injury to the taxpayers so as to take it out of the status of an ETP.
The court said that it agreed with the taxpayers’ submission that the AAT erred by treating the payment as excluded from the definition of a fringe benefit. However, that did not affect its final conclusion.
Court ref: [2015] FCA 245, Mansfield J, 25 March 2015, Adelaide.
FJM note: this case was one of three matters heard together because the issues were relevantly the same. The other matters were Purvis v FC of T [2015] FCA 246 and Kentish v FC of T [2015] FCA 247.
[IT, 1&2/4/15] [LTN 63, 2/4/15]
Section 82-135 of the ITAA 1997
Payments that are not employment termination payments
The following payments you receive are not employment termination payments :
(a) a * superannuation benefit (see Divisions 301 to 307);
(b) a payment of a pension or an * annuity (whether or not the payment is a superannuation benefit); and
(c) an * unused annual leave payment (see Subdivision 83-A);
(d) an * unused long service leave payment (see Subdivision 83-B);
(e) the part of a * genuine redundancy payment or an * early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C);
(f) a payment to which Subdivision 83-D (Foreign termination payments) applies;
(fa) a payment (or part of one) made by a company or trust as mentioned in subsection 152-310(2);
(g) a payment that is an advance or a loan to you on terms and conditions that would apply if you and the payer were dealing at * arm’s length;
(h) a payment that is deemed to be a *dividend under this Act;
(i) a capital payment for, or in respect of, personal injury to you so far as the payment is reasonable having regard to the nature of the personal injury and its likely effect on your capacity to * derive income from personal exertion (within the meaning of the definition of income derived from personal exertion in subsection 6(1) of the Income Tax Assessment Act 1936;
(j) a capital payment for, or in respect of, a legally enforceable contract in restraint of trade by you so far as the payment is reasonable having regard to the nature and extent of the restraint;
(k) a payment:
(i) received by you, or to which you are entitled, as the result of the commutation of a pension payable from a * constitutionally protected fund; and
(ii) wholly applied in paying any superannuation contributions surcharge (as defined in section 37 of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds Assessment and Collection Act 1997);
(l) a payment:
(i) received by you, or to which you are entitled, as the result of the commutation of a pension payable by a superannuation provider (within the meaning of the Superannuation Contributions Tax (Assessment and Collection) Act 1997); and
(ii) wholly applied in paying any superannuation contributions surcharge (as defined in section 43 of that Act);
(m) an amount included in your assessable income under Division 83A of this Act (which deals with employee share schemes).
Note: For paragraph (e)–the remaining part of a genuine redundancy payment or an early retirement scheme payment (apart from the amount mentioned in the paragraph) is an employment termination payment if section 82-130 applies to that part.